Author Topic: Size of emergency fund  (Read 32086 times)

fiveoh

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Size of emergency fund
« on: April 09, 2012, 08:55:58 PM »
I have an emergency fund in a savings account with about 3 months of expenses in it.  It pains me to look at the .80 interest rate on the account but I do like having some sort of cash fund there just in case.   I was thinking about reducing it to 1-1.5 months of expenses and investing the rest. 

How many months worth of expenses do you guys keep in your emergency funds?   

R62

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Re: Size of emergency fund
« Reply #1 on: April 09, 2012, 09:32:19 PM »
1 year's worth of minimum expenses in laddered, 90-day CD's.

Very liquid.  Not much growth currently.  No worries.


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Re: Size of emergency fund
« Reply #2 on: April 09, 2012, 09:33:18 PM »
My stated goal is to keep one month worth ($1000) but a I rarely do.
I have around $20k in credit card limit (0 balance), so while I'd prefer to never use them, in an actual emergency I could just use one or more cards.  As long as I could earn the amount in a month, no harm - no foul.  Worse case scenario, I either pay a couple months of finance charges, or I have to draw from my market investments at a capital loss.

In the mean time, as long as no emergency comes up, I don't have assets sitting in a sub1% interest bank account.

arebelspy

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Re: Size of emergency fund
« Reply #3 on: April 09, 2012, 11:25:43 PM »
Right now I have about 100k sitting due to short sale timings (they take awhile).  But no emergency fund.

I'm comfortable with essentially 0 emergency fund.  A few reasons:
- I have credit cards for anything short term.
- Due to our savings rate, we're saving 5-6k/mo.  What is the point of an emergency fund when you can basically pay for any emergency out of that single month's savings?  Car breaks down, costs a few grand?  Pay for it.  Why would we need an emergency fun?
- Stable jobs.  We won't lose our jobs, barring some sort of negligence or something.

If one has a low savings rate, unsteady employment, etc., they should have an emergency fund.  If their job is fairly secure and they have a Mustachian savings rate, an emergency fund is superfluous (and harmful to the size of your 'stache).
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AJ

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Re: Size of emergency fund
« Reply #4 on: April 10, 2012, 10:45:55 AM »
I keep 4 months, but I think of it more like an opportunity fund. Someone in another thread recently had the chance to snag a car for $5k under value but couldn't do it because he was cash-poor. Little things like that seem to crop up now and again, and the ability to pounce on opportunities offsets the cost of keeping some of my funds liquid, IMO.

Eventually, I hope to be in a place where I can "pounce" on real estate opportunities, but I don't have that much cash yet.

kolorado

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Re: Size of emergency fund
« Reply #5 on: April 10, 2012, 11:09:22 AM »
You know how often I've needed our EF in my 11.5 years of marriage? Never. We've always been able to live under our means enough that I could funnel money that would have gone into savings or debt payments to fund the "emergency". We never even touched our EF during the 3 months hubby was laid up after knee surgery and we had two kids at the time. The worker's comp was enough to cover all our basic needs for those months. So that leads me to believe that an EF is more for peace of mind than actual financial benefit.
At first we kept a 3 month EF. When the kids came along we bumped it up to 6 months. We are a single income family with three kids that I homeschool. Before #3 came along we upped the EF again to a year of expenses. It's really absurd but I like the comforting feeling I get from knowing it's there. That's mostly because I consider it my life insurance. If something happens to my hubby, the income earner, I'd collect on his life insurance policy and SSI benefits for the kids as well. But if something happens to me, my hubby would have to reduce hours and pay more for just about everything that I use my time on to save money.


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Re: Size of emergency fund
« Reply #6 on: April 10, 2012, 11:36:38 AM »
We keep $10k in an ING account

arebelspy

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Re: Size of emergency fund
« Reply #7 on: April 10, 2012, 11:54:13 AM »
I keep 4 months, but I think of it more like an opportunity fund. Someone in another thread recently had the chance to snag a car for $5k under value but couldn't do it because he was cash-poor. Little things like that seem to crop up now and again, and the ability to pounce on opportunities offsets the cost of keeping some of my funds liquid, IMO.

Eventually, I hope to be in a place where I can "pounce" on real estate opportunities, but I don't have that much cash yet.

Heck yes.  I'm waiting for MMM to write a post about this idea.  Having a flexible asset allocation to jump on opportunities is great.  The 4-5k instaprofit in car is a good example.
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James

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Re: Size of emergency fund
« Reply #8 on: April 10, 2012, 12:50:33 PM »
When I first got into making a financial plan I figured the more EF the better.  I worked it up to two months, than 4 months.  Right now I'm on the down slope headed back to no EF, just a buffer in the bank accounts to allow for various movement between accounts.  I'm saving the $20,000 I have in my EF to enable a short sale on my house if that option comes up, but if not needed for that then it will go straight against my student loans.

Having said that, it depends a lot on your cash flow situations and comfort level.  I have a relatively safe job position, equity in the house, $20,000 credit limit on the CC, etc.  I can imagine a situation requiring much higher EF, but one issue for me is the false sense of security having that large EF provides.  It screams "I HAVE PLENTY OF MONEY!" in your ear constantly.  I would rather have an empty bank account screaming "SAVE YOUR MONEY YOU FOOL!" at me until all my loans are paid in full and my retirement accounts are funded at my goals.  Until then I'm realizing an empty bank account might be a good thing for me personally.

zinnie

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Re: Size of emergency fund
« Reply #9 on: April 10, 2012, 02:08:28 PM »
Not much--just what's in my checking account at any given time and money that is on the way to other accounts. I don't have a separate emergency fund. If I suddenly found myself with no job I could make it through about 6 months of mortgage and food before tapping into investments. I could make it another six months if I went to credit cards before investments.

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Re: Size of emergency fund
« Reply #10 on: April 10, 2012, 02:43:30 PM »
I usually keep 3 months emergency fund.  Being married its nice knowing that if anything happens my wife wouldn't have to worry about money waiting for any life insurance to kick in.  I no longer use credit cards so I consider the cash a form of self insuring and not an investment.  Its nice that if i blow a tire i can just pay for it on a debit card.  I agree with james that an emergency fund over 3 months it seems I lose a bit of ambition when it comes to overtime etc.  While having a lower than 3 months emer fund I seem to find hours at work as opposed to not.  So for me 3 months is great and makes the family feel safe.  Six months is to much as I feel too comfortable.   

I have no problems using the emergency fund for true opportunities if it so arrives such as the post about "flipping" a car or getting it for a deal.  I would however switch to building my emer fund back up right after.

SoWantEre


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Re: Size of emergency fund
« Reply #11 on: April 10, 2012, 04:44:58 PM »
I keep about 3 months as a dedicated emergency fund on top of some savings that were separate for a big expense that had about a 50% chance of happening. The extra savings are going to start making their way into investments now that said big expense (a potential move) is clearly not happening. I also have a credit card limit of about six months' expenses that could be used to smooth over rough patches.

It appears I'm a little more conservative about the emergency fund issue than some of the people here because (in my mind) I have fewer of the other resources to fall back on and my life's in a fair bit of flux. Thus I see more advantages in having a relatively high amount of ready cash, though my basic philosophy on e-funds of "the more the better" is certainly changing. At this point, everything beyond the three months would be better put into rounding out my woefully unbalanced portfolio.

fiveoh

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Re: Size of emergency fund
« Reply #12 on: April 10, 2012, 08:14:37 PM »
thanks for the replies.  I realized with all my CC limits and 50% savings rate, I can come up with cash pretty quick if needed.  Reduced my EF to 2 months today and used the extra cash to buy some stocks since we've had a nice 5 day drop.

arebelspy

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Re: Size of emergency fund
« Reply #13 on: April 10, 2012, 10:37:48 PM »
thanks for the replies.  I realized with all my CC limits and 50% savings rate, I can come up with cash pretty quick if needed.  Reduced my EF to 2 months today and used the extra cash to buy some stocks since we've had a nice 5 day drop.

Good for you.  That's a sound move, and as long as you're comfortable with it, it's the best way to go, IMO.
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Dicey

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Re: Size of emergency fund
« Reply #14 on: May 09, 2012, 12:39:42 AM »
Talk about credit card limits to the folks who have had them rolled back or eliminated entirely...Banks do it all the time, often for no apparent reason. I had a bank do it on a rewards card I've had a long time. When I called to ask why when nothing had changed, I was told it was because of the places I was using the card. Seems like shopping at the Dollar Store can hurt your credit limit!

There is no substitute for accessible cash. I define my EF as all funds that are not in retirement vehicles. At present, this equals a year's gross earnings. I'd stretch it like crazy in the event of an actual emergency. I also keep a separate fund for my rental property, which equals about ten month's worth of mortgage payments. It took a long time to build this EF. My job could vaporize at any time and I like to sleep well at night.

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Re: Size of emergency fund
« Reply #15 on: May 09, 2012, 01:37:49 AM »
Like a lot of people I use my CC and would plan on paying it off before the balance is due.

arebelspy

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Re: Size of emergency fund
« Reply #16 on: May 09, 2012, 07:56:35 AM »
My job could vaporize at any time and I like to sleep well at night.

You're absolutely right to have an emergency fund, given that situation.
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Dicey

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Re: Size of emergency fund
« Reply #17 on: May 09, 2012, 09:02:39 AM »
It's hard to imagine ANY situation that would not be improved by the presence of a >$1K EF.

grantmeaname

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Re: Size of emergency fund
« Reply #18 on: May 09, 2012, 09:33:26 AM »
The textbook example of MMM, who owns his home outright and has a HELOC, would not be improved by an emergency fund of >1k.

Workstoomcuh

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Re: Size of emergency fund
« Reply #19 on: May 09, 2012, 09:41:32 AM »
We keep 1 year aside in an online account (.8% interest). We've never needed it. Its really only there in case I lose my job. Which probably won't happen. Even if it does, we'd get unemployment for 75 weeks or so. But with my DW having no job and having a little one around, it gives us that peace of mind. We keep another 1.5 months worth of living expenses in a checking out as the buffer for day to day life/ mini emergencies.

Tyler

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Re: Size of emergency fund
« Reply #20 on: May 09, 2012, 11:52:20 AM »
I personally keep a 6-month cash buffer, and will increase that to 1 year once I hit FI.  Having a cash buffer is important not only for job loss, but also for market dives. And remember, those two things often go together.

The last thing you want to happen is for the stock market to tank like in 2008 and you lose your job as a result.  Credit cards won't save you if you can't get a job quickly or need to sell your stock at a big loss to pay them off.  Having 6-12 months of reserves to ride out the bad times and let things stabilize helps me sleep a lot easier.

Dicey

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Re: Size of emergency fund
« Reply #21 on: May 10, 2012, 09:19:40 AM »
The textbook example of MMM, who owns his home outright and has a HELOC, would not be improved by an emergency fund of >1k.

Just curious. Where does MMM endorse only a $1K emergency fund?

HELOCs have been known to be reduced or closed by banks for no reason at all.

Here's just one of their neat tricks: Say you have a 25K balance/limit on your HELOC, due to a medical emergency. (You have insurance, this is for the part that wasn't covered.) You pay back 5K ahead of schedule. The bank reduces your credit line by $5K, to 20K. Where's your emergency fund now?

Those who advocate less than $1K EF's are most likely people who have never experienced a true emergency. Conversely, they could be folks still trying to dig out from a mountain of debt, partially caused by not having a big enough EF  in the first place.

Also, DR's $1K EF is a baby step, band-aid measure for folks who are trying to escape debt's clutches. Once debt is managed, he advocates a building a bigger EF as well. In general, MMM is not about baby steps, it's a rare thing in the financial blog world: advanced training for financial badasses.

arebelspy

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Re: Size of emergency fund
« Reply #22 on: May 10, 2012, 11:03:30 AM »
The textbook example of MMM, who owns his home outright and has a HELOC, would not be improved by an emergency fund of >1k.

Just curious. Where does MMM endorse only a $1K emergency fund?


MMM has posted about having a spongeable emergency fund, here: http://www.mrmoneymustache.com/2012/02/22/reader-case-study-getting-blood-from-a-stone/

He unequivocally states, in the comments: "Mr. Money Mustache is not backing down on this one. BIG EMERGENCY FUNDS ARE DUMB!!"
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gooki

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Re: Size of emergency fund
« Reply #23 on: May 10, 2012, 06:51:07 PM »
The other half of the story is structuring your life and your finances so an emergency fund isn't required.

- Multiple income sources
- Appropriate levels of insurance
- Controlled level of expense
- Semi liquid assets

All reduce the need to have an overly large emergency fund.

arebelspy

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Re: Size of emergency fund
« Reply #24 on: May 10, 2012, 06:58:52 PM »
The other half of the story is structuring your life and your finances so an emergency fund isn't required.

- Multiple income sources
- Appropriate levels of insurance
- Controlled level of expense
- Semi liquid assets

All reduce the need to have an overly large emergency fund.

Completely agree gooki, and well said.

A stable job and high savings rate alone make for emergency fund almost unnecessary. Combined with your points, there's not much excuse to have a year's of income or expenses sitting idle.
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Dicey

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Re: Size of emergency fund
« Reply #25 on: May 10, 2012, 10:12:32 PM »
Don't want to sound in any way smug, so you will have to trust my stated intention in the absence of inflection. Once you have a large EF, you won't ever want to be without it. When it's your turn to be gobsmacked by life (and one day it will happen to every one of us), you'll be damned glad it's there. Every balanced investment strategy includes a portion in cash or other super-safe assets. My EF is the "safe" portion of my portfolio.

I was covered on all four of gooki's points when I was diagnosed with cancer (fluke thing, no family history). My portion, even with good insurance and a kind employer, was a buttload of money. I was glad I had already learned how to live on little and to save well. I was also glad I didn't have to sell a house to afford my treatment.

Mr. MMM and I can happily agree to disagree on this point.

grantmeaname

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Re: Size of emergency fund
« Reply #26 on: May 11, 2012, 07:46:59 AM »
That's all well and good, but it's not terribly productive for you to suggest that everyone's lifestyle needs to match yours. If everyone in the forums were required to keep $40k in cash at all times it would really push back FI for many people. If keeping a huge E-fund is what it takes for you to feel financially secure, then by all means you should do it. I would say that's even perfectly sensible, given your financial past.

That doesn't make it the right decision for everyone, and not everyone is going to have a six-figure emergency in their lives.

Dicey

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Re: Size of emergency fund
« Reply #27 on: May 11, 2012, 08:32:28 AM »

...not everyone is going to have a six-figure emergency in their lives.

What's scary is how many people's financial well-being would be upended by even a $10,000 emergency.

 

Devils Advocate

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Re: Size of emergency fund
« Reply #28 on: May 11, 2012, 10:32:05 AM »
I would agree with Diane C.

An emergency fund by definition is for those black swan events that you have no way of predicting.  A line of credit or credit card is not that helpful IMO.
For one thing, if you have an "emergency" and the lending vehicle you were planning on using dry your line of credit up, you are fucked.  Also, if it is a real "emergency" how long will you be unable to work and pay off the line of credit?  In the mean time you are racking up interest and sinking further into your emergency.

The size of one's EF is totally unique to one's own personal and financial situation.  So perhaps a single man or couple who have 2 "stable jobs" (until they aren't) and have little to no debt may need a few grand in the bank.

A family who has only one income stream and have some liabilities may need a larger one. 

To rely on a line of credit or credit card IMO is financially irresponsible.

Of course if one has a huge EF sitting in the bank and eroding slowly due to inflation can be irresponsible obviously as well

To each their own I guess.  I prefer to have a bit of coin ready for a true emergency that Diane C has eluded to above.

DA
« Last Edit: May 11, 2012, 10:50:57 AM by Devils Advocate »

MrSaturday

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Re: Size of emergency fund
« Reply #29 on: May 11, 2012, 11:38:23 AM »
What's scary is how many people's financial well-being would be upended by even a $10,000 emergency.

Reminds me of the time when my employer switched from paychecks paying through the current week to paying 1 week in arrears.  It nearly caused a riot because delaying half a paycheck was an emergency to the majority despite a couple months of advance notice.

It was such a widespread problem I actually had to opt-out of taking an advance with the rest of them.

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Re: Size of emergency fund
« Reply #30 on: May 11, 2012, 12:28:59 PM »
I consider my lines of credit not to actually BE the emergency fund itself, but rather the bridge between the emergency and my less liquid assets.

I assume we are all on the same page about saving and investing.  We should do both of those, at as high a rate as we can afford.

The question is about keeping cash as cash.

If you use a credit card (or HELOC, or whatever) to pay the actual in-the-moment emergency, you have a month to turn investments into cash to pay off the loan with no interest.  If cashing out investments took 2 months, you pay 1 month finances charges, which is not ideal, but is more than made up for by the interest you made by not keeping cash.

Worse case scenario you have to sell a house or stocks when the market is low, and you have capital losses.  Which would suck.  Potentially a whole lot.  But that is why you would only do it in an emergency.

If you don't yet have any investments, the same principal applies to the first 1000 you either keep in savings or invest as it does to the 100th 1000, (except that in an emergency you would pay a larger percentage in transaction fees).

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Re: Size of emergency fund
« Reply #31 on: May 11, 2012, 12:57:00 PM »

...not everyone is going to have a six-figure emergency in their lives.

What's scary is how many people's financial well-being would be upended by even a $10,000 emergency.

 
Er, you're over (by) $9000.

Dicey

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Re: Size of emergency fund
« Reply #32 on: May 11, 2012, 10:59:08 PM »
Er, don't think so.
I was comparing six figures (100,000) to five figures (10,000 or 10%). Your example would be four figures (1,000 or 1%). If you read MrSaturday's comment, it's a safe assumption that the delayed paychecks he referred to were over 1K.
My point is that the Dave Ramsey 1K EF is a BABY EF, for those just getting started, who still have debt. As one's obligations increase, so should one's EF. Thanks for the comment, as it gave me a chance to clarify. I'm sorry if I was unclear.

grantmeaname

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Re: Size of emergency fund
« Reply #33 on: May 12, 2012, 08:38:25 AM »
Only if you can't just 'cashflow' your emergencies and you can't tap home equity with a HELOC. If I'm saving $2500 a month, it makes an emergency fund much less necessary. And if I can take out equity, spend it on my emergency, and pay it back instead of saving for the next 2 or 3 months, what's the purpose of a big e-fund?

I'm with MMM, big e-funds are dumb.

arebelspy

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Re: Size of emergency fund
« Reply #34 on: May 12, 2012, 08:48:03 AM »
Only if you can't just 'cashflow' your emergencies and you can't tap home equity with a HELOC. If I'm saving $2500 a month, it makes an emergency fund much less necessary. And if I can take out equity, spend it on my emergency, and pay it back instead of saving for the next 2 or 3 months, what's the purpose of a big e-fund?

I'm with MMM, big e-funds are dumb.

I completely agree, with the caveat that your job is stable/secure.  Cashflowing lots doesn't help if you lose your income stream.

Were I in an unstable job (barely survived te last round of layoffs, say), I'd be okay with having a small emergency fund.  Also Bakari's post earlier nailed it; the credit cards, HELOC, etc. are a temporary bridge to investments that can be tapped in an emergency (e.g. principal from a Roth).
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nolajo

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Re: Size of emergency fund
« Reply #35 on: May 12, 2012, 10:49:21 AM »
I suppose in an emergency you just have to accept that you're probably going to take a bit of a hit, even with a good 'stache. The fact is, you've either lost money in interest you didn't get, or you may have to cash out at a bad time for the market and take a capital loss. Since a lot of people's financial emergencies do coincide with a downturn in the economy, I still come down on the side of having a bit more than many of the more hard core mustachians. Once you're more insulated from the economy at large by having enough assets in enough places/classes that it's unlikely all of them would tank at once, you could go exclusively to springy debt.

Though Murphy's Law may state otherwise, personal/medical emergencies don't correlate as strongly to a weak economy and for those, cashing out stocks, etc, or taking out personal lines of credit can be a good approach and is certainly part of my back-up plan. Especially on the medical side, the crazy expense of a lot of treatments would be ridiculous for most of us to keep in a savings account.

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Re: Size of emergency fund
« Reply #36 on: May 12, 2012, 11:53:32 AM »
I was comparing six figures (100,000) to five figures (10,000 or 10%). Your example would be four figures (1,000 or 1%). If you read MrSaturday's comment, it's a safe assumption that the delayed paychecks he referred to were over 1K.

Actually most of them were going to be short by less than $1000.  Practically everyone I work with lives paycheck to paycheck, no matter how much they make.

Devils Advocate

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Re: Size of emergency fund
« Reply #37 on: May 12, 2012, 03:37:52 PM »
Many people have stable jobs, until they don't.   

What if you can't "cash flow" your emergency because you lost your job? Hence "emergency".

What if you are too sick to work and cannot "cash flow" emergency?

What if the person only has tax deferred retirement accounts and would take a big penalty if cashed in?  "Emergency"

As stated earlier each person/family has a unique set of circumstances.


No offense, but I won't take investment or financial advice from a wet behind the ears 19 year old. GrantMeAName...How 'bout NAIVE?

DA
« Last Edit: May 12, 2012, 03:50:29 PM by Devils Advocate »

arebelspy

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Re: Size of emergency fund
« Reply #38 on: May 12, 2012, 04:49:35 PM »
No offense, but I won't take investment or financial advice from a wet behind the ears 19 year old. GrantMeAName...How 'bout NAIVE?

Can we try to keep our disagreements civil?  Most people around here try to remain friendly, even when we disagree.  Name calling really doesn't prove your point.  At all.

And calling grantmeaname naive is wrong, since many of us agree, including MMM.

As you say, everyone's circumstance is different, so if someone is at a point where having an emergency fund of idle cash is wasteful, they shouldn't have it.  (And ideally, most people will get to this circumstance, IMO.)
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grantmeaname

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Re: Size of emergency fund
« Reply #39 on: May 12, 2012, 05:20:06 PM »
Many people have stable jobs, until they don't.
What if you can't "cash flow" your emergency because you lost your job? Hence "emergency".
What if you are too sick to work and cannot "cash flow" emergency?
If you had no home equity and no HELOC, and no Roth IRA, and no partner or other support, then your years of losing 4% a year on your six months income worth of cash would finally pay off.

Quote
What if the person only has tax deferred retirement accounts and would take a big penalty if cashed in?  "Emergency"
Wouldn't the solution to this be to set up a Roth IRA now? You know, to avoid exactly this problem? Instead of intentionally locating your assets in such a way that you have to keep an emergency fund in cash, why wouldn't you intentionally keep some of your retirement savings in an after-tax vehicle? Come on, that's not a difficult concept, it's been mentioned a dozen times in this thread, throughout the forums, on the blog, in the blog comments section...

Quote
No offense, but I won't take investment or financial advice from a wet behind the ears 19 year old. GrantMeAName...How 'bout NAIVE?
DA
If you didn't mean to offend, you wouldn't have said that. Now, I'm more concerned with whether or not advice I receive is correct than the age of the person giving it to me. If you see a problem with what I'm saying, why don't you point out that problem and not my age? The logical fallacy you're committing here is called ad hominem.

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Re: Size of emergency fund
« Reply #40 on: May 12, 2012, 09:09:09 PM »
GrantMeAName,

You have some logical conclusions on EF. 

But calling someone else's choice for their size of EF "dumb" is not appropriate either.

I shouldn't have called you Naive, even if I think you are a little, but I did.  I apologize, maybe I'll just call ya Grant for short.

Have a good one.

DA

P.S.

Roth IRA early withdrawals ARE subject to 10% penalty (except for those funds used for 1st home)

You CAN withdraw you annual contributions without penalty if done prior to a certain date.  But what kind of emergency is $5000 going to pay for?  Not much.

http://www.irs.gov/publications/p590/ch02.html#en_US_2011_publink1000231057
« Last Edit: May 12, 2012, 09:24:17 PM by Devils Advocate »

arebelspy

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Re: Size of emergency fund
« Reply #41 on: May 12, 2012, 09:54:45 PM »
P.S.

Roth IRA early withdrawals ARE subject to 10% penalty (except for those funds used for 1st home)

You CAN withdraw you annual contributions without penalty if done prior to a certain date.  But what kind of emergency is $5000 going to pay for?  Not much.

http://www.irs.gov/publications/p590/ch02.html#en_US_2011_publink1000231057

This is wrong.  You can withdraw your principal contributions at any time, with no penalty.  Only gains are subject to the 10% penalty.  So you can withdraw much more than 5k (assuming you've donated more than 5k).
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Re: Size of emergency fund
« Reply #42 on: May 12, 2012, 10:23:52 PM »
I'm more concerned with whether or not advice I receive is correct than the age of the person giving it to me.

“It’s an old rule of logic that the competence of a speaker has no relevance to the truth of what he says, … The world’s biggest fool can say the sun is shining, but that doesn’t make it dark out.”

My apologies for the plagiarism, but I just finished the book that is the source of that quote, and it seemed appropriate here. 

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Re: Size of emergency fund
« Reply #43 on: May 13, 2012, 01:43:03 AM »
I've always heard you can withdraw Roth contributions, but the IRS publications are clear as mud. 

Irregardless not everyone qualifies for a Roth IRA.

Does anyone know if a backdoor Roth can have withdrawals of contributions without penalty?

DA
« Last Edit: May 13, 2012, 04:39:50 AM by Devils Advocate »

grantmeaname

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Re: Size of emergency fund
« Reply #44 on: May 13, 2012, 09:47:30 AM »
The only people I'm seeing as ineligible for Roth IRAs are people making more than $125k singly or $183k jointly. Those people do exist, but that means that anyone else -- nearly everyone -- qualifies. Or is there another qualification that I'm missing?

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Re: Size of emergency fund
« Reply #45 on: May 13, 2012, 10:56:27 AM »
Does anyone know if a backdoor Roth can have withdrawals of contributions without penalty?

Backdoor Roth contributions, aka 401k rollovers into a Roth, have to sit in the Roth for 5 years before they can be withdrawn without penalty.  This is the source of the 5 year pipeline method that is so oft mentioned on this site for tapping your 401k funds before retirement age.

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Re: Size of emergency fund
« Reply #46 on: May 13, 2012, 10:56:51 AM »
Well my wife and I are inelgible for one as are anyone else who makes above a certain income.

I believe the income requirements are the only qualification (you have to have EARNED INCOME though).

So perhaps it may be a good source of EF for nearly everyone (I would like to see the link to IRS that explains how to avoid the 10% penalty for withdrawal of contributions).

DA

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Re: Size of emergency fund
« Reply #47 on: May 13, 2012, 10:58:47 AM »
Thanks Sol.

I guess my emergency will have to sit around and wait for awhile!

DA

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Re: Size of emergency fund
« Reply #48 on: May 13, 2012, 07:10:04 PM »
What if the person only has tax deferred retirement accounts and would take a big penalty if cashed in?  "Emergency"

So, there was that whole discussion of ROTHs and withdrawal technicalities, but another answer is just: ok, so you pay the penalty.  This is only an issue in an actual emergency.   Actual emergencies are rare.  You can't predict the future, and therefor you want to have some option available to cover that rare chance, but it doesn't make sense to take a known and continuous financial penalty to avoid a possible one time financial penalty.

Lets say that for whatever reason, a tax-deferred account works out better for you.
You can either put 10,000 in a savings account as a EF, and lose out on 5% a year in potential interest for ever,  or you can put it all into the traditional IRA, and when/IF an emergency comes up, you pay a 10% penalty.

In just 2 years in the IRA, the account has earned as much as the early withdrawal penalty would be!  Which means once you go 3 years without a 10k emergency, you are losing money by having the large EF, even if you do have an emergency and have to pay the penalty.

But wait!  There's more!!
The penalty is waived for actual emergencies!!!
You were unemployed and paid for health insurance premiums, or permanently or totally disabled, or paid for medical expenses exceeding 7.5% of your adjusted gross income.  Its also waived for college expenses and buying a first home, and those aren't even emergencies.

Basically, having a liquid EF which could be invested is gambling that a crises WILL occur, and will occur soon, (and repeatedly, if you maintain it post-crises) which statistically doesn't make sense.

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Re: Size of emergency fund
« Reply #49 on: May 13, 2012, 08:15:00 PM »
Bakari,

You're assuming the investment in your IRA is going to be positive after 2 years.  What about the possibility of a negative market and the need to tap your EF thus realizing your losses?  Then the simple savings account doesn't look too bad. 

Plus the 10% penalty on top of the losses.  No thanks.

Different folks have different risk tolerances.

This discussion is eerily similar to the pros and cons of paying down mortagages and philosophies regarding asset allocation.  You among others on this topic have a higher risk tolerance than I have. I can live with it.  I don't call your decision "dumb".  Which is why I commented on this thread initially anyway.  To each their own.  I will risk a bit of capital erosion from inflation, you risk a 10% penalty.  I'm okay with your reasoning, I just don't see the benefit for me personally!

DA

Also, I'm not sure how rare emergencies actually are.  Job loss, sick spouse or child, accidents, etc are not really that rare.  Perhaps it is unlikely to occur to anyone of us this year.  But over the course of your lifetime an emergency is more likely the norm than not.  Of course as I get older and obtain more assets the amount of cash I keep may lessen (b/c of a soon to be paid off mortgage and taxable investment accounts).  With less monthly obligations my risk tolerance WILL go up and I won't need as much cash on hand. Asset allocation SHOULD change over the course of a lifetime.  Perhaps our disagreements just reflect where each one of us are at currently. 

May health and prosperity find you all.
« Last Edit: May 13, 2012, 08:32:25 PM by Devils Advocate »