The Emergency Fund: It’s Still Useless!

Discussion in 'Shares & Funds' started by Redwing, 16th Jul, 2021.

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  1. Redwing

    Redwing Well-Known Member

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    From Big ERN

    Cont......

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  2. Hockey Monkey

    Hockey Monkey Well-Known Member

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    Interesting article

    Personally we hold a 90/10 portfolio without a separate emergency fund across liquid assets (cash, equities inside and outside super), so similar to the 60/40 example in the article.

    Use the offset account as the 10%, so technically leveraged overall but enough in cash to cover 2-3 years expenses or rebalance in a downturn.

    Not sure I’d feel comfortable with no cash and 100% equities
     
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  3. pippen

    pippen Well-Known Member

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  4. Anne11

    Anne11 Well-Known Member

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    Most other FIRE bloggers advocate for having spare funds, some having 2 years, others 5 years, or cash cushion +yield shield etc..In an interview Warren Buffet also said something a long the line of : if you own your own home and have a mil in investable assets and have a job then no need to keep emergency fund (if i remember correctly). I understand that financially it is optimal to invest the spare fund, but perhaps it depends on how large my porfolio will be, if it generate ways more that what we need then there is no need to have emergency fund at all?
     
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  5. Zenith Chaos

    Zenith Chaos Well-Known Member

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    My take on the purpose of the emergency fund is: reducing the need to sell off equities during a post-retirement crash. Whilst still working (risk of losing job aside), the money is best invested although keeping some sort of war chest is not a bad idea. As @Hockey Monkey mentioned using offset accounts is a good strategy. @Nodrog is the expert on the cash emergency fund whose ideas I have applied.
     
  6. SatayKing

    SatayKing Well-Known Member

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    Emergency fund for what emergency? Undefined.
     
  7. Wilko

    Wilko Well-Known Member

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    Which brings up the issue of insurance instead of emergency fund.
    If I had no tenants in any property my "emergency fund" would cover all repayments for 5 years. Having this level of buffer has been the reason I've been happy to keep taking on more debt. While this money is in offset accounts there is a fairly large opportunity cost involved also.
    Wondering if it might be better to take out landlord insurance for default of rent and income protection for redundancy and have a large % of the emergency fund invested in the sharemarket where it can be converted to cash in 3 days in an emergency anyway.
     
  8. Ryan23

    Ryan23 Well-Known Member

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    The emergency fund doesn’t just have to sit there and do nothing. Mine sits in an offset account account and was used to purchase shares at some of their lowest prices last year. So I think it can serve more then one purpose.
     
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  9. Rex

    Rex Well-Known Member

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    I don't see a point in having more than $10K in cash unless you need more for an upcoming purchase. Even if you have PPoR debt, with interest rates so low the offset account is not as advantaged as it used to be. Any liquid assets you have are an 'emergency fund' IMO.
     
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  10. Zenith Chaos

    Zenith Chaos Well-Known Member

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    Learning about risk the easy way is much less painful than dealing with the consequences of ignoring it completely.

    While in a low risk job, the emergency fund can be minimal and income protection is one mitigation. However, in a situation where you rely on share income and don't have a job (eg retired) it becomes necessary to mitigate the need to sell shares. You can also use bonds bit you'll need to adjust the SAA.
     
    Last edited: 25th Jul, 2021
  11. dunno

    dunno Well-Known Member

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    I'm positive that I don't feel comfortable with anything but that. I keep 1% cash in the asset allocation as a float for transactions and withdrawals etc and think that's too much. Cash is a necessary evil for transaction liquidity and that's all its good for in my book.

    But I'm happy to sell in bad times if necessary. I've stored enough nuts for winter.
     
  12. Hockey Monkey

    Hockey Monkey Well-Known Member

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    With your portfolio, 1% is more than enough :)

    Our overall cash is about 4% when also factoring in illiquid total assets like property, private equity etc. Enough for 2-3 years expenses but also slowing reducing leverage as we head into retirement.

    Some of the cash is sitting in a 100% offset unused loan ready to quickly access and buy cheap equities in a future downturn. So real cash is more like 2.5%, but gives a little SANF.

    Do you have any debt?
     
    Last edited: 25th Jul, 2021
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  13. dunno

    dunno Well-Known Member

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    Offset is interesting. Presumably if you have an offset you have debt. Sometimes wonder if people confuse liquidity and emergency management. Can't see how going into more debt at times of stress is an emergency plan.

    Lets say you have 800K house, 400K shares, 100K offset and 600K loan, net equity 700K.
    your asset allocation is 114% property, 57% shares and net short cash 71%

    if property drops 25% and shares 40% so you decide to use your offset loan for emergency than your asset allocation becomes property 250% shares 100% short cash 250% net equity 240K.

    if property drops a further 25% (43% from top drop) and shares another 40% (64% from top drop) then you are in negative equity. If you had sold 100K of shares after the first drop instead of increasing you net short on cash then you would still be in positive equity.

    So 100% equities and having to sell might seem aggressive at first glance but in reality its being a wimp compared to somebody that would increase net short against cash in times of crises - that is serious brass monkeys unless of course they are oblivious to the difference between emergency management and liquidity. Nobody takes risk so calmly as those that don't perceive it.
     
    Last edited: 25th Jul, 2021
  14. Trainee

    Trainee Well-Known Member

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    Except residential property loans generally dont have margin calls. So wiped out (zero or negative equity) isnt the same for shares as for resi.

    Liquidity is about surviving until markets pick up again. Asset allocation % dont matter much in a crisis.
     
    Last edited: 25th Jul, 2021
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  15. dunno

    dunno Well-Known Member

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    Good point, I edited to say negative/positive equity instead of wiped out.
    No
     
  16. Hockey Monkey

    Hockey Monkey Well-Known Member

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    Great post and way to view a portfolio.

    Note, the suggestion of increasing debt was more about taking advantage of rebalancing in a market correction rather than an emergency like unplanned expense, redundancy etc. Cash is doing double duty in that regard.

    For perspective, our portfolio comprises
    65% Property (including PPOR)
    49% Equities (including super)
    10% Private Equity (my employer)
    1% Vehicles
    -25% Cash

    Will continue to consider the future direction of our portfolio,
     
    Last edited: 25th Jul, 2021
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  17. Ruby Tuesday

    Ruby Tuesday Well-Known Member

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    If you have a 600k loan you would have it against the property, for the shares . You can twist and concoct all sorts of scenarios to suit your bias, if property dropped 50% and shares dropped 25% you still have 100% of value of house in assets You still have your capital, and still have 32k a year income @4% net yeild. Asset allocation does matter It is key. That is why you buy property to store and protect your wealth, and leverage into shares for high growth. Property is about finance but shares arent , at least not directly but internally. Anyway it seems to work out that the best allocation of wealth in shares is 35%, just the way it works out with CG on both ,casflow on both and LVR requirements.
     
    Last edited: 25th Jul, 2021
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  18. Nodrog

    Nodrog Well-Known Member

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    I have no problem using an offset account to smooth "short term" cash flow. An emphasis on the duration of "short term"! And in our case the offset account "fully" offsets the debt. Eg in the last 12 months we spent like drunken sailors exhausting personal cash. Rather than sell personal equity holdings we used the offset account to see out the FY until we could draw on the "minimum" Super pension cash for subsequent year.

    May not be optimal but it suits us.
     
    Last edited: 25th Jul, 2021
  19. truong

    truong Well-Known Member

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    If an emergency fund is there to provide SANF then it can’t be one-size-fits-all. Everyone’s SANF is different and therefore it’s important to choose the level of your cash buffer according to your own SANF and not somebody else’s – except of course if that somebody is your partner in life.

    As for me, the purpose of a cash buffer is to give me the freedom to not react to certain events e.g. a major downturn or a crisis. Things can get pretty bad around me but I’m not forced in any way to react to it and make decisions in that frame of mind. It makes me almost impervious to outer circumstances.

    There’s a big difference between reacting and acting. To be able to act of my own free will is what contributes the most to my peace of mind.

    In fact I tend to make better decisions when I’m not forced to do something, and in this regard the GFC and this COVID crisis have been great in that I’ve been able to redeploy unused cash buffers in the way I wanted, not necessarily the most profitable way possible but profitable enough and the most satisfying.

    So if you can remain reactionless without a buffer then by all means, have no buffers.
     
  20. Rex

    Rex Well-Known Member

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    Very true, I am coming from the perspective of somebody in the accumulation phase with a regular/reliable income.