Author Topic: Am I stupid for not having an emergency fund?  (Read 36804 times)

thepokercab

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Am I stupid for not having an emergency fund?
« on: July 17, 2013, 08:32:44 AM »
I know that it seems to be common personal finance advice that everyone should work towards having an emergency fund of cash lying around.  Whether its 6 months or 3 months, or whatever.  My wife and I also have two small kids, so that seems to make folks think we need it even more.  However- we don't really have one.  We've got a month's worth of expenses in a savings account,  but that's mostly in case some sort of direct deposit snafu happens or something.   We save 50%- which goes into a 401K, an HSA, a Roth IRA and then the rest into a taxable account. 

My income is relatively secure, and i feel pretty confident I could find income if I lost my job (i've been steadily employed for about 11 years) My wife could also find work if need be.  We don't own our home, nor plan to any time soon. We don't have any debt. We don't own a car, nor plan to. We live on half our income.  We have health insurance, plus a health savings account that we max out, and we try to stay pretty healthy.  Also, if the worst happened, i could always take money out of my investments and have them within a few days.  I wouldn't want to obviously, but the point is that i can have a decently large sum of money available to me in a few days. Why would I need that much liquid cash within 24 hours? 

Am I missing something?  Do i really need more cash lying around?  Have other folks thought they were in similar shoes, than had an "emergency" happen and suddenly needed a lot of cash?  I feel like we're ok, but when we tell folks we don't have much of an emergency fund, i suddenly lose any votes for father of the year. 

EMP

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Re: Am I stupid for not having an emergency fund?
« Reply #1 on: July 17, 2013, 08:39:36 AM »
I'd guess those people don't have anything in the way of savings themselves.

willn

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Re: Am I stupid for not having an emergency fund?
« Reply #2 on: July 17, 2013, 08:50:42 AM »
Why?  For an emergency.  It's insurance protecting against risk, and that's a cost.   Life happens.  Roofs leak, skin lacerates, investments go down, water heaters fail. 11 years of steady employment isn't an indication of what happens next year employment wise.  The 500 year flood is unimaginable, but it happens sometimes.  It might even happen two years in a row.  What if your electricity dies for 2 weeks.  Boom, use your emergency fund to buy a generator.

Typically this stuff happens just after your investment went down 30%, and you now have to swallow a big loss to pay for your emergency.  Worse if you nick it from a tax advantaged account.

You and your income and financial status are all stable, if your monthly expenses are 2K, throwing another 4K in a savings account isn't going to change your future that much.  You certainly don't sound anxious, and I'm not saying you should feel anxious, but you might even find the added security you feel increases, letting you focus more on career, family, and making solid, non rushed decisions.   In other words, there is more to finance than math.

One aspect I like about it is that I know I could help a relative in distress also.  My family is pretty financially stable, but I like that I could help if needed--it contributes again to a positive emotional state--I can help my little band if needed.  Stability, security, community, it all ties in.

(Re: my perspective on this: this board is about squeezing every bit of gain out of every single dollar, in order to stop working earlier than most.  That's not quite my goal, because I enjoy my work, and don't plan on stopping).








renbutler

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Re: Am I stupid for not having an emergency fund?
« Reply #3 on: July 17, 2013, 08:53:43 AM »
I consider my Roth IRA contributions as part of my emergency fund, as I can easily get it in a couple days with no taxes or penalties.

I know that some people say you shouldn't have your emergency fund in an investment that could drop in value, but I have a large cushion of Roth earnings (representing about 40% of the full value of the account) on top of those contributions right now. So there's no serious risk of losing any of my contributions at this point.

aj_yooper

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Re: Am I stupid for not having an emergency fund?
« Reply #4 on: July 17, 2013, 09:02:09 AM »
+1 willn and renbutler

OP, you are doing very well on your savings rate and efficient lifestyle. 

I think an EF helps me as willn notes and allows better asset management, e.g. not having to sell in a down market or disturb a Roth.  It is also a part of our AA as we have some stash in cash as a self-insurance plan.  Bigger emergencies would mean bigger financial plan disturbance.  Bogleheads recommends healthy EFs and they have been doing it a long time.

Riceman

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Re: Am I stupid for not having an emergency fund?
« Reply #5 on: July 17, 2013, 09:10:57 AM »
Why?  For an emergency.  It's insurance protecting against risk, and that's a cost.   Life happens.  Roofs leak, skin lacerates, investments go down, water heaters fail. 11 years of steady employment isn't an indication of what happens next year employment wise.  The 500 year flood is unimaginable, but it happens sometimes.  It might even happen two years in a row.  What if your electricity dies for 2 weeks.  Boom, use your emergency fund to buy a generator.

Typically this stuff happens just after your investment went down 30%, and you now have to swallow a big loss to pay for your emergency.  Worse if you nick it from a tax advantaged account.


I don't see the problem here.  Let's say your emergency fund was 10k, went down to 8k and now you have an emergency, so you need to withdraw all 8k.  Are you really swallowing a 2k loss?

I think saying "yes" amounts to timing the market, i.e., worrying that liquifying your funds for an emergency will cause you to miss out on a positive market timing situation.  Maybe the market was going to fall down to 6k, and spending the 8k now instead of waiting for it to fall to 6k actually saved you money.  Or maybe it would have shot up to 12k the next day--in that case, you're not losing 2k, you're losing 4k.  From a general net worth perspective, withdrawing money never causes you to lose money, because the money is in fact already lost.

From an accounting (and tax) perspective, swallowing a loss is a good thing!  That's why people call it harvesting.  You then deduct that from capital gains (or income, up to 3k) on your tax return, even if you take the Standard Deduction.

If you have a very detailed plan for when you want to harvest capital gains and losses and are worried that an emergency--by dint of forcing you to liquidate them all at once rather than at your carefully chosen intervals--could upset that, you could always create an emergency fund of 10 separate ETFs, then carefully choose which to liquify when the emergency strikes.

brand new stash

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Re: Am I stupid for not having an emergency fund?
« Reply #6 on: July 17, 2013, 09:16:11 AM »
If you lost your job and it took you 6 months to find another one...how would you pay for your living expenses.   You need a plan for that situation.    That is what most people are talking about when they talk about an emergency fund.  For some people that means that they need it to be in a separate account set aside for the purpose.  But if you have savings that are accessible...then that is your emergency fund, even if you don't call it that.


Riceman

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Re: Am I stupid for not having an emergency fund?
« Reply #7 on: July 17, 2013, 09:20:00 AM »
If you lost your job and it took you 6 months to find another one...how would you pay for your living expenses.   You need a plan for that situation.    That is what most people are talking about when they talk about an emergency fund.  For some people that means that they need it to be in a separate account set aside for the purpose.  But if you have savings that are accessible...then that is your emergency fund, even if you don't call it that.

I think the problem that the OP is pointing out is not the amount or purpose of the fund.  It's the fact that people often are specifically advised to keep it in cash, or a cash equivalent such as money markets, rather than in equities or other higher-yield investments.

daverobev

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Re: Am I stupid for not having an emergency fund?
« Reply #8 on: July 17, 2013, 09:41:10 AM »
Credit cards + line of credit. If you are in good shape otherwise, IMHO, there is no need for a dedicated emergency fund.

If you live paycheque to paycheque, then it's more sensible to have a couple of months stashed away. But it would be even more sensible not to live paycheque to paycheque!

Kazimieras

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Re: Am I stupid for not having an emergency fund?
« Reply #9 on: July 17, 2013, 10:07:15 AM »
I am a big fan of having an emergency fund. There is something to be said about having cash on hand and having liquidity when you actually need it. Stocks take time to sell, and you are forced to sell right then. Lines of credit are handy - unless we have something like 2008 where the lines are quickly reduced. The nice aspect of having a reasonable buffer is that if there is a great fire sale on an investment, you can actually buy it.

Also a big +1 for willn's comments :) Especially the ending

Rural

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Re: Am I stupid for not having an emergency fund?
« Reply #10 on: July 17, 2013, 10:22:29 AM »
I'm usually a big fan of emergency funds, but the OP has a one-month EF, no car, a maxed-out HSA for any medical emergencies, and rents. One month is enough time to pull out of the taxable account the OP also has. Yes, some gains might be lost. But if the same amount were kept in cash, there would be little to no gains at all.

I prefer to have more or an EF because of home and (essential) car ownership (I also have a maxed-out HSA). But if I were in the OP's situation? I'd probably do the same.

Eric

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Re: Am I stupid for not having an emergency fund?
« Reply #11 on: July 17, 2013, 10:38:03 AM »
If you have enough money available to cover emergencies (no matter where it's kept), then you have an emergency fund.  Good work!

thepokercab

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Re: Am I stupid for not having an emergency fund?
« Reply #12 on: July 17, 2013, 10:55:46 AM »
Thanks everyone for your comments and thoughts!  This community is always so helpful.  I think at the end of the day it's most about what lets you sleep at night, and right now I'm sleeping ok. That might change in the future, and we might feel we need to stuff some more cash under the mattress but right now I feel pretty good.   

Kazimieras- i might just save a little more cash though for the point you made, i.e. buying when the price is low. :) 

willn

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Re: Am I stupid for not having an emergency fund?
« Reply #13 on: July 17, 2013, 11:13:36 AM »
Why?  For an emergency.  It's insurance protecting against risk, and that's a cost.   Life happens.  Roofs leak, skin lacerates, investments go down, water heaters fail. 11 years of steady employment isn't an indication of what happens next year employment wise.  The 500 year flood is unimaginable, but it happens sometimes.  It might even happen two years in a row.  What if your electricity dies for 2 weeks.  Boom, use your emergency fund to buy a generator.

Typically this stuff happens just after your investment went down 30%, and you now have to swallow a big loss to pay for your emergency.  Worse if you nick it from a tax advantaged account.


I don't see the problem here.  Let's say your emergency fund was 10k, went down to 8k and now you have an emergency, so you need to withdraw all 8k.  Are you really swallowing a 2k loss?


Yes, that's the definition of a loss actually. But that's not the only problem.  What if you needed 10K, not 8K?

And losing money is NOT a good thing from an accounting or tax perspective! If you're in a 25% tax bracket, you don't sell at a $100 loss to save say, $25 in taxes, that's still $75 in hole.

Sure, if you can claim the loss then it's less of a loss, by the amount of your marginal rate x loss.   Even then the tax deduction usually isn't recouped until next tax years April, which could be 16 months away.

Also, the idea that people use debt instruments as an emergency fund seems way too risky to me.  Going into debt when you are out of work? That's trying to dig your way out of a hole. 


hybrid

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Re: Am I stupid for not having an emergency fund?
« Reply #14 on: July 17, 2013, 11:20:09 AM »
I am all for having six months of living expenses available.  But IMO that includes investments that are easily and quickly liquidated if necessary.  As in, I could sell some of my stock if I had to but I couldn't readily tap my 401K or sell my rental home.

So if I were to rephrase, I would recommend having six months of easily liquidated assets at your disposal, how you choose to allocate those assets is up to you.   

Villanelle

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Re: Am I stupid for not having an emergency fund?
« Reply #15 on: July 17, 2013, 11:34:56 AM »
Having that much cash is a bit silly as it earns you nothing. However, to me, if I am going to have it in the market, then I am going to make my portfolio a smidge more conservative than I might otherwise do.  That way, I'm less likely to run into a situation where the 6 months I am without income are also the 6 months where the stock market and my portfolio plummet.

Part of the problem with having it in investments is the math.  If 6 months of expenses is what you want, and that number is $12k for you, what does that translate into in an investment account?  $12k?  What if that $12k becomes $9k tomorrow, the day you lose your job?  And what if, after you withdraw the $2k for the first month, the remaining $7k is down to $5k?  Suddenly, you only have enough to cover 3.5 months, even though you started with the full 6k.

That being said, a significant part of our emergency plan is our HELOC.  If necessary, we could tap that for a year's+ worth of expenses, and it is currently far less than the equity we have in the house so there's little chance of it being decreased significantly, or being closed out.  Sure, it wouldn't be ideal, but to us, it's worth it to allow more of our money to be working hard for us in the market and in real estate.

(FTR, we definitely have some cash and money in non-retirement investment accounts.  Those would be our first choices, but if the market was awful and we didn't want to lock in those losses, it's nice knowing the HELOC is there as well, and that does allow us to have our money in less-liquid, more aggressive places.)

Jamesqf

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Re: Am I stupid for not having an emergency fund?
« Reply #16 on: July 17, 2013, 11:38:45 AM »
Life happens.  Roofs leak, skin lacerates, investments go down, water heaters fail. 11 years of steady employment isn't an indication of what happens next year employment wise.

That's what the 0%-interest-for-umpteen-months credit card is for.

In real life, when I needed to replace the water heater (a couple of years ago) or have the septic system pumped out (last month), I didn't trot down to the credit union and ask for a bunch of $100 bills, I used the credit cards.

Quote
What if your electricity dies for 2 weeks.  Boom, use your emergency fund to buy a generator.

Or learn to survive without electricity :-)

Quote
Typically this stuff happens just after your investment went down 30%, and you now have to swallow a big loss to pay for your emergency.  Worse if you nick it from a tax advantaged account.

But you have to figure whether (probability of loss * risk) is greater than the loss from not keeping your little green employees in that cash emergency fund just sitting around, rather than being out working for you.

Khan

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Re: Am I stupid for not having an emergency fund?
« Reply #17 on: July 17, 2013, 11:51:50 AM »
Quote
Also, the idea that people use debt instruments as an emergency fund seems way too risky to me.

But that's your thoughts on the matter, and I fully respect your thoughts and your own actions willn, but what's right for you isn't what's right for me, the OP, or anyone else who holds differing opinions. For me, the idea is that I hold enough cash to fund my standard expenses for ~ 2 months, but if, say, I have an immediate expense like a medical bill? I'll use my credit card, then I'll pull money from my other accounts to pay it off. Is there risk involved? Sure, the sun could explode, I could lose my job, the stock market could crash, and I might be forced to sell. I fully accept and acknowledge that risk, because I can still access that money in a maximum of about 5 days probably, and in that worst case scenario I can always eat up the interest costs while I take my time reorganizing my finances.

What's your risk from holding 6+ months of cash? Inflation, eating the value of that money up all the time, for the convenience of having it around. I'll happily bet my interest rate against that for myself, if you don't want to do that, that's your prerogative. Whatever makes you sleep better at night, but remember that there are no absolute rules in personal finance. If you want to be 100% in bonds, whether because you're 90 years old, or have no risk tolerance, then that is what's right for you.

Albert

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Re: Am I stupid for not having an emergency fund?
« Reply #18 on: July 17, 2013, 12:05:11 PM »
Maybe I'm a chicken, but I prefer to keep some cash around (currently 20-30k). We don't really have "proper" credit cards here so I wouldn't have an easy access to a lot of cash if the shit were to hit a fun in a major way.

CanuckExpat

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Re: Am I stupid for not having an emergency fund?
« Reply #19 on: July 17, 2013, 01:06:40 PM »
OP, based on your description of the situation, you are fine. It sounds like you are reasonably confident that you can handle any unexpected occurrences that might come your way.

We have what could be called an emergency fund, but in reality it is just part of the fixed income portion of our overall investment allocation. If worse comes to worse and we need cash, I can in order raid our savings accounts, cash out CDs early, sell bond funds, or stock investments in a taxable account and then just rebalance back to the planned allocation.

Riceman

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Re: Am I stupid for not having an emergency fund?
« Reply #20 on: July 17, 2013, 01:55:40 PM »
Why?  For an emergency.  It's insurance protecting against risk, and that's a cost.   Life happens.  Roofs leak, skin lacerates, investments go down, water heaters fail. 11 years of steady employment isn't an indication of what happens next year employment wise.  The 500 year flood is unimaginable, but it happens sometimes.  It might even happen two years in a row.  What if your electricity dies for 2 weeks.  Boom, use your emergency fund to buy a generator.

Typically this stuff happens just after your investment went down 30%, and you now have to swallow a big loss to pay for your emergency.  Worse if you nick it from a tax advantaged account.


I don't see the problem here.  Let's say your emergency fund was 10k, went down to 8k and now you have an emergency, so you need to withdraw all 8k.  Are you really swallowing a 2k loss?


Yes, that's the definition of a loss actually. But that's not the only problem.  What if you needed 10K, not 8K?

And losing money is NOT a good thing from an accounting or tax perspective! If you're in a 25% tax bracket, you don't sell at a $100 loss to save say, $25 in taxes, that's still $75 in hole.

Sure, if you can claim the loss then it's less of a loss, by the amount of your marginal rate x loss.   Even then the tax deduction usually isn't recouped until next tax years April, which could be 16 months away.

Also, the idea that people use debt instruments as an emergency fund seems way too risky to me.  Going into debt when you are out of work? That's trying to dig your way out of a hole.

The problem I have with this response is the same argument could be made against any kind of investing in equities, not just in the emergency fund. 

Losing money is not a good thing, but not risking loss and keeping one's money outside of the market is a bad thing.  In the long run, investing in the market earns you far more than holding cash.

What if you don't need 10k, but what if you need 15k?  What if you need 30k? 100k?  How do you determine the amount of cash you need in your emergency fund, and how do you determine when that's enough, so that you can invest the rest? The logical way, to me, seems to base the amount of cash in your emergency fund on the amount of cash you might need in the vast majority of emergencies.  That way the money is flexible, and the rest can be in funds that you can easily sell off within 5 days.  But what kind of emergency requires 10k in cash immediately?  Can anyone think of one? I honestly can't.

I certainly agree with your last sentence, and perhaps that's why we have different perspectives.  I don't consider a credit card a debt instrument, even if I was out of work, because I have always paid my credit card on time, I have 60,000 line of credit spread across three cards*, and I have enough investments that I could liquidate in 5 days to pay them off in time.  I rather consider a credit card a transaction facilitator and cashback generator.  If you are living paycheck to paycheck, a credit card might mean something very different.
« Last Edit: July 17, 2013, 04:00:42 PM by Riceman »

Riceman

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Re: Am I stupid for not having an emergency fund?
« Reply #21 on: July 17, 2013, 02:05:38 PM »
If you're in a 25% tax bracket, you don't sell at a $100 loss to save say, $25 in taxes, that's still $75 in hole.


I think this is worth quoting separately from the rest of my response. 

Yes, you do do this.  You do this 100% of the time. If you're not doing this now, I highly recommend reading up on harvesting capital losses and capital gains.  It is not an intuitive part of the tax code and of personal investing, but it is worth learning about and can save you hundreds if not thousands of dollars a year. 

TrulyStashin

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Re: Am I stupid for not having an emergency fund?
« Reply #22 on: July 17, 2013, 02:42:40 PM »
I consider my Roth IRA contributions as part of my emergency fund, as I can easily get it in a couple days with no taxes or penalties.

I know that some people say you shouldn't have your emergency fund in an investment that could drop in value, but I have a large cushion of Roth earnings (representing about 40% of the full value of the account) on top of those contributions right now. So there's no serious risk of losing any of my contributions at this point.

+1

The only exception (that I know of) is if you've converted from a traditional IRA or 403b into a Roth.  In such a case, any withdrawals from any Roth you hold made within five years of the conversion are subject to tax and penalties -- even withdrawals of principal that don't touch earnings. 

willn

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Re: Am I stupid for not having an emergency fund?
« Reply #23 on: July 17, 2013, 03:27:32 PM »
If you're in a 25% tax bracket, you don't sell at a $100 loss to save say, $25 in taxes, that's still $75 in hole.


I think this is worth quoting separately from the rest of my response. 

Yes, you do do this.  You do this 100% of the time. If you're not doing this now, I highly recommend reading up on harvesting capital losses and capital gains.  It is not an intuitive part of the tax code and of personal investing, but it is worth learning about and can save you hundreds if not thousands of dollars a year.

If you do this, how about we take a shortcut.  Go ahead and send me 100, I'll send you 75 back. Same result.

Yeah,  I understand capital gain and loss harvesting: minimize your loss when you don't think a speculative investment is going to recoup, and use the tax benefit to reinvest.  The math isn't really that compelling on the amounts we are talking about--for most of us, 6 months expenses is < 20K.  The harvest benefit is measured in amounts without commas.

 Problem again, is that benefits / opportunity cost of emergency funds aren't just financial--ever interviewed a job hunter who just added 18K in credit card debt or tapped his 401k after 3 months of unemployment?  I have, and that dude is desperate, it shows, and who hires desperate people? Not me--it would increase risk to MY business!

I get that YOU can handle it, you have it figured out, the complexity of tax harvesting, the trading of EFT's, the managing of a few credit cards. But generally your advice isn't appropriate for 90% of us.

Good discussion though. Since I'm certain it's been abused here many times I'll just thank you and bow out now!



Jack

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Re: Am I stupid for not having an emergency fund?
« Reply #24 on: July 17, 2013, 08:32:46 PM »
Problem again, is that benefits / opportunity cost of emergency funds aren't just financial--ever interviewed a job hunter who just added 18K in credit card debt or tapped his 401k after 3 months of unemployment?  I have, and that dude is desperate, it shows, and who hires desperate people? Not me--it would increase risk to MY business!

In what way does the job hunter's desperation show?

(I want to know because I'm job hunting right now and want to make sure I don't look desperate.)

Hotstreak

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Re: Am I stupid for not having an emergency fund?
« Reply #25 on: July 18, 2013, 08:10:40 PM »
I have enough money in savings to pay for 1 month, plus enough available on an unsecured credit line to pay for another 4 months (adding 1 month/month as line is paid down from a vehicle purchase).  So, at the end of the year, I will have enough to pay 10 months on a credit line plus one or maybe two months built up in the savings.  I also keep another account I put money in to for periodic expenses like insurance, household appliances, minor car repairs, etc., and have an HSA with enough to at least cover my deductible.

If you're living well below your means in a two income household, your emergency fund is probably your spouse, they can make enough to keep you afloat in case of job loss.  You have your HSA in case someone breaks a leg and needs extensive care + physical therapy.  You rent, so you don't have to worry about home repairs.. what else could that money be used for?  You might have a once-in-100-year event, but you also might never have it, and if you do have it, paying a credit line @ 10% to cover it for a year is better than losing out on 6% returns over the other 99 years. 

willn

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Re: Am I stupid for not having an emergency fund?
« Reply #26 on: July 19, 2013, 06:57:19 AM »
Problem again, is that benefits / opportunity cost of emergency funds aren't just financial--ever interviewed a job hunter who just added 18K in credit card debt or tapped his 401k after 3 months of unemployment?  I have, and that dude is desperate, it shows, and who hires desperate people? Not me--it would increase risk to MY business!

In what way does the job hunter's desperation show?

(I want to know because I'm job hunting right now and want to make sure I don't look desperate.)

Good question.  It was pretty obvious: he blurted out his financial problem. I think it was in response to one of the "Why do you want to work here?" questions.   "I've had to borrow against my 401k".  Wasn't the first thing he said and it's pretty much interviewing 101 to not answer with the "I really really need it" type answers but he was nervous, desperate, and he really did need it.  Unfortunately for him that's not a qualification.  If he'd been the most highly qualified (he wasn't) we might have considered him and asked him to come back and explain or delved into it in an offer discussion.

It's a big distraction and stressor to have a financial crisis in life, and all else being equal, that person probably can't be as great an employee as one with low stress.

For an interview, even if you're having a financial crisis, I guess you have to find comfort and confidence by having a strong plan and vision for the future, and that the job prospect really has to align with those goals.  Then you can go in and be free from distraction, focused on whether the job is really the one you want, and not have to "need" the job, just because your financially strapped.  Else you are more likely to end up in the wrong job, and you won't excel.

I've been there--flat broke, desperate, and made stupid decisions.  The road out of that is tough and for me involved some luck, some hard, dirty labor, living out of the back of a truck for a few weeks, and a plan for the future.




Jacob F

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Re: Am I stupid for not having an emergency fund?
« Reply #27 on: July 19, 2013, 09:12:33 AM »
I get that YOU can handle it, you have it figured out, the complexity of tax harvesting, the trading of EFT's, the managing of a few credit cards. But generally your advice isn't appropriate for 90% of us.

Good discussion though. Since I'm certain it's been abused here many times I'll just thank you and bow out now!
Maybe if you haven't figured it out, you should go back to read the MMM Blog again. Credit Card is the instrument that you should use. The opportunity cost of letting 20K in the bank over say 10 years is way too high in my view (its technically equal to just spending the 20k for sure at around an 8% compounding rate: 20.000*1.08^9 = 40.000).
I'd rather take an investment loss of 4k in case of an emergency (who knows whether it will ever happen anyway, assume it happens once in ten years) than spending 20k over 10 years guaranteed. Of course, having 2k in a checking account just for being liquid is never a bad idea. But not >10k.

A difference would be if you think the stock market is overvalued or you are a high net worth person looking for opportunities like buying a business or real estate in cash at depressed values. That would be what Warren Buffet calls his "Elephant Gun", which is cash sitting readily available for being used in rare situations of opportunity.

If you don't want to take a loss on a stock investment, thats just your feelings playing games with you. Only because as of now it only is on paper, that doesn't mean that it isn't already 'real'. Thats like just not selling a stock of a company that filed for bankruptcy only to be able to pretend that the loss is still only on paper..

I'd rather put it like this: That person you interviewed was not necessarily desperate because he/she lost their job and didn't have an 'emergency fund'. That person was rather desperate because he/she didn't have any savings besides a 401(k), regardless of whether the savings were in an 'emergency fund' or in an 'investment account'.
It might comfort people to just rename their 'investment account' into 'emergency fund'. For when I sell ETFs, my money is readily available the next day or the day after. More than enough time to balance out the credit card.

brewer12345

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Re: Am I stupid for not having an emergency fund?
« Reply #28 on: July 19, 2013, 09:17:52 PM »
Yep, it is stupid not to have a healthy emergency fund.

MrMetalMoney

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Re: Am I stupid for not having an emergency fund?
« Reply #29 on: April 05, 2015, 06:31:00 PM »
There are some really good thoughts on this topic here. Despite the differences in philosophy (cash cushion vs. springy debt), everyone here is very reasonable.

But I'll tell ya, look online for "emergency fund calculators" and you'll see crazyshit stupid things. "Calculators" that first want to know how much I have already saved. Hey - I'm trying to understand what I NEED - not give you a tasty entry in your lead database. I'm talking to YOU, Bankrate.com.

Seems some folks have a strange idea of "emergency". To me, a long-duration emergency, one that would require say a big 5 digit number to sustain for some period of months, is a time of sacrifice. Yet these "emergency fund calculators" prompt for monthly budget expenditures like entertainment and dining out.

Uh, excuse me but losing my job and being unemployed for 6 months probably means I'm throwing out those luxuries. I'm talkin' barebones folks - minimum debt payments (I have just a mortgage but I pay extra principal, but I probably won't in a true emergency), food, no new clothes, etc.  Like, ya know, rough it! It's a fucking emergency!

I like the practical approach. Let's break it down by scenario:

Shit breaks: Like others said, if you have an "oh shit some stuff broke" moment, you'll pay via credit card. Most have at least 30 day grace period on purchases. No worries. 90% of the time this means that next paycheck will have less going into savings and more going towards the credit card (which you pay off of course). Emergency fund untouched.

Bigger Shit breaks: I have a septic issue right now that has a looming 5-digit figure attached to it. I know it's out there, I'll probably need to give it attention this summer. I'm pretty sure when the dude finally asks for the check I won't be surprised and have to sprint breathlessly to an ATM machine to give him cash. When I get an estimate I'll casually move some assets into liquidity, so I can write a check.  This has happened recently for a car that shit the bed.

Catastrophe: Ok now the big one happens. I must admit I can't speak from any experience here, thankfully. My approach will be to rachet down life to barebones, and make weekly sell-offs (reverse dollar cost averaging) of equities to meet the household budget requirements.

No where here do I see a need for a "cash cushion" other than "feeling good". Therefore, to appease that feelgood feeling, make my wife feel safe, and get the better interest checking rate at my bank, I keep $10,000 in my savings account which is linked to my checking account. It also provides overdraft safety when cash flow is lumpy. The rest of my non-tax-deferred savings gets swept into investment accounts each month.

Try as a might, I see no reason why this cannot work except in the perfect storm scenario of a 50% market drop (hey you are diversified, right!?) and loss of job coincidentally.

Risk tolerance I guess.

retireatbirth

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Re: Am I stupid for not having an emergency fund?
« Reply #30 on: April 05, 2015, 06:43:37 PM »
Sometimes stuff happens. Until last week, I would have agreed no emergency fund was needed since I have credit cards and equities.

 But then my landlord decided to offer me a 10% rent increase forcing me to move. Here in NYC, that means I need first months rent, security deposit, and a brokers fee. A big chunk of cash, but wouldn't be a huge problem except for the fact I've already scheduled for the IRS to debit 7k from my account for taxes next week and I cant change that.

Plus I need the cash to cover this months rent before I move. All told its 15 k I had to save pretty rapidly. Some of this was of course planned for, but the move just came out of nowhere and I cant charge it. Yeah I could sell equities, but last week we had some really negative days and I'm glad I'm going to squeak by without having to do so. In the future I think I'll keep 3 months on hand.

kpd905

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Re: Am I stupid for not having an emergency fund?
« Reply #31 on: April 05, 2015, 07:00:35 PM »
There are a few different methods I am thinking about using to keep my emergency fund earning me a bit of a return.

1. Checking account bonuses

These normally make you tie up a bit of cash for a number of months to avoid account fees.  I signed up for PNC, got $300 and have to keep $5000 there for 6 months.  I also signed up for Chase, got $300 and only have to keep $1500 there. 

$600 to tie up $6500 for 6 months sounds good to me.  I plan to keep doing these whenever I see a good one pop up.  With Chase you get the bonus, keep the money in for 6 months, then cancel.  They then let you do it again after 3 months.

2. Mango Money

Mango money is a type of checking account that is linked to a debit card they give you.  They pay 6% interest on up to $5000, but you have to have a monthly direct deposit, and there is a $3 monthly fee.  After the fee, this ends up being 4.8% return on your $5000.  Maybe not worth the time for some people, but I might give it a shot.

This article describes it better than I just did: http://thefinancebuff.com/mango-prepaid-card-6-apy-savings-account-a-hidden-gem.html


Villanelle

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Re: Am I stupid for not having an emergency fund?
« Reply #32 on: April 06, 2015, 02:37:40 AM »
Sometimes stuff happens. Until last week, I would have agreed no emergency fund was needed since I have credit cards and equities.

 But then my landlord decided to offer me a 10% rent increase forcing me to move. Here in NYC, that means I need first months rent, security deposit, and a brokers fee. A big chunk of cash, but wouldn't be a huge problem except for the fact I've already scheduled for the IRS to debit 7k from my account for taxes next week and I cant change that.

Plus I need the cash to cover this months rent before I move. All told its 15 k I had to save pretty rapidly. Some of this was of course planned for, but the move just came out of nowhere and I cant charge it. Yeah I could sell equities, but last week we had some really negative days and I'm glad I'm going to squeak by without having to do so. In the future I think I'll keep 3 months on hand.

Won't you be getting the security deposit from your current place back, making that pretty much a wash?  And wouldn't you have to pay the rent for that first month anyway, if you were staying?  (IOW, you'd have been paying May rent to your current place, and instead you pay it to another place.)  The timing might be slightly different, but that's not really an additional cost.  Given that most credit cards have 30 day cycles, it seems that you could easily use them to adjust for paying that rent a bit sooner than anticipated, and for having to pay one security deposit before getting the other back.  Charge anything you can, and in a few weeks, those shifted costs should be evened out, no?

retireatbirth

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Re: Am I stupid for not having an emergency fund?
« Reply #33 on: April 06, 2015, 05:23:05 AM »
Sometimes stuff happens. Until last week, I would have agreed no emergency fund was needed since I have credit cards and equities.

 But then my landlord decided to offer me a 10% rent increase forcing me to move. Here in NYC, that means I need first months rent, security deposit, and a brokers fee. A big chunk of cash, but wouldn't be a huge problem except for the fact I've already scheduled for the IRS to debit 7k from my account for taxes next week and I cant change that.

Plus I need the cash to cover this months rent before I move. All told its 15 k I had to save pretty rapidly. Some of this was of course planned for, but the move just came out of nowhere and I cant charge it. Yeah I could sell equities, but last week we had some really negative days and I'm glad I'm going to squeak by without having to do so. In the future I think I'll keep 3 months on hand.

Won't you be getting the security deposit from your current place back, making that pretty much a wash?  And wouldn't you have to pay the rent for that first month anyway, if you were staying?  (IOW, you'd have been paying May rent to your current place, and instead you pay it to another place.)  The timing might be slightly different, but that's not really an additional cost.  Given that most credit cards have 30 day cycles, it seems that you could easily use them to adjust for paying that rent a bit sooner than anticipated, and for having to pay one security deposit before getting the other back.  Charge anything you can, and in a few weeks, those shifted costs should be evened out, no?

You're right Its mostly just timing, but these are expenses I can't charge. They want cash or cashiers check for those first rent checks.

MrsPete

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Re: Am I stupid for not having an emergency fund?
« Reply #34 on: April 06, 2015, 06:20:42 AM »
You need access to cash for emergencies.  We have a small untouchable-except-in-emergencies account, plus we have a short-term savings account.  If you choose to have a credit card "at the ready" for such emergencies, that's a plan too. 

Thing is, in our case anyway, emergencies don't seem to come in single servings.  They seem to double-team us.  My husband was laid off while I was pregnant.  The car died (very expected) the same month the roof started leaking (unexpected).  My young daughter broke her arm across a growth plate just after an expensive vacation. 

You need an emergency plan of some sort.   

Bob W

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Re: Am I stupid for not having an emergency fund?
« Reply #35 on: April 06, 2015, 08:54:47 AM »

An emergency fund is a great concept for the poor and those trying to get out of debt or unable to have any foresight.  It is also an alright concept for several months while people are getting started on serious savings and investments. 

It is not for you or most MMMers who are maxing out retirement accounts.

Here is why it is an entirely bad idea.

Dave Ramsey often suggests a 6 month E fund.  That is 6 months of income.  He also suggests keeping it in money markets or checking.

So let's see,  if a person keeps 40K at essentially zero interest, in 30 years they will have an inflation adjusted 13K.

Now take that same 40K and invest at an average 9-10% and in 30 years you'll have an inflation adjusted 425K.   

So you decide --- would you rather have 13K or 425K?

So for emergency cash you can bank account churn (see post here somewhere) and earn over 20% on your cash,  or have credit cards,  or HELOCs ready.

You may want to have some of your investments in taxable accounts for access if there is a true emergency.

I love Dave R's argument for the money market or checking instead of the market.     He says what if the market is down when you need the money.  Duh,  what if the market is up?  It is a ridiculous manner to manage your money out of fear.   If you are that scared the market might be down when you need the cash,  simply put twice as much in that account.   


Blonde Lawyer

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Re: Am I stupid for not having an emergency fund?
« Reply #36 on: April 06, 2015, 09:42:52 AM »
I didn't have time to read all of the replies but I want to mention one quick thing.  You say you don't own and don't intend to anytime soon.  The plus side to that is you don't have to worry about major sudden repairs.  You do, however, have one concern owners don't have - eviction.  In most states it takes 6 months to a year to foreclose on a mortgaged home.  In some states, evictions of renters for non-payment of rent can happen in as little as a month.  I think as a renter you need to make sure you have enough rent on hand to cover you until you could liquidate any necessary assets (a retirement account or what not) to cover your emergency or until you or your wife found other work. 

mathlete

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Re: Am I stupid for not having an emergency fund?
« Reply #37 on: April 06, 2015, 10:00:30 AM »
So let's see,  if a person keeps 40K at essentially zero interest, in 30 years they will have an inflation adjusted 13K.

Now take that same 40K and invest at an average 9-10% and in 30 years you'll have an inflation adjusted 425K.   

So you decide --- would you rather have 13K or 425K?

This ignores that possibility of an actual emergency though. It's like saying that health insurance is a bad idea since you might die without ever getting sick.

Health emergencies, car emergencies, home emergencies, layoffs, natural disasters. Bad things happen.

Imagine you experienced a job loss or an emergency in 2008-2009 and you had no liquid savings. What are you options?

HELOC: The housing market crashed so lots of homes are under water.

Selling investments: The market has bottomed out so selling $10k of investments now means losing out on $30K - $40K just a few years later.

Low interest credit: The credit squeeze made this hard to come by.

High interest credit will probably be the most readily available option.


Blonde Lawyer

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Re: Am I stupid for not having an emergency fund?
« Reply #38 on: April 06, 2015, 10:23:32 AM »
I think we also have to keep in mind that there are emergencies that require cash and don't accept credit cards.  My mortgage doesn't take credit nor do most service people (plumber, electrician.)  Not an issue for OP but applies to others here.  Credit is great for car emergencies, health/pet emergencies, covering groceries in the short term but it likely won't cover your utilities (water, sewer, electric).

GlobeTrttr

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Re: Am I stupid for not having an emergency fund?
« Reply #39 on: April 06, 2015, 10:45:44 AM »
Hi guys and gals.  Long time MMM reader, first-time poster. 

To the poster who mentioned that "bad things happen in pairs", I can attest to that, and then some:

March 2011, aged late 20s:  laid off from sales job amidst lingering effects of recession.  Kinda saw it coming and had been dabbling in the still very difficult job market, but when phone rang with my boss delivering the news, that really sucked.  There was a lot of uncertainty as to the future, but at least I got a nice severance package amounting to 3 months pay (totally unexpected). 

About a month later I was in a serious car accident where a guy ran straight through a red light and t-boned me at about 50mph.  After dealing with the various authorities on scene, I walked home from it with some glass embedded in my kneecap and a few bruises (miraculous) while my freshly paid-off car was hauled away to the salvage yard.  I bought a 100k mile car for cash with the insurance money.

In May 2011 I landed a job at a start-up with good growth prospects.  Started in June and a month later, the company suddenly hit a rough patch and was insolvent for about 6 weeks before paying on time.  I nearly walked out on them then, but stuck around and was made whole.  I ended up changing jobs a couple years later, for what it's worth.

All told, it was about 6 months before I saw a regular paycheck from an employer during the first half of 2011. 

Despite the severance and insurance $$ for my car, I'm glad I had about a $10k cash emergency fund at that time.  What did it get me?  Peace of mind in knowing I did not borrow a dime from 401K, Roth IRA, Simple IRA, brokerage accounts, credit cards, or parents. 

celticmyst08

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Re: Am I stupid for not having an emergency fund?
« Reply #40 on: April 06, 2015, 10:46:01 AM »
Dave Ramsey often suggests a 6 month E fund.  That is 6 months of income.  He also suggests keeping it in money markets or checking.

It's 3-6 months of expenses, not income, so that's going to (hopefully) be a lot lower than $40k.

thd7t

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Re: Am I stupid for not having an emergency fund?
« Reply #41 on: April 06, 2015, 11:15:15 AM »
I've attached a link to a reddit explanation of good reasons to have a 6 month e-fund.  While I think that's overkill in a lot of our cases, the arguments are strong and backed up with data.
http://www.reddit.com/r/personalfinance/comments/25qrbm/a_crash_course_in_risk_analysis_why_six_months_in/

This is looking at life in a business context and is really interesting, whatever you end up deciding.

gluskap

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Re: Am I stupid for not having an emergency fund?
« Reply #42 on: April 06, 2015, 12:17:17 PM »
I've been thinking about this a lot and have decided to keep our EF as follows:

1. 1-2 months expenses in cash/savings account
2. 6 months expenses in tax exempt taxable account in bonds (this is part of our AA strategy and comprises about 10% bonds/90% stocks) We are still young so as we get closer to retirement we might increase our share of bonds for more stability
3. 6 months expenses in taxable account in investments

Of course we would try to use our credit cards first if possible before using the above.  I believe this offers a lot of flexibility without losing a lot of money to inflation.  The money is staggered so most of the time, we would never need to use our long term EF except for a catastrophe like both of us getting laid off in a bad economy.  I don't want to touch Roth IRA/401k as once you pull out that money from retirement, you lose that tax advantaged space and the compounded growth.

AlanStache

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Re: Am I stupid for not having an emergency fund?
« Reply #43 on: April 06, 2015, 01:00:42 PM »
OP: Seems like you know what you are doing only thing I would add is to explicitly bring up what your cc limit is, if you only have a 3-5k limit that might not get you through a bad holiday weekend where money is locked up* in investments.  I do something similar with relatively low amounts of cash (~1-2 months in the checking) but I have a linked taxable account (with more cash) and significant cc limits.  There is nearly no cost to keeping a 10-20k limit and having two different cards in case of a problem with one of them.

money is locked up*: buying a car years ago they ran my debit card twice and caused all sorts of pain as I did not have a linked account to cover it.  Ended up having to live off cc's for a week or so till it was sorted out or had a pay day.

Eric

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Re: Am I stupid for not having an emergency fund?
« Reply #44 on: April 06, 2015, 01:14:26 PM »
The original post is from almost 2 years ago.  I hope the OP has his shit worked out by now.  :)

nereo

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Re: Am I stupid for not having an emergency fund?
« Reply #45 on: April 06, 2015, 01:16:34 PM »
I think we also have to keep in mind that there are emergencies that require cash and don't accept credit cards.  My mortgage doesn't take credit nor do most service people (plumber, electrician.)  Not an issue for OP but applies to others here.  Credit is great for car emergencies, health/pet emergencies, covering groceries in the short term but it likely won't cover your utilities (water, sewer, electric).
maybe this is just regional differences, but I've never encountered a service that can bill you more >$500 that won't take some sort of credit payment option.   Utilities, government services etc. I've paid online via credit.   Besides my rent (see below) I've never needed more than a few hundred bucks cash to pay for anything, ever, for any reason.  Biggest cash purchases have always been voluntary craigslist type purchases.
I also don't understand how the mortgage could ever be an 'emergency' - seems like the most predictable of all expenses.  One poster mentioned having to suddenly move and put down another deposit, but that's typically solved by getting the old deposit back, and regardless is generally a month's rent or less (which would be a fraction of one month's total expenses).  If you are suddenly looking for a new place during an economic hardship I'll view that as a golden opportunity to slash expenses until things improved.

Quote
The original post is from almost 2 years ago.  I hope the OP has his shit worked out by now.  :)
I hope he's FI/FIRE.  It sounded like he was on a golden path with 50% savings rate, numerous investments, a (maybe unnecessary) month's expenses in his checking account and plenty of ways of meeting any emergency, real or imagined.

AlanStache

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Re: Am I stupid for not having an emergency fund?
« Reply #46 on: April 06, 2015, 01:26:54 PM »
The original post is from almost 2 years ago.  I hope the OP has his shit worked out by now.  :)

Egad so it is not 2013!! then it worked!!!

Davids

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Re: Am I stupid for not having an emergency fund?
« Reply #47 on: April 06, 2015, 07:07:44 PM »
I am all for having 6 (or 12 if you want to be more conservative) months worth of expenses in a "high" yield savings account as an emergency fund. With that said though it seems the debate is more the source of the emergency fund. Technically a Roth IRA can be used as an emergency fund since you can withdraw your principal penalty free, it is not something I would do but you can use a Roth as an emergency fund. Having a credit card with a 0% intro APR for 12 months can be a great source, especially if you know you have a big expense coming up that you would rather spread your payments out over. Anything can happen and having a source of quick cash on hand is important just in case.

thepokercab

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Re: Am I stupid for not having an emergency fund?
« Reply #48 on: April 06, 2015, 07:24:03 PM »
The original post is from almost 2 years ago.  I hope the OP has his shit worked out by now.  :)

What a trip down memory lane!  Actually- I just started this thread last week:

http://forum.mrmoneymustache.com/share-your-badassity/another-'we-hit-100k-net-worth!!'-post/msg609133/#msg609133

Needless to say, I feel like I've got my shit worked out now :)

NoraLenderbee

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Re: Am I stupid for not having an emergency fund?
« Reply #49 on: April 06, 2015, 08:36:10 PM »
Sometimes stuff happens. Until last week, I would have agreed no emergency fund was needed since I have credit cards and equities.

 But then my landlord decided to offer me a 10% rent increase forcing me to move. Here in NYC, that means I need first months rent, security deposit, and a brokers fee. A big chunk of cash, but wouldn't be a huge problem except for the fact I've already scheduled for the IRS to debit 7k from my account for taxes next week and I cant change that.

Plus I need the cash to cover this months rent before I move. All told its 15 k I had to save pretty rapidly. Some of this was of course planned for, but the move just came out of nowhere and I cant charge it. Yeah I could sell equities, but last week we had some really negative days and I'm glad I'm going to squeak by without having to do so. In the future I think I'll keep 3 months on hand.

Won't you be getting the security deposit from your current place back, making that pretty much a wash?  And wouldn't you have to pay the rent for that first month anyway, if you were staying?  (IOW, you'd have been paying May rent to your current place, and instead you pay it to another place.)  The timing might be slightly different, but that's not really an additional cost.  Given that most credit cards have 30 day cycles, it seems that you could easily use them to adjust for paying that rent a bit sooner than anticipated, and for having to pay one security deposit before getting the other back.  Charge anything you can, and in a few weeks, those shifted costs should be evened out, no?

You're right Its mostly just timing, but these are expenses I can't charge. They want cash or cashiers check for those first rent checks.


Timing issues are another reason to have an EF. If you need to pay a lot of money for something up front, and you can't or don't want to liquidate investments  to cover what's only a temporary shortfall, having that 8K in the bank saves a lot of grief.