Author Topic: Mini case study - Size of Emergency Fund  (Read 917 times)

moonpalace

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Mini case study - Size of Emergency Fund
« on: June 25, 2018, 09:46:13 AM »
Married, two kids. My wife is a daycare provider and I work in state government. Our kids are healthy. We don't commute by car so we could do without a car indefinitely if needed.

There's a tremendous daycare shortage and she has a waiting list a mile long. My job is very secure. We both have disability coverage and life insurance. Credit scores are in the 820's.

We currently have $5k in cash as an e-fund, and we are pretty meticulous about saving cash for known future expenses (vacation, summer camps, new-used car in a few years, home repairs, etc.).

We've been putting $350/month into building the e-fund up, and I'm considering either slowing that down or stopping entirely and putting that money towards investments (likely a 457). It just seems a bit unnecessary to have much more than that in the e-fund and I'd love to build the 457 up faster.

Would love to hear people's thoughts on this situation.

LifeHappens

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Re: Mini case study - Size of Emergency Fund
« Reply #1 on: June 25, 2018, 10:07:01 AM »
Emergency funds are one of the topics (*cough* mortgage paydown *cough*) that are more psychological than mathematical. You will see arguments on all sides from having $0 to holding 6 or even 12 months expenses in ready cash.

The way I think about it, is to pick 2-3 true emergencies and your likely out of pocket expenses. For me that would be something like the deductible on my homeowners insurance for a named storm + my max OOP for healthcare. The likelihood of needing all that money at the same time is small, but it works for my psychology.

Sun Hat

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Re: Mini case study - Size of Emergency Fund
« Reply #2 on: June 25, 2018, 11:17:42 AM »
I second what Life Happens said. A furnace replacement + insurance deductible sounds like a good amount to have on hand. For me that would be $8k, but I'd be happy with anything north of $6k so long as I could sell some investments from non-registered accounts in a pinch.


moonpalace

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Re: Mini case study - Size of Emergency Fund
« Reply #3 on: June 25, 2018, 11:30:39 AM »
Thanks, @Sun Hat and @LifeHappens !

I think I might call it good at $5,000, particularly since we have a separate fund for house emergencies.

2Birds1Stone

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Re: Mini case study - Size of Emergency Fund
« Reply #4 on: June 25, 2018, 02:01:56 PM »
I'm in the $100k camp, but my emergencies are jet-setting with hookers and blow.

Finances_With_Purpose

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Re: Mini case study - Size of Emergency Fund
« Reply #5 on: June 25, 2018, 09:06:36 PM »
Married, two kids. My wife is a daycare provider and I work in state government. Our kids are healthy. We don't commute by car so we could do without a car indefinitely if needed.

There's a tremendous daycare shortage and she has a waiting list a mile long. My job is very secure. We both have disability coverage and life insurance. Credit scores are in the 820's.

We currently have $5k in cash as an e-fund, and we are pretty meticulous about saving cash for known future expenses (vacation, summer camps, new-used car in a few years, home repairs, etc.).

We've been putting $350/month into building the e-fund up, and I'm considering either slowing that down or stopping entirely and putting that money towards investments (likely a 457). It just seems a bit unnecessary to have much more than that in the e-fund and I'd love to build the 457 up faster.

Would love to hear people's thoughts on this situation.

We have confronted this situation as well, or one very much like it.  Like you, we budget ahead. 

Your question is hard to give a specific answer to that applies across the board; it depends on too many things.  But you seem to realize that and just want a sounding board, so here goes...

I realized at one point that we had an absurd amount sitting around in cash equivalents: a fully-funded emergency fund (6 months' expenses) plus savings for a whole host of things. 

After that, I started managing it a little more closely and we now avoid having a huge cash position.  Instead, we have an emergency fund, then we look at our short-term/medium-term savings (for things like cars and only keep roughly the amount we think we'll need over the next six months to a year.  And we realize that we could trade some things off.  For instance, we had time when only one of us worked, and we decided to move the car savings (for the next car) into a house down payment and roll with less cash savings. 

You may find that you suffer a job loss the same time as the A/C goes out at the same time as you need car repairs - it's ultimately up to you how much savings you want to have on hand for that.  Personally, we find that we want six months' expenses in cash equivalents as a minimum.  If we really needed to, we could probably squeeze it even farther.  But we don't tend to have much more than that on hand. 

We have less now that we both work, because we're unlikely to both be jobless at the same time, so we wouldn't need as much cash flow even if we had an emergency.  If I were the only one working, though, we would carry more cash savings. 

We like having a solid amount of cash on hand, so I keep up to 50k cash.  Why 50k?  Because there's a local bank we found one time that gave us 2.5% on up to 50k in deposits, so we kept the account there and are fine with having up to 50k cash.  Really, about $54k, to be specific, because I have some small CDs (at another local bank) that get 5% interest too.  Above that, we tend to put cash in investments unless there's a large looming reason, such as when we were saving up for our house down payment and knew we would be spending a lot in one quarter. 

I keep a general eye on cash level, but don't worry about it much.  Right now, for instance, we're low on cash after some medium-term expenses, but we're inching back up. 

Telecaster

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Re: Mini case study - Size of Emergency Fund
« Reply #6 on: June 25, 2018, 09:13:01 PM »
Emergency funds are one of the topics (*cough* mortgage paydown *cough*) that are more psychological than mathematical. You will see arguments on all sides from having $0 to holding 6 or even 12 months expenses in ready cash.

The way I think about it, is to pick 2-3 true emergencies and your likely out of pocket expenses. For me that would be something like the deductible on my homeowners insurance for a named storm + my max OOP for healthcare. The likelihood of needing all that money at the same time is small, but it works for my psychology.

Good post.  The water heater going out  isn't an emergency.  It is a predictable, but irregular expense.  Most irregular expenses can be handled with an extra month's cash on hand, and maybe some springy debt.  Something like a job loss might require more, but those things seldom happen completely out of the blue and that can give you time to build up a cash cushion.   Something like a serious illness might require a good bit more, but it doesn't have to be saved up in the form of cash.  It can be in the form of taxable investment accounts.