Author Topic: What's an "emergency?"  (Read 7292 times)

sunflower_yellow

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What's an "emergency?"
« on: March 09, 2015, 11:54:51 AM »
Husband and I are re-thinking our "emergency fund" strategy.  We are both savers by default, but that means we build up a lot of cash sitting around in 0% interest savings accounts.

What constitutes an "emergency" that would require an "emergency fund" withdrawal?  I imagine it would vary based on one's financial situation, right?

For us, I would imagine...
  • Job loss w/ 2 incomes - no big deal, we can live on 1 income
  • Job loss w/ 1 income (after having a child) - bigger deal.  Need ~8 months in "the bank," with unemployment we can stretch to a full 12 months
  • Car gets totaled - we only have 1 car and feel that is right for us.  We could get by for a few weeks with bus/bike combo, maybe longer in the summer.  Definitely long enough to find a decent used car and get a low-interest loan through our lovely credit union.  Seem reasonable?
  • Major home repair - we're relatively new homeowners, but I can't imagine anything super major that we wouldn't be able to identify in advance and save for (e.g. roof repair, which we would do ourselves anyway) OR wouldn't be covered by homeowner's insurance (e.g. tree falls on roof).  What am I overlooking, people who have owned homes for longer?
  • Major health care expense - we both have high deductible plans and HSA.  I have enough in my HSA that I can fully cover a year's deductible.  Hubs has almost enough, and we can cover the difference with our checking account balance.

Questions:

  • What other disasters/ emergencies am I overlooking?
  • Are my strategies for dealing with loss of the car and major home repairs sound?

If that's the case...  we have a WHOLE lot of extra funds that we should invest.

Thank you so much, fellow mustache wearers!

Kitsune

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Re: What's an "emergency?"
« Reply #1 on: March 09, 2015, 12:12:30 PM »
I think you've identified the main things people need a "cushion" for! Also sometimes less expensive things... Appliances breaking, a kid throws a ball through a window, unexpected car repairs, a water pipe breaking and flooding the basement... Things that, if you've got a bit of accessible cash, are annoying, but if you don't have the cash,  they're a big problem.

There's no reason your emergency fund should be on 0% accounts, though, as long as the money is accessible (ish - mine is accessible in 24h, but I have always-empty credit cards for emergencies that can bridge the gap) and not in a high-risk investment (because a stock market downswing right before a period of unemployment when you're counting on that cash would suck...).

sunflower_yellow

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Re: What's an "emergency?"
« Reply #2 on: March 09, 2015, 12:56:37 PM »
Thanks, Kitsune.  That's what I was thinking.

I would add that anything in the "small in magnitude but potentially major in impact without a little cushion" would come out of our checking account balance.  We try to keep ~2 months of living expenses there for immediate access cash when the stove breaks and neither husband nor i can fix it and we can't cook for a week - cooking on the camp stove gets old fast!

When we first bought our house, I was so convinced that there were tons of hidden costs in owning real estate that I convinced husband to set aside another ~5 months living expenses specifically for the house emergency fund, so that we could pay out of pocket in case a tree fell on the house or our non-existent basement flooded or the floor joists cracked or other such insanity.  I am thinking that we really don't need separate home emergency and job loss emergency funds, and we really just need the job loss emergency funds.  Perhaps that will change if/when we have a child, but then I would just bump up the job loss emergency fund a bit.  Is that reasonable?

Input from anyone else?

ZiziPB

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Re: What's an "emergency?"
« Reply #3 on: March 09, 2015, 01:03:29 PM »
You definitely don't need separate emergency funds for each possible emergency.  I simply have 6 months of basic living expenses set aside that I view as protection in case of a job loss (single person with one source of income).  If I use a portion of it for some smaller unanticipated expense, I replenish it to the 6 months level.  BTW, I have it at Ally earning something like 1%.

feelingroovy

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Re: What's an "emergency?"
« Reply #4 on: March 09, 2015, 02:21:05 PM »
I wouldn't count a major home repair as an emergency as you know those are coming sooner or later.  These are the things I would add:

 - Sudden visit needed for funeral or illness of a close family member that lives far enough away that flying/hotel/etc. is necessary.

 - The extra costs required for a long, serious illness or injury, beyond the medical costs.  This is the most expensive emergency.  It's the things like: one of you is ill and can't work or care for kids and needs care.  You have to travel often to another state for treatments (I know multiple people who have had to do this, so it's not uncommon).  Neither the sick person nor the caretaker has time/energy to do things you usually would like shoveling driveway, mowing, home repairs.  If you have family nearby they might help with these things, but otherwise, your only option is to pay someone. 

Wow, those are depressing. 

I have to say, both would be good candidates for the HELOC as emergency fund, though.

Ynari

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Re: What's an "emergency?"
« Reply #5 on: March 09, 2015, 03:38:24 PM »
You definitely don't need separate emergency funds for each possible emergency.  I simply have 6 months of basic living expenses set aside that I view as protection in case of a job loss (single person with one source of income).  If I use a portion of it for some smaller unanticipated expense, I replenish it to the 6 months level.  BTW, I have it at Ally earning something like 1%.

This. An emergency fund buys you time to figure stuff out, it's not supposed to 100% pay for any potential emergency you have in the next century.

While it would suck if all of your emergencies happened at once, it's very unlikely that your car breaks down the same week your roof caves in and you lose your job.

In fact, standard insurance and disability should guard you from being completely out of luck in case something devastating like that does happen. (Job loss with 1 income > if breadwinner gets in a car accident totalling the car and preventing them from working, they will collect disability and car insurance will help with the vehicle. You do need a few months of expenses as a buffer for if the insurance companies take a long time.)  6-12 months of expenses gives you plenty of time to say "Ok, what do we do next? Pull from investments, change our living situation, have SAHP go back to work?"

deborah

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Re: What's an "emergency?"
« Reply #6 on: March 09, 2015, 04:08:38 PM »
What emergencies have I been involved with?

Burnt my room and all possessions while in uni. Cost - lost all paperwork for my thesis, and probably grades. Had nothing at all except the clothes I stood up in. Needed clothes... immediately. Emergency funds needed probably $2000 same day to get stuff needed in first few days to live. If you are self insuring - how much would you need?

I had an accident that put me part time for several years and totaled my car. Problem was no insurance covered the part time versus full time as I had become a contractor less than 6 months previously, so I didn't have appropriate work history. Cost at least $100k over several years. Emergency funds needed initially until money from insurance came through.

Canberra Bushfires http://en.wikipedia.org/wiki/2003_Canberra_bushfires - about 500 houses in destroyed, no power for many others for up to four weeks - people I worked with lost everything, or were just without power and needed to buy or hire a generator immediately (those who didn't missed out). This is only one of a number of instances I can think of where power outages occur - what do you need for that sort of emergency, with or without the normal infrastructure around you? The recent cyclone in Rockhampton saw all the petrol stations out of fuel, and with powerlines down everywhere, even those with homes still would have problems with those sorts of things. You might plan to just take several weeks off camping somewhere else in that sort of emergency, and if so how much would it cost?

2Birds1Stone

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Re: What's an "emergency?"
« Reply #7 on: March 09, 2015, 04:10:09 PM »
I think many people er on the side of caution with the E-fund. I am one of those people. Slowly changing my ways.

If I lose my job, I am guaranteed 6 months of unemployment, during which time I could easily find *something* part time even if its in the $12-15/hr range.

If my car breaks down, a reasonable large repair might cost $1-3k, anything more and its considered totaled.

I rent, so nothing can go wrong with the house, if I had to suddenly move and cough up money for a few months rent and security deposit it wouldn't be more than a few thousand.

I ask myself why I keep 6 months of living expenses on hand, I guess I sleep better knowing I have some cash, also for those unlikely scenarios were the market crashes hard and fast, I would buy more than usual during such opportunity. At least in theory =D

SpendyMcSpend

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Re: What's an "emergency?"
« Reply #8 on: March 09, 2015, 04:14:29 PM »
Medical illness.  My mom had to stop working for a long time to take care of my dad and us kids.  Lots of expenses driving to the treatment center.  Seeing another family member dying can cause grief expenses such as counseling and not being up to cooking.  Nursing home expense if it gets there.  Rehab out of pocket.  Special foods for ill partner.  Family visits or flying to help out.  Losing job bc of grief. 

Spondulix

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Re: What's an "emergency?"
« Reply #9 on: March 09, 2015, 05:42:49 PM »
I was also going to say illness that takes both spouses out of work. My DH fell off a bike and broke both his arms. It was six weeks before he could drive or lift more than 2 pounds. I was lucky to have a flexible job (and friends willing to help), but that opened my eyes. The last thing you want to think about is where the money will come from (or how you will access it), even if it's just for a few weeks.

SaintM

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Re: What's an "emergency?"
« Reply #10 on: March 09, 2015, 05:58:03 PM »
Emergency = sale at Macy's!!! /s

Paul der Krake

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Re: What's an "emergency?"
« Reply #11 on: March 09, 2015, 06:37:13 PM »
Real, annoying emergencies strike in pairs. It can be two or more of the events that you listed happening at the same time, or even just one combining with what would usually qualify as a minor inconvenience, but now turns into a combo multiplier.

Examples!

- car gets totalled, AND you sprain your wrist (no biking)
- the roof leaks, AND the DIY spouse happens to be on a business trip, so you need to hire someone right now
- Dad loses job when Mom is on pregnancy leave

You get the idea.

zurich78

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Re: What's an "emergency?"
« Reply #12 on: March 09, 2015, 07:32:16 PM »
I think what you want to make it for is not as important as operating under the assumption that you will need it.  I've seen a lot of posts that take the steps of maximizing their return on it IF they don't need it but to me that defeats the purpose of its existence.

Different people need different levels of emergency funds to.  Me, I'm single so I probably need more than if I were married but less than if I was married with kids on one income.

GetItRight

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Re: What's an "emergency?"
« Reply #13 on: March 09, 2015, 08:39:52 PM »
Good question. I'd think job loss primarily. Otherwise anything that can't be cash flowed with the cushion I keep in my primary checking account. most home repairs are pretty cheap if you do the work yourself, same with anything on a car. I suppose anything you can't cash flow by reducing either debt payments or investments and calling it a bad month, depending on what stage you're at?

FarmerPete

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Re: What's an "emergency?"
« Reply #14 on: March 11, 2015, 08:19:35 AM »
I like to look at the probability of a risk happening to determine the appropriate amount of money to leave for it.  My emergency fund is $1000.  It's not much, but it's designed to cover small emergencies that are a little too big to cash flow that month.  I've got a years worth of income in my taxable brokerage, so even if the stock market crashed 50%, I'd still have my 6 months.  It would kill me to spend it, but it's there.  Having said that, while most people use their emergency fund for expenses that they should have planned, I go the other way.  I have a ton of funds that I am saving money in for planned expenses.  That could range from vacations to home repairs or car replacement.  For example, I currently have $6k saved for a new car when one of ours is beyond repairing.  If I lost my job tomorrow, suddenly, that money would get a new job in my budget.  Boom, there is 3-4 months of living expenses.  If things go on beyond that, I have other funds that could be tapped, and I'm sure reaching 6 months of living expenses could be easily done without touching my brokerage at all.  Especially when you consider unemployment benefits and whatnot.

slugline

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Re: What's an "emergency?"
« Reply #15 on: March 11, 2015, 10:59:56 AM »
I've got a years worth of income in my taxable brokerage, so even if the stock market crashed 50%, I'd still have my 6 months.  It would kill me to spend it, but it's there.

This is a very interesting perspective. I've been contemplating a "two-staged approach" combining maybe 9-10 months of expenses in index funds with 2-3 months expenses in a savings account. Maybe that would give a little flexibility of choosing when to sell the equities-exposed portion.

frugaliknowit

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Re: What's an "emergency?"
« Reply #16 on: March 11, 2015, 11:24:41 AM »
What are your deductibles on your high deductible medical plans?  The reason I ask is I just had some routine surgery (hernia repair).  The insurance company was billed $26,600.  Ask yourself what your financial responsibility would be for something like this.

The other biggies are serious auto repair (think transmission, engine, or A/C blows), HVAC, major plumbing problem or termite rot on the house, job losses.

As someone stated earlier, these tend to come in 2's and 3's.

nobody123

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Re: What's an "emergency?"
« Reply #17 on: March 11, 2015, 11:52:10 AM »
My emergency fund is essentially a job loss / hit by a bus fund.  We want to get it up to 1 year of take home pay over time.  We are not in the most booming economic area, so a new job might require moving to a new area / significant pay cut.  If I die unexpectedly, my wife could use it for living expenses while the insurance and other financial stuff is being worked out.  We are not at all concerned about maximizing our return on these funds, since the point of that pile of money is to replace my paycheck if I am no longer receiving it. 

We have sinking funds for car replacement, house maintenance, etc., as part of our regular budget.  Luckily, we've never had to tap the "emergency" fund because any of those was inadequate for something that has come up, and even if something did, I think our credit cards would let us buy 30 days to figure out how to handle the extraordinary expense.

sunflower_yellow

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Re: What's an "emergency?"
« Reply #18 on: March 11, 2015, 08:03:15 PM »
Quote from: freznow
An emergency fund buys you time to figure stuff out, it's not supposed to 100% pay for any potential emergency you have in the next century.

Oh my goodness, LIGHTBULB.  That makes SO much more sense than how I have approached our emergency fund in the past, which was a sad attempt at "budgeting" for the unknown.  As we have a very positive net worth, even in the very worst case scenario (several concurrent emergencies), the emergency fund would help us get through and beyond the initial "figuring it out" stage until we were able to settle an insurance claim, access an investment, or liquidate an asset.

Quote from: farmerpete
Having said that, while most people use their emergency fund for expenses that they should have planned, I go the other way.  I have a ton of funds that I am saving money in for planned expenses.  That could range from vacations to home repairs or car replacement.  For example, I currently have $6k saved for a new car when one of ours is beyond repairing.  If I lost my job tomorrow, suddenly, that money would get a new job in my budget.  Boom, there is 3-4 months of living expenses.  If things go on beyond that, I have other funds that could be tapped, and I'm sure reaching 6 months of living expenses could be easily done without touching my brokerage at all.  Especially when you consider unemployment benefits and whatnot.

Another excellent point.  We are currently saving for a new car in the next 3-5 years, as well as putting a little by for the child we hope to welcome in the next year or three.  Should we have multiple, simultaneous emergencies, we would definitely tap those savings envelopes should our emergency fund near depletion, before tapping into investments or assets.

Quote from: frugaliknowit
What are your deductibles on your high deductible medical plans?

For each of us, it's in the ~$2-3k range.  I have well over double that in an HSA, and I think Mr. Sunflower has about that much.

~

Many of you have mentioned the need for assistance cooking, cleaning, shoveling snow, etc. in the event of a traumatic life experience.  While I can't say for sure how I would react, I do feel that these activities are helpful in maintaining some semblance of normality and connection to home and family.  If I were unable to take care of something for physical reasons, our best friends live across the street, plus we have very strong and deep community bonds here.  While I wouldn't expect to rely on the generosity of our friends, I know that they would not want us to hire help, especially if we were experiencing some sort of trauma.

~

Thank you all so very much for your input.  While I didn't respond to each of you, I did read all of your responses carefully and considered your input and personal strategies.

First, I am going to reduce our emergency fund to 8 months of living expenses in an account bearing 1% at Ally (thank you for the kick in the seat of the pants, Zizi!  our old account earns 0.85%, soon to be 0.35%).  With unemployment in the case of job loss, this could stretch to 1 year (if we were a single-income family).

In the future, Mr. Sunflower and I may consider something similar to Farmer Pete's strategy, with perhaps 16 months in a taxable brokerage account, and another ~2-3 months of living expenses in our checking account.

Thank you again!  I knew I could count on this forum for insight!

Retire-Canada

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Re: What's an "emergency?"
« Reply #19 on: March 11, 2015, 08:07:22 PM »

What constitutes an "emergency" that would require an "emergency fund" withdrawal?  I imagine it would vary based on one's financial situation, right?

You withdraw from your EF when your investment income and/or work income are not sufficient for something you deem essential.

Your EF can be a line of credit so your cash is invested making you money and you only "pay" for EF funds when you need them - which should be rarely.

-- Vik

EllieStan

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Re: What's an "emergency?"
« Reply #20 on: March 12, 2015, 09:24:00 AM »
If you have pets, I would suggest to add vet bills.

We adopted 4 rescue cats. In 2013, two of them got ill (from two distinct health issues) one after the other. The 2nd cat, we wanted to investigate what was wrong with its heart, so within a period of 6 weeks, I paid something like 1,2K worth of bills after numerous visits to the vet. Unexpected vet bills are now part of our emergency fund !

sunflower_yellow

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Re: What's an "emergency?"
« Reply #21 on: March 12, 2015, 09:34:13 AM »
You withdraw from your EF when your investment income and/or work income are not sufficient for something you deem essential.

Your EF can be a line of credit so your cash is invested making you money and you only "pay" for EF funds when you need them - which should be rarely.

-- Vik

RE: line of credit, are you referring to a HELOC?  In our most likely emergency scenario (down to 1 income due to child, then job loss), wouldn't it be difficult to secure such credit?  I'm not sure how I would feel about using a credit card with a high interest rate, and I'm not sure how I'd be comfortable with depending on securing a HELOC to feed my family.  Thoughts?

celticmyst08

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Re: What's an "emergency?"
« Reply #22 on: March 12, 2015, 01:18:18 PM »
Quote from: freznow
An emergency fund buys you time to figure stuff out, it's not supposed to 100% pay for any potential emergency you have in the next century.

Oh my goodness, LIGHTBULB.  That makes SO much more sense than how I have approached our emergency fund in the past, which was a sad attempt at "budgeting" for the unknown.  As we have a very positive net worth, even in the very worst case scenario (several concurrent emergencies), the emergency fund would help us get through and beyond the initial "figuring it out" stage until we were able to settle an insurance claim, access an investment, or liquidate an asset.
+1 to the lightbulb moment. I'm not entirely sure why I never realized this fully, but yea... this makes so much more sense. DH and I have definitely been approaching it from the "have lots of money in case we need to pay for any emergency ever" standpoint.

To be fair, a lot of people don't have any investments/assets to liquidate, so having a bigger e-fund would be more important than for someone with more options.

Retire-Canada

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Re: What's an "emergency?"
« Reply #23 on: March 12, 2015, 08:10:06 PM »

RE: line of credit, are you referring to a HELOC?  In our most likely emergency scenario (down to 1 income due to child, then job loss), wouldn't it be difficult to secure such credit?  I'm not sure how I would feel about using a credit card with a high interest rate, and I'm not sure how I'd be comfortable with depending on securing a HELOC to feed my family.  Thoughts?

HELOC offers the lowest interest. But you can get other LOC that are not home equity secured.

You get the LOC now while your income and assets are good not when you've both lost your job.

Why lose out on a your market returns year after year on a large EF in cash just in case something bad might happen one day?

If the market is up or at least reasonably priced you just cash in investments to pay for the emergency. If the market has just crashed and you need money you use the LOC.

I recently had to look for new work. I was aiming for a $80K - $100K annual income, but if I didn't find that job in the time I gave myself I'd be working a retail job paying my bills. I would only dip into my EF or my investments in a worst case scenario.

The LOC is just there to give you a month or two of liquidity to get things back on track.

A credit card is fine for expenses you can pay back with diverted savings in a month. A LOC gives you a larger pool of EF money without the deadly interest rate of a CC.

-- Vik