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Does a person have only one asset allocation?

I am reviewing some account information and making sure I understand what is generally recomended.

We have savings for 4 reasons:

1) Emergency fund with 3 months expenses (in a 90 day CD ladder) 2) Retirement (160k, invested in nearly 100% equities) 3) Mortgage paydown fund (invested in PRPFX). This doubles as a secondary emergency fund, so investment risk is moderate at best. 4) HSA- this is a new one- It finally has enough money to invest (I need to keep some of it in cash for current medical expenses, and the rest of it could be invested).

I am trying to wrap my head around 1-3-4. Retirement asset allocation looks solid. Not sure if I should just keep 1-3-4 in cash, and within HSA, my thought is to keep 2 years medical expenses in cash, invest the rest as aggressively as possible. Within mortage paydown fund, I need to beat a 5.75% interest rate to make that account work for me, but also like idea of having this money liquid (and not tied up in equity).

Would you bundle this all into one plan, or keep each pile of money in a seperate account/ seperate from overall asset allocation?

Probably a 5th thing to consider is college savings for kids, but not ready to go there just yet (kids are 3 days old).

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Reply to
jIM
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Well, first, congrats on the new kids. I don't really understand (3). If it's an emergency fund, treat it as such. It stays liquid. But then how is it different than (1)? You might want to cap 1+3 at 6 months' expenses and choose between actually paying down the mortgage or putting it in your retirement portfolio.

Are you able to contribute to a Roth? That's one hybrid choice to consider, as deposits may be withdrawn with no penalty, but if no emergency comes up, you can shift it to more aggressive investments. Joe

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Reply to
joetaxpayer

Your HSA probably has to be kept separate, so you can only combine 1 and 3. Some mortgages allow you to prepay and if you are short for a few months you wouldn't have to make payments. Combining 1 and 3 should reduce your emergency funds requirement.

-- Ron

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Reply to
Ron Peterson

Maybe I gave too much information to distract from the question. The question is do HSA's count in normal asset allocation, and do emergency funds count in normal asset allocation? I don't think they do (based on the time horizons of each account need or liquidity need of each account).

The 160k I have is a combination of 401ks, rollovers and Roths.

I don't think it's prudent to keep 6 months expenses in cash. Interest rates are way too low and 1-3% growth is not what I think is prudent for (in my case) 24k of assets (that is 16% of my portfolio and I am only 35 yo).

So my compromise (to myself) was 3 months expenses in CDs and 3 months expenses in a moderate investment.

My wife wanted to pay down the mortgage once we hit 3 months expenses (where as I was in camp to invest instead of paying off). So what I did was combine all 3 into one "objective". Keep 6 months expenses, but make sure some of this is in an investment which will beat mortgage rate (5.75%) while also being relatively stable in value (preserve my investment). The mutual fund is quite moderate (PRPFX), it does not quite have 3 months expenses in it yet, but should within

18 months. I want to keep at least 3 months expenses in this, as this fund also becomes the "new roof" fund, the "new water heater" fund, and the "problem/crisis" fund.

If we used the 12k slated for this initially to pay down mortgage, we could not easily tap into it to get a new roof or new water heater. If we used the 12k in a cash account, it would not grow faster than the mortgage would be costing over any time period (debt is costing

5.75% before taxes). If we only kept 3 months in EF, it may not cover cost of new roof, water heater or similar expense.

HSA- this is like a reverse lifecycle fund. I see a need to keep 2 years medical expenses in cash, then have the rest grow-grow-grow for when I have higher expenses later. 2 years expenses makes sense in that I need to have $X in money market (by account rule) before I can invest $Y amount to grow. $X is probably 1 years expenses for me, so having 2 years expenses gives me a chance to not withdraw investment out in a down year to meet plan rules.

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Reply to
jIM

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