Author Topic: How much of an emergency fund should I have?  (Read 5258 times)

Strawberrykiwi75

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How much of an emergency fund should I have?
« on: August 29, 2014, 04:14:35 PM »
I've been playing around with my money a lot in recent months due to home renovations. But these are drawing to a close and I plan to pay down any surplus funds onto my home loan.

What I'm not sure about is how much to keep as an emergency fund after. My budget covers everything from doctors fees to rates (house taxes) etc so I don't need to have funds aside for that sort of thing. My car has been recently serviced and is in good condition. I have no debts. I have income protection for redundancy & sickness.

I have a low interest credit card if I needed quick access to funds (never used it for this purpose before but I know some people do) & work in a bank so would be able to get approved for a loan or anything if I needed it- however this is something I would ideally like to avoid. My investments cannot be accessed in a hurry which is deliberate.

How much do you think I should keep aside? I know some people recommend 3 months salary but that seems too much- I want my money working for me. Would one month be enough?

wwweb

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Re: How much of an emergency fund should I have?
« Reply #1 on: August 29, 2014, 04:42:11 PM »
How much to have in an emergency fund is a very personal calculation.  I keep about 4-6 months worth of expenses, but this is a small fraction of my net worth (and getting smaller).

When setting that number I found it useful to imagine five "very bad" emergencies which could happen to me.  For example
1) Job Loss
2) Major Medical Emergency (requiring hospitalization)
3) Loss of Transportation
4) Family Emergency (requiring multiple cross country flights)
5) Stock Market Crash

Then I set my emergency fund to be able to handle two of those emergencies at once.

Some people will think this is too conservative and others will think it is not conservative enough.  It is a personal decisions that you have to make for yourself.

Beric01

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Re: How much of an emergency fund should I have?
« Reply #2 on: August 29, 2014, 05:02:42 PM »
How much to have in an emergency fund is a very personal calculation.  I keep about 4-6 months worth of expenses, but this is a small fraction of my net worth (and getting smaller).

When setting that number I found it useful to imagine five "very bad" emergencies which could happen to me.  For example
1) Job Loss
2) Major Medical Emergency (requiring hospitalization)
3) Loss of Transportation
4) Family Emergency (requiring multiple cross country flights)
5) Stock Market Crash

Then I set my emergency fund to be able to handle two of those emergencies at once.

Some people will think this is too conservative and others will think it is not conservative enough.  It is a personal decisions that you have to make for yourself.

To each his own, though that is way too conservative for me.

IMO the most likely risk is job loss, and this is very personal depending on your career/field. It could take you 1 week or 1 year to get a replacement job depending on your field. But you can cover essential monthly expenses with a credit card or investment account withdrawals if it gets desperate.

Medical insurance (no longer optional) covers a medical emergency. I ride my bike only, so I can buy a $100 bike off Craigslist if my bike gets stolen. Family emergency should also be a minor expense - flights are cheap these days, and they go on your credit card. Stock market crash - why is this even relevant? If you lose 50% of your portfolio's value, that's happened in the past and will recover. If you lose 100% of your portfolio's value, you have bigger things to worry about than your portfolio's value - you have an economic crisis of unprecedented proportion going on.

Remember, every dollar you don't have invested is a dollar that isn't working for you. I keep 1-2 months' expenses, and that's just to cover my automatic payments.

Pooperman

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Re: How much of an emergency fund should I have?
« Reply #3 on: August 29, 2014, 05:10:02 PM »
I'm pretty conservative with my ass-saving funds. I like to keep 6 months worth of expenses in a liquid form. This turns out to be $15,000 for me. My biggest worry is job loss so that is what I've planned for.

horsepoor

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Re: How much of an emergency fund should I have?
« Reply #4 on: August 29, 2014, 05:26:07 PM »
I've been playing around with my money a lot in recent months due to home renovations. But these are drawing to a close and I plan to pay down any surplus funds onto my home loan.

What I'm not sure about is how much to keep as an emergency fund after. My budget covers everything from doctors fees to rates (house taxes) etc so I don't need to have funds aside for that sort of thing. My car has been recently serviced and is in good condition. I have no debts. I have income protection for redundancy & sickness.

I have a low interest credit card if I needed quick access to funds (never used it for this purpose before but I know some people do) & work in a bank so would be able to get approved for a loan or anything if I needed it- however this is something I would ideally like to avoid. My investments cannot be accessed in a hurry which is deliberate.

How much do you think I should keep aside? I know some people recommend 3 months salary but that seems too much- I want my money working for me. Would one month be enough?

I think the X months salary recommendations make no sense, because they have no bearing on your actual expenses or potential liabilities.  It sounds like you've got coverage for job loss and medical, and don't expect major car repairs.  If you're a home owner, having at least your insurance deductible set aside would be a good idea.  Preferably, you could handle larger home repairs such as a furnace going kaput without too much disruption of your finances.  However, if you make $8K/month and spend $2k per month, in my mind, you effectively have a $6K cushion built in, because in an emergency you can simply stop diverting money to investments for a time period and address the emergency.  However, if you make $2,500 and spend $2,000, your income won't absorb an emergency so neatly, in which case, it might be a good idea to keep some more liquidity.  Likewise, a bigger cash cushion makes sense with increasing responsibility, such as dependents, rental properties, pets etc.

Personally, I keep about 2 months expenses liquid, and my bare expenses would be about half my take home if I were to drop my retirement contributions.  I also have almost six months of combined sick leave and annual leave calculated into my cushion for illness/injury type situations, and know that unemployment benefits cover about half of my monthly expenses, effectively stretching my cash reserves out to a 4-month cushion if needed (job security is not a big issue to me, but you never know for sure). 

GGNoob

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Re: How much of an emergency fund should I have?
« Reply #5 on: August 29, 2014, 05:52:27 PM »
It's really a personal decision if you ask me. I'm only keeping $5,000 cash on hand to pay for annual expenses like life, disability, and car insurance. Along with vehicle registration and income taxes. Basically when the time comes to pay those, I'll try not to use that cash, but if I need to its there. Then I have room in my budget to rebuild that fund or invest. My wife and I could live off of just one of our incomes if one of us lost a job. Then we have our taxable investments that we could use in an emergency where we needed money and Roth IRA contributions if we got desperate.

nz

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Re: How much of an emergency fund should I have?
« Reply #6 on: August 30, 2014, 02:08:12 AM »
Each person will have their own comfort zone.
 I like the idea of using your credit card as an emergency fund and have a lump sum on a relatively short term deposit  ( say 90 days)....which allows your money to still be working for you but can still be accessed if really necessary.

Remember too that as a kiwi our health system, welfare system and ACC are relatively generous and are a pretty good backstop if you fall on hard times.

Davids

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Re: How much of an emergency fund should I have?
« Reply #7 on: August 30, 2014, 02:33:44 PM »
My opinion is you should have 6 months worth of expenses but I can understand if someone is concerned and goes up to a full year of expenses.

Calvawt

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Re: How much of an emergency fund should I have?
« Reply #8 on: August 30, 2014, 02:37:32 PM »
I only keep about 2 months set aside.  I have credit cards as my back up.  If I got in a pinch I would tap my home equity or Roth contributions.  I want my money working for me, so I would rather keep a lower emergency fund.  There is a wide spectrum depending on your risk level and personal situation. 

Last time I lost my job I ended up getting paid from two companies at once for about 2 months (new salary and vacation cash out from old job).  I also ended up getting a promotion at the new job and 2.5 years later my base salary is about 50% higher, so it ended up being a good experience.

dividendman

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Re: How much of an emergency fund should I have?
« Reply #9 on: August 30, 2014, 04:13:43 PM »
I really don't have anything "set aside". But liquidating the bond portion of my portfolio (20%) is good enough in case shit really hits the fan. These funds (all government bonds - 10% TIP
https://www.google.com/finance?q=NYSEARCA%3ATIP&ei=4jgCVMjSMIeLjAKomYGICQ, 10% IGOV  https://www.google.com/finance?q=NASDAQ%3AIGOV&ei=pUsCVPCPNJO1iALJrICoAw) are unlikely to go crazy up or down when crazy things happen (although interest rate risk is obviously a concern).

I'm probably missing out on a bit of stock gains but I'm OK with that.