Author Topic: Why do I see so many variations on the "emergency fund"?  (Read 3440 times)

WootWoot

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Why do I see so many variations on the "emergency fund"?
« on: November 07, 2017, 05:21:03 PM »
Three months? Six months? A year's worth of expenses?

My gosh, why are there so many variations on the advice to keep a cushion or an emergency fund?

Just curious about this. Is there an average amongst Mustachians?

Bourbon

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Re: Why do I see so many variations on the "emergency fund"?
« Reply #1 on: November 07, 2017, 05:21:49 PM »
25X annual spending.

PoutineLover

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Re: Why do I see so many variations on the "emergency fund"?
« Reply #2 on: November 07, 2017, 05:33:06 PM »
It depends on how secure your sources of income are, what kinds of emergencies you are anticipating and how much they could cost, and if you have springy debt to get immediate access to extra cash. 

WootWoot

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Re: Why do I see so many variations on the "emergency fund"?
« Reply #3 on: November 07, 2017, 05:37:25 PM »
Ah, I see.

I have springy debt (and no other debt) in the form of credit cards.

Megma

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Re: Why do I see so many variations on the "emergency fund"?
« Reply #4 on: November 07, 2017, 05:53:31 PM »
Everyone has their own risk tolerance also. Some people might feel their income is secure and only want 3 months expenses in liquid savings others might not sleep without 6 months sitting in a savings account.

It might also vary based on if you have multiple houses (shit breaks more often) or kids.

Kyle Schuant

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Re: Why do I see so many variations on the "emergency fund"?
« Reply #5 on: November 07, 2017, 06:07:17 PM »
Security of employment will matter, also. If you're a tenured academic, 3 months might be plenty. If your work is casual part-time and you might lose all your shifts with 2 hours' notice, 6 or even 12 months might be better.

one piece at a time

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Re: Why do I see so many variations on the "emergency fund"?
« Reply #6 on: November 07, 2017, 07:22:56 PM »
Any money you have in exchange traded funds is very liquid. Most debts can be paid back 30 days later, whilst stock trades clear in 5.

JLee

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Re: Why do I see so many variations on the "emergency fund"?
« Reply #7 on: November 07, 2017, 07:30:53 PM »
It's different for everyone.

If I had a rental lease in a HCOL area and was working contract jobs that could vanish at any time, I'd want far more of an emergency fund.  I'm happy with $2-5k liquid because I have an exceptionally secure job and a month to month lease, and I own a house that's currently rented out to friends. Absolute worst case, I could go buy a ~20ft travel trailer and park it on the RV pad next to my garage at my house and live for nearly nothing while I figured out what I was going to do next.

This is ignoring taxable accounts, which would let me stay in my HCOL area for a while.

Dicey

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Re: Why do I see so many variations on the "emergency fund"?
« Reply #8 on: November 07, 2017, 10:00:24 PM »
The closer I got to FIRE, the more I had in cash. At the beginning, it's important to get as many soldiers pressed into action as possible. Later on, it's important to have a fat wad of cash so you can avoid drawing down investments in a bad market.

We are sitting on a shitload of cash, because we're looking to do interesting things with it. We flipped a house and that was fun. We've bought a couple of properties, spiffed them up and rented them out and that was fun. We're not sure what we'll do next, but we have enough in equities that keeping a lot of cash out of the market (aka EF) allows us to think and dream big in other directions without risking our future.

Clean Shaven

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Re: Why do I see so many variations on the "emergency fund"?
« Reply #9 on: November 08, 2017, 07:59:50 AM »
As a counterpoint to the "lots of cash in or near FIRE" practice, there's the argument about cash being a drag on investment returns. I don't think there's necessarily a right or wrong way to do this.

Last year, we decided to cut our cash pile from $60K to $30K, and just dump it into the taxable investment account. We've never needed to tap the emergency fund for anything, and figured it should be earning more than 2% as cash.  We're looking at FIRE-ing next spring. $30K is roughly 6-8 months of basic expenses under the current projected budget.

formerlydivorcedmom

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Re: Why do I see so many variations on the "emergency fund"?
« Reply #10 on: November 08, 2017, 08:14:13 AM »
We are 10 years out from retirement. Our emergency fund is about 2 months of current expenses in cash. 

This is way too risky for a lot of people.  It's okay for us because
a) it covers the deductibles for insurance

b) There's plenty of fluff in our budget.  We have no debt except the mortgage, and I could cut out 35-50% of our non-mortgage monthly expenses tomorrow if I had to.

c) Our income streams are diverse. 
 *I'm the primary breadwinner.  I'm currently contracting, but I'm confident enough in my skills that I could find another job within 4-6 months, even in a down market.
 *My husband is in college. He has an internship that brings in 20% of our non-mortgage expenses , and he could easily go back to work for his old boss (as a mechanic) in the evenings and bring in another 10%. (For a total of 30% of our non-mortgage expenses)
 *I deliberately planned my mortgage to be the same amount as the child support I receive, and the mortgage will be paid off the same month youngest kid turns 18.  My ex's job is extremely stable, so I'm not concerned that he will miss a payment. 

d) We have other forms of savings we COULD access.
  *There's an additional month in another savings account that I have earmarked for the kids' coverdell ESAs next year; I could rely on that if it were needed.
  *We also have $80k invested in a taxable account.  I can pull that money out in a few days if I had to.  Worst-case scenario, the market crashes and we're down to about 50% of the total.  We can live on that for at least a year, at our current spending levels, with H's job and child support.  I've also pulled money out of this account to deal with an unexpected catastrophic plumbing issue; it surprised the company that I paid the $10k outright rather than finance it.

My friends have an emergency fund of at least a year in cash, even though their jobs are more secure than mine. That makes them feel more secure.

swinginbeef

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Re: Why do I see so many variations on the "emergency fund"?
« Reply #11 on: November 08, 2017, 08:39:48 AM »
I'm personally comfortable with having a credit card to cashflow and a roth account with more than enough contributions available to withdraw to cover anything that may come up. My wife on the other hand "needs" $20k in a savings account at our credit union to feel warm and fuzzy. I attempted to address the issue but quickly decided that, like with most things, a warm and fuzzy wife is the most important investment one can make.

rubybeth

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Re: Why do I see so many variations on the "emergency fund"?
« Reply #12 on: November 08, 2017, 09:05:03 AM »
Three months? Six months? A year's worth of expenses?

My gosh, why are there so many variations on the advice to keep a cushion or an emergency fund?

Just curious about this. Is there an average amongst Mustachians?

People vary. Some people have different definitions of "emergency." Some people are on the hook for more responsibilities (spouse, kids, property), and people have varying levels of health, job security, or ability to find a replacement job in their field in their geography if they got laid off.

Personally, I like to make sure our deductibles are covered in case we experience some kind of catastrophic loss (like a car crash where both of us are seriously injured and the car is junked, too). We also have disability insurance. I don't think of it in terms of "month's expenses," more in terms of what feels comfortable to me. I also learned from my parents that it's really nice to be able to go out and replace a refrigerator on the day that it dies, and not worry about the credit card bill. I think most mustachians could probably handle a $2,000 expense fairly easily between credit cards, just saving a little less the next month, etc., but for many Americans, a $400 "emergency" would be catastrophic: https://www.washingtonpost.com/news/wonk/wp/2016/05/25/the-shocking-number-of-americans-who-cant-cover-a-400-expense/?utm_term=.ae2a9f25f34f


ketchup

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Re: Why do I see so many variations on the "emergency fund"?
« Reply #13 on: November 08, 2017, 09:42:59 AM »
Like others have said, it varies a lot based on your personal situation.  Do you have a steady paycheck, high savings rate, high job security, limited external responsibility and very marketable skills if you do get let go?  Then you probably don't need much in the way of an emergency fund.  Do you have inconsistent income, a lower savings rate, less sure of what you'd do in a down economy, and are the sole breadwinner for your wife and 15 kids?  Then you probably need a gigantic emergency fund.  Most are somewhere in between.  Personally, I like keeping 10k liquid these days (plus plenty of springy debt with some silly-high credit limit credit cards).

Schaefer Light

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Re: Why do I see so many variations on the "emergency fund"?
« Reply #14 on: November 08, 2017, 09:51:30 AM »
I think being a single-income household vs. a dual-income household is the biggest factor in determining how much you want in your EF.  Job loss can be financially devastating for a single person, but that same job loss might be no big deal to a person whose significant other brings in a decent income.

WootWoot

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Re: Why do I see so many variations on the "emergency fund"?
« Reply #15 on: November 08, 2017, 11:11:47 AM »
Thank you, ladies and gents. Many lifestyles, many viewpoints. Makes a lot of sense now.

dreams_and_discoveries

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Re: Why do I see so many variations on the "emergency fund"?
« Reply #16 on: November 08, 2017, 11:45:18 AM »
To add to what everyone has said, there is not a simple one size fits all approach, and ultimately comes down to your risk tolerance verses fear of missing out on market returns.

I don't really keep an emergency fund, but have a variable large cash float in my current account, and funds in my business account; anything less than 500 is fine to fit in budget, less than 4k means less investing next month and so on, to drawing down my business account, then having to sell out and raid my taxable account if it's a momentous amount.  I haven't ever had a momentous emergency expense yet in my life...

frugaliknowit

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Re: Why do I see so many variations on the "emergency fund"?
« Reply #17 on: November 08, 2017, 01:51:00 PM »
I think being a single-income household vs. a dual-income household is the biggest factor in determining how much you want in your EF.  Job loss can be financially devastating for a single person, but that same job loss might be no big deal to a person whose significant other brings in a decent income.

+1

Having a spouse or committed partner to back you up makes all of the difference!!  If they can cover your basic expenses, then arguably your EF can be minimal (what are the odds you will both be out of work at the same time...?).

Otherwise, it's kind of like Fire Insurance:  You need it, even though you will probably never use it and hate paying the premium (in this case the drag on potential earnings).

Those who think of credit as an EF:  Theoretically correct, however, borrowing money when one is having problems, definitely increases the pressure.

Those who think non retirement investments as EF:  Theoretically correct, however pulling money out of the market when the market is way down and you are having problems is not a winning strategy.

PoutineLover

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Re: Why do I see so many variations on the "emergency fund"?
« Reply #18 on: November 08, 2017, 02:40:22 PM »

Those who think of credit as an EF:  Theoretically correct, however, borrowing money when one is having problems, definitely increases the pressure.

Those who think non retirement investments as EF:  Theoretically correct, however pulling money out of the market when the market is way down and you are having problems is not a winning strategy.
I think of my line of credit as a sort of backup EF, where I hope not to need it, and I hope that I'll be able to pay it back ASAP, but it's still better than using credit cards since the interest is much lower, and it might be better than pulling out investments if there's a big drop at the same time. But I still keep cash just in case. Luckily I don't own a house or a car and living in Canada means I don't have to worry about a medical issue bankrupting me, so my main need for an emergency fund would basically be (bare-bones) living expenses if I lose my job.

Retire-Canada

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Re: Why do I see so many variations on the "emergency fund"?
« Reply #19 on: November 08, 2017, 06:23:18 PM »
$0 for EF here and I do contract work that can end anytime. I use a LOC [not tied to home equity] as my primary EF. Yes the bank could close it. No they didn't touch it in 2008. If they do I am sitting on ~23 x a base level cost of living in my investments. Yes my investments could drop right when I need to pull a some money out, but the additional money I have made by not having an EF has more than made up for any potential losses.

cFIREsim tells me that $35K [1 year's reduced COL] invested for 10yrs would be:

- max = $414K
- median = $173K
- min = $61K

So if I held my EF in a savings vehicle that kept pace with inflation the cost for holding that EF vs. investing is between $26K and $379K based on historical data.

I'm just not rich enough to hold an EF.

rubybeth

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Re: Why do I see so many variations on the "emergency fund"?
« Reply #20 on: November 09, 2017, 08:03:45 AM »
One of the problems with depending on a credit line or HELOC or even credit cards for an EF is that those can be cancelled. During the recession many credit lines and credit cards had their limits lowered or were completely cancelled. Same with HELOC that you already had in place. Lots of people who counted on those were left adrift.

I also just think of the hassle factor. What if I'm in the hospital in a coma and my spouse needs help paying some bills? How would he manage the medical stuff as well as the household things? Having things in cash in an account with a debit card/checks attached and that's automatically linked with our main credit card makes it easy--he could hand off the login info. to a trusted family member for them to take care of it for us, and he could focus on the other, more important things.

Note: I'm not just being paranoid, I have a family member who was in a similar situation. Shit happens.

WootWoot

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Re: Why do I see so many variations on the "emergency fund"?
« Reply #21 on: November 09, 2017, 02:01:03 PM »
rubybeth, you are so right on that one.
My spouse doesn't pay the bills, but he does have a debit card and knows how to get in touch with the credit union should he need access to our EF.

diapasoun

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Re: Why do I see so many variations on the "emergency fund"?
« Reply #22 on: November 09, 2017, 03:36:54 PM »
I'm still building up my emergency fund, but my goal is about 6 months of expenses (currently at about 2). I have some fixed payments (student loans), and I rent month-to-month in a HCOL area; my currently very cheap rent could double within 30 days if something went badly while unemployed. I also work in a niche industry, though with some decently marketable skills, so finding a new job could take a few months. My comfort level is basically that I'd like to be able to handle a small emergency (e.g. significant car repairs or raised rent) while unemployed for three months with some buffer left over.