The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: fiveoh on April 09, 2012, 08:55:58 PM
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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?
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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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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.
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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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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.
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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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We keep $10k in an ING account
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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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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.
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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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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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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.
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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.
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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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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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Like a lot of people I use my CC and would plan on paying it off before the balance is due.
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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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It's hard to imagine ANY situation that would not be improved by the presence of a >$1K EF.
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The textbook example of MMM, who owns his home outright and has a HELOC, would not be improved by an emergency fund of >1k.
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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.
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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.
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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.
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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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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.
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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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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.
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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.
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...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.
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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
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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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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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...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 (http://money.cnn.com/2011/08/10/pf/emergency_fund/index.htm).
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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.
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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.
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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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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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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.
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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
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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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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.
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...
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 (http://lmgtfy.com/?q=ad+hominem&l=1).
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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
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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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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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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
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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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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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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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Thanks Sol.
I guess my emergency will have to sit around and wait for awhile!
DA
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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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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.
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not exactly, I'm assuming that an emergency won't happen in exactly two years.
It could be two years, it could be 20 years, and the longer the time frame, the more likely that an investment shows positive returns. Especially if those investments are diversified and/or in anything that pays dividends or interest and/or broad index funds.
In your examples - lost job and/or high medical bills due to sickness or accident - the 10% penalty is waived. So then the issue is only are you willing to lose capital in the market.
There is risk in any investment, that's true whether there is an emergency or not. Your risk tolerance should be reflected in what you invest in.
The market could crash right after you retire. Or the dollar could stop being the worlds country and see hyper-inflation. So by that reasoning no one should ever invest anything. Any investment is going on the assumption that historical trends of positive return will continue.
I'm not saying its dumb to pick any particular course. All investing, just like insurance, is informed gambling. That's just the nature of the game. What I would say is that it is important to consider the statistical likelyhood of a particular event happening, the consequences if it happened, and the consequences if it didn't happen - and to try not to let emotional fears have disproportionate weight in the decision.
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Just for clarification how is unemployment a qualified distribution?
DA
You weren't the one who called a cash EF dumb, that was grant
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Again, withdrawals of principal are not subject to penalty, so that's a moot point.
The fact that you may have lost money in the meantime is a good point, however, and yes, it's not a strategy for the more risk adverse.
In that case, I'd recommend a CD ladder, or even just regular CDs, and you forfeit the interest if you need to access the money right away. Better to earn a little money and forfeit it in the case of an emergency than earn none.
You are right, DA, that having an emergency fund is not dumb. I recommend it to many, many people. I think it's unnecessary (and a bit wasteful) for an advanced Mustachian, however. It does indeed depend on your circumstances, your post a few posts up is well put, I don't disagree. Thanks for clarifying your position.
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Lets all attribute "Big Emergency Funds are Dumb" to the right person.
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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He knows, he was just choosing to ignore that for the sake of making a stronger ad hominem attack against me. In fact, the only place I used the word "dumb", I used it in a sentence directly attributing it to MMM. But he's willing to ignore that for the sake of a good argument.
Further, I didn't say all cash emergency funds are dumb. I'm with arebelspy, for less advanced individuals a few thousand in cash could be a great idea. I said big cash emergency funds are dumb for people with high savings rates, stable jobs, dual income households, medical insurance...
So far, you haven't said anything to contradict that statement other than repeating over and over again that you'd have to take a penalty in circumstances that we've repeatedly demonstrated that you wouldn't.
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Grant,
Please link to the IRS website on ROTH's whether or not contributions are exempt from penalty. They may be, however no one here has proven this yet.
To call big EF is dumb across the board is an inflammatory statement meant to spark controversy, i.e. increase readership. I'm okay with that. It's MMM's blog and that's his perogative. You and Arepelsby reiterated the comment thus affirming it. Calling someone's asset allocation "dumb" is an inflammatory statement and you should expect to offend some. I was a bit offended. So I flipped you a bit of shit.
Calling those folks with a more conservative asset allocation than your's LESS ADVANCED is an inflammatory statement as well. So expect some push back.
Plus as stated above I don't even qualify for a ROTH! So how can my situation be considered less advanced than yours? WTF?
DA
Does anyone else think there's a RECENCY BIAS here? Using levarage for real estate is one reason we are in this morass of a situation. Would you use leverage for stock buying too?
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Please link to the IRS website on ROTH's whether or not contributions are exempt from penalty. They may be, however no one here has proven this yet.
Done. (http://www.irs.gov/publications/p590/ch02.html#en_US_2011_publink1000231057) That took less than 30 seconds. Principal is not subject to penalty! For fuck's sake, it's not! Arebelspy has said it, I've said it, Bakari's said it, and you've acknowledged it repeatedly. So why are you acting like nobody's told you that yet?
Calling those folks with a more conservative asset allocation than your's LESS ADVANCED is an inflammatory statement as well. So expect some push back.
That's not what I said. I said, if you're not advanced at personal finance (that is, Dave Ramsey's target market, or Suze Orman's, for example), then keeping a small cash emergency fund is a good idea. My use of the word dumb was in summary, not for inflammation. Let me reiterate, I've made actual, substantive points which you're now ignoring because you'd rather bitch about semantics than talk finance. I said "here are a bunch of conditions, which together combine to make most people poorly served by a big cash emergency fund". Then, instead of arguing with my conditions, you got pissed and attacked me for calling you not advanced, which for the record I didn't do. Let's look at what I said:
I didn't say all cash emergency funds are dumb. I'm with arebelspy, for less advanced individuals a few thousand in cash could be a great idea. I said big cash emergency funds are dumb for people with high savings rates, stable jobs, dual income households, medical insurance...
The "less advanced individuals" is a condition for "keeping cash is a great idea". That does not equate to the logical converse, that "keeping cash" implies you're a "less advanced individual".
Plus as stated above I don't even qualify for a ROTH! So how can my situation be considered less advanced than yours? WTF?
I didn't say your situation was less advanced than mine. Learn to read before you start yelling, you'll come out looking more intelligent at the end. And, as has already been noted in the thread, you can backdoor 401k contributions into a Roth IRA. Everyone can get for a Roth, hooray! If you prefer to accept a loss each year equal to the annual inflation rate rather than risk capital losses by needing to liquidate assets during a downturn emergency, that's your prerogative. I don't choose it, but you're perfectly welcome to.
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Sorry Grant,
I really was referring to Arepelsby calling some with an EF less advanced.
Do you allocate a 100% stock/real estate asset allocation?
Most would have stocks/bonds/real estate/cash equivalents.
To say that a more conservative allocation is less advanced as some have stated above is what I am railing against. A 19 year old SHOULD have a more aggressive allocation than let's say a 40 year old with a family.
DA
by the way that's the same link I used. the contributions are not penalized in the year you put them in...Please highlight the section you are referring to. I really am not interested in heresay, I want to see the exact quote about the contribution. I'm not saying you are wrong I want to SEE it.
Here's what I see:
Exceptions
There are several exceptions to the age 59½ rule. Even if you receive a distribution before you are age 59½, you may not have to pay the 10% additional tax if you are in one of the following situations.
You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.
The distributions are not more than the cost of your medical insurance.
You are disabled.
You are the beneficiary of a deceased IRA owner.
You are receiving distributions in the form of an annuity.
The distributions are not more than your qualified higher education expenses.
You use the distributions to buy, build, or rebuild a first home.
The distribution is due to an IRS levy of the qualified plan.
The distribution is a qualified reservist distribution.
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I really was referring to Arepelsby calling some with an EF less advanced.
I think you may be misreading him. He's said much the same thing in several other threads. What he means is he advises his friends who aren't advanced at personal finance (again, the Ramsey/Orman crowd) to keep a small emergency fund. I can look for a couple examples if you'd like, but the point is he's saying that they are good tools for novices, not that having an emergency fund makes you a novice.
Do you allocate a 100% stock/real estate asset allocation?
Most would have stocks/bonds/real estate/cash equivalents.
To say that a more conservative allocation is less advanced as some have stated above is what I am railing against. A 19 year old SHOULD have a more aggressive allocation than let's say a 40 year old with a family.
If I have this right in my head, intelligent asset location would tell you to put your risky investments in post-tax vehicle like a Roth and your conservative investments in a tax deferred vehicle like a regular 401k or IRA. That said, if you really dread taking a loss in the portion of the Roth that's an emergency fund, it may be better to also keep something more steady like bonds, TIPS, or cash in the Roth up to the amount you want to use for emergencies, and only using risky investments for any remainder that may exist.
I have a ton of capacity for risk. Even so, my portfolio if I ever am in the position of having money (i.e., not as a college student) is going to balance domestic and international stocks with bonds. Despite my risk capacity, I have little appetite for risk and and insane amount of debt aversion... definitely, I won't be using a whole ton of leverage. Unless I find a more optimal strategy for me personally, I want to pay down a mortgage quickly and own my home outright, and pay off any other debt that I may acquire even if it is more expensive to do so than invest the difference. That's not so different than keeping it in cash, really. It's just the way that my finances will sit right with me personally.
by the way that's the same link I used. the contributions are not penalized in the year you put them in...Please highlight the section you are referring to. I really am not interested in heresay, I want to see the exact quote about the contribution.
This image. (http://www.irs.gov/publications/images/15160x04.gif) Bottom right corner. "The portion of the distribution allocable to earnings may be subject to tax". That is, the portion of the distribution not allocable to earnings, the portion of the distribution that's principal, isn't subject to tax. It's a little bit in legalese, to be fair.
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Okay.
I can see how that could represent no penalty on contributions. Fair enough.
I am also paying off my mortgage. I think the missed earnings in a more stock oriented portfolio will be unneeded for me to reach FI soon.
My goal is not necessarily to make the most possible money, but to reach FI. To me, the mortgage payoff is not just a "warm squishy" feeling, but actual reduction in the years I MUST WORK. I basically use this portion of my portfolio to represent "bonds" and have the vast majority in stocks/real estate still. So I don't see missed earnings from using funds to payoff mortgage as lost.
DA
Thanks.
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Re: Roth withdrawing principal: It's not just the image, but the very first sentence of Grant's link.
You generally do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s).
This sentence as well:
The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions.
DA: Don't be so quick to take offense. I agree with grant, doing something that is an advanced move (i.e. risky but can be rewarding, one must know what they're doing) does not make one "unadvanced" if they don't do it. Relax, take a breath, and realize that people will do things differently, and you don't have to take offense at that. :)
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My goal is not necessarily to make the most possible money, but to reach FI. To me, the mortgage payoff is not just a "warm squishy" feeling, but actual reduction in the years I MUST WORK.
My goal is the same, to reach FI. I don't care about making money. However, I'd like to reach FI as soon as possible, so I'd rather do things the mathematically optimal way, which does mean making the most possible money (for now) to reach FI quicker.
My goal is not necessarily to make the most possible money, but to reach FI. To me, the mortgage payoff is not just a "warm squishy" feeling, but actual reduction in the years I MUST WORK.
To me, not paying off the mortgage and accumulating money quicker means I hit FI quicker (and can then pay it off if I want), which DOES give me a warm squishy feeling, and gives an even faster reduction in the years I must work.
Just a different way to approach it.
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DA: Don't be so quick to take offense. I agree with grant, doing something that is an advanced move (i.e. risky but can be rewarding, one must know what they're doing) does not make one "unadvanced" if they don't do it. Relax, take a breath, and realize that people will do things differently, and you don't have to take offense at that. :)
DA - It might help to remember that while the term "advanced" certainly puts a positive spin on a technique, that doesn't make it a good idea in all circumstances. Day trading options is an advanced move as well, that doesn't make it a good idea.
It reminds me of some of the bands DH has played in. Beginner guitarists and drummers struggle just to play all the notes and beats at the right time. Good musicians can play all the notes and beats, and can also improvise a bit and play a nice loud, complicated solo when their time comes. But the truly excellent musicians, the ones that are a joy to play with, are those that can not only do all that, but know when is the appropriate time for it and when to play quietly and blend in. They have a quiet confidence, and they don't have to "prove" their worth with unnecessary volume and complexity - though they can and do when the timing is right.
Other commenters are (we assume for the benefit of the doubt) in appropriate solo moments - stable jobs, multi-income households, good health, high risk-tolerance. That they recommend certain techniques to less advanced friends doesn't mean those techniques are bad. A beginner and a professional guitarist might play the same melody at times but for different reasons - the beginner because that's all they can do, the professional because they know its the right move for the time.
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Wow, what a great analogy AJ, and I completely agree with the last line. It may indeed be be the correct move and time for some individuals to pay down student loans, or mortgage, or have a large emergency fund, be they beginner or advanced.
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Wow! Love all the conversation here. Is there an age/size of EF ratio happening here? Young and eager tend to be positive they need less. Older (and wiser??) know that life occasionally hands out shit sandwiches and choose to be prepared should another one be delivered.
So yes, we did have a little verbal sparring today, but so far I am very impressed with the relative courtesy and above average FI (I for Intelligence) of the MMM crowd. Kudos to Mr. & Mrs. MMM for making this wonderful forum happen. Now everyone go and play outside until dinnertime.
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It stays nice and courteous until people show up and call all young people unwise in what was otherwise a productive and pleasant conversation.
You can't write half a post applauding how respectful the conversants are being, then use the other half to denigrate people who disagree with you.
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Wow! Love all the conversation here. Is there an age/size of EF ratio happening here? Young and eager tend to be positive they need less. Older (and wiser??) know that life occasionally hands out shit sandwiches and choose to be prepared should another one be delivered.
Not necessarily, I am only 24 and keep ~$10k sitting in cash for an emergency. Maybe $10k is small by some of you old geezers' standards, but it's a good chunk of change for us youngun's. Sounds like it's more than some of the older posters' cash reserves.
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Wow! Love all the conversation here. Is there an age/size of EF ratio happening here? Young and eager tend to be positive they need less. Older (and wiser??) know that life occasionally hands out shit sandwiches and choose to be prepared should another one be delivered.
I would almost expect the opposite. While younger people are certainly eager to get the money invested and working for them, they often need the reserve for the greater range of potential emergencies due to kids, mortgage, tighter cash flow, etc. As people get older I'd expect things to be more stable with less emergency potential and more skill developed at making things work in an emergency.
But in the end I think the issue is too tied up in the million variable between each and every situation, along with the huge variable of risk tolerance and comfort level. Everyone just need to use sound judgement in determining what is best for themselves.
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Grant,
I am sorry I called you Naive. Like I said in another post I was reacting to the blanket statement that large EF's were "dumb". That is an inflammatory statement and usually I react negatively to those who call my methods "dumb". To be fair you weren't the first (or the last) to state that however you were the last one to state it when I went "postal".
A 19 year old typically hasn't been around long enough or have had enough life experiences to be a good resource for financial advice. You are certainly further along in financial IQ than I was at your age, so you should be applauded. Your input is helplful obviously and I welcome different viewpoints. You and I both should be tolerant of others methods. There are more than one one way to become FI.
So I apologize for giving you some shit earlier. Hopefully we can contribute to this forum in a reasonable and courteous way in the future.
DA
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Grant...
Since our little spat, I think you and I have been having a perfectly pleasant conversation that's been productive for everyone involved. I'm totally tolerant of your choices, as we discussed above, even though they may not be the ones I would make.
What I'm frustrated about is that someone else has come into the thread after so much productive progress has been made and contributed such an unhelpful comment as "This is a great thread. But young people are unwise because they don't understand that bad things can happen in life". It does everyone a disservice to stereotype so thoroughly, for one. For two, nobody in the thread had even been talking about what she brought up... she's brought in another conversation she was having elsewhere in order to try and start a fire here.
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I haven't seen this discussed here, but it seemed relevant because people were talking about earning tiny interest rates on cash balances for Emergency Funds.
I keep my EF in a rewards checking account and I earn 3% interest on any balance up to $15k in return for doing 10 debit card transactions per month and having my statements received electronically.
It's not huge but it at least keeps up with inflation, as opposed to most of the other savings/CD products out there.
Once a month I log into Verizon's site and pay for my internet bill in 10 separate transactions. Takes me just a few minutes and then I don't have to worry about meeting the transacton requirement.
This seems like the ideal Mustachian method for earning a few extra bucks on emergency fund money that is otherwise sitting around, losing value to inflation.
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I haven't seen this discussed here, but it seemed relevant because people were talking about earning tiny interest rates on cash balances for Emergency Funds.
I keep my EF in a rewards checking account and I earn 3% interest on any balance up to $15k in return for doing 10 debit card transactions per month and having my statements received electronically.
It's not huge but it at least keeps up with inflation, as opposed to most of the other savings/CD products out there.
Once a month I log into Verizon's site and pay for my internet bill in 10 separate transactions. Takes me just a few minutes and then I don't have to worry about meeting the transacton requirement.
This seems like the ideal Mustachian method for earning a few extra bucks on emergency fund money that is otherwise sitting around, losing value to inflation.
That is pretty impressive, what bank is that?
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That is pretty impressive, what bank is that?
Lake Michigan Credit Union.
You can find a listing of banks offering high yield reward checking accounts, along with info on their requirements, here:
http://www.depositaccounts.com/checking/reward-checking-accounts.html
Lake Michigan was easy to join, just had to make a $5 donation to their local ALS fund.
Here is the specific info on Lake Michigan:
http://www.depositaccounts.com/blog/2012/05/updated-review-of-lake-michigan-credit-unions-max-checking.html
You'll notice that there is 1 bank listed with a higher rate than LMCU - that's Consumers Credit Union. They are dropping their rate in June, so don't bother. Looks like there is one other bank paying 3% right now.
Most of the banks on this list also refund ATM fees, so it doesn't matter if you're not local to them (I actually live in Massachusetts, so I'm not local to LMCU)
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Thanks AJ for your analogy. Certainly a different and interesting perspective. I appreciate the idea!
DA
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I keep my EF in a rewards checking account and I earn 3% interest on any balance up to $15k in return for doing 10 debit card transactions per month and having my statements received electronically.
This is a good way to get a better rate if you don't mind changing banks every year or so. Reward checking accounts are designed to hook you in, then lower the rate. For me personally, I don't keep enough money in savings to out-weigh the hassle of watching my transactions and changing banks every year. Plus if I miss a bill in the transition I'll end up with a late or NSF fee, negating all my efforts. But for folks willing to put out the effort, it's worth looking into. Side benefit: you'll build relationships with multiple financial institutions, which might prove handy in the future.
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This is a good way to get a better rate if you don't mind changing banks every year or so. Reward checking accounts are designed to hook you in, then lower the rate. For me personally, I don't keep enough money in savings to out-weigh the hassle of watching my transactions and changing banks every year. Plus if I miss a bill in the transition I'll end up with a late or NSF fee, negating all my efforts. But for folks willing to put out the effort, it's worth looking into. Side benefit: you'll build relationships with multiple financial institutions, which might prove handy in the future.
I've had LMCU for awhile now and while they dropped from 4% to 3% last year, they're still one of the highest out there so I have not had to switch my account since I opened it in January 2011. The depositaccounts.com site shows the rate history of the various accounts so you can evaluate if different banks have kept the rate high consistently.
It literally takes me 5 minutes a month to do the 10 transactions and I don't have to think about it, and I earn an extra $10-$20 a month for my troubles (depending on how much cash I am keeping in my emergency fund). I can see why most people don't want the hassle, but I would think Mustachians would be all about something like this. The money definitely adds up over time.
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Dear Grantmeaname,
I would politely ask you to re-read my comments. I would also politely request that if you quote something that someone else has written (indicated by the use of quotation marks), then please make it an actual quote, not your own words.
A forum is a free exchange of ideas, not a private two-way conversation. Things were getting heated and surprisingly unkind things were being said yesterday. I had hoped to add a calm voice to the discussion, to offer some positive reinforcement and even add a tiny bit of wry humor to the discussion. If I may quote myself accurately, I said "Older (and wiser??)". By using parenthesis and two question marks, I intended to show that older does not necessarily mean wiser. Not to denigrate all old(er) people, I just don't consider myself to be as wise as I could be, nor as old as I hope to become :-))
I completely respect your decision not to keep a large EF. It's your choice. I am not stating that either viewpoint is right or wrong, just different. This is not stereotyping, it's an observation. What works for you works for you. I do not expect to change anyone's position, just share my view from where I stand in the world, just as you have from your own vantage point.
There is cross pollination in almost all threads with more than a few replies. It's fun to watch how some meander before eventually returning to the subject at hand. In this thread, for example, we're all now learning about LCMU, which as far as I can tell, has very little to do with "size of emergency fund". It looks like it could be an interesting option for where to 'stache said funds, for those who elect to have them.
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What you said is that older, wiser people understand that life can hand out shit sandwiches sometimes. Not that people understand that, but that older, wiser people understand that. Considering you jumped into the middle of a mature and productive conversation about risk appetite and risk tolerance with conversants of all ages represented, and made a sweeping generalization that young people don't understand that emergencies exist, I feel like I and other younger posters are pretty badly misrepresented by your stereotype.
And where do you get this bit about my decision not to keep a large emergency fund? I don't believe I've said that anywhere in this thread or elsewhere. Again, you say you're not stereotyping and then throw in a stereotype that I'm against risk preparedness because I'm young.
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Older (and wiser??) know that life occasionally hands out shit sandwiches and choose to be prepared should another one be delivered.
I would agree that the implication I got from this statement was that younger people may unwisely choose to not have a large EF because they are young and haven't been through hard times. I took it as a sutle dig at those who don't advocate a large EF.
Edited to add: I agree with arebelspy that I didn't see offense intended in the comment, it was sincere and meant to be lighthearted. I just thought it fair to point out how it came across. I certainly don't want this place to be timid, I think we should all expect to be tweaked, intended or not, and not take offense.
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I'm okay with subtle digs, even at positions I agree with. We all get a little snarky sometimes, and while I read that comment the same as James, it's not as rude (IMO) as directly callin someone naive.
Nevertheless, it's clear Diane didn't really intend it the way it sounded.
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What Grant says I said: "What you said is that older, wiser people understand that life can hand out shit sandwiches sometimes."
What I actually said was: "Older (and wiser??) know that life occasionally hands out shit sandwiches".
Later, I clarified: "Older (and wiser??)". By using parenthesis and two question marks, I intended to show that older does not necessarily mean wiser."
Another quote from Grant "And where do you get this bit about my decision not to keep a large emergency fund?" I ask, respectfully, what makes you think I was talking about you? Are you the only "young and eager" person who participates in these forums? If you are not a person who lacks belief in the value of a large (or even large-ish) EF, why would you include yourself in that group? Methinks you may occasionally feel you are not being taken seriously because of your age. I think you write well, have interesting ideas, and are viewing this whole exchange through your own lens, as we all do. I really don't give a damn how old you are. I care about your ideas and how you present them, not what year is on your birth certificate. Apparently, I also care about being quoted accurately.
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Dear Grantmeaname,
...
I completely respect your decision not to keep a large EF. It's your choice. I am not stating that either viewpoint is right or wrong, just different. This is not stereotyping, it's an observation. What works for you works for you. I do not expect to change anyone's position, just share my view from where I stand in the world, just as you have from your own vantage point.
That seems like a pretty direct statement towards me, doesn't it? I don't know of any other way to read it...
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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.
And where do you get this bit about my decision not to keep a large emergency fund? I don't believe I've said that anywhere in this thread or elsewhere. Again, you say you're not stereotyping and then throw in a stereotype that I'm against risk preparedness because I'm young.
Wow! I think I'm finally getting the hang of this quote thing. Thanks to all who offered suggestions.
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I'm gonna go ahead and lock this topic. I think we're going around in circles about minor personal squabbles and something not even relevant to the original topic, or Mustachianism.
Anyone interested in continuing the conversation can PM the party they wish to discuss with, or myself.
Feel free to start a new thread on the original topic (size of emergency fund) if you feel you have more to say on that topic (in general, not any individual person's view on it).
Feel free to PM me if you disagree.
Cheers!