Author Topic: emergency fund  (Read 6918 times)

pattiber

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emergency fund
« on: February 24, 2015, 10:42:11 AM »
What is the best thing to do with the 20K that my financial investor says I should have in savings for emergencies? I hate to see it losing value with inflation...I have it in a money market at my local credit union right now

johnny847

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Re: emergency fund
« Reply #1 on: February 24, 2015, 10:49:02 AM »
A few months ago, I would have given the "standard" response that it belongs in a money market account, or at least part of it in a money market account and part of it in say an I Bond.

But I've since changed my views a bit, expressed here http://forum.mrmoneymustache.com/ask-a-mustachian/emergency-fund-where-do-you-keep-it/msg563060/#msg563060
tl;dr - There is a limited usefulness to an emergency fund if you have enough in liquid assets to cover an emergency. But you should play with the probabilities yourself. Also, boarder42 comments that I didn't take the analysis as far as I could have.

I've since eliminated my emergency fund.

Also, MMM doesn't have an emergency fund http://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/. But one could argue that post FIRE, you don't need an emergency fund simply because your entire portfolio is an emergency fund.

SantaFeSteve

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Re: emergency fund
« Reply #2 on: February 24, 2015, 10:50:48 AM »
What is the best thing to do with the 20K that my financial investor says I should have in savings for emergencies? I hate to see it losing value with inflation...I have it in a money market at my local credit union right now

First, that is a HUGE sum of money for an emergency fund and I think the amount should be reconsidered.  How many months of "Basic" Necessary" expenses does that represent? Do you have other liquid assets? if you do, then what amount and where are they? 

I would look very hard at what that money is supposed to be for.  Your post makes it sound as if your FA told you to save 20k in an emergency fund and you simply followed that advice without considering the implications, need and applicability to your situation.  Under what circumstances would you have to access that money?  How likely are those possible circumstances to occur?

Once you have a solid understanding of why you need the emergency fund, then you can evaluate how large the fund should be, and finally decide where it should be stored.

For reference I think most people on these forums have an "emergency fund" that is probably $5,000 or less.   

Scandium

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Re: emergency fund
« Reply #3 on: February 24, 2015, 11:36:29 AM »
What is the best thing to do with the 20K that my financial investor says I should have in savings for emergencies? I hate to see it losing value with inflation...I have it in a money market at my local credit union right now

First, that is a HUGE sum of money for an emergency fund and I think the amount should be reconsidered.  How many months of "Basic" Necessary" expenses does that represent? Do you have other liquid assets? if you do, then what amount and where are they? 

I would look very hard at what that money is supposed to be for.  Your post makes it sound as if your FA told you to save 20k in an emergency fund and you simply followed that advice without considering the implications, need and applicability to your situation.  Under what circumstances would you have to access that money?  How likely are those possible circumstances to occur?

Once you have a solid understanding of why you need the emergency fund, then you can evaluate how large the fund should be, and finally decide where it should be stored.

For reference I think most people on these forums have an "emergency fund" that is probably $5,000 or less.

Really? $5,000 is not an emergency fund, that's the peak of my checking account in most months! If we use 6 month expenses our mortgage alone is $12K. (and now we have daycare which is another $10k). I wouldn't want to miss those payments if one of use loose our jobs.

I guess some would call it a house maintenance fund, but our heat pump broke and cost $8,000 to replace (during a heat wave). We had cash on hand so it was no problem (and the guy seemed confused we weren't doing financing..). If we need a new car that'll be north of $10K too. These kinds of things make me glad we have a ~$15K fund sitting around. And my wife is conservative so she has at least as much in another account, but that's another issue.

Now, I'm considering rotating some of this into I-bonds or similar as part of a bond allocation, and reduce it some. But having $10-20K in cash I think is perfectly fine for smaller or larger emergencies.

SantaFeSteve

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Re: emergency fund
« Reply #4 on: February 24, 2015, 11:57:16 AM »
What is the best thing to do with the 20K that my financial investor says I should have in savings for emergencies? I hate to see it losing value with inflation...I have it in a money market at my local credit union right now

First, that is a HUGE sum of money for an emergency fund and I think the amount should be reconsidered.  How many months of "Basic" Necessary" expenses does that represent? Do you have other liquid assets? if you do, then what amount and where are they? 

I would look very hard at what that money is supposed to be for.  Your post makes it sound as if your FA told you to save 20k in an emergency fund and you simply followed that advice without considering the implications, need and applicability to your situation.  Under what circumstances would you have to access that money?  How likely are those possible circumstances to occur?

Once you have a solid understanding of why you need the emergency fund, then you can evaluate how large the fund should be, and finally decide where it should be stored.

For reference I think most people on these forums have an "emergency fund" that is probably $5,000 or less.

Really? $5,000 is not an emergency fund, that's the peak of my checking account in most months! If we use 6 month expenses our mortgage alone is $12K. (and now we have daycare which is another $10k). I wouldn't want to miss those payments if one of use loose our jobs.

I guess some would call it a house maintenance fund, but our heat pump broke and cost $8,000 to replace (during a heat wave). We had cash on hand so it was no problem (and the guy seemed confused we weren't doing financing..). If we need a new car that'll be north of $10K too. These kinds of things make me glad we have a ~$15K fund sitting around. And my wife is conservative so she has at least as much in another account, but that's another issue.

Now, I'm considering rotating some of this into I-bonds or similar as part of a bond allocation, and reduce it some. But having $10-20K in cash I think is perfectly fine for smaller or larger emergencies.

To each their own, but I think most on here would prefer to have their money working for them instead of sitting idle, losing value, just in case something happens. 
MMM and other (myself) use (I forget the term MMM used in his blog post) (Squishy credit?) for some of the "emergencies" you are describing such as a car failure or a major household expense.  A HELOC is a great solution for home repair issues.  It doesn't cost anything until you use it, then you can choose to either sell some productive assets, use money you would have normally saved and invested for a few months, or some other solution to pay that off.  the same approach could be used for a car replacement, although $10k is much more than I would spend, it could work the same way. 

My main point is that you should evaluate WHY you have that money sitting idle and losing value.  If you are worried about a job loss, then you could ladder some CD's in the amount of your minimum monthly expenses.   If it is for replacing a car/home appliance/etc then maybe you would prefer to have that money invested in something that will beat inflation and use some alternative solutions to address the "emergency". 

Drew664

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Re: emergency fund
« Reply #5 on: February 24, 2015, 04:58:07 PM »
I keep $20k liquid cash as an emergency fund, which is close to a year's expenses.

- single income family
- responsible for wife and child if a job loss occurs
- don't agree with leveraging debt as a financial plan, especially in an emergency

The opportunity cost of not having it elswhere doesn't bridge the gap of risk for me. Life's not a spreadsheet,  and this is an area where the math doesn't fit into my plan.

Just my 2 cents.

SantaFeSteve

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Re: emergency fund
« Reply #6 on: February 24, 2015, 05:11:29 PM »
I keep $20k liquid cash as an emergency fund, which is close to a year's expenses.

- single income family
- responsible for wife and child if a job loss occurs
- don't agree with leveraging debt as a financial plan, especially in an emergency

The opportunity cost of not having it elswhere doesn't bridge the gap of risk for me. Life's not a spreadsheet,  and this is an area where the math doesn't fit into my plan.

Just my 2 cents.

Drew, are you saying that you keep that money to self-insure against a job loss/income loss that may last 12 months?  If this is the case, let's make the math easy and say you have yourself about $2,000 per month in the event that you lose your income.  Why not consider that as a 10-month income stream in which you actually only need $2,000 per month for 10 months?  That allows you to invest, at least come, of that money in something with a slightly higher return than a savings account.  You could ladder CD's, invest half in a low-volatility/low-return ETF, or some other version?

I guess as a percentage of your total net worth that $20,000 might be small enough that you don't mind it losing value to inflation, but in my case that is a lot of potential earnings being left on the table.  I agree that life is not a spread sheet, life is a measured risk.  I am not advocating that you, or the OP, spend that emergency fund down, but rather to consider if you need the entirety of that sum always available in cash? 

FWIW, we keep a small portion of our emergency fund in an online savings account earning 0.75% at the moment, with the balance in a CD earning a promotional rate of 5%.  If we have an emergency we will first use our surplus income that would normally go into savings, then if needed we will draw on the few thousand in cash in the online savings account, and if that doesn't take care of it we will cash out our CD paying a penalty equal to 2 months interest, and if that still isn't enough.....well then we start liquidating the investments whether we want to or not. 

Drew664

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Re: emergency fund
« Reply #7 on: February 24, 2015, 06:36:18 PM »
The $20k is ear marked as emergency only, yes. I've tried taking advantage of a promotional rate CD, but the bank changed their direct deposit rules or something to the effect where I got dinged with fees insread of gaining a marginal rate on a small sum of money. A bit jaded, yes and I understand this is probably an isolated incident but not worth the hassle for me with emergency funds.

As a total %, it currently represents less than 10% of my NW. This % will keep going down as other assets grow. Ultimate goal is to have no mortgage,  and much reduced expenses month to month.  At that point, the emergency fund will be reduced.

Really no wrong way to go about this as no one is going into financial ruin with either preference.

Mutton Chop

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Re: emergency fund
« Reply #8 on: February 24, 2015, 06:37:30 PM »
I've seen folks advocate investing your emergency fund money into something like a low cost, 40% stock, 60% bond fund.

Some people won't be comfortable with exposing themselves to short term fluctuations in the stock and bond world, but I think when you take a long term view of it, you're better off doing something other than sticking it in a savings account with little to no interest.

lise

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Re: emergency fund
« Reply #9 on: February 24, 2015, 06:43:13 PM »
I think super cautious people like me want to know they have cash available INSTANTLY if they need it.  It's just a mental thing for me.    After reading MMM I've reduced this fund to 2 months of expenses in a high interest online savings account with debit card access.   So baby steps.  Maybe I'll get to the point where I don't think this needs to be in a savings account but mentally I'm not there yet. 

johnny847

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Re: emergency fund
« Reply #10 on: February 24, 2015, 06:45:32 PM »
I think super cautious people like me want to know they have cash available INSTANTLY if they need it.  It's just a mental thing for me.    After reading MMM I've reduced this fund to 2 months of expenses in a high interest online savings account with debit card access.   So baby steps.  Maybe I'll get to the point where I don't think this needs to be in a savings account but mentally I'm not there yet.
I get your mentality, but have you encountered situations where you actually need cash available instantly? I think thinking about this will help you towards not sticking an emergency fund in a savings account.
Though I suppose if you have encountered situations where you need cash immediately, then you should just leave it in a savings account.


lise

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Re: emergency fund
« Reply #11 on: February 24, 2015, 06:52:06 PM »
I think super cautious people like me want to know they have cash available INSTANTLY if they need it.  It's just a mental thing for me.    After reading MMM I've reduced this fund to 2 months of expenses in a high interest online savings account with debit card access.   So baby steps.  Maybe I'll get to the point where I don't think this needs to be in a savings account but mentally I'm not there yet.
I get your mentality, but have you encountered situations where you actually need cash available instantly? I think thinking about this will help you towards not sticking an emergency fund in a savings account.
Though I suppose if you have encountered situations where you need cash immediately, then you should just leave it in a savings account.

I freelance so my income can become uneven if a client decides to pay late or something.   Yeah, I put many expenses on credit cards but I can't for others like estimated tax payments and rent. 

johnny847

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Re: emergency fund
« Reply #12 on: February 24, 2015, 07:04:35 PM »
I think super cautious people like me want to know they have cash available INSTANTLY if they need it.  It's just a mental thing for me.    After reading MMM I've reduced this fund to 2 months of expenses in a high interest online savings account with debit card access.   So baby steps.  Maybe I'll get to the point where I don't think this needs to be in a savings account but mentally I'm not there yet.
I get your mentality, but have you encountered situations where you actually need cash available instantly? I think thinking about this will help you towards not sticking an emergency fund in a savings account.
Though I suppose if you have encountered situations where you need cash immediately, then you should just leave it in a savings account.

I freelance so my income can become uneven if a client decides to pay late or something.   Yeah, I put many expenses on credit cards but I can't for others like estimated tax payments and rent.
Ah well variable income is a good reason to have an emergency fund. It's certainly easier to get rid of your emergency fund if you have a steady paycheck (or just a massive portfolio because you've FIRE'd)

GGNoob

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Re: emergency fund
« Reply #13 on: February 24, 2015, 07:32:26 PM »
I've seen folks advocate investing your emergency fund money into something like a low cost, 40% stock, 60% bond fund.

This is pretty much what I'd recommend. I also really like Vanguard's Wellesley Income Fund. It lost less than 10% in 2008 and has pretty good returns.

Scandium

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Re: emergency fund
« Reply #14 on: February 25, 2015, 09:04:23 AM »
...


To each their own, but I think most on here would prefer to have their money working for them instead of sitting idle, losing value, just in case something happens. 
MMM and other (myself) use (I forget the term MMM used in his blog post) (Squishy credit?) for some of the "emergencies" you are describing such as a car failure or a major household expense.  A HELOC is a great solution for home repair issues.  It doesn't cost anything until you use it, then you can choose to either sell some productive assets, use money you would have normally saved and invested for a few months, or some other solution to pay that off.  the same approach could be used for a car replacement, although $10k is much more than I would spend, it could work the same way. 

My main point is that you should evaluate WHY you have that money sitting idle and losing value.  If you are worried about a job loss, then you could ladder some CD's in the amount of your minimum monthly expenses.   If it is for replacing a car/home appliance/etc then maybe you would prefer to have that money invested in something that will beat inflation and use some alternative solutions to address the "emergency".

I will look into a HELOC at some point, when our equity increase (just did refi a year ago), and like I said will rotate more and more into I-bonds, which will at least track CPI. As these accounts, and the taxable stock account, grows I might reduce the ER. But at the moment with almost $4k/month in fixed expense alone I prefer to keep it high.

It's probably also easier for people saving large % of after tax income. We max 401ks, but after high mortgage and expenses in a high COL area we don't seem to have as much left to save as others here (mainly our own fault obviously). As our portfolio grows and child care expenses go down we can probably reduce it.

But even if I still want say $20k in case of job loss and put that in a CD instead of current 0.9% savings account, that would likely only yield an extra 1.5% more interest, or $300/year. Or ~$5K over 10 years. A pretty minuscule amount considering our overall portfolio.
Or, say I cut it in half and invested $10K. In 10 years that would grow to about $7k more in the market than in the savings account. Again, not a huge amount IMO. (In 20 years: $20K difference. Real money, but I don't think outrageous price for risk-free cash holdings.)

netskyblue

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Re: emergency fund
« Reply #15 on: February 25, 2015, 09:19:35 AM »
We keep 10k in a high yield checking account (3.25% APY).  This is a little over 6 months of our normal spending, could stretch to 9+ months if we cut out ALL the fat.

However, our only other savings at this point is ~$36k in a 401k.  We rent, so HELOC is not an option.

10k would cover both our deductibles if we were, say, badly injured in a car crash together.  There'd be nothing left to replace the car, though, or make up for lost wages if we couldn't work for a time.  So no, I don't think we have "too much" in an emergency fund.

DH did lose his job last year.  Employer replaced him with his son-in-law (very small business ~10 employees).  It took him 4 months to get a new job.  But we had savings, and were able to hold back on the 'staching for those few months, cut back, and live off my pay alone.

lise

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Re: emergency fund
« Reply #16 on: February 25, 2015, 10:28:13 AM »
We keep 10k in a high yield checking account (3.25% APY).  This is a little over 6 months of our normal spending, could stretch to 9+ months if we cut out ALL the fat.

However, our only other savings at this point is ~$36k in a 401k.  We rent, so HELOC is not an option.

10k would cover both our deductibles if we were, say, badly injured in a car crash together.  There'd be nothing left to replace the car, though, or make up for lost wages if we couldn't work for a time.  So no, I don't think we have "too much" in an emergency fund.

DH did lose his job last year.  Employer replaced him with his son-in-law (very small business ~10 employees).  It took him 4 months to get a new job.  But we had savings, and were able to hold back on the 'staching for those few months, cut back, and live off my pay alone.

who do you bank with? 3.25% is very nice ...!

FarmerPete

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Re: emergency fund
« Reply #17 on: February 25, 2015, 11:25:45 AM »
I guess some would call it a house maintenance fund, but our heat pump broke and cost $8,000 to replace (during a heat wave). We had cash on hand so it was no problem (and the guy seemed confused we weren't doing financing..). If we need a new car that'll be north of $10K too. These kinds of things make me glad we have a ~$15K fund sitting around. And my wife is conservative so she has at least as much in another account, but that's another issue.

Don't you guys save up money for known future expenses?  I've got accruing categories for things like house repairs and maintenance.  Same with cars.  I feel like it would be financially irresponsible of me to not plan for predictable events like that.  Sure, you might end up spending more than you saved, but to not even try seems silly.  Last year I had a slightly unexpected roof tear-off and replacement.  Cost me $8k.  Then I had my rear deck partially collapse.  Cost me $3.5k to replace it (Insurance covered half, the cost, but I upgraded to composite so had to pay the difference).  You can bet that I hadn't saved up 11.5k for home repair.  I did have 3/4 of it saved up.  If I hadn't, that extra cost would have been crippling to my financials.  Instead, I rolled with it and have already rebuilt my balances for home repair back up to $3k.  That's well on it's way to cover my furnace which will probably be the next big ticket item to need replacing.

netskyblue

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Re: emergency fund
« Reply #18 on: February 25, 2015, 11:34:03 AM »
who do you bank with? 3.25% is very nice ...!

It's a small local bank.  State Savings Bank, 2 branches in Iowa.

RyeWhiskey

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Re: emergency fund
« Reply #19 on: February 25, 2015, 11:37:47 AM »
All of these emergency fund discussions need to be contextualized by the five-year bull market in equities. I doubt these discussions were so frequent during the 2008 crash.

SantaFeSteve

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Re: emergency fund
« Reply #20 on: February 25, 2015, 11:45:48 AM »
All of these emergency fund discussions need to be contextualized by the five-year bull market in equities. I doubt these discussions were so frequent during the 2008 crash.

I think that the "emergency fund" discussions are always valid.  What I am a little surprised about on this particular thread is the very vague idea of what an "emergency fund" is and why people keep one.  An emergency fund is for.....wait for it........an EMERGENCY. 
It is NOT a fund for a planned replacement of a car, car repairs, a home repair/upgrade, a vacation, unexpected gifts, or any of these....these are not emergencies.  There is a very large difference, in my opinion, and therefore there is a large difference in how that money should be handled/kept.  We have an emergency fund, but we also have a car replacement fund, vacation fund, bicycle repair/replacement fund...etc.  In all honesty, many of these other funds are relatively small and so they are kept in savings accounts earning 0.75%.  But some of them are larger and therefore they are put to work while they await the time when they will be called upon to serve their purpose. 


NotJen

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Re: emergency fund
« Reply #21 on: February 25, 2015, 12:13:30 PM »
My emergency fund is pretty strictly for job-loss only. Most unplanned expenses I can imagine could probably be cash-flowed, floated on credit cards, or paid for with a short term loan.

I keep about 1 year's worth of expenses in my EF. I'm not married and my family lives 800 miles away; if I were to lose my job, I want that much cushion to allow me time to find another job before I have to make drastic changes. Or allow me to better plan a drastic change!  In reality, it's hard to imagine a situation where I wouldn't have any income for a full year.

This year, I did decide to "move" half my EF into my 401k (I saw the suggestion on Bogleheads). I put some of my 401k in the stable value fund, and started a taxable investment account with the EF money. Eventually, the goal is to have enough in the taxable account that it can serve as the EF (enough so that i could withdrawal $X even if it lost 50% of its value, or something like that), and I can get rid of the stable value fund.

lise

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Re: emergency fund
« Reply #22 on: February 25, 2015, 12:15:23 PM »
All of these emergency fund discussions need to be contextualized by the five-year bull market in equities. I doubt these discussions were so frequent during the 2008 crash.

+1 !!!!!