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Comment by derekp7 | Hacker News Reader

This list leaves off the most important thing -- emergency fund. You should have enough to cover expenses for a sudden loss of employment (3 months is usually recommended, but in this climate I wouldn't feel comfortable with anything less than 6). And esp. if you own a home, you need enough to cover things that pop up without depleting your emergency fund too much. For example I had to spend 9k recently to have a sewer line replaced in the yard.

Yes, you have better return on investments if you pay off that 20% interest credit card. But if you become unemployed, it is better to be able to have that fund so you can keep your house and the lights on.

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Once you have more than about two years worth of salary invested in a brokerage account, you don't need a cash emergency fund anymore. You can withdraw cash from a brokerage account instantly, up to a large percentage of your total balance, without selling anything.

This creates a margin loan, and then at your leisure you can sell your investments to pay the loan, only paying a few days worth of interest at most. Or you can keep the loan. The rates are far better than credit cards and there's no minimum payment or required repayment schedule. Interactive Brokers' current margin rate is 1.57%!

You can withdraw on margin?! I suppose in a way that's arguably lower risk, but still seems weird. Also think that's quite nation/broker specific, pretty sure that's not an option with T212 or IG in the UK (which provide margin for trading CFDs and the latter limited options too).

Also shouldn't discount overdrafts, pretty sure mine (as in, available to me) is <1.57% equivalent, and 'arranged' I believe they tend to be cheaper or at least much bigger.

Yup. You can buy a house on margin if you like. With Interactive Brokers' rates as low as 0.75% for large balances it doesn't look like a terrible option vs. an adjustable rate mortgage, if your account balance is high enough that you're not risking a margin call.

If the house is an investment, the margin loan interest may even be tax deductible, without the 750k limit that the mortgage interest deduction has.

I'm curious where you can find a 1.57% overdraft rate? Looking at https://moneyfacts.co.uk/news/banking/revealed-the-cost-of-n..., for example, lists (arranged) rates in the range of 15-40%.

You may be right, I've never had to use one and didn't actually work out the equivalent rate of my unarranged one.

1.57% is a lot compared to the ease of just leaving a couple grand in a high-yield savings account. Maybe it's just me but it feels wrong to take out a loan against my portfolio everytime I have to replace my MacBook.

> everytime I have to replace my MacBook.

that's not an emergency! And having a few thousand dollars of liquid cash in a bank account is no brainer.

A real emergency might be like a roof collapse, where you need 10-20k to fix. Or a medical emergency, or a family issue where a fair chunk of change is needed. Using margin is a good way, and is much lower interest than a credit card, provided you have the witherall to pay it back.

With respect, I think this is outdated advice.

Sitting on tens of thousands of dollars of cash (six months of income!) in a zero interest rate environment is a mistake that really compounds over the years -- to the point of a few $100k in lost appreciation over your career.

Equities are no longer hard to turn into cash in an emergency. You can pull money out of your investment account the same day using a debit card if need be, no need to even sell your equities.

Keeping access to credit, but not using it unless it's needed, is the better plan. But after several years of saving you won't need it anyway.

If you lost your job April 2020 and all your spare cash was in stocks you'd be forced to eat a massive loss. Given a downturn makes unemployment more likely this isn't an improbable scenario.

Only if you liquidate all your stocks to cash at what is obviously a very disadvantageous time.

In reality, your rent/mortgage and other commitments would continue to fall due at a very predictable monthly schedule.

So you sell down only as your liabilities fall due. The majority of your holding stays invested so you can capture the rebound over the following months.

>the rebound over the following months.

This is an assumption that some people might say is unreasonable. There have been many times in the past where the rebound takes years.

Although, one might be able to make the case that the political winds have changed to ensure the rebound happened in months. But it’s still a riskier assumption than assuming a rebound in a few years.

It's only potentially outdated advice for people that are already financially sound, have a large amount invested, and understand the risks. "Don't keep an emergency fund, just sell your stocks or use credit" is really bad advice for people trying to get ahead for the first time.

If you're trying to get ahead, sitting on six months of cash that could be put to productive (and compounding) use over the course of your entire career is even worse advice.

No, it's not. Investing that money would be about the long term horizon. Like, 10-30 years at least. If you're trying to get ahead, your current goals should be getting and staying out of debt, and preparing for emergencies. What happens if you throw that emergency fund in the market, there's a crash, and then you lose your job in six months?

Get out of debt. Build an emergency fund. Start investing. Then re-think your emergency fund strategy if you really want.

The 'productive' use of six months living expenses in an account is being easily accessible in times of crisis.

Like, my whole department got let go not long after Covid hit. Had I kept my savings in stock, I'd have sold them at a major loss, because stock market falls and job losses tend to happen at the same time. By keeping some savings separate, you can decouple these things, to an extent. You don't want your emergency money to rely on a good economy.

On the flip side, if you have six months or more of expenses in a brokerage account, you don't need to sell all of it day one. And if you sold a little at a time over six months during the covid crash, it wouldn't have been as bad of a loss.

And you need to compare that loss to what you would have had if you sat on cash for all of the time leading up to the crash too.

I'd be willing to bet keeping it cash would have been worse in most cases (depending on specific amounts and time frames and monthly expenses).

Emergency funds are for emergencies, and you never know when an emergency is going to happen. Stock market tanks and you lose your job, bet having all your money in stocks will feel real smart at that point.

It’s about balancing risk management and wealth. That balance is going to be different for everyone, but you always need to be a little cautious.

I like to think of different tranches of emergency too, and keep different emergency funds in different vehicles for each type of emergency. General cooling off of the market? Hold Series I bonds or some security that's pretty much as good as cash but has a small amount of growth. Sudden unemployment? Cash in a money market account. Natural disaster like an earthquake that may limit your access to financial institutions? Cash stuffed in the mattress. The zombie apocalypse? Ammunition and bottled water.

Have a little bit of your emergency fund in each of these.

I think emergency often means the next financial crisis (at least statistically). During which, you lose your job but also your access to credit. As worsening credit conditions are often the cause of crisis.

Other than that you're right. Maintaining an emergency fund is expensive in term of opportunity cost. Like the cost of any insurance. There is no free lunch.

If you have more than 20% equity in your home, open a HELOC. It’s like a super low interest credit card for up to 80% of your equity.

Then never use it. There’s your emergency fund.

Critical thing is that you won’t get approved for one when you need it, so open it when you don’t.

If it’s only for an emergency, the interest rate doesn’t matter much. Many banks and credit unions offer 90% or even 100% LTV HELOCs at a rate a couple percent higher than the usual 80% LTV.

Yes, this is very true. Emergency funds will make your life so much less stressful.

I will say that his recommendation to buy in bulk is in some way an emergency fund (or an aspect of it) because you're saving money on things you know you'll buy in the future.

One thing I did when I lost a job was move some of my retirement account (roth IRA) to money market funds (from short term bonds). Basically moving some of the bond portion of my retirement from slightly risky to not risky/cash.

Roth IRAs let you pull out your contribution. This was basically to augment my emergency fund, just in case finding the right new job took longer than I thought. (I was lucky, it didn't, and I was able to convert the money market funds back to short term bonds).

Not a fan of pulling from retirement, but if I had to, better to take from the tax penalty free, stable portion of it.

You're a 100% right - having an emergency fund is extremely important and I'd like to add an appendix that mentions it - do you have any good resources for learning about what goes in to building one?

I didn't comment on it because I'm living at home right now and am young/commitment-free enough to move back in with my parents if I ever need to - I don't have one so I feel I'm not qualified to discuss it.

Typically it’s as simple as saving cash enough to cover 3-6 months or unexpected expenses. Fixed income investments are almost so low as to be ignorable but you can put it in a high yield online savings account. The key is for it to be liquid.

It's simply just putting money into a checking or savings account that you use to cover unexpected expenses. The amount varies by your life situation and risk tolerance, but a couple months salary is a good start.

Think of the sort of "adult expenses" your parents have - refrigerator failed and too expensive to repair, need to buy a new one - that will be $2,000, right now. My teeth need to be fixed - that will be $3,000. It's winter and the furnace broke - that will be $7,000. You want to be able to have the money on hand to deal with those situations. Those were not random examples - those are things that have come up for me in the last two years

You probably shouldn't have more than a few hundred dollars in an emergency fund if you're paying off high interest loans (10%+)

"In our financial plan, you will never find the one staple item that every financial planner calls the cornerstone of a responsible financial plan: the emergency fund. We have none. Zilch. Nada." https://earlyretirementnow.com/2016/05/05/emergency-fund/

If you get fired you can live off severance and liquidate some of your investments.

If you have a contract that includes severance and if you have investments then the ERN plan makes sense. If either of those things is false it’s a much shakier argument.

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