Smarter Approach to Emergency Funds Lecture Notes

This set of vocabulary flashcards covers key financial concepts, investment vehicles, and strategies discussed in the Bogleheads forum regarding modern approaches to emergency fund management.

Emergency Fund

A household's financial capital intended to withstand unexpected shocks, such as unemployment or major unplanned expenses, without undue stress.

Inflation

Described as the "true enemy of cash" because it erodes purchasing power over time; for example, $10,000 in Treasury bills lost $15\%$ of its purchasing power between 2008 and 2020.

Vanguard LifeStrategy Income Fund (VASIX)

A conservative balanced fund that maintains an asset allocation of approximately $20\%$ to $30\%$ stocks and the remainder in bonds.

Drawdown

The peak-to-trough decline of an investment; for a $20/80$ stock and bond combination, the maximum drawdown since the Great Depression is calculated at approximately $15\%$.

Hybrid Approach

An emergency fund strategy involving one month of expenses in an immediate-access cash account and six months of expenses in a conservative balanced fund like VASIX.

Asset Allocation (AA)

The implementation of an investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals and risk tolerance.

Bucketing

A form of mental accounting where different pools of money are separated by purpose (e.g., an emergency bucket vs. a normal investment bucket) rather than viewing all assets as a single portfolio.

TIPS (Treasury Inflation-Protected Securities)

Treasury securities indexed to inflation to protect against purchasing power erosion, though short-term versions may still see marginal losses in real value.

Deflation

A general decline in prices; cash and nominal bonds are cited as asset classes that protect an investor against this economic condition.

SWAN ETF

Short for "Sleep Well At Night," this fund is described as an initial $90/10$ mix of treasuries and S&P 500 LEAPS (long-term equity anticipation securities).

I bonds

Inflation-indexed savings bonds issued by the U.S. government, suggested as a solution for maintaining the purchasing power of an emergency fund.

Bond Barbell

An investment strategy where an investor holds short-term and long-term bonds but few intermediate-term bonds; cash and money markets are often placed at the "short end."

Liquidity

The ease with which an asset can be converted into ready cash without affecting its market price.

Fidelity Freedom Index Income (FIKFX)

One of several low-fee, widely available conservative fund alternatives to VASIX suitable for an overfunded emergency fund strategy.