Get It Now? An Emergency Fund Is NOT Optional

According to the latest news on Friday, President Trump has decided to call a temporary, three-week cease-fire in his wall battle with Congress, which will certainly come as some relief to the hundreds of thousands of Americans -- federal workers, contractors, and others -- who weren't paid during the 35 days of the government shutdown. And beyond those directly affected, millions more took hits to their income from the knock-on effects: Government workers without paychecks reined their spending back to bare minimums, and billions of dollars in purchases that normally would have happened, didn't.
All of which is a darn good reminder that no matter whom you work for, and no matter what you do, you need to have an emergency fund, because stuff happens.

In this segment from the Motley Fool Answers -- recorded before we had any idea how much longer the shutdown would last -- hosts Alison Southwick and Robert Brokamp cover the basics: How big your emergency fund should be; where should you keep it -- not in your mattress, but not in stocks, either; what to do when trouble strikes and you have to start relying on that cash cushion; and the pros and cons of the various options you might have to explore if you've run your bank accounts and emergency funds dry. They also look back on the remarkable life of Jack Bogle, a man who could easily have become a billionaire, but instead helped millions of ordinary Americans save an estimated $1 trillion in investing costs.

A full transcript follows the video.

This video was recorded on Jan. 22, 2019.

Alison Southwick: This is Motley Fool Answers! I'm Alison Southwick and I'm joined, as always, by Robert Brokamp, personal finance expert here at The Motley Fool.

Robert Brokamp: Hi, Alison!

Southwick: Hey, Bro! In today's episode, we're going to talk about how to build an emergency fund, how to maintain one, and what to do if you don't have one when an emergency does happen. We'll also spend a lot of time remembering Jack Bogle...

Brokamp: Yeah...

Southwick: ...the founder of Vanguard, who passed away last week. All that and more on this week's episode of Motley Fool Answers.

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Southwick: So Bro, I have a feeling I already know what's up.

Brokamp: Yes.

Southwick: And it's not us.

Brokamp: It's not us, no. Last Wednesday, Vanguard founder John Bogle passed away at the age of 89. As many longtime Fools and listeners will know, he was an inspiration and a hero to many of us. We have a room named in his honor here at Fool HQ. We've been lucky enough to host him here at Fool HQ a couple of times. He even rode in The Fool Mobile several years ago at a convention in Houston. He's been such a figure in many of our lives that with his passing we thought we'd take this opportunity and this episode to do a tribute to him.

Let's start with a little bit of his biography. We've talked about him before, so some of this is going over information we've passed along. I'm sure many of you read some of it, so we won't go too deep into his biography.

He was born in 1929 to a relatively affluent family, but it didn't last very long because then came the Great Depression. His father lost most of the family fortune and then, according to John Bogle, turned to alcoholism. His parents got divorced and mostly disappeared from his life, at that point, from what I understand. That [put] Jack Bogle in a situation where he had to work a lot as a young kid.

But he didn't think that was such a bad thing, even though in the course of all this they lost their family home and they had to move in with relatives. [He worked many jobs] -- as a newspaper boy, as a guy who set up pins at a bowling alley, all kinds of these things -- but he said, "They were tough times and I started working when I was 10 years old delivering papers and eventually becoming a waiter. I learned you work for what you get and I feel sorry for people who haven't had that upbringing." He really did see it as a disadvantage if you didn't have to work a little bit when you were younger.

He eventually got a full scholarship to Princeton, but he still had to work as a waiter at the school dining hall while he was there. He struggled a little bit academically at first, but then recovered and graduated magna cum laude. Then when he was there, even at that young age, he recognized that actively managed mutual funds were a challenge. It was difficult to beat the market and he wrote his senior thesis, called "The Economic Role of the Investment Company," in which he said that funds can make no claim to superiority over the market averages. He wrote, "A fund's management should operate in the most efficient, honest, and economical way possible."

He sent that thesis to Wellington Management. The guy who was running the company, then, liked it so much he hired Bogle, and Bogle really rose through the ranks. He was the golden boy there for a while. Unfortunately, in 1974, he ended up getting fired after an ill-advised merger and he called the mistake "shameful and excusable in reflection of my immaturity." But he also said that if he weren't fired, there never would have been a Vanguard.

The story usually goes that he then sets off and establishes Vanguard very quickly, but actually it was a really tough time for him. He told a biographer that one day he was on a train and he just started crying, because he didn't know what he was going to do. He said, "I was totally wiped out. I don't recall another time like that when I was wiped out by it all." Still, he managed to found Vanguard in 1975 with a lineup of 11 actively managed mutual funds.

What's key, here, is that Vanguard is not a publicly traded company. It's a true mutual company in that it is owned by the funds which are, in turn, owned by the shareholders. If you own a Vanguard fund you own part of the company, and what's great about that is as opposed to being a publicly traded company that has a profit motive, Vanguard just has to cover its costs, which is why they can keep their costs so low.

In 1976 came the thing that Vanguard is mostly known for these days and that was launching the first publicly available index fund. It was called First Index Investment Trust...

Southwick: Creatively named.

Brokamp: Creatively named, and it was a flop. The banks that managed it were hoping to raise $150 million at launch, but it raised just over $11 million. Bogle was urged to close the fund. It was called "Bogle's Folly." It was called "un-American." He appears to have persevered and now the fund is the biggest mutual fund in the world.

It was also one of the first companies to offer funds directly to people who wanted to invest in them; essentially, no-load funds. Up until that point, if you wanted to buy a mutual fund, you had to pay a broker a commission upwards of 8%. Just another way that Vanguard has kept costs low for people.

That's all back then. Where are we now?

Vanguard is the second-biggest money manager in the world, managing more than $5 trillion. Bloomberg's Eric Balchunas once calculated that Bogle, through Vanguard, has saved investors upwards of $175 billion. That's just from the low costs. But then he estimated what the "Vanguard effect" is -- not only the low cost of Vanguard, but the competition in the industry that has caused people to drive down the cost of their funds. Now Fidelity is offering a no-fee index fund. He estimates that as a value of $1 trillion that Bogle and Vanguard have given to American investors.

Just a couple of personal notes about Bogle. He married Eve Sherrerd in 1956 and they were still married when he passed away, so it was a marriage of 62 years. They had six kids. She, I assume, is the complete opposite of him in terms of publicity because I did not find a single quote from her, and if you look on the internet, there's like three pictures. She's obviously very different from him when it comes to the spotlight.

The other interesting thing about him is that he had a pretty bad heart. Over the course of his life, starting at age 30, he had anywhere between six and eight heart attacks until he eventually had a transplant in the '90s, which essentially rejuvenated his life. But after he had his first heart attack in his thirties, the doctors told him that he would only live to his forties. That he needed to stop working, to stop exercising, and he shouldn't have any more kids. He obviously ignored all of that, because he then had two more kids.

I think if there's anything that shows the perseverance of Jack Bogle, it's the launching of that index fund and being able to make it what it is today despite all the troubles he had along the way and that he was able to do this with a bum ticker and still live to age 89.

Looking at his interviews over the last couple of months, he had some words of caution for investors. First of all, it seems he could sense the end was coming. He spoke at the Bogleheads Conference in October and he began by quoting the ancient Greek playwright Sophocles saying, "One must wait until the evening to see how the splendid day has been." Then he added, "I think my evening is here, and I don't much like that."

But he said at that meeting, as well as in an interview in Barron's in December, that investors should expect below-average returns. He estimated as low as 2-4% from the stock market and about the same from bonds. When asked what people should do, the answer was you're going to have to save a little bit more and you're going to have to get costs out of the equation.

Since Bogle passed away last Wednesday there have been plenty of great tweets, tributes, and anecdotes about him. I want to read a few of those. Friend of this show Morgan Housel tweeted, "John Bogle built a non-profit business with $5 trillion under management. What would have been profit effectively went to retirees. He was the biggest undercover philanthropist of all time."

Rick Ferri, who's a money manager and author, [is] very active in the Bogleheads group, a group devoted to John Bogle. That, itself, is kind of interesting. There's no one in the financial services industry that has groupies like John Bogle did.

Southwick: Buffett has groupies. They don't have a name, but he's got...

Brokamp: Right. It's close.

Southwick: He's got groupies.

Brokamp: Rick is also the person who does the Bogleheads podcast. He interviewed Jack Bogle in September, which I would recommend to anyone. It's a long podcast about the history of Vanguard. Rick said in his article, "You cannot measure the quality of a man by the size of his bank account, but in John Bogle's case, you can measure it by the size of your bank account. No one on this planet has done more to increase the lot of individual investors in the last 50 years than John C. Bogle."

Bogle, also, was a big fan of fiduciary rule, which requires all financial advisors to act in the best interests of their clients which, believe it or not, is a controversial thing. It still hasn't been approved for everyone, but Rick suggests that because Bogle is such a fan of it, if it ever does pass we call it the Bogle Rule.

Speaking of the Bogleheads, David J. on the Bogleheads' discussion boards wrote...

Southwick: It sounds like a band.

Brokamp: I know. He wrote, "He could have been a billionaire. Instead he made hundreds of thousands of us investors millionaires." In 2012 Bogle put his net worth in the low double-digit millions -- $10-30 million. The guy wasn't poor, but compared to other people running mutual funds, he could have been a billionaire.

Bogle, himself, points out that the Johnson family that founded the Fidelity funds is worth billions of dollars. Abi Johnson is the chairwoman of Fidelity, now. She's the granddaughter of the founder, Ned Johnson. She, alone, is worth $15.4 billion, just in Fidelity. Vanguard's a bigger company, so you can only imagine what John Bogle would be worth if he structured the company differently, but he chose not to. He chose to, instead, pass all that along to the shareholders.

Kevin O'Leary of Shark Tank fame tweeted out that if the only free lunch in investing is diversification, then Jack Bogle ran the most popular diner on Wall Street. He served up indexing and never looked back. He was the rock star maverick of change and the founder of a trillion-dollar industry. His DNA is in every ETF traded.

Becky Quick, upon hearing of the death of Jack Bogle, called Warren Buffett. Warren Buffett said, "Jack did more for the American investor as a whole than any individual I've known. A lot of Wall Street is devoted to charging a lot for nothing. He charged nothing to accomplish a huge amount."

I loved going through Twitter for personal anecdotes about John Bogle because he was famously accessible. He responded to people with handwritten notes. He sent me a handwritten note after he read one of my articles. Greg Ip, who's a journalist for The Wall Street Journal tweeted out that, "A limo driver once told me about giving Jack Bogle a ride back from a TV interview. They got to talking, and Bogle told him about index funds. Upon arrival, Bogle personally helped the driver fill out the paperwork to open an index fund account on the hood of his car."

He was also famously frugal. I did not catch the person's name, but I read this also on Twitter. It was from a Vanguard employee. He was at the Vanguard cafeteria getting his salad. He put his salad dressing on the salad and looked to his right. There's John Bogle, and John Bogle says, "You know, if you keep the salad dressing on the side they don't charge you for it and it will save you a dollar. I've been doing it for years."

But my favorite quote and a good way to end this is from William Bernstein who's also a money manager and author. A big indexer. He was quoted in The Philadelphia Inquirer as saying, "Jack could have been a multi-billionaire on par with Gates and Buffett. Instead, he turned his company into one owned by its mutual funds and, in turn, their investors.

"He basically chose to forego an enormous fortune to do something right for millions of people. I don't know any other story like it in American business history. Simply put, Jack cared. He cared enough about his clients to personally answer their letters, he cared enough about his employees to be on a first-name basis with thousands of them, and to pitch in at the phone banks when things got busy.

"In the end he cared enough about his country that he spent much of the last two decades away from his home tirelessly crusading against the increasingly elephantine and dysfunctional financial system."

I'll close with a quote from Bogle, himself. "It's about being a good husband, a good father, a good colleague, a good member of the community. Everything else pales by comparison. The accumulation of material goods is a waste. You can't take them with you, anyway, and the waste is typified by our financial system. The essential message is stop focusing on self and start thinking about service to others."

[...]

Southwick: Because of the government shutdown, roughly 420,000 Americans across the country are going without pay and have missed, at this point, at least a couple of paychecks. Imagine going a month without any income. Would you still be able to pay the bills? Most people wouldn't. As Bro has mentioned before on the show, 40% of U.S. adults don't have enough money in savings to cover a $400 emergency, so now seems like a really good time to have an episode dedicated to building an emergency fund and what to do if you don't already have one.

Brokamp: Right.

Southwick: Bro, where do you want to start?

Brokamp: I talked about this a little bit in the last episode. People have been focusing on the [federal employees' problems due to the shutdown]. Some people are saying they'll get their money eventually, but this is affecting an estimated four million contractors and there are so many businesses that are built around the federal government [suppliers, restaurants, cab drivers, service providers]. They're not going to get paid. They're just missing out on their business.

We, here, at Fool HQ are in Alexandria, Virginia. We're in the suburbs of Washington, D.C. We all know people who are being affected by this, including spouses of Fools, so it is pretty widespread, and there's no question that the economy is going to take a little bit of a hit because of this. Standard & Poor's estimates that very soon the cost of the shutdown is going to exceed the cost of the wall that President Trump wants, so it's kind of crazy.

The bottom line is a lot of people [must] have thought, "Well, I'm a government employee. I have a safe job." An example is the people in the Coast Guard. Fun fact -- I was accepted into the Coast Guard Academy. I was thinking of going into the Coast Guard and flying helicopters. Instead, I decided I wanted to be a priest so I didn't go. And we see how that worked out. But you think if you're in the Coast Guard your paycheck is safe and this happens.

What it goes to show is no matter what situation you're in, something unexpected could happen, and the solution to that is the big, old, boring emergency fund. It's the most standard advice from all financial planners, but it just shows the need for it. If you don't have that emergency fund, you'll have to rely on other sources for the funds. We're going to talk about those later in the show, and the pros and cons of each option, but all of them are inferior to just having some cash on the side.

First of all, let's talk about why you would have an emergency fund. Talking about the shutdown, it's income disruption. It could also be an unexpected expense [home repair, car repair, medical bill] that you didn't budget for. That's a reason why you would have an emergency fund.

What should the size of the emergency fund be? We've always said three to six months of must-pay expenses. It's not three to six months of income, or three to six months of expenses. It's the must-pay expenses.

Southwick: Not Netflix.

Brokamp: Not Netflix.

Southwick: You may feel like that's a must, but it's not.

Brokamp: I've been saying that for years because that's what I've always heard for years, and I was wondering where that came from. Was there one person who was the first person who said that and is given credit for it? The answer is I couldn't find an answer to that.

But while that's the consensus on it, there is a bit of disagreement. First of all, there are people who think three to six months is too much. You have other ways to pay bills and again, we'll talk about those in a little bit. But some people do think that by having that much cash on the side you're missing out on opportunity costs [what you could have gotten if it were in the stock market or the things you could have spent it on and had some fun]. I don't agree with that, but there are people who believe that.

Then there are people who believe it should be bigger. Suze Orman thinks it should be eight to 12 months of expenses. David Bach, another well-known personal financial writer thinks it should be at least a year, and his emergency fund is two years.

Is there any empirical evidence for the size of an emergency fund? Bankrate just came out with a survey that asked people, "Have you had an emergency and how big was it?" They found that 30% reported that either they or an immediate family member have experienced one major unexpected expense. The average of that expense was $3,750 and more than one-third was more than $5,000. That says, right there, that based on that evidence, a good emergency fund should at least be $4,000 to $6,000.

And what about the income disruption? That's usually because you've been laid off in most situations. I looked at that and right now the average duration of unemployment in the U.S. is nine weeks, or a couple of months. That's about the long-term average. But when you look at things like the Great Recession of a decade ago, that spiked to 24 weeks, so on average the unemployed person was out of work for one-half of a year.

In those types of situations, I don't think you need an emergency fund for those outlier experiences. That was the worst economic downturn since the Great Depression, but it definitely makes sense that when you look at the average unemployment of being more than two months, three to six months is not a bad guideline.

We should point out that one of the reasons why some people think you don't need that big of an emergency fund is because when you've been laid off, in many situations you get severance pay. The average severance pay is one to two weeks for every year of service. If you've worked for a company for five years, you could expect severance pay of five to 10 weeks.

Southwick: Not here at The Motley Fool.

Brokamp: Yes, it's a little more generous. I've heard discussions of it not being quite so generous. One thing I think everyone should do is find out your own company's severance package. And in the case of the Enron's, the WorldCom's, the Lehman Brothers, and all those situations, many of them went out of business. I don't know the exact details for each of those companies, but in many situations when a company goes under, you lose your job and they don't have money to pay severance.

There's also unemployment benefits -- those are run by each state -- but the maximum they pay per week is pretty low. The average across the country is $400 per week, so $1,600 per month. Not a lot of money. Better than nothing, but not a lot of money. Those federal employees might be wondering if you can apply for unemployment benefits? Depending on the situation the answer is yes...

Southwick: Oh, good.

Brokamp: ... but if you then go back to work and you get the back pay, you have to return the unemployment benefits. That might be fine.

Southwick: A loan...

Brokamp: Maybe you just need something to get you there. But certainly for people in that situation it's something to look at.

The bottom line -- what should the size of your emergency fund be? I still stick with the three to six months must-pay expenses. The type of situations where I would say you need more would be if you have big, non-negotiable expenses like a mortgage or a car loan. I have a big family. I don't have extended family who can help me. And I have a job that is more likely that I'm going to lose it during the next downturn or at least my pay will somehow be affected by that. Those are all factors that you would use to determine the size of your emergency fund.

What should it be in? Cash, plain and simple.

Now these days you can get a higher yield. The Motley Fool has a website called The Ascent where you can find some good yields. CDs, now, are actually paying upwards of 3% and some over 3%. Those are worth looking at. Just know that if you're going to buy a CD, you're supposed to keep it until the duration [a two-to-three-year CD]. You want to know the CD's policy if you need to cash it in early. Usually it's something like three to six months of interest. You want to know that beforehand.

Let's say you're now in the situation where you need the emergency fund. For some reason you've had an income disruption or just a big expense. How can you stretch it out? What should you do to your finances to put yourself on emergency footing to make sure it lasts as long as possible?

As I pointed out, the emergency fund is based on must-pay expenses, so you want to look at the discretionary expenses. You want to do as much as possible but not spend money. In the last episode we talked about how you could suspend your cable service. You don't have to cancel it -- you could suspend it. You look at the things that you normally spend money on and you try to cut back.

But it's not just your spending. You might be on some sort of automatic investment plan. You might be sending $400 a month to the 529 plan. You might be spending $200 or $400 to an IRA. You probably should stop that for now.

You want to be in contact with the people to whom you owe bills, and you start with the people who have the biggest influence over your credit score, and that's usually banks. So call the people who are providing your mortgage, your car loan, your school loan. Let them know the situation. More and more companies, everyday now, at least in terms of the shutdown, are announcing ways that they're going to accommodate these folks, but you want to know what that is now. They're either going to extend deadlines. Maybe extend grace periods. Waive certain fees.

Southwick: Our neighbor is furloughed. She said that the most her credit card company will do is waive the late fees. That's still something.

Brokamp: That's still something, but you want to start there, because those are the companies that if you don't pay those bills it's going to affect your credit score. There's a bank out in Oklahoma -- First Oklahoma Bank -- that has more than 6,000 federal employees as customers, and they are going to cover their bills until they start getting paid.

First of all, that's just a great story. Second of all, it shows that when a lot of people are thinking of this federal shutdown they think of Washington, D.C., but there are federal employees all over the country.

More and more companies are also announcing some form of accommodation. Verizon, AT&T, T-Mobile. More restaurants are coming out, especially in the D.C. area, saying they're giving discounts.

Southwick: Yes, José Andres is feeding people for free.

Brokamp: So you want to be aware of what's available to you. The other thing you need to do is look for money you're due. For example, obviously someone owes you money. It's time to collect.

But the other thing would be flexible spending, for example. Now this is the interesting thing about medical flexible spending. Let's say you signed up to set aside $2,700. You don't have to wait until all that has been taken out of your paycheck to get that money. You could submit a legitimate reimbursement today and get that full $2,700 today even before you've put all that money away from your paycheck.

Southwick: Is it true with dependent care, too?

Brokamp: It is not true.

Southwick: OK, I was going to say because that didn't happen with me. It's different with dependent care.

Brokamp: It's a good time to get your flexible spending. The other way you may be due money is a tax refund. The IRS has said that they're going to start accepting returns on January 28th. They've said the shutdown will not affect their ability to process tax returns and give refunds. And on average, according to the IRS, you get a refund in 21 days.

So if you think you're going to get a tax refund, now is a good time to start getting your taxes ready. Of course, there's a state refund, too. Now there are services that will speed up your refund. They're called "refund anticipation loans." Generally not a great idea -- obviously there are going to be fees attached to that -- but if you need the money and you can't wait 21 days to get your refund, that is an option.

You should access other resources available to you like employee assistance programs. We at The Fool have one. It's basically a program by which you call them and they can point you to helpful resources. Many employers, as well as unions and associations, have assistance funds. We at The Fool have Fool in Need. If someone's in any financial trouble, they can apply and get some money. Federal employees actually have the Federal Employee Education and Assistance Fund, which you can find at FEEA.org.

But contact any sort of these types of organizations to which you have an association or you belong to and they might have some sort of way of helping you out. And also other organizations like United Way and the Red Cross are always offering resources and help to people, but they are starting to do more specifically for federal employees.

Those are ways to make your emergency fund last a little longer. What should you do once it's gone? What if you don't have any more cash in the bank? I'm going to lay out a few options and give the pros and cons, and depending on your situation, one might be better than the other.

The first one is to sell investments in regular taxable accounts. If you have a regular brokerage account and you own stocks, just sell those. The pros are it's pretty easy and pretty liquid. You'll get the cash pretty soon. The market is down somewhat. Maybe it's a good time to do some tax loss harvesting. You can sell a stock that is less than what you paid for it and wait 30 days to buy it back. If you don't have the money, don't buy it back, but at least that will reduce your tax bill this year. That's a pro. It's pretty easy to get that money.

The con is ideally you bought that investment as a long-term investment and now you're going to have to sell it. The market is down and that's one of the reasons why you want an emergency fund -- you're not forced to sell stocks when they're down. Plus, if you are selling at a gain you're going to owe taxes in a year. If you sell an investment with a big capital gain, make sure you have a plan for paying those taxes. You don't want to forget about it and then be surprised come April 15th, 2020.

Another option, of course, is credit cards. Credit cards are easy because everyone takes them and if you are a federal employee and you do expect to get your money back [they just passed a bill that says once people do go back to work they will get their pay], a credit card is a good source of short-term money. You just have to make sure you pay the bill. Maybe get some points for airline miles.

The cons are of all the debt you could owe, this has got the higher interest rate. In December of last year the Fed raised interest rates. Despite that, rates across the board in everything from Treasuries to mortgages went down with one exception -- credit cards. Credit card rates went up and they're now at all-time highs, according to CreditCards.com.

Southwick: Really?

Brokamp: Yes, at least as long as they've been tracking it. That's obviously the reason you want to avoid credit cards. It is a short-term bridge, but it is not a long-term solution.

Another option is home equity, and for most people that's a home equity line of credit. The pro is if you've got the equity you probably can get it. There's some setup costs, a credit check, and things like that, but it's usually not a big deal. The interest rate will be much lower than what you pay on a credit card.

The con is you're using your house as collateral, which is always a tricky thing. Also, due to the new tax law that was passed a year ago, the interest on a home equity loan is no longer deductible unless you use it to improve your house. If you're using it to cover short-term bills, that interest is no longer deductible. I'm not a big fan of home equity lines of credit, but it's available.

Another option is to borrow from your employer-sponsored retirement account -- your 401(k), your 403(b), or in the case of federal employees, the thrift savings plan known as the TSP. The pros are that it's pretty easy. Even though it's called a loan, you're really just getting your own money, so there's no credit check. You don't have to get a credit approval.

Southwick: Rick and I know all about a 401(k) loan.

Brokamp: So you know how easy it is.

Southwick: It was so easy that when I asked Rick about any aspect of the process, he was like, "I don't remember. It must have been really easy because I don't remember."

Brokamp: It is easy. You're paying the interest to yourself and not to a bank. Those are the pros. The most you can borrow is $50,000 or half of your vested balance, whichever is less.

The cons are that money gets taken out of the market, so if the market takes off in the course of this loan you'll miss out on that. Also, if you don't pay off the loan, it's considered a distribution and you'll pay taxes and penalties if you're not 59 and a half. Generally you have five years to do it. Again, it's a fine short-term solution, but you have to have a plan to pay it back because if you don't, not only will you pay the tax and the penalties, but you're going to miss out on the future growth of what that money could have provided you if it were left alone in your 401(k).

I should say there recently was a bill proposed to make it easier for federal employees to access the money in their TSP. I haven't followed the details, yet, but know that that's also on the horizon for you folks.

Another option is your other retirement accounts like an IRA. You can always access that money anytime. Interestingly, if you take that money out and get it back in within 60 days, it's like you never did anything. While you legally cannot borrow money from an IRA, people refer to this as the "IRA loan." Take it out. You've just got to make sure you get it back within 60 days.

Just a note of caution. This is considered a rollover and there are some rules about rollovers, including a limit to only one every 12 months. So if you've already done it once and you try it again, it's considered a distribution. You won't be able to put the money back in the IRA and you may owe taxes and penalties. Make sure you learn all about the ins and outs before trying this strategy.

If you're taking money out of a Roth IRA and you don't get the money back in, the contribution you put in will still be tax and penalty-free. It's any growth you took out on which you'll pay taxes and penalties if you're not 59 and a half. A traditional IRA -- if you take it out and don't get it back in you're going to pay taxes and penalties. The negative there is the same as the 401(k). If you don't pay it back you'll miss out on all that growth and your retirement will be compromised.

Southwick: Or maybe the stock market tanks.

Brokamp: That's true.

Southwick: Some people might time it very well, so let's try to look on the bright side.

Brokamp: That's right. Someone in this studio, in fact. My last option is to borrow from family and friends. If you are in a family where that's fine, it's not embarrassing, and it won't cause any friction with folks, it's a perfectly good solution. When I bought my first house it involved borrowing money from my dad who, in the end, said, "You know what? Don't pay it back. You just won't inherit as much when I eventually die." I was happy with that. That's a great option if you can do it.

The cons of it are it can cause troubles.

Southwick: Borrowing money always can be difficult with family in keeping things fair.

Brokamp: And if you're not in a position of being able to pay it back, that causes problems.

Southwick: Is that Bro's last resort?

Brokamp: It depends. If you have a family where people are well off and have established, "If you're ever in trouble I'm here to help you out," I think that's the first resort. It's probably an interest-free loan and you don't have to go through all the other hassles.

Southwick: No paperwork.

Brokamp: It just depends on your situation.

There you have it. Building an emergency fund is the most boring of financial planning advice ever because sitting on a big pile of cash just isn't very exciting; but right now there are hundreds of thousands if not millions of Americans who either wish they had built an emergency fund or are very happy they did. Regardless of your situation, having one I think is really the foundation of a good, solid financial plan.

Southwick: And what's your advice for those who are furloughed and who will eventually get back pay? They will eventually come into a big pile of money...

Brokamp: Right.

Southwick: Do you have any advice for that?

Brokamp: Yes. Obviously if you've borrowed any money to do this...

Southwick: Pay it back!

Brokamp: Pay it back. If you've stopped contributing to your IRAs, 529s, or something like that get back on that track. I think there could be a silver lining to this. If you go without a paycheck for a while, it really forces you to prioritize your budget and I think it's very possible you eliminate expenses that you thought were important and then you realize you don't really need that.

Once you're back on a firmer footing, maybe you don't need cable anymore. Maybe you didn't need a particular service. Maybe you didn't need the gym membership like you thought you did. But then once you get that cash don't go nuts. Don't think now that you've got this big check you're going on vacation or anything like that. Rule No. 1 is to build up that emergency fund.

Southwick: So start listening to this podcast episode all over again. Just rewind. It's a virtuous circle.

Brokamp: Right.

__

Southwick: Bro, we're not done talking about Jack Bogle, because while at the beginning of the show you did display an extensive amount of knowledge about one John C. Bogle, I contend that you don't know Jack. Are you ready? I'm going to see if I can stump you.

Brokamp: It's interesting. I'll just point out that as someone who did interview him once [and many people will say this], he insisted that I call him Jack. If you called him Mr. Bogle he would say, "Please call me Jack." So we'll see if I know Jack.

Southwick: We'll see if I can stump you. Some of these questions are going to be pretty hard. As you mentioned, Jack's first index fund, the First Index Investment Trust, later went on to be renamed the Vanguard 500 Index Fund. It started off with about $11 million. When did it cross the $100 billion milestone? In what year? Or how many years did it take?

Brokamp: 1997.

Southwick: Close! 1999. Wow! Bogle predicted in January 1992 that it would very likely surpass the Magellan Fund before 2001, which it did. And as you mentioned, Vanguard currently has $5 trillion in assets under management.

Also as you mentioned, Bogle's senior thesis was titled, The Economic Role of the Investment Company. In December of 1949 he happened to read an article in what magazine that inspired his senior thesis and his life's work?

Brokamp: Fortune or Forbes.

Southwick: It was Fortune! Very nice! Bogle referred to it as a remarkable accident -- him reading this article that sparked his career. He said, "If I hadn't opened that magazine I wouldn't be in this business today."

Brokamp: Do you know what's interesting? Jason Zweig had a great article in The Wall Street Journal as a tribute to John Bogle. Zweig pointed out he wrote that article in 1951, I think. He joins Wellington, which was an actively managed fund shop, because there weren't index funds back then. And there are points in Bogle's history, even as late as 1973, where he is defending active management and saying if you own a mutual fund the average person will beat the market. It wasn't until he was forced out of Wellington and then started Vanguard that he really embraced the index concept.

But even while he was there, something like half the assets of Vanguard were actively managed. It's just one of those interesting things about him because he's so known for indexing that he ran a company that manages trillions of dollars in actively managed funds.

Southwick: And still does. Still some Vanguard funds are actively managed.

Brokamp: Still. 30% of their assets are actively managed.

Southwick: Paul Samuelson, the first American to win the Nobel Prize in economics, [had a great influence] on Bogle and he also liked Bogle, as well. He ranked Bogle's invention of the index fund alongside the invention of what other major achievements?

Brokamp: The wheel, and it's like sliced bread and cheese or something like that.

Southwick: Those are good inventions. The wheel, the alphabet, and the Gutenberg press.

Brokamp: Well, I was close.

Southwick: You were very close!

Brokamp: Many people will call Bogle the father of indexing, but the concept was discussed for years before the first index fund and one of them was by Paul Samuelson. Even Benjamin Graham came to a point where he [believed] it was hard to beat the market. It was really Bogle who made it the first publicly available retail index fund.

Southwick: Rick Stengel, the former managing editor of Time and a friend of Bogle's said that Bogle was a straight shooter and fond of describing pretentious people as all "blank" and no cattle.

Brokamp: All hat.

Southwick: Yes. Mr. Stengel described Bogle as all cattle and not very much hat. What is Vanguard named after?

Brokamp: It is named after a ship from the 1798 Battle of the Nile. Horatio Nelson vs. Napoleon and they won.

Southwick: Very nicely done. Yes. The HMS Vanguard. The company is noted for its nautical theme. Employees are called...

Brokamp: Crew members.

Southwick: ... crew members. The cafeteria is the galley. The gym is called ShipShape and the company store is the chandlery.

Brokamp: I'll take your word for it. I've been to their campus, and as I said before, they put the industrial in industrial park. It is a no frills place, which makes me happy as a Vanguard shareholder, of course.

Southwick: As quoted in The New York Times by Jeff Sommer, Jack was proud that he was not a what?

Brokamp: A billionaire.

Southwick: Yes!

Brokamp: There you go!

Southwick: You got it! Despite managing all that money he was worth roughly $80 million according to estimates. He said people are so often measured by the size of their financial assets [and that] his were not really awesome. "I don't share those values," he said. Apparently he only flew first class once because the upgrade was only going to cost him $50. There you go.

Bro, you've impressed me! I am going to say that yes, you actually do know Jack. It was very good!

Brokamp: Thank you! One fact I left out of the bio because I thought for sure you were going to ask me about it is that he was actually a twin and he outlived his brother by more than 20 years.

Southwick: Do you know what his congenital heart defect was?

Brokamp: I don't know the name of it, but I think it causes your heart to race like 200 beats per minute.

Southwick: It has a hard time regulating the electrical current. Crazy, huh?

Brokamp: Yes, very crazy.

Southwick: We're crazy. All right, very impressed, Bro!

Brokamp: Thank you! Thank you very much!

Southwick: That's the show! It's edited Bogglingly by Rick Engdahl.

Brokamp: Mind-Bogglingly. Mind-Bogglingly.

Southwick: It's edited mind-bogglingly by Rick Engdahl. Our email is [email protected]. We've got a Mailbag episode coming up so we'll get to that. For Robert Brokamp, I'm Alison Southwick. Stay Foolish, everybody!