How much emergency fund and where to store it? (and other advice?)

[FlowRate]

For the first year of residency, I've been saving ~1/3 of my gross (about $1000) every month because I've read that you should ideally have 6months-1year of living expenses on hand, which for me would be 12-24k. I'm now at about the middle of that range and thinking that I should probably be doing something else with the money other than letting it sit in a BoA checking account. Any advice on how much I should actually have straight liquid in checking/debit account? Where should I put the rest?

My residency doesn't offer investment match. I'm contributing $200/mo to Vanguard retirement date MF in a Roth. I have 135k in loans pretty evenly split between perkins, direct, and institutional loans. The direct is on RePAYE, Perkins is forbearing (I recently learned that I should have consolidated it into my lowest-rate Direct for the RePAYE interest benefits, not sure if it's worth the re-capitalization now.) Institutional will stay on forbearance through residency because it requires a standard 10-year repayment plan. Would it be more worth it to start paying loans or increase my Roth contribution?

Thanks!

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[goodoldalky]

Unless your student loans are at an outrageous interest rate, it sounds like they are not, you should max your Roth.

Regarding the emergency fund, you need it to be liquid. You can't afford to lose it in the market, so you can't take risk with it or tie it up in something illiquid in case you need it. Your only alternative to your BOA would be to put it in a "high interest" account or money market on Vanguard. Given the amount you are talking about the difference is pretty small and may or may not be worth your time.

Regarding amount of emergency fund, 6 months of expenses is more than enough. I am assuming your residency program has a program for disability insurance for you, etc., but after maxing the Roth my next step would be to acquire high quality long term own occupation disability insurance that you can take with you without a reexamination after graduation and keep indefinitely.

 

[FlowRate]

Thanks for the advice. I'll likely max my Roth this year.

I was denied for own-occ disability insurance, presumably due to a preexisting condition, so my long-term plan is to simply invest the money that would have gone to that otherwise. After about 20 years (very conservatively), that will be the same amount of money as the average disability period at my specialty's average salary. Obviously that doesn't fully protect against permanent disability. I may try to reapply in a few years with documentation of continued lack of any issues with the PEC.

 

[PistolPete]

It seems like 3-6 months is popular for emergency fund, and many people use Ally Bank for savings.

 

[G-Man82]

I currently have 6 months in liquid cash. Downsized to 5 just last month and will make it 3 months worth now that I've been at my job going on 2 years and it seems less likely that I'll leave. I have a big enough taxable account (Vgd Total stock and international indexes) that I could dip into that if needed.


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[edmadison]

Many local banks have high interest checking -- between 2 and 3% for 10 or 15k. You have to do direct deposit and do a certain number of transactions each month. If you have the self discipline to keep your emergency fund in your checking account, it's hard to beat. I've done it in 3 different cities over the past 8 years.

-Ed

 

[goodoldalky]

Thanks for the advice. I'll likely max my Roth this year.

I was denied for own-occ disability insurance, presumably due to a preexisting condition, so my long-term plan is to simply invest the money that would have gone to that otherwise. After about 20 years (very conservatively), that will be the same amount of money as the average disability period at my specialty's average salary. Obviously that doesn't fully protect against permanent disability. I may try to reapply in a few years with documentation of continued lack of any issues with the PEC.

I would continually apply for disability insurance and I would try with all of the major companies with good reputations in your field. You are much more likely to be disabled during your career than many of the other alternatives that we insure for. If you are unable to acquire this, look closely at employers than can provide good group disability. And if all of that fails you will have to save aggressively early in your career to self-insure.

 

[FlowRate]

I would continually apply for disability insurance and I would try with all of the major companies with good reputations in your field. You are much more likely to be disabled during your career than many of the other alternatives that we insure for. If you are unable to acquire this, look closely at employers than can provide good group disability. And if all of that fails you will have to save aggressively early in your career to self-insure.

The odds of being disabled for >6 months are much lower than the odds of being disabled (which are the figures put out by all the insurance companies). I agree overall that disability insurance would probably be a good thing, but I think the odds of needing/collecting disability insurance are much lower than the odds of being disabled generally.

 

[Promethean]

I keep 3 months of purely liquid cash on hand, if at all possible. You can solve a lot of problems in 90 days. The rest of an emergency fund doesn't need to be nearly as liquid. It just shouldn't be invested in anything risky or difficult to liquidate.

 

[PistolPete]

I keep 3 months of purely liquid cash on hand, if at all possible. You can solve a lot of problems in 90 days. The rest of an emergency fund doesn't need to be nearly as liquid. It just shouldn't be invested in anything risky or difficult to liquidate.

Where do you keep your 3 months of cash, though?

 

[Promethean]

Where do you keep your 3 months of cash, though?

In my regular old bank account with some miniscule interest rate that is too low for me to even keep track of.

The interest that you can earn on $3-6k by putting it in a less liquid vehicle is not worth the trouble. A 90 day T-bill gets you around 1%. Let's pretend you put in $10k and kept it flipped over into a new instrument each 90s days. Cool. In a year, you will have earned $100 in interest. -$25 for taxes. Net gain of $75 maybe for the inconvenience of lacking access to your funds in a pinch.

You can play around with higher rates of return in exchange for additional risk, etc, but the equation is never really going to get a lot more exciting. An emergency fund is not an investment asset that is supposed to bring you a return. It is an emergency fund that keeps you from needing to waste money by borrowing on credit if you run into a cash flow problem.

Any place you put the money that keeps it readily available and FDIC insured (so, not under your mattress,) is the right place to put your emergency fund. Save investment strategies for other pools of money.

 

[NYCNative]

I get 4.59% on up to $20,000 with this account: Free High Interest Checking | Waukegan, IL Rewards Checking | CCU

All you need to do is join the credit union ($5), and apply for their credit card. You have to make 15 credit transactions per month with your debit card (I purchase fifteen 50 cent Amazon gift cards -- you have to change the card setting from debit to credit from within Amazon), and spend more than $1,000 total with the credit card (I purchase two $500 dollar visa debit cards from Kroger, and then take them over to customer service and use them to buy a $1000 money order that I deposit in my own bank account).

All said and done, about an hour of effort every month. Depending on how much is in your fund, it can definitely be worth your time (up to $918 annually).

 

[Neurologo]

Many local banks have high interest checking -- between 2 and 3% for 10 or 15k. You have to do direct deposit and do a certain number of transactions each month. If you have the self discipline to keep your emergency fund in your checking account, it's hard to beat. I've done it in 3 different cities over the past 8 years.

Mind sharing which banks they are? The best I could find was a savings online bank at 1.05%. Or are you talking about CDs? Or are you talking about CDs?

 

[PistolPete]

Mind sharing which banks they are? The best I could find was a savings online bank at 1.05%. Or are you talking about CDs? Or are you talking about CDs?

I'd be interested to know too what local banks have high interest checking!

 

[SageRad]

I am in the Ally 1.05% account for the bulk of my efund.

 

[calvnandhobbs68]

Mind sharing which banks they are? The best I could find was a savings online bank at 1.05%. Or are you talking about CDs? Or are you talking about CDs?

Youre right the highest ones youll find are around 1-1.05% for regular savings/money market accounts. The two that come to mind for me immediately are Ally's saving account which is at least 1% right now and Capital One's money market account at 1%. The other ones people are talking about usually have some requirements (certain numbers of transactions monthly, certain number of direct deposits monthly, etc). You can find those through both small credit unions like mentioned above or even bigger banks like Chase or Wells Fargo if you have enough money for a "jumbo" checking or savigs account. Smaller banks are probably the best bet for high interest rates if youre willing go jump through the hoops.

 

[PistolPete]

I looked into the smaller banks, many of which offer 2-5% nationally, but I don't think the 12 debit transactions per month and direct deposit monthly and logging into the checking account monthly are worth the trouble. Ally Bank it is.

 

[TexasPhysician]

It seems like 3-6 months is popular for emergency fund, and many people use Ally Bank for savings.

I struggle to understand the importance of an emergency fund for physicians with good credit and disability insurance. Jobs are fairly easy to come by and disability should kick-in within a few months. Isn't worse case scenario - disability with no income for 3 months? If so, I have credit card limits of at least $60k. That's 6+ months. I could charge everything and pay it down with disability checks or pay it off with other investments.

Alternatively, keeping $30-60k in a savings account earning 1.1% instead of 8% compounded in the market seems like an easy way to miss out on $100k+ of earnings over a lifetime of work.

Where am I wrong?

 

[calvnandhobbs68]

I struggle to understand the importance of an emergency fund for physicians with good credit and disability insurance. Jobs are fairly easy to come by and disability should kick-in within a few months. Isn't worse case scenario - disability with no income for 3 months? If so, I have credit card limits of at least $60k. That's 6+ months. I could charge everything and pay it down with disability checks or pay it off with other investments.

Alternatively, keeping $30-60k in a savings account earning 1.1% instead of 8% compounded in the market seems like an easy way to miss out on $100k+ of earnings over a lifetime of work.

Where am I wrong?

Depends on what specialty you're in. If you get fired from a pathology position, it'll probably be harder to find a new job than for someone in FM. Even with specialties that don't have a "bad" job market, it doesn't mean jobs are dropping off trees and it might take you a few months to find a job in the area you need to be because of a house, family, etc.

You also typically can't pay your mortgage/rent with credit cards (usually the biggest expense for people). Nor car payments. You can get cash advances but then we're talking about serious interest rate hits.

 

[PistolPete]

I struggle to understand the importance of an emergency fund for physicians with good credit and disability insurance. Jobs are fairly easy to come by and disability should kick-in within a few months. Isn't worse case scenario - disability with no income for 3 months? If so, I have credit card limits of at least $60k. That's 6+ months. I could charge everything and pay it down with disability checks or pay it off with other investments.

Alternatively, keeping $30-60k in a savings account earning 1.1% instead of 8% compounded in the market seems like an easy way to miss out on $100k+ of earnings over a lifetime of work.

Where am I wrong?

Good points. Our field is more flexible than others, though, like the above poster mentioned about pathology. I guess it all comes down to peace of mind, knowing you have 3 months of living expense sitting in an easy-to-access savings account.

 

[G-Man82]

I've got 5 months, but I'm going to start cutting it down to 3 months I think since I think at almost 2 years at this job, I'm in a good spot.


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[dpmd]

I struggle to understand the importance of an emergency fund for physicians with good credit and disability insurance. Jobs are fairly easy to come by and disability should kick-in within a few months. Isn't worse case scenario - disability with no income for 3 months? If so, I have credit card limits of at least $60k. That's 6+ months. I could charge everything and pay it down with disability checks or pay it off with other investments.

Alternatively, keeping $30-60k in a savings account earning 1.1% instead of 8% compounded in the market seems like an easy way to miss out on $100k+ of earnings over a lifetime of work.

Where am I wrong?

If your disability doesn't kick in until 90 days you will at least need enough to make the minimum credit card payments along with any any payments that can't be made by credit card (or be willing to accept the cash advance fees). And not all specialties have jobs that will be easy to come by in the same town, nor will those jobs necessarily be quick to start paying you money so having money accessible for those situations may be important. Not saying that it can't be in the market, just that there is potential risk involved with that that goes beyond "I'll just put it on my credit card".

 

[TexasPhysician]

If your disability doesn't kick in until 90 days you will at least need enough to make the minimum credit card payments along with any any payments that can't be made by credit card (or be willing to accept the cash advance fees). And not all specialties have jobs that will be easy to come by in the same town, nor will those jobs necessarily be quick to start paying you money so having money accessible for those situations may be important. Not saying that it can't be in the market, just that there is potential risk involved with that that goes beyond "I'll just put it on my credit card".

I think it's common sense to have enough cash in checking to cover the next mortgage payment and a minimum cc payment. Beyond that, I'd argue that most docs would benefit from normal taxable mutual funds over an emergency fund. The late cc fees and interest should easily be covered by the increased compounded interest over a 20 year career. Liquidating taxable mutual funds can be done in a week if needed.

Any argument that pulling money from mutual funds could happen in a down market is negated that it equally could happen at the right time in a bull market.


$40,000 in the market averaging 8% vs 1% in a savings account should earn an extra $140,000+ over 20 years if not touched.

 

[dpmd]

I think it's common sense to have enough cash in checking to cover the next mortgage payment and a minimum cc payment. Beyond that, I'd argue that most docs would benefit from normal taxable mutual funds over an emergency fund. The late cc fees and interest should easily be covered by the increased compounded interest over a 20 year career. Liquidating taxable mutual funds can be done in a week if needed.

Any argument that pulling money from mutual funds could happen in a down market is negated that it equally could happen at the right time in a bull market.


$40,000 in the market averaging 8% vs 1% in a savings account should earn an extra $140,000+ over 20 years if not touched.

So really you are not arguing against an emergency fund, just the size of it and what you call it.

 

[TexasPhysician]

So really you are not arguing against an emergency fund, just the size of it and what you call it.

I don't consider money to pay 1 mortgage payment and part of 1 cc bill an emergency fund.

Most families do keep an emergency fund in a savings account that includes 3-6 months. This is sound advice for "most" families as expenses like a new air conditioner and lay-offs are unpredictable. Most families do not earn and save enough for much to be left outside of retirement accounts. Retirement accounts have big penalties for early withdrawals.

High earners are different. We typically have taxable investments and monthly income should exceed expenditures. When I bought a new a/c, I paid the 6k off from that month's earnings.

We are low risk for lay-offs and finding locums isn't hard.

I'd keep taxable investments instead of a savings account for emergencies is all I'm saying.

 

[PistolPete]

I don't consider money to pay 1 mortgage payment and part of 1 cc bill an emergency fund.

Most families do keep an emergency fund in a savings account that includes 3-6 months. This is sound advice for "most" families as expenses like a new air conditioner and lay-offs are unpredictable. Most families do not earn and save enough for much to be left outside of retirement accounts. Retirement accounts have big penalties for early withdrawals.

High earners are different. We typically have taxable investments and monthly income should exceed expenditures. When I bought a new a/c, I paid the 6k off from that month's earnings.

We are low risk for lay-offs and finding locums isn't hard.

I'd keep taxable investments instead of a savings account for emergencies is all I'm saying.

I haven't really thought of things in this way, but you raise good points. I may only keep 1-2 months in a traditional savings account and maybe 2-3 months more in a taxable account.

 

[Mman]

I struggle to understand the importance of an emergency fund for physicians with good credit and disability insurance. Jobs are fairly easy to come by and disability should kick-in within a few months. Isn't worse case scenario - disability with no income for 3 months? If so, I have credit card limits of at least $60k. That's 6+ months. I could charge everything and pay it down with disability checks or pay it off with other investments.

Alternatively, keeping $30-60k in a savings account earning 1.1% instead of 8% compounded in the market seems like an easy way to miss out on $100k+ of earnings over a lifetime of work.

Where am I wrong?

I keep basically 12 months expenses in an emergency fund earning 1% interest. Why? Peace of mind. If I were to lose my job in anesthesiology it could potentially take me months to line up the next job. Now I could get "a job" in a month or two. But why have to worry about getting a job that turns out to be horrible and costs me millions of dollars over 10-20 years instead of making sure I can take the time to get the right job from the start?

The emergency fund allows me to do things correctly should the need arise instead of having to make decisions biased towards the short term. Besides, those 12 months of cash sitting there earning 1% instead of 8% (although that's fairly high compared to what you should expect) will only roughly triple over the course of 20 years compared to what you'd get earning the 1%. But you gotta take taxes out of those gains. So if I have $120K to start with, I'm losing out on about $360K of earnings, of which something like 150K would be lost to taxes. So it's costing about 10K per year to have the peace of mind to not be forced into making a rash decision that could cost hundreds of thousands of lost income per year.

I'll pay that cost every time knowing that if life works out well and I never change jobs that it will have cost me some money.

 

[TexasPhysician]

I keep basically 12 months expenses in an emergency fund earning 1% interest. Why? Peace of mind. If I were to lose my job in anesthesiology it could potentially take me months to line up the next job. Now I could get "a job" in a month or two. But why have to worry about getting a job that turns out to be horrible and costs me millions of dollars over 10-20 years instead of making sure I can take the time to get the right job from the start?

The emergency fund allows me to do things correctly should the need arise instead of having to make decisions biased towards the short term. Besides, those 12 months of cash sitting there earning 1% instead of 8% (although that's fairly high compared to what you should expect) will only roughly triple over the course of 20 years compared to what you'd get earning the 1%. But you gotta take taxes out of those gains. So if I have $120K to start with, I'm losing out on about $360K of earnings, of which something like 150K would be lost to taxes. So it's costing about 10K per year to have the peace of mind to not be forced into making a rash decision that could cost hundreds of thousands of lost income per year.

I'll pay that cost every time knowing that if life works out well and I never change jobs that it will have cost me some money.

Or is it costing 10k+/year for nothing? Peace of mind can exist whether the 12 months of "emergency funds" comes from a savings account, muni bond fund, etf or whatever. It only takes an extra couple days to liquidate any higher paying funds in taxable accounts.

 

[Mman]

Or is it costing 10k+/year for nothing? Peace of mind can exist whether the 12 months of "emergency funds" comes from a savings account, muni bond fund, etf or whatever. It only takes an extra couple days to liquidate any higher paying funds in taxable accounts.

You'd rather not have to divest holdings of a bond or ETF fund in case of emergency because you might be selling them at a low and costing yourself returns over time. The point of an emergency fund is to be able to have easy access to that cash no matter what stock or bond markets are doing. And honestly, if you are using a muni bond fund it isn't costing 10K per year because you aren't generating 8% returns per year with that vehicle. It's more like 2K per year.


It's OK to argue that you don't feel the need to have an emergency fund. There is no requirement to have one. But that doesn't mean there aren't valid and logical reasons for someone else to do so.

 

[TexasPhysician]

You'd rather not have to divest holdings of a bond or ETF fund in case of emergency because you might be selling them at a low and costing yourself returns over time. The point of an emergency fund is to be able to have easy access to that cash no matter what stock or bond markets are doing. And honestly, if you are using a muni bond fund it isn't costing 10K per year because you aren't generating 8% returns per year with that vehicle. It's more like 2K per year.


It's OK to argue that you don't feel the need to have an emergency fund. There is no requirement to have one. But that doesn't mean there aren't valid and logical reasons for someone else to do so.

What are the odds of selling at less than 1% gains and having multiple emergencies to consistently not earn >1%?

I just believe that savings account emergency funds are designed for lower income groups or jobs with higher turnover. Most physicians are neither.

The risk of selling mutual funds at <1% gains over 20 years is worth the reward when jobs are plentiful and earnings are high in my opinion.

I am not a financial planner, nor do I care what others do with their money. I just believe that broad financial recommendations are not valid for everyone.

 

[Mman]

What are the odds of selling at less than 1% gains and having multiple emergencies to consistently not earn >1%?

I just believe that savings account emergency funds are designed for lower income groups or jobs with higher turnover. Most physicians are neither.

The risk of selling mutual funds at <1% gains over 20 years is worth the reward when jobs are plentiful and earnings are high in my opinion.

I am not a financial planner, nor do I care what others do with their money. I just believe that broad financial recommendations are not valid for everyone.

That's OK for you to believe those things. I actually believe an emergency fund is more valuable to a physician that earns a high income than it is to a broader base since a job search for a physician can take a LOT longer than it can for your average Joe. I'd personally anticipate 6-12 months worth of job searching from coast to coast and I'd be willing to wait 18-24 months if that's what it took to get the right job since taking the wrong job would be so devastating. I mean if I wanted to take a 75% paycut I could find a job tomorrow, but that wouldn't be a good long term plan. It would take me lots of work to find a job similar to what I have now, but it would be worth it long term.

Does it cost me a little money long term to have that security? Sure, but not much. It's not like I'll have to work extra years to make up for it.

 

[The White Coat Investor]

There's no right or wrong with emergency funds. Lots of reasonable things you can do:

Are Emergency Funds For The Weak Minded?

Mine is 6 months of basic living expenses in a tax-free municipal money market fund at Vanguard. Helps me take risk with my investments and my life without worrying about how to put food on the table. But I think we were several years out of residency before we ever got to six months worth. We just kept finding better things to do with the money (max out retirement accounts, pay off debt) and we kept increasing our spending!

 

[G-Man82]

I had mine in an Ally 1.05% HYS account, with a portion in I-bonds. I transitioned the HYS to VMSXX (Vanguard Municipal money market, a tax exempt fund). It has a 0.78% SEC yield now, and I'm in the 33% federal bracket. So my tax-equivalent yield would be 1.16%.

With rising interest rates, these funds are looking more attractive. I suppose I could put it into the Ally 1.5% no-penalty CD ...


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