Emergency Fund - Invest?

[runmanTX]

My understanding on the EF purpose was always:
1. For unexpected "emergencies" (job loss, emergency flight, broken home appliance)
2. Should be totally liquid (cash on hand in bank or safely stored at home) and not invested

I've got 6 months of expenses kept in a separate bank account which I never touch. Also keep a different "Sinking Fund" account for upcoming expenses that I know about (car shaken, rent renewal, insurance premiums, Christmas or BD presents, etc.)

All this talk about EF here and I have thoughts of those movies where people are living off the grid. The doomsday underground shelters, power generators, stored can food, water, whiskey, Haha Too many movies, perhaps.

[Gulliver]

I would consider six months EF an absolute minimum. Really think about how long it would actually take you to find a new job in today’s environment if you became unemployed. Then there are the unexpected auxiliary cost of moving in and out of apartments, waiting for your first months paycheck etc. Personally, I would not feel comfortable with anything under A one year yeah EF.

Six months should be readily available in a bank account.

The other six months worth you can put any NISA (which by the way is also totally liquid and tax sheltered at the same time). If you don’t know anything about investing just put all your NiSA in an S&P 500 or Dow Jones industrial index fund. (Because let’s face it, there’s nowhere else to put it right now.) Hopefully the NISA Will have an average gain of at least 2 or 3% per year which will keep you ahead of inflation.

[zeroshiki]

I'm sorry, but putting your money in NISA with the idea of pulling it out in an emergency is quite a bad piece of advice that I feel compelled to call it out. I hope no one follows it.

[Gulliver]

I'm sorry, but putting your money in NISA with the idea of pulling it out in an emergency is quite a bad piece of advice that I feel compelled to call it out. I hope no one follows it.

Care to elaborate?

[Butterball]

The problem with putting your "emergency fund" in mutual funds is, sure you can probably get the money within a few days if you need it, but if the market happens to be down at that time, you'll selling low, which will do disproportionate damage to your savings going forward. And a lot of emergencies, like sudden, unexpected unemployment and a bad job market, are more likely to happen in the midst of a market crash. Emergency funds are for minimizing worst-case-type scenarios.

Gulliver » Thu Aug 26, 2021 10:30 pm

zeroshiki wrote: ↑
Thu Aug 26, 2021 10:26 pm
I'm sorry, but putting your money in NISA with the idea of pulling it out in an emergency is quite a bad piece of advice that I feel compelled to call it out. I hope no one follows it.

Care to elaborate?

Not OP, but it's a bad idea because selling out of your NISA doesn't give your back your allowance. That tax advantage is gone forever. NISA (and iDeco) are the funds you want to hold the longest. It's always better to sell from taxable accounts first.

[Gulliver]

NISA (rand iDeco) are the funds you want to hold the longest.

From what you’ve written here I’m not sure you understand how NISA works. The NISA and iDeco Are two completely different animals. You’re correct in that iDeco is a great way to generate long-term investment savings for retirement (like the IRA in the USA). The NISA, although sometimes the marketed in the same way, is not.

NISA was originally meant to be a way to gently encourage cash hoarding Japanese to learn how to save and invest for the future/retirement. The ability to withdraw the money any time before retirement age was seen as the carrot on a stick. Fast forward through several government committees and politicians terrified of losing tax revenue, and you have the current Frankenstein’s monster that is NISA. As it stands, unless you are about 10 years away from retirement, it is one of the worst ways to save for your golden years out there. Due to the way it is structured every 10 years you will be taxed on investment gains. Consequently, NISA has turned into a short to medium term investment that can be beneficial, but not in the way it was intended.

Imagine for minute that you had invested in a tax-exempt municipal bond in the USA that somehow yielded a 200% return. This is essentially what would’ve happened if you had your NISA invested in t be he Dow Jones industrial index fund over the last 10 years. This makes NISA not only an ideal way to hedge inflation for your rainy day fund, but for various miscellaneous purposes as well. Ie. I also use it for my vacation fund. It has yielded enough to go on a luxurious vacation over five years time. On the other hand, Leaving six months to a year of cash in your bank/under your mattress may result in a loss of 20-30% of its worth due to inflation (a greater certainty than a possible long-term recession).

So there you have it. A years worth of EF in form of A 50-50 split of cash in the bank (for immediate needs) and NISA for that extra cushion and inflation protection just works in the screwy investment environment that is Japan.

[captainspoke]

...stored can food, water, whiskey, ...

I'll have to ask the wife about that last one at dinner. Might be a good barter item--and I can sell her on it that way.

[RetireJapan]

As it stands, unless you are about 10 years away from retirement, it is one of the worst ways to save for your golden years out there. Due to the way it is structured every 10 years you will be taxed on investment gains.

Compared to a taxable account, 10 years of tax-free capital gains (or 20 from tsumitate) seems pretty good. So I wouldn't agree it is one of the worst ways to save for retirement. In fact, it's only second to iDeCo, surely? Unless there is something better out there that I have missed. Maybe fuka nenkin I guess, but that is too small to move the needle much...

Saying you will be taxed every ten years seems a bit misleading: you'll be taxed on gains going forward, but there is no tax at the ten-year point.

[Gulliver]

As it stands, unless you are about 10 years away from retirement, it is one of the worst ways to save for your golden years out there. Due to the way it is structured every 10 years you will be taxed on investment gains.

So I wouldn't agree it is one of the worst ways to save for retirement. In fact, it's only second to iDeCo, surely?

Fair points. If you do not have access other investment vehicles such as 401(k)(j)s, pensions, or other foreign investment accounts- NISA is better than nothing if you’re trying to save retirement. Another thing to remember is that each family member can have their own NISA Account, which is a big positive (as long as you trust in them )and should always be considered in your calculations.

[adamu]

A years worth of EF in form of A 50-50 split of cash in the bank (for immediate needs) and NISA for that extra cushion and inflation protection

What's the difference between your 50% emergency fund in the NISA, and any other investment?

Another way of looking at this is that your emergency fund is just the cash portion. If that's not big enough for whatever emergency, you're willing to risk selling some investments at a loss.