Separate emergency fund?

Discussion of the Cash portion of the Permanent Portfolio

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KevinW
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Separate emergency fund?

Post by KevinW » Tue Jun 22, 2010 7:43 pm

Financial advisors tend to suggest building up a liquid cash reserve of 3-12 months' expenses before investing.  In effect, the advice is to hold two portfolios: an "emergency" portfolio of 100% cash, and an "everything else" portfolio of a volatile mix of stocks and bonds.

Is a separate emergency fund necessary when investing in a Permanent Portfolio?

My inclination is that a separate emergency fund is unnecessary.  Small withdrawals can come from the cash allocation, to be replenished by the usual rebalancing process.  Large withdrawals can be covered by selling down the portfolio as a whole, since the portfolio holds a fairly stable value and the assets are relatively liquid.

What are other peoples' thoughts?
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craigr
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Re: Separate emergency fund?

Post by craigr » Tue Jun 22, 2010 8:38 pm

Like you, I use my cash allocation for emergency/living expenses. By having your interest and dividends deposited into the cash allocation you are able to build it back up without selling other assets and incurring additional taxable events as well.
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Re: Separate emergency fund?

Post by jswinner » Tue Jun 22, 2010 9:20 pm

I have separate cash chunks, but my PP portion is tax deferred, so tapping it for living expenses is not a good option.  I may reduce the cash percentage in the deferred area over time, but felt more comfortable keeping the PP intact there for now...
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Re: Separate emergency fund?

Post by Pkg Man » Tue Jun 22, 2010 10:12 pm

jswinner wrote: I have separate cash chunks, but my PP portion is tax deferred, so tapping it for living expenses is not a good option.  I may reduce the cash percentage in the deferred area over time, but felt more comfortable keeping the PP intact there for now...
You might want to consider swapping out some of the tax deferred cash for something else, perhaps a bit of GLD or IAU since the taxes are so high on gold, and some cash in a taxable account.  This breaks the rules slightly but seems reasonable for of small portion of your gold holdings.
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Re: Separate emergency fund?

Post by MediumTex » Tue Jun 22, 2010 10:39 pm

I think the PP is a turn key solution for the individual investor.  I don't think it is necessary to hold cash outside of the PP.  When people say "the PP has WAY too much cash", I think about how everyone should have an emergency fund and about 25% of one's liquid assets sounds about right to me.

It's funny, but if you listen long enough you will hear people say the PP holds too much cash...then too little cash; people will say the PP is too conservative...then it's too risky.
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Re: Separate emergency fund?

Post by Bonafede » Thu Jun 24, 2010 11:57 am

I'm a recent PP convert, and have come to believe very strongly in it and the principles that Harry Browne advocated. I agree 100% with all of the above regarding the emergency fund. However, here's my take as it relates to the PP:

While an individual's portfolio really includes all of his/her assets - and generally should be looked at in total to determine proper asset allocation, I don't view an emergency fund as part of my investment/retirement portfolio...PP or otherwise.

My rationale. I believe an emergency fund is just that...an emergency fund. In an emergency, I don't want to dip into the cash portion of my PP. I think this defeats the purpose of having such a portfolio if you use it as both a retirement account and an emergency account. Plus, not to mention, most of my retirement assets are locked into tax deferred accounts.

While this may over weight my true cash portion, I prefer this to co-mingling such funds. Maybe it's a discipline thing, or what not, but I think that emergency fund should remain independent of the PP.

Cheers!

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Re: Separate emergency fund?

Post by MediumTex » Thu Jun 24, 2010 12:28 pm

Bonafede wrote: I'm a recent PP convert, and have come to believe very strongly in it and the principles that Harry Browne advocated. I agree 100% with all of the above regarding the emergency fund. However, here's my take as it relates to the PP:

While an individual's portfolio really includes all of his/her assets - and generally should be looked at in total to determine proper asset allocation, I don't view an emergency fund as part of my investment/retirement portfolio...PP or otherwise.

My rationale. I believe an emergency fund is just that...an emergency fund. In an emergency, I don't want to dip into the cash portion of my PP. I think this defeats the purpose of having such a portfolio if you use it as both a retirement account and an emergency account. Plus, not to mention, most of my retirement assets are locked into tax deferred accounts.

While this may over weight my true cash portion, I prefer this to co-mingling such funds. Maybe it's a discipline thing, or what not, but I think that emergency fund should remain independent of the PP.
Nothing wrong with that approach.  What you are describing, to me, is cash as part of a variable portfolio and earmarked for emergency use only.

All of our assets have to be categorized in some way.  For me, there is the PP, there is the variable portfolio, there are consumption items like cars and the contents of my house, and illiquid assets like the house itself.

I think, too, that the role of emergency cash in the overall PP approach is a function of the total size of the portfolio and the amount that is sitting in tax-deferred accounts.  Thus, for example, a person with a $1,000,000 PP, all in taxable accounts, could more safely include his emergency cash in the PP than a person with a $100,000 PP, all in tax-deferred accounts.

There is obviously no one right answer to this question, but the guidelines above may be helpful.
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Re: Separate emergency fund?

Post by Bonafede » Thu Jun 24, 2010 12:49 pm

MediumTex wrote:
Bonafede wrote:
Nothing wrong with that approach.  What you are describing, to me, is cash as part of a variable portfolio and earmarked for emergency use only.

All of our assets have to be categorized in some way.  For me, there is the PP, there is the variable portfolio, there are consumption items like cars and the contents of my house, and illiquid assets like the house itself.

I think, too, that the role of emergency cash in the overall PP approach is a function of the total size of the portfolio and the amount that is sitting in tax-deferred accounts.  Thus, for example, a person with a $1,000,000 PP, all in taxable accounts, could more safely include his emergency cash in the PP than a person with a $100,000 PP, all in tax-deferred accounts.

There is obviously no one right answer to this question, but the guidelines above may be helpful.
Great points MediumTex. particularly about the role of the emergency cash in relation to the total size of the portfolio. Couldn't agree more.

One comment about the Cash portion as part of the variable portfolio. I'm not sure this fits there either, as I'm not 'speculating' with my emergency funds. But again, I'd definitely agree that this is a moot point if your portfolio is of substantial size.

Thanks again. Helps to have a forum such as this, no doubt!

-b
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Re: Separate emergency fund?

Post by Jan Van » Sat Jun 26, 2010 10:34 pm

MediumTex wrote:I don't think it is necessary to hold cash outside of the PP.
This is something I've been struggling with too, so great to read this thread. I'd lean to including my emergency funds in a PP if I started one. But then the next question. What about cash to buy a new car? Might want to buy another car in a couple of years, so where do I take that money from? A separate "new-car" fund? Split my current emergency fund in two, one part real emergency to be included in a PP, the other part for upcoming unavoidable expenses like that new car, or the new fridge we will need before long?  btw, my emergency fund currently is in Vanguard tax_exempt ST, tax_exempt inter-term and ST treasury.
???
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Re: Separate emergency fund?

Post by KevinW » Sun Jun 27, 2010 1:47 am

MediumTex wrote: I think the PP is a turn key solution for the individual investor.  I don't think it is necessary to hold cash outside of the PP.  When people say "the PP has WAY too much cash", I think about how everyone should have an emergency fund and about 25% of one's liquid assets sounds about right to me.
Yeah, I'm gradually realizing just how turn-key it is.  This emergency fund issue is one example; with other portfolios there's the whole sidebar issue of how much to save in cash, how to prioritize that against retirement savings, and so on.  The permanent portfolio handles the need for cash internally, so that issue just doesn't exist.  The prospect of having one big "wealth" pile is liberating.
jmourik wrote: What about cash to buy a new car? Might want to buy another car in a couple of years, so where do I take that money from? A separate "new-car" fund? Split my current emergency fund in two, one part real emergency to be included in a PP, the other part for upcoming unavoidable expenses like that new car, or the new fridge we will need before long?  btw, my emergency fund currently is in Vanguard tax_exempt ST, tax_exempt inter-term and ST treasury.
???
This seems like the kind of question that has no one right answer.  I think any system that your family is comfortable with, and keeps you reasonably prepared for unforeseen expenses, is fine.

What we've done is pick a round number, in the ballpark of 2 months' expenses, as the baseline level of operating cash to keep in our checking account.  This much cash can handle routine expenses like repair bills, appliances, holiday shopping, and so on.  It's also a small enough amount of cash that moving it into something with a higher yield wouldn't earn us more than a few dollars, so we don't pay much for the convenience.  We also have an "emergency fund" in an online savings account, but I am rethinking that.

My new idea (not yet implemented, I make deliberate movements) is to treat the retirement accounts and emergency fund as one big permanent portfolio, with the constraint that a certain target number of dollars needs to be kept liquid and outside retirement accounts.  The taxable part of the portfolio can be liquidated in the event of an emergency that outstrips the operating cash.  It can also be used if "life happens" and we have a new savings goal like a downpayment or big vacation or something.  The target number would factor in unemployment self-insurance (what emergency funds are usually for), insurance deductibles, and other potential liabilities.  If I had something like a car purchase looming I would add that in too.  If you want to be precise you could use accounting methods to estimate your liability on durable items using the depreciated value of what you have.  Then again I might just pick a round number like $50k or $100k and move on to other things.
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Re: Separate emergency fund?

Post by pplooker » Wed Sep 22, 2010 9:13 pm

I too have been struggling with this lately.

I've been running some quick and dirty numbers, and have become more and more convinced if I just bit the bullet and held a PP in a boring, taxable account, I would generally have enough liquid cash to deal with life's "oh nuts" moments for short term situations, enough to know if I should cash in the other assets to endure longer.

The main problem I can see is my "oh nuts" moment might come at a weird time when every component but the cash is down (it can happen!), but then I remind myself I'm just trying to be a market timer that way.

But that pile of neat, dedicated cash, it's such a security blanket...
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