The Money Mustache Community
General Discussion => Welcome and General Discussion => Topic started by: thepokercab on July 17, 2013, 08:32:44 AM
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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.
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I'd guess those people don't have anything in the way of savings themselves.
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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).
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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.
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+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.
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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.
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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.
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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.
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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!
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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
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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.
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If you have enough money available to cover emergencies (no matter where it's kept), then you have an emergency fund. Good work!
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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. :)
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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.
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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.
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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.)
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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.
What if your electricity dies for 2 weeks. Boom, use your emergency fund to buy a generator.
Or learn to survive without electricity :-)
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.
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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.
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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.
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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.
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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.
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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.
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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.
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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!
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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.)
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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.
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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.
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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.
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Yep, it is stupid not to have a healthy emergency fund.
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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.
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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.
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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
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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?
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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.
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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.
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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.
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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.
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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.
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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).
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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.
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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.
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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.
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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.
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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.
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The original post is from almost 2 years ago. I hope the OP has his shit worked out by now. :)
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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.
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.
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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!!!
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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.
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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 :)
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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.
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In the case of an OP he may not need an emergency fund. Dont they recommend at least having a few month emergency fund just in case? And what constitutes the use of this fund, medical emergency, loss of job, car accident? For me I think it would be loss of job.
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Talking from experience here. I have a solid job, but due to an injury was off work for 5-6 months. I had to deal with EI and later insurance minimal payouts. As much as we have good insurance, they don't pay you 100% of your income. Ei was about half or less of my normal income. It was a hell of a shock.
Ive been fairly good with my finances, but it taught me a lesson that you can never depend on anything 100% I am also single living alone so ALL expenses fell on my shoulders as well. Well let say my spending has dramatically improved since then and i've recovered nicely in the bank side of things as well.
I had a EF that saved my ass. It took a hell of a hit, but i was able to get through the ups and downs, the waiting weeks without any payments because i had my EF to pull from. I had it as a savings account in a TFSA. (I'm Canadian)Had to have it as liquid as possible for that reason.
A EF makes it easy to sleep at night. Hopefully most of you wont, but its worth its weight in gold when you need it in a crunch.
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But I don't think there's a one size fits all answer. DH's job is freakishly stable (military). If he's injured, he still gets full pay, assuming it is recoverable. If it isn't, he'd have to deal with the mess that is the VA, but he'd still have income. That alone means we need less EF than other people. And we have a HELOC, with nearly 5 figures of room on it, and we could probably increase that if necessary (though we'd lose the great terms we currently have, so we haven't bothered).
Everyone needs to evaluate their own situation, but I certainly don't think that having thousands or tens of thousands of dollars sitting around not working is necessary for everyone, or even most people.
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All i had was $5k. not much but enough to ride out the bad waves. You may not need 20k, but it depends on where and how you live. after reading more in these forums, those who live on less will find it easier. Those who have working partners will find it easier. My future goal is about 8k. But that's me and my life style. Especially it will be better now that my mortgage is just about over with.
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I don't keep cash as an EF. That would be a huge waste of money - literally!
In order of priority I deal with unforeseen expenses as follows:
1. current month's income
2. credit card to defer cost to next month's income
3. line of credit
4. non-taxable investments
5. taxable investments
There are more options below #5, but I've never had to go further down than my LOC so no point planning beyond my investments.
If I lost my current contract and my income dried up I would take a retail job and have all my expenses covered with less than a week's lost pay. I'd look for a higher paying gig immediately and be back on track within a few months.
If I had a life changing medical condition/accident I have enough invested to cover my basic no frills living costs with the help of my GF's medical benefits plan and Canada's universal health care system.
-- Vik
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I don't keep cash as an EF. That would be a huge waste of money - literally!
In order of priority I deal with unforeseen expenses as follows:
1. current month's income
2. credit card to defer cost to next month's income
3. line of credit
4. non-taxable investments
5. taxable investments
If I lost my current contract and my income dried up I would take a retail job and have all my expenses covered with less than a week's lost pay. I'd look for a higher paying gig immediately and be back on track within a few months.
If I had a life changing medical condition/accident I have enough invested to cover my basic no frills living costs with the help of my GF's medical benefits plan and Canada's universal health care system.
-- Vik
The only flaw in your strategy is the belief that you could secure a retail position in a week.
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This thread has been a real eye-opener. I've always advocated having an emergency fund of some sort, yet I still didn't want my entire savings sitting in a savings account losing value to inflation. Based on this thread, I think I will adjust my approach a little bit. I will probably keep 1 months living expenses in a cash savings account(about $2000). Anything more that I save after that will be put in somewhat conservative investments in my taxable brokerage account. I can always sell off my positions if a real emergency hits. I have credit cards to float/defer any debt by 30 days in case I hit an emergency. In case of a job loss, I can always grab more hours at my side job until I can find another job.
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But I don't think there's a one size fits all answer. ...
Everyone needs to evaluate their own situation, but I certainly don't think that having thousands or tens of thousands of dollars sitting around not working is necessary for everyone, or even most people.
+1. I've been lambasted on this forum and others when I say I try to keep no more than $500 in our checking accounts, but for our personal situation, having an ER fund earning <1% would seem like such a huge waste. We both work freakishly stable jobs (6-18 month contracts which are virtually guaranteed... until the next one), and we can live on only one of us earning anything, so we'd both need to loose our jobs for us not to have a surplus of cash each month. We have a HELOC at 3.1% which could cover any 5-figure expense, and we have both ROTH and taxable accounts we could draw off of if absolutely needed to. We can (and have) rented out our spare bedroom for extra income. And while this may not be an option for many, both of our parents are very comfortably retired, and if we suffered something truly catastrophic we know we could count on either one of them to help us back on our feet. The only scenario I can come up with here would be a debilitating illness that requires extensive care not covered under our health plan. That or having to hire an attorney for a prolonged criminal trial.
Some people have cited that having an ER fund in a 0% savings account helps them sleep better at night, and that's fine. But for me I feel just the opposite - I hate inefficiency and the thought of all those 'little-green-employees' just sitting on their asses keeps me up at night.
While I appreciate people not wanting to withdraw money when the market is down, the alternative way of thinking about it is to consider how long you've been in the market and calculating what your total gain/loss would have been. In our case, even if the market dropped 25% and we had to suddenly pull out a chunk, that money still would have earned us a pretty return because it's been there for 15+ years.
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The only flaw in your strategy is the belief that you could secure a retail position in a week.
I know I can. I have contacts at 20 different businesses through my hobbies. One of which would employ me on short notice.
In the absolute worst case it would take 2-3 weeks which makes virtually no difference at all.
-- Vik
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But I don't think there's a one size fits all answer. DH's job is freakishly stable (military). If he's injured, he still gets full pay, assuming it is recoverable. If it isn't, he'd have to deal with the mess that is the VA, but he'd still have income. That alone means we need less EF than other people. And we have a HELOC, with nearly 5 figures of room on it, and we could probably increase that if necessary (though we'd lose the great terms we currently have, so we haven't bothered).
Everyone needs to evaluate their own situation, but I certainly don't think that having thousands or tens of thousands of dollars sitting around not working is necessary for everyone, or even most people.
You never know. Debt ceiling nonsense could screw with your husband's pay and HELOCs are no good if home values fall again.
You'll probably be okay w/o a cash emergency fund.
I'm healthy, thin, and in my 20s. I don't smoke and I drink maybe once or twice a month. I could save thousands of dollars a year by forgoing health insurance until I'm 30 and I'd probably be okay. I'm not going to do that though =D
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You never know. Debt ceiling nonsense could screw with your husband's pay and HELOCs are no good if home values fall again.
You'll probably be okay w/o a cash emergency fund.
I'm healthy, thin, and in my 20s. I don't smoke and I drink maybe once or twice a month. I could save thousands of dollars a year by forgoing health insurance until I'm 30 and I'd probably be okay. I'm not going to do that though =D
HELOCs are fine as long as you have sufficient equity in your home. Also, it's just one arrow in the quiver.
I don't think your analogy of forgoing health insurance applies here. In the case of health insurance any injury or illness will result in a bill, some of which can be incredibly expensive (e.g. ICU after a car accident). There's only one scenario at play: need healthcare, pay a lot of money. If you are FI and can "self-insure", that's great. Otherwise you are weighing the risk of something happening with your expected ability to pay while sick/injured.
Financial emergencies are a different beast because they can come in many forms, but there are also many, many ways of dealing with them. We have health and disability insurance. We have a HELOC and multiple lines of credit. We both earn more than we need to live off of. We have investments, and assets that could generate more income in a pinch. We have a network of family members who could assist us if it became necessary.
BTW, I'm surprised someone who is healthy, thin and in their 20s is paying several 'thousand dollars a year' for health care. Too many variables for me to say for sure, but I'd look at plans again - I'd expect you could find one for under $170/month.
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But I don't think there's a one size fits all answer. DH's job is freakishly stable (military). If he's injured, he still gets full pay, assuming it is recoverable. If it isn't, he'd have to deal with the mess that is the VA, but he'd still have income. That alone means we need less EF than other people. And we have a HELOC, with nearly 5 figures of room on it, and we could probably increase that if necessary (though we'd lose the great terms we currently have, so we haven't bothered).
Everyone needs to evaluate their own situation, but I certainly don't think that having thousands or tens of thousands of dollars sitting around not working is necessary for everyone, or even most people.
You'll probably be okay w/o a cash emergency fund.
I'm healthy, thin, and in my 20s. I don't smoke and I drink maybe once or twice a month. I could save thousands of dollars a year by forgoing health insurance until I'm 30 and I'd probably be okay. I'm not going to do that though =D
Our home value would have to fall by roughly 80% before it hit a point where we would have less equity in it than our HELOC value. If that happens, so much shit will be hitting the fan that little else will matter.
You never know. Debt ceiling nonsense could screw with your husband's pay and HELOCs are no good if home values fall again.
As for the debt ceiling stuff, the HELOC would cover us for a couple years of expenses. And we have a few other options in addition to our savings, our taxable investments, and our Roths.
Last year, when the debt ceiling nonsense was looming, we did cut spending for the month or two prior, just to build up the savings account a bit. It wasn't strictly necessary, but it would have made things easier. Which also shows that we have a lot we can cut from our budget if necessary.
So again, it comes down to evaluating one's situation. It's just odd to me that so many people here seem to look down on those who are overly risk-averse when it comes to SWR, and yet many are so conservative when it comes to ES.
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So again, it comes down to evaluating one's situation. It's just odd to me that so many people here seem to look down on those who are overly risk-averse when it comes to SWR, and yet many are so conservative when it comes to ES.
That's an interesting point. I hope I'm not one who comes down too hard on those who are risk-adverse with their SWR - I certainly have argued passionately that simple flexibility makes it very easy to implement. There can be a fine line between arguing one's point and being intolerant of other's.
But I do find it strange that people can be risk-adverse with EFs and more risk tolerant with WR, since i see them as different sides of the same die. What also confuses me is how you can have 5+ available options for handling an emergency, and someone will latch onto just one of those and declare how it may not be available under certain circumstances, and conclude that the entire plan is unstable. Multiple options means no single option needs to be relied upon.
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Multiple options means no single option needs to be relied upon.
Bingo! :)
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Multiple options means no single option needs to be relied upon.
Bingo! :)
While I think that when you get to 5 options, you're pretty secure, multiple options can offer a false sense of security. For example, in 2007, home prices went down rapidly. A lot of HELOCs were cancelled due to credit tightening, while reevaluation took place. Meanwhile, the job market had far fewer offerings. If you were forced to sell stock at that point, you'd be forced to sell low, which would be damaging in the long term to your plans. Having multiple options sounds great, as long as your options are really diversified.
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BTW, I'm surprised someone who is healthy, thin and in their 20s is paying several 'thousand dollars a year' for health care. Too many variables for me to say for sure, but I'd look at plans again - I'd expect you could find one for under $170/month.
I get it through my employer. I picked the highest deductible plan (b/c I never get sick and could afford the deductible if I did) and even that is about $2000 a year in premiums.
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sorry to use up this old thread again, what does anyone think of my strategy, I save 50% of whatever leftover money I have left at the end of the month towards my EF and the other 50% I invest it. I do that for 12 months, on the 13th, I clear my EF and invest and I restart all over again. Is that a better strategy to have an EF in my case??? I usually don't get many emergencies throught the year, but it does happen that once in awhile my parents ask me for money and sometimes the amount can be bigger than my leftover money. So I figure if after one calendar year my EF is still intact, I can invest the money and restart filling up my EF all over again and repeat the same pattern every year. is there a flaw to this plan that I didn't think of?
I figure that it's a hybrid EF meanining the money is in my EF throught the year and then it gets invested if the year was good to me, if not, at least it will be used to bail me out of a situation like last year when I helped out my parents to pay for the repair of their roof.
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sorry to use up this old thread again, what does anyone think of my strategy, I save 50% of whatever leftover money I have left at the end of the month towards my EF and the other 50% I invest it. I do that for 12 months, on the 13th, I clear my EF and invest and I restart all over again. Is that a better strategy to have an EF in my case??? I usually don't get many emergencies throught the year, but it does happen that once in awhile my parents ask me for money and sometimes the amount can be bigger than my leftover money. So I figure if after one calendar year my EF is still intact, I can invest the money and restart filling up my EF all over again and repeat the same pattern every year. is there a flaw to this plan that I didn't think of?
I figure that it's a hybrid EF meanining the money is in my EF throught the year and then it gets invested if the year was good to me, if not, at least it will be used to bail me out of a situation like last year when I helped out my parents to pay for the repair of their roof.
Your strategy is a bit non-conventional, but if it works for you...
My concern is that you want to have both a cash ER fund and not have any opportunity cost. You are attempting to do this by letting your ER fund grow for 12 months and then zero-ing it out and investing it all. The flaws in your plan are 1) you never know when an emergency will actually strike and 2) you won't reduce your opportunity cost because your average balance in your ER fund remains the same, even while it fluctuates from $0 at month 1 to whatever it is in month 13. Because of this, it is NOT earning you any more than if you simply held an ER fund with the same amount you'd have in month 7 of your plan (the average annual balance).
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So am I better off doing the MMM way and simply invest everything and if there is an emergency (usually caused by a family member, not myself) I use the credit line or should I simply continue my way?
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So am I better off doing the MMM way and simply invest everything and if there is an emergency (usually caused by a family member, not myself) I use the credit line or should I simply continue my way?
well... figure out what works best for you and what helps you sleep at night.
You seem to want to have some money in an ER fund, and that's fine. Perhaps a good strategy for you would be to keep a few months worth of savings in an cash-equivalent account. Once this is established you can put 100% of your monthly cash surplus towards long-term savings. Use your ER only for real emergencies.
If, after a year or two you discover that you haven't needed to dip into the ER fund *and* you have many layers of security (e.g. a monthly cash surplus, credit cards, a HELOC, large amounts of savings in taxable or IRA accounts, the ability to reduce expenses if necessary, etc) then shrink your ER fund and rely a bit more on 'springy debt'. The more sources you have for taking care of financial emergencies, the less you need an ER.
you might want to read: http://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/ (http://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/)
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I think it really depends on the person and their overall financial situation. For me if I have to wait 24 hours to access my money, then I don't count it as "emergency money". For me an emergency is a "right here right now need".
If you are 100% debt free and are making investments, then probably having a credit card with a zero balance is all the emergency fund you need.
For me I have 1 years living expenses as an emergency fund. I came up with this arbitrary number a few years ago as my goal. I've since hit and maintained it. In reality I don't need that much in a savings account and should invest it, but it gives me a sense of comfort having it there.
However for my in debt friends who ask for advice, I ask them, if they each (usually a husband and wife) had an at-fault car accident at the same time, would they be able to cover 2 car insurance deductibles and still have enough money to cover their monthly expenses (house, daycare, food, etc)? Usually the answer is no. So I advise them to start with an emergency fund to cover that.
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I think it really depends on the person and their overall financial situation. For me if I have to wait 24 hours to access my money, then I don't count it as "emergency money". For me an emergency is a "right here right now need".
I'm really curious about your 24 hour rule. Does that preclude things like savings and checking accounts, which often have a $500 daily ATM maximum limit and the bank may not be open on Sunday? Would credit cards still count?
At the risk of repeating myself from earlier in this thread, I've never encountered an emergency situation costing >$500 where I had to pay with cash (no cc) and I had to pay the full balance that day. I'm having a hard time even coming up with a plausible situation where I'd need that much cash in under 24hrs that didn't involve criminal activity.
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I think it really depends on the person and their overall financial situation. For me if I have to wait 24 hours to access my money, then I don't count it as "emergency money". For me an emergency is a "right here right now need".
I'm really curious about your 24 hour rule. Does that preclude things like savings and checking accounts, which often have a $500 daily ATM maximum limit and the bank may not be open on Sunday? Would credit cards still count?
At the risk of repeating myself from earlier in this thread, I've never encountered an emergency situation costing >$500 where I had to pay with cash (no cc) and I had to pay the full balance that day. I'm having a hard time even coming up with a plausible situation where I'd need that much cash in under 24hrs that didn't involve criminal activity.
I've only ever needed money right away a couple of times.
1) was when my hot water tank blew and I needed a replacement. I was maybe 25 years old (14 years ago) and didn't have an emergency fund or enough left on my only credit card to pay for a new one to be delivered/installed that day, so I had to call my parents for help. I wrote them a check and paid it off a week later, but without them I would have had to wait a week (with a young child).
2) To pay for a $1200 airplane ticket when my dad had a stroke. I got the call and 2 hours later I was on a flight.
There have been a couple of similar things: my grandmother passed and I had to pay for plane tickets, rental car, hotel for my daughter and I; My friend called me crying because she was her car broke down and was 100 miles from the nearest town and couldn't afford a tow that far, etc). I've never had to post bail for anything, most of my emergencies have to do with a relative passing and me living far away, but I've had to use my debit card (with a credit card logo) several times.
Now if either of these things happened I would use my credit card and pay it off before the next billing cycle, but back then I was trying to get myself out of debt but still have a plan for worst case scenarios, so that is where my 24 hour rule came from and it just kind of stuck.
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I think it really depends on the person and their overall financial situation. For me if I have to wait 24 hours to access my money, then I don't count it as "emergency money". For me an emergency is a "right here right now need".
I'm really curious about your 24 hour rule. Does that preclude things like savings and checking accounts, which often have a $500 daily ATM maximum limit and the bank may not be open on Sunday? Would credit cards still count?
At the risk of repeating myself from earlier in this thread, I've never encountered an emergency situation costing >$500 where I had to pay with cash (no cc) and I had to pay the full balance that day. I'm having a hard time even coming up with a plausible situation where I'd need that much cash in under 24hrs that didn't involve criminal activity.
I've only ever needed money right away a couple of times.
1) was when my hot water tank blew and I needed a replacement.
2) To pay for a $1200 airplane ticket when my dad had a stroke. I got the call and 2 hours later I was on a flight.
Now if either of these things happened I would use my credit card and pay it off before the next billing cycle, but back then I was trying to get myself out of debt but still have a plan for worst case scenarios, so that is where my 24 hour rule came from and it just kind of stuck.
Ok - thanks for the response. I certainly would just use a credit card in any of these scenarios. I agree that when you don't have a lot of surplus each month an EF can be a useful tool. If you have credit card debt - well it makes no sense to keep an EF fund and continue to pay interest on your credit cards; your cc is your de-facto EF.
Just a tip - almost all major airlines offer medical emergency fares and bereavement fares. You have to call them each directly but it can save you when you have to book a ticket within 24h to reach a family member during a medical emergency.
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This is an interesting discussion and I am glad it was resurrected. I don't think we will ever fully agree on emergency funds in part because I feel the "right answer" is going to be different according to the particulars of one's situation.
In the case where someone is just starting out on the path of getting their financial $hit together, the idea of a cash emergency fund makes a lot of sense. In cases where the household is dependent on a single income, has high monthly debt obligations, or similar situations I can also see having a good chunk of cash sitting around makes sense. Other posters above have listed various scenarios where it may make sense.
Personally we followed the mantra of having 3-6 months of expenses in a money market for years. Finally my husband woke up (interestingly, after reading a couple of the MMM blog posts) and we realized that having 6 months' expenses in cash was stupid. We do keep about 2 months' expenses in cash-like forms spread across random accounts; that has come in handy at times. Mostly though we realized we don't need that kind of cash sitting around for the following reasons:
1) We are dual income and save 50%+ of our income. The most likely emergency would be if one of us loses a job. In that case we would simply temporarily stop saving to cover expenses.
2) We are heavily insured and so I feel comfortable we would be covered in most disasters (car accident, getting sick, etc.)
3) We rent and own our vehicles outright; no debt helps us sleep a little better at night
4) We keep a few k cash in a safe in case a true natural disaster hits and power is out to our area (i.e. for when "the big one" earthquake hits)
Basically our strategy is to first use the cash buffer we keep in checking/savings to absorb outlier expenses; then the credit cards are available. We could always dial back our savings temporarily which would free up cash. If need be, we could sell some investments if we really needed a big chunk of cash. Mainly though I have a hard time imagining a scenario that would require that much money. Maybe I suffer from failure of imagination. So far, so good (fingers crossed)!
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I prefer to have two emergency funds, one in cash at home (600-1200 usually), the other in my checking account (6-7k usually). That way, if the banks are closed Im not stuck in line waiting for my only source of cash.
Ive experienced cash only emergencies during hurricanes and they can last a week or two before things are functioning normally. If I had to pull money from Vanguard it would have been a major problem due to power and cell service being down for weeks.
So keep cash on hand, even if its in single dollar bills (I save all my pocket change and dont spend it for a slowly buliding fund of dollar bills).
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Not stupid at all... if there are no penalties for extract some current investments and the timing isn't too bad then I see no reason to have a large emergency fund.
We personally don't have have a direct "emergency" fund either. Our is based on this, and I think we're fine.
- We both work, would be fine on single income for the long haul. The event we're both layed off... EI/severance could even keep us going for some time.
- our investment TSFA (allow withdrawals) is over 100k and can be replenished after the fact if required... in "lockdown" mode this could last a LONG time
- 60k LOC (untouched) at a good rate... would not touch probably ever, but nice to know it's there.
- $5-7k always in chequing/savings account.
- we both have decent life insurance plans from work and 3rd party
- OHIP covers most health related stuff (Canada universal health)
- we have dental/eye/etc from work plans
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Well that is why it is a tough choice for me to either chose having a hybrid EF or not. I am still trying to figure out if I should continue what I am doing, that is putting 50% each month towards my EF and then at the end of the year, I clear it to invest if I haven't touched the money or partially.
On one hand, it has happened a few occasions where my parents would ask me out of nowhere for 3K-4K$ to help them pay their bills or some repairs for the house, but on the other hand, it doesn't happen on a regular basis (maybe once every 2-3 years minimum). So that is why I am debating between having a EF and not having one. I usually have about 1000$ in unspent money by the end of the month, so I am wondering if I am simply better off borrowing from my credit line and pay it off after 2-3 months instead of carrying an emergency fund if the time comes that my parents ask me for money.
If it were only me, my choice would be easy, I would choose MMM's way going with debt springy.
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Well that is why it is a tough choice for me to either chose having a hybrid EF or not. I am still trying to figure out if I should continue what I am doing, that is putting 50% each month towards my EF and then at the end of the year, I clear it to invest if I haven't touched the money or partially.
On one hand, it has happened a few occasions where my parents would ask me out of nowhere for 3K-4K$ to help them pay their bills or some repairs for the house, but on the other hand, it doesn't happen on a regular basis (maybe once every 2-3 years minimum). So that is why I am debating between having a EF and not having one. I usually have about 1000$ in unspent money by the end of the month, so I am wondering if I am simply better off borrowing from my credit line and pay it off after 2-3 months instead of carrying an emergency fund if the time comes that my parents ask me for money.
If it were only me, my choice would be easy, I would choose MMM's way going with debt springy.
to be clear, what I'm concerned about is (if I am reading your posts correctly) your tendency to move ALL of your EF into investments at the end of the year, effectively zeroing out your EF. That makes it less useful, because you never know when an emergency might strike, and if it happens shortly after zeroing out your EF you won't be any better off. It's kind of the "worst of both worlds" - you loose the opportunity cost of not having that money invested, and you loose the insurance of knowing there's money to handle the next time you need to shell out a few thousand bucks unexpectedly.
Instead, if you want an EF, I'd suggest going with the more traditional approach; set a dollar amount you want in your EF and then do what you are doing (50% in investments, 50% in your EF) until you hit that target. Once you've hit that amount, put everything into investments. As you move closer to FI, as your savings rate goes up and as other sources of credit become available you can gradually reduce your EF.
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sorry to use up this old thread again, what does anyone think of my strategy, I save 50% of whatever leftover money I have left at the end of the month towards my EF and the other 50% I invest it. I do that for 12 months, on the 13th, I clear my EF and invest and I restart all over again. Is that a better strategy to have an EF in my case??? I usually don't get many emergencies throught the year, but it does happen that once in awhile my parents ask me for money and sometimes the amount can be bigger than my leftover money. So I figure if after one calendar year my EF is still intact, I can invest the money and restart filling up my EF all over again and repeat the same pattern every year. is there a flaw to this plan that I didn't think of?
I figure that it's a hybrid EF meanining the money is in my EF throught the year and then it gets invested if the year was good to me, if not, at least it will be used to bail me out of a situation like last year when I helped out my parents to pay for the repair of their roof.
If you want to keep up investing, why not do more 20% savings, 80% investing and continue a bit slower until you hit your goal? Then put all of it to investing? Why restart every year? Just at the end of each year you would have to see if the amount you had was adequate for what you thought your expenses would be. What if the rates go shooting up, would you still invest a lump sum at the high of the market? and what happens if you invest your money in january and suddenly in february you have an emergency? All that money is now gone
This is an interesting discussion and I am glad it was resurrected. I don't think we will ever fully agree on emergency funds in part because I feel the "right answer" is going to be different according to the particulars of one's situation.
In the case where someone is just starting out on the path of getting their financial $hit together, the idea of a cash emergency fund makes a lot of sense. In cases where the household is dependent on a single income, has high monthly debt obligations, or similar situations I can also see having a good chunk of cash sitting around makes sense. Other posters above have listed various scenarios where it may make sense.
Personally we followed the mantra of having 3-6 months of expenses in a money market for years. Finally my husband woke up (interestingly, after reading a couple of the MMM blog posts) and we realized that having 6 months' expenses in cash was stupid. We do keep about 2 months' expenses in cash-like forms spread across random accounts; that has come in handy at times. Mostly though we realized we don't need that kind of cash sitting around for the following reasons:
1) We are dual income and save 50%+ of our income. The most likely emergency would be if one of us loses a job. In that case we would simply temporarily stop saving to cover expenses.
2) We are heavily insured and so I feel comfortable we would be covered in most disasters (car accident, getting sick, etc.)
3) We rent and own our vehicles outright; no debt helps us sleep a little better at night
4) We keep a few k cash in a safe in case a true natural disaster hits and power is out to our area (i.e. for when "the big one" earthquake hits)
Basically our strategy is to first use the cash buffer we keep in checking/savings to absorb outlier expenses; then the credit cards are available. We could always dial back our savings temporarily which would free up cash. If need be, we could sell some investments if we really needed a big chunk of cash. Mainly though I have a hard time imagining a scenario that would require that much money. Maybe I suffer from failure of imagination. So far, so good (fingers crossed)!
+1!!!
Every plan is not right for every body. I keep about a month buffer in my checking accounts to avoid fees and accidental things/unplanned expenses. Then my goal is another 2-3 months saved up in a separate savings account. I'll see what i want to do after i get that saved up to goal again. I'm single so everything is dependent on my income. I don't have a partner to fall back on, so i have to protect myself.
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What if your electricity dies for 2 weeks. Boom, use your emergency fund to buy a generator.
Or learn to survive without electricity :-)
I hate camping. But, that's beside the point...electricity runs more than TVs and hair dryers. A fridge and freezer full of food won't last 2 weeks, if it's winter, the furnace has to run, 2 weeks without a sump or septic pump never turns out good, etc...
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What if your electricity dies for 2 weeks. Boom, use your emergency fund to buy a generator.
Or learn to survive without electricity :-)
I hate camping. But, that's beside the point...electricity runs more than TVs and hair dryers. A fridge and freezer full of food won't last 2 weeks, if it's winter, the furnace has to run, 2 weeks without a sump or septic pump never turns out good, etc...
Huh. We take the exact opposite approach. Part of our disaster preparedness is being able to function without electricity for at least a week. We've been forced to put this into action once after an ice storm left us without power for almost 6 days, and we've voluntarily 'practiced' for 3 day periods just for fun and to see where the kinks are. I'd wager almost all homes could go without electricity for 2 weeks with a bit of planning. To be fair I've never lived in a home that has needed a sump-pump. Sure, you might loose the milk and yogurt in the fridge, but stuff in the freezer stays safe for days. Cooking is easy on a propane grill or camping stove, and a stocked pantry can provide gourmet meals for weeks. Water can be shut off and drained from pipes before they freeze, etc. etc.
The hardest part we've had is storing enough water, but there are ways around that, too...
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Thought I'd throw in a personal story, since this is what I'm dealing with right now.
Last year I started getting my finances together, motivated largely by MMM. At the time I was keeping $10k in my checking account as an emergency fund. I also had a HELOC with a $30k limit and a $4k balance, with no other debt save the mortgage. I was putting $7k per year in my 401(k).
After reading the Springy Debt (http://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/) blog post and thinking about it, I decided to put that $10k of cash to work. I put $5500 into an IRA for the year and upped my 401(k) contribution so that I would max out for the year in the last five months. That was about 75% of my salary, so I used the rest of the cash to cover living expenses for the rest of the year.
This spring the HELOC balance was zero and my monthly 401(k) contributions are set to hit the limit. In May I bought a car and I took $3k out of the HELOC to pay for it. No problem - the HELOC is there to smooth the cash flow just as a cash emergency fund would. But now, I find I need a new roof on the house. That's going to be about $16k. So I'll take that out of the HELOC as well, giving me a balance of about $18k and continuing to pay off a thousand a month or so.
Now mathematically, this is exactly what I intended. The roof is an unexpected expense, and the HELOC means I'm paying about 2.5% to finance it. That's better than keeping the money in cash, losing the 25% deduction from putting it in the 401(k) to say nothing of the investment returns it will eventually accrue. My net worth is going up, even with this expense. I'm not in danger of losing the HELOC - I've got $70k in equity in the home. So I feel comfortable that I can do this and even should some other emergency come up, I've still got over $10k of room. And that's quick to access - just log onto my bank's website and transfer the money to checking and it's ready to go.
But emotionally, I'm having some trouble pulling the trigger on the roof. I just got that HELOC paid off. I really don't like the idea of having a large balance again. It feels like I'm sliding backwards. I'm getting estimates on the roof work, and in the evenings I'm creating different reports in Quicken, trying to find one that helps me feel as good about this as I think I do.
One day, I think I'd like to have a cash emergency fund again. But it won't be until I can build it up with money after I have maxed my retirement accounts and paid off all existing debt. That's going to be a few years, so I just have to be patient and keep my eye on my ever-growing Stash. :)
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No, you're not stupid. My thoughts on the matter are here (http://forum.mrmoneymustache.com/ask-a-mustachian/emergency-fund-where-do-you-keep-it/msg563060/#msg563060).
Long story short, an emergency fund is supposed to protect you from an unforseen expense. However, so long as that money is sitting in cash, there is an opportunity cost: your emergency fund could be making money in the market. As long as your financial situation is reasonably stable and you have a large enough portfolio, your cost of guarding against an unforseen expense is much higher than your expected return from investing your emergency fund instead.
Depending on the probability of an unforseen expense and job security, this is akin to investing in gold: gold (allegedly?) protects against hyperinflation. But in the long run, gold's real return should be zero. So you are effectively losing money by not investing elsewhere to protect against this rare beast that is hyperinflation.
I've been meaning to actually backtest this: using VFINX data, assume some probability of an emergency expense occurring and see if you are better off investing that amount or leaving it in cash. I imagine this would have a strong dependence on initial conditions: a low net worth individual will get hit hard if he/she is invested and has a large expense when the market tanks, but a high net worth individual doesn't care.
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Here's a question. I have a daughter who will be getting specialized education for probably at least the next 2 years. This year's out of pocket will be 13.2K, (plus another 2600 for the summer program). We filled out a financial aid form to receive 5K in financial aid.
Since we had multiple things happen we have very little in the way of an emergency fund at this time (maybe a month's expenses), we are going to take out a home equity line of credit, for months we can't make the payments, to pay off later.
Realistically I don't think we will be able to save addition for an emergency fund these next 2 years. However even if we could, any money we save in a checking or savings account is going to count against us for financial aid next year, while having debt "helps" in the equation.
It has also made me think, that after the 2 years, what is so horrible with using the line of equity as an emergency fund instead of having a separate cash fund? Any thoughts?
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It has also made me think, that after the 2 years, what is so horrible with using the line of equity as an emergency fund instead of having a separate cash fund? Any thoughts?
The classic answer is that using a HELOC transfers debt to your home which (in the 'classical, debt-is-bad' camp) means that you will be pushing your mortgage-free day further into the future and putting your retirement in jeopardy. People get caught up using HELOCs as virtual ATMs to inflate their style of living and then run into problems later when they either loose their job (and were already living on the edge financially) or they go to sell their home and discover they have no equity and are underwater.
As individuals who aren't consumer suckas, using a low interest HELOC as an emergency fund can be a GREAT way of dealing with the unexpected. As always, you shuold make sure that you are living below you means, and that you aren't using a HELOC "just because you can".
I haven't had to tap into it yet, but my HELOC is just one of several sources we could draw from if necessary.
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Yes the idea is just to have it there, in case of an emergency. Not to use it as an ATM, but to have a month's expenses, and then access to line of credit for bigger emergencies. I guess we will have to see whether we are mature enough to handle it (not to use it for "easy money"). Only time will tell.
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An 'Emergency Fund' is overrated. It is easily replaceable by liquid investments or a HELOC.
The term originated as a means to help persuade otherwise non-saving individuals to put aside enough cash to 'weather the inevitable storm'.
The reality is your investments can easily provide this coverage. As far as the 'you don't want to pull from your investments when they're down!' comments; we have negatively correlated assets for a reason. The majority of this board is invested in individual index funds which offer this advantage. Historically, bonds and equities have proven to be negatively correlated. Therefore, if one asset class has taken a significant dive during an 'emergency', you simply pull from the other asset class. Replenishment and repositioning awaits the post-emergency crisis.
The only benefit in keeping a cash component is to have the ability to deploy funds into potentially lucrative investment opportunities.
*Side note: This opinion is obviously for the mass affluent investor who has a significant portfolio over-and-above their retirement account (in which withdrawals would be 100% taxable and a HELOC would be a better route).
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Do i really need more cash lying around?
I say no, and I'm in very similar shoes as you. I think a credit card can be good for someone like us. You can use your current small EF + the credit card if needed to cover initial costs of an emergency, then pay off the card after selling some shares from your taxable account days later.
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I think I will listen to your advices, I won't carry an EF. I mean whenever I get hit with an emmergency, usually the amount is 3-4K$ at most and I can pay that in max. 3-4 months, plus in my case, I use YNAB, so with rule #4, living on last month's income, it makes it easier to pay off those emergencies.
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An 'Emergency Fund' is overrated. It is easily replaceable by liquid investments or a HELOC.
The term originated as a means to help persuade otherwise non-saving individuals to put aside enough cash to 'weather the inevitable storm'.
The reality is your investments can easily provide this coverage. As far as the 'you don't want to pull from your investments when they're down!' comments; we have negatively correlated assets for a reason. The majority of this board is invested in individual index funds which offer this advantage. Historically, bonds and equities have proven to be negatively correlated. Therefore, if one asset class has taken a significant dive during an 'emergency', you simply pull from the other asset class. Replenishment and repositioning awaits the post-emergency crisis.
The only benefit in keeping a cash component is to have the ability to deploy funds into potentially lucrative investment opportunities.
*Side note: This opinion is obviously for the mass affluent investor who has a significant portfolio over-and-above their retirement account (in which withdrawals would be 100% taxable and a HELOC would be a better route).
I think your side note should be your up-front disclaimer, here. However, regarding negatively correlated assets (which you explain very well), early retiree/aspirants will probably be light on bonds. In an event like the 2008 recession, home values fell quickly enough to eliminate a lot of people's available HELOCs (and a lot of comanies froze HELOCs, because they worried about more potential fall in the housing market). Equities fell precipitously at the same time. If one had an emergency (we'll use job loss as an example, because that was fairly common at the same time), a bond heavy taxable account would become the only place to get money without selling in a down market.
In addition, once you've got assets at the level that you've mentioned, a cash component makes sense as a negatively correlated asset class. Cash for a few months of survival will also no longer be a significant portion of the portfolio, so it won't hurt to keep it.
Most posters who disparage the emergency fund have a very narrow view of "emergency". Fixing/replacing your car isn't an emergency, it's an expense. Emergencies come at the confluence of a number of problems (falling home values, portfolio values, job loss, and more) which were common across income levels and savings rates not very long ago.
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An 'Emergency Fund' is overrated. It is easily replaceable by liquid investments or a HELOC.
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*Side note: This opinion is obviously for the mass affluent investor who has a significant portfolio over-and-above their retirement account (in which withdrawals would be 100% taxable and a HELOC would be a better route).
I think your side note should be your up-front disclaimer, here. However, regarding negatively correlated assets (which you explain very well), early retiree/aspirants will probably be light on bonds. In an event like the 2008 recession, home values fell quickly enough to eliminate a lot of people's available HELOCs (and a lot of companies froze HELOCs, because they worried about more potential fall in the housing market). Equities fell precipitously at the same time. If one had an emergency (we'll use job loss as an example, because that was fairly common at the same time), a bond heavy taxable account would become the only place to get money without selling in a down market.
In addition, once you've got assets at the level that you've mentioned, a cash component makes sense as a negatively correlated asset class. Cash for a few months of survival will also no longer be a significant portion of the portfolio, so it won't hurt to keep it.
Most posters who disparage the emergency fund have a very narrow view of "emergency". Fixing/replacing your car isn't an emergency, it's an expense. Emergencies come at the confluence of a number of problems (falling home values, portfolio values, job loss, and more) which were common across income levels and savings rates not very long ago.
I disagree with several of your assertions. First of all, a bond heavy taxable account is not the only place to get money without selling equities in a down market. A savvy individual already has a large cash surplus to invest every month and can identify the differences between "wants" and "needs", so the two immediate steps would be to postpone contributions and reduce spending. While HELOCs dissapeared for some (particularly those with little/no equity in their homes) they persisted for many, including me. Even without a HELOC, credit cards are an option. Borrowing money from family is an option. Starting/expanding a side-hustle is an option. Selling any number of things in our opulent lives is an option. Renting out a bedroom is an option. Moving is an option - particularly if you are renting. Sure, not all of these options will be available or appealing to everyone, but declaring bonds to be the only source of money in a crisis is a bit absurd.
Second, while a large portfolio by definition means that a 3-6 month cash fund is a relatively small portion of the overall portfolio, $15,000 is still $15,000, regardless of whether you have a NW of $100k or $1MM. That's a lot of idle employees sitting around eating donuts, and I can respect people who have "won the game" and want to keep them there just to play defense (or keep a 'negatively correlated asset class), but for everyone else they are just a wasted resource.
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An 'Emergency Fund' is overrated. It is easily replaceable by liquid investments or a HELOC.
...
*Side note: This opinion is obviously for the mass affluent investor who has a significant portfolio over-and-above their retirement account (in which withdrawals would be 100% taxable and a HELOC would be a better route).
I think your side note should be your up-front disclaimer, here. However, regarding negatively correlated assets (which you explain very well), early retiree/aspirants will probably be light on bonds. In an event like the 2008 recession, home values fell quickly enough to eliminate a lot of people's available HELOCs (and a lot of companies froze HELOCs, because they worried about more potential fall in the housing market). Equities fell precipitously at the same time. If one had an emergency (we'll use job loss as an example, because that was fairly common at the same time), a bond heavy taxable account would become the only place to get money without selling in a down market.
In addition, once you've got assets at the level that you've mentioned, a cash component makes sense as a negatively correlated asset class. Cash for a few months of survival will also no longer be a significant portion of the portfolio, so it won't hurt to keep it.
Most posters who disparage the emergency fund have a very narrow view of "emergency". Fixing/replacing your car isn't an emergency, it's an expense. Emergencies come at the confluence of a number of problems (falling home values, portfolio values, job loss, and more) which were common across income levels and savings rates not very long ago.
I disagree with several of your assertions. First of all, a bond heavy taxable account is not the only place to get money without selling equities in a down market. A savvy individual already has a large cash surplus to invest every month and can identify the differences between "wants" and "needs", so the two immediate steps would be to postpone contributions and reduce spending. While HELOCs dissapeared for some (particularly those with little/no equity in their homes) they persisted for many, including me. Even without a HELOC, credit cards are an option. Borrowing money from family is an option. Starting/expanding a side-hustle is an option. Selling any number of things in our opulent lives is an option. Renting out a bedroom is an option. Moving is an option - particularly if you are renting. Sure, not all of these options will be available or appealing to everyone, but declaring bonds to be the only source of money in a crisis is a bit absurd.
Second, while a large portfolio by definition means that a 3-6 month cash fund is a relatively small portion of the overall portfolio, $15,000 is still $15,000, regardless of whether you have a NW of $100k or $1MM. That's a lot of idle employees sitting around eating donuts, and I can respect people who have "won the game" and want to keep them there just to play defense (or keep a 'negatively correlated asset class), but for everyone else they are just a wasted resource.
Bonds were just an example of a negatively correlated asset class that you could sell in a down market without a loss (I did say "only", which was a mistake).
In terms of a large, cash surplus each month, that goes away pretty quickly with job loss. You present a number of great options to increase income, but they're only valid if you are not already doing them, and if you can get them started in time. I definitely agree that cutting/selling from opulent lives is an opportunity for many of us and would be an instant option as a first line of defense.
In stable markets, only people with little equity in their homes lost access to HELOCs, but in Florida, Maryland, Nevada and several other markets, median prices fell by over 20% (some over 35%). People with 40% equity or more lost the equity required for a HELOC. This wasn't isolated to people who had taken advantage of bad terms.
Regarding credit cards, I'd be very wary about using them as springy debt. Their terms are almost always adjustable by the company and unless you are constantly applying for introductory offers, you're unlikely to have a low rate. In addition, if an emergency strikes and you are using the springy debt technique, your credit use will rise, making it harder to get new lines of credit.
On your final point, people "just getting into the game" particularly benefit from an emergency fund, as their expenses are low (hopefully) and their opportunity cost is reduced, but they lack a lot of the resources that you and I have mentioned in this discussion.
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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.
Dave Ramsey recommends 6 months expenses, not 6 months income.
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I do have an emergency fund. It is woefully shy of 6months living expenses, but it is there. Honestly, I don't really need it but it just makes me feel secure, and I have it in a 3% interest bearing checking account so I don't feel too guilty about keeping it there.
I think the "canned" advice comes from the fact that average americans live paycheck to paycheck and their retirement savings are inadequate to begin with. So using their retirement as an emergency has especially bad consequences when the equation is already tipped against them.
There are many ways to have an emergency fund besides money in a mattress or a savings account. having a HELOC open, ROTH contributions etc. You could always use a credit card as your "emergency fund" then you have 25 days to move some money over from your ROTH or HELOC or taxable brokerage account before you start paying interest on the credit card purchase (plus...you might get some credit card rewards doing it this way).
The only thing I could think of where you might need actual cash in a hurry is like a bail-bonds situation. Might not be for you, personally. maybe it's friday night and banks are closed and your brother gets a DUI or something....
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I do have an emergency fund. It is woefully shy of 6months living expenses, but it is there. Honestly, I don't really need it but it just makes me feel secure, and I have it in a 3% interest bearing checking account so I don't feel too guilty about keeping it there.
I think the "canned" advice comes from the fact that average americans live paycheck to paycheck and their retirement savings are inadequate to begin with. So using their retirement as an emergency has especially bad consequences when the equation is already tipped against them.
There are many ways to have an emergency fund besides money in a mattress or a savings account. having a HELOC open, ROTH contributions etc. You could always use a credit card as your "emergency fund" then you have 25 days to move some money over from your ROTH or HELOC or taxable brokerage account before you start paying interest on the credit card purchase (plus...you might get some credit card rewards doing it this way).
The only thing I could think of where you might need actual cash in a hurry is like a bail-bonds situation. Might not be for you, personally. maybe it's friday night and banks are closed and your brother gets a DUI or something....
If that were the case you can simply go to your online banking, transfer the money towards your checking account and withdraw from an ATM if that were the case. But I do agree you need some cash on you, it happens (although very rare) that no debit or credit card works because banks are having technical issues.
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I do have an emergency fund. It is woefully shy of 6months living expenses, but it is there. Honestly, I don't really need it but it just makes me feel secure, and I have it in a 3% interest bearing checking account so I don't feel too guilty about keeping it there.
I think the "canned" advice comes from the fact that average americans live paycheck to paycheck and their retirement savings are inadequate to begin with. So using their retirement as an emergency has especially bad consequences when the equation is already tipped against them.
There are many ways to have an emergency fund besides money in a mattress or a savings account. having a HELOC open, ROTH contributions etc. You could always use a credit card as your "emergency fund" then you have 25 days to move some money over from your ROTH or HELOC or taxable brokerage account before you start paying interest on the credit card purchase (plus...you might get some credit card rewards doing it this way).
The only thing I could think of where you might need actual cash in a hurry is like a bail-bonds situation. Might not be for you, personally. maybe it's friday night and banks are closed and your brother gets a DUI or something....
If that were the case you can simply go to your online banking, transfer the money towards your checking account and withdraw from an ATM if that were the case. But I do agree you need some cash on you, it happens (although very rare) that no debit or credit card works because banks are having technical issues.
yes. Which should work fine for most situations. I quoted the bail bond as an exception because there is usually a daily limit to how much cash you can get from an ATM. Usually $300 or $500 per day maximum. so just because you have $10,000 in the bank doesn't mean you can access $10k in cash on a friday night. But I think those situations are rare enough and you have to go out of your way to dream up scenarios where you actually need access to a large amount of cash when banks are closed.
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I do have an emergency fund. It is woefully shy of 6months living expenses, but it is there. Honestly, I don't really need it but it just makes me feel secure, and I have it in a 3% interest bearing checking account so I don't feel too guilty about keeping it there.
I think the "canned" advice comes from the fact that average americans live paycheck to paycheck and their retirement savings are inadequate to begin with. So using their retirement as an emergency has especially bad consequences when the equation is already tipped against them.
There are many ways to have an emergency fund besides money in a mattress or a savings account. having a HELOC open, ROTH contributions etc. You could always use a credit card as your "emergency fund" then you have 25 days to move some money over from your ROTH or HELOC or taxable brokerage account before you start paying interest on the credit card purchase (plus...you might get some credit card rewards doing it this way).
The only thing I could think of where you might need actual cash in a hurry is like a bail-bonds situation. Might not be for you, personally. maybe it's friday night and banks are closed and your brother gets a DUI or something....
If that were the case you can simply go to your online banking, transfer the money towards your checking account and withdraw from an ATM if that were the case. But I do agree you need some cash on you, it happens (although very rare) that no debit or credit card works because banks are having technical issues.
yes. Which should work fine for most situations. I quoted the bail bond as an exception because there is usually a daily limit to how much cash you can get from an ATM. Usually $300 or $500 per day maximum. so just because you have $10,000 in the bank doesn't mean you can access $10k in cash on a friday night. But I think those situations are rare enough and you have to go out of your way to dream up scenarios where you actually need access to a large amount of cash when banks are closed.
I forgot to add you can take the money from the credit line.
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The only thing I could think of where you might need actual cash in a hurry is like a bail-bonds situation. Might not be for you, personally. maybe it's friday night and banks are closed and your brother gets a DUI or something....
Something very close to this happened to me with my brother. It wasn't a DUI, just some parking tickets that he had stupidly ignored. He needed $4000 to get out and avoid losing his job. Because I had a large cash stash, I was able to send the money very quickly and cheaply.
I figure I have about a 30% chance of ever being paid back. But my brother is a very good guy and I didn't want him to lose his job-- that would just make everything worse. He has since gotten a promotion.
Having said that, after reading this thread and others, I am going to reduce the size of my emergency fund. Mine is right now very large, around $30k, because my automatic savings toward major house repairs and a (someday) new-to-me car were going into cash. But it makes more sense to put most of that money into mutual funds, and just sell some investments when those expenses happen. If they happen during a down market, oh well. At the very least, I can use the selling as an opportunity to rebalance.
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I do have an emergency fund. It is woefully shy of 6months living expenses, but it is there. Honestly, I don't really need it but it just makes me feel secure, and I have it in a 3% interest bearing checking account so I don't feel too guilty about keeping it there.
I think the "canned" advice comes from the fact that average americans live paycheck to paycheck and their retirement savings are inadequate to begin with. So using their retirement as an emergency has especially bad consequences when the equation is already tipped against them.
There are many ways to have an emergency fund besides money in a mattress or a savings account. having a HELOC open, ROTH contributions etc. You could always use a credit card as your "emergency fund" then you have 25 days to move some money over from your ROTH or HELOC or taxable brokerage account before you start paying interest on the credit card purchase (plus...you might get some credit card rewards doing it this way).
The only thing I could think of where you might need actual cash in a hurry is like a bail-bonds situation. Might not be for you, personally. maybe it's friday night and banks are closed and your brother gets a DUI or something....
The other thing with this is people who are in perpetual small emergencies that really shouldn't be emergencies every month - e.g. oh, I didn't know my car would need new tires. Emergency! Oh, ancient water heater busted. Emergency! Johnny needs his sports fees paid. Emergency! And suddenly, voila, no more retirement savings. This is the type of stuff that should be built into the budget, or just get cash flowed by reducing investments for a month by anyone with a decent savings rate and ability to plan ahead.
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I do have an emergency fund. It is woefully shy of 6months living expenses, but it is there. Honestly, I don't really need it but it just makes me feel secure, and I have it in a 3% interest bearing checking account so I don't feel too guilty about keeping it there.
I think the "canned" advice comes from the fact that average americans live paycheck to paycheck and their retirement savings are inadequate to begin with. So using their retirement as an emergency has especially bad consequences when the equation is already tipped against them.
There are many ways to have an emergency fund besides money in a mattress or a savings account. having a HELOC open, ROTH contributions etc. You could always use a credit card as your "emergency fund" then you have 25 days to move some money over from your ROTH or HELOC or taxable brokerage account before you start paying interest on the credit card purchase (plus...you might get some credit card rewards doing it this way).
The only thing I could think of where you might need actual cash in a hurry is like a bail-bonds situation. Might not be for you, personally. maybe it's friday night and banks are closed and your brother gets a DUI or something....
The other thing with this is people who are in perpetual small emergencies that really shouldn't be emergencies every month - e.g. oh, I didn't know my car would need new tires. Emergency! Oh, ancient water heater busted. Emergency! Johnny needs his sports fees paid. Emergency! And suddenly, voila, no more retirement savings. This is the type of stuff that should be built into the budget, or just get cash flowed by reducing investments for a month by anyone with a decent savings rate and ability to plan ahead.
Exactly. It's also why I advocate calculating your savings rate by looking at the last year (or several years) of income / savings. Too often someone will say they are 'saving' 10-30% of their paycheck each month, but then occasional expenses wipe it all out. Guess what? your savings rate is really 0%.
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I wonder if I should have more of an EF. We have about 3k earmarked as an EF, all our retirement is in tax-advantaged vehicles that I'd rather not pull from, we don't have much home equity, and currently about 9k ahead in YNAB but I'll probably be rolling that into a new furnace in not too long. But I've been aggressively paying down student loans instead of aggressively saving. Student loans are not springy debt. We don't have a ton of extra money each month and it took a while to build the EF we do have. I am the sole breadwinner. If we had an emergency I'd put our student loans in forbearance, but even so I expect about 3.5-4k expenses per month, so I have not even one month in an EF. I feel like my job is pretty stable. This preys on my mind, but so do the student loans. I wonder if I should save the 9k in an EF instead and restart the furnace fund.
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I wonder if I should have more of an EF. We have about 3k earmarked as an EF, all our retirement is in tax-advantaged vehicles that I'd rather not pull from, we don't have much home equity, and currently about 9k ahead in YNAB but I'll probably be rolling that into a new furnace in not too long. But I've been aggressively paying down student loans instead of aggressively saving. Student loans are not springy debt. We don't have a ton of extra money each month and it took a while to build the EF we do have. I am the sole breadwinner. If we had an emergency I'd put our student loans in forbearance, but even so I expect about 3.5-4k expenses per month, so I have not even one month in an EF. I feel like my job is pretty stable. This preys on my mind, but so do the student loans. I wonder if I should save the 9k in an EF instead and restart the furnace fund.
For whatever it's worth, when we had a new HVAC system put in our house a) we were able to get it financed for 18 months at 0% interest, and b) for a clownish 3,000 sf house, it was $6400 for a paired Trane 95% efficient gas furnace and I think 14 SEER A/C unit. I think quotes ranged from $4500 to almost $10K, so if you haven't already, get several bids before assuming you need to spend $9K. Also, I think we got a better deal by having the work don in April, which is sort of slow season post heat/pre cooling for those guys.
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I wonder if I should have more of an EF. We have about 3k earmarked as an EF, all our retirement is in tax-advantaged vehicles that I'd rather not pull from, we don't have much home equity, and currently about 9k ahead in YNAB but I'll probably be rolling that into a new furnace in not too long. But I've been aggressively paying down student loans instead of aggressively saving. Student loans are not springy debt. We don't have a ton of extra money each month and it took a while to build the EF we do have. I am the sole breadwinner. If we had an emergency I'd put our student loans in forbearance, but even so I expect about 3.5-4k expenses per month, so I have not even one month in an EF. I feel like my job is pretty stable. This preys on my mind, but so do the student loans. I wonder if I should save the 9k in an EF instead and restart the furnace fund.
You are a person who will benefit from a real EF. If you lost your job or had something go wrong at the same time that you need your furnace, you'd be squeezed more than most people, here.
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I wonder if I should have more of an EF. We have about 3k earmarked as an EF, all our retirement is in tax-advantaged vehicles that I'd rather not pull from, we don't have much home equity, and currently about 9k ahead in YNAB but I'll probably be rolling that into a new furnace in not too long. But I've been aggressively paying down student loans instead of aggressively saving. Student loans are not springy debt. We don't have a ton of extra money each month and it took a while to build the EF we do have. I am the sole breadwinner. If we had an emergency I'd put our student loans in forbearance, but even so I expect about 3.5-4k expenses per month, so I have not even one month in an EF. I feel like my job is pretty stable. This preys on my mind, but so do the student loans. I wonder if I should save the 9k in an EF instead and restart the furnace fund.
Its one of those things if you wait too long and try to do it in a rush it will not be easy, and will be way more expensive. Do it in the off season and get lots of quotes. ask lots of questions. lots here tried to BS me about stuff. In the end i got mine for about 4.5k for a good sized house and a variable valve and all that jazz. was worth it since i spend a lot less in heating now. How much do you have in the fund already or is that the 9k in YNAB? You should have plenty to do a furnace, and yes you are the perfect example of someone who needs a emergency fund. Depending on what your heating costs are, it may be smarter to do it sooner so your bills this winter are smaller. Have any neighbors who have done it who can say what they've saved?
Can you get a free energy audit and is there any grants for doing an upgrade? there's loans here for minimal % for people to upgrade their furnace. there was also a bunch of eco grants about 5 years ago when i did mine. That could save you a few $. The energy audits show you where your best bang for buck is usually. And the furnace is the main one but i had drafty sills that were really bad i never knew about.
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I wonder if I should have more of an EF. We have about 3k earmarked as an EF, all our retirement is in tax-advantaged vehicles that I'd rather not pull from, we don't have much home equity, and currently about 9k ahead in YNAB but I'll probably be rolling that into a new furnace in not too long. But I've been aggressively paying down student loans instead of aggressively saving. Student loans are not springy debt. We don't have a ton of extra money each month and it took a while to build the EF we do have. I am the sole breadwinner. If we had an emergency I'd put our student loans in forbearance, but even so I expect about 3.5-4k expenses per month, so I have not even one month in an EF. I feel like my job is pretty stable. This preys on my mind, but so do the student loans. I wonder if I should save the 9k in an EF instead and restart the furnace fund.
Have you thought about getting appliance insurance? My house had two furnaces, both in their last legs (15-20 year expected lifespans, and both about 18 years old), as well as the other typical appliances when I bought it. To protect myself, I purchased appliance insurance with American Home Shield for $500/year or so. First furnace blew in about 6 months, cost me 1K to replace it with deductible instead of 6K.
Of course, if I had brand new everything, this would not be worthwhile...
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I wonder if I should have more of an EF. We have about 3k earmarked as an EF, all our retirement is in tax-advantaged vehicles that I'd rather not pull from, we don't have much home equity, and currently about 9k ahead in YNAB but I'll probably be rolling that into a new furnace in not too long. But I've been aggressively paying down student loans instead of aggressively saving. Student loans are not springy debt. We don't have a ton of extra money each month and it took a while to build the EF we do have. I am the sole breadwinner. If we had an emergency I'd put our student loans in forbearance, but even so I expect about 3.5-4k expenses per month, so I have not even one month in an EF. I feel like my job is pretty stable. This preys on my mind, but so do the student loans. I wonder if I should save the 9k in an EF instead and restart the furnace fund.
I don't know...it kinda sounds to me like you actually DO have a pretty decent emergency plan. I mean, if you had zero EF I would say you should get one....but tripling it up to 9k at the cost of not paying down your student loans which are actively accruing interest?
So, if you lost your job you would still have 3,500-4,000 expenses per month. But presumably at least some of those expenses could go on a credit card (groceries, gas maybe some utilities?) SO, it sounds to me like you have about a 1 month EF. You have a self described "stable" job. How long do you think it would take you to replace it? Would you be earning $0 per week while job hunting?
I don't know if you're from the US, but I am and so I would qualify for unemployment while I job hunted which would replace probably 30% of my income. And i have the type of job where I should be able to get a job within a couple of weeks...even if it's not the best job. I could still "job hunt" on the side for better opportunities while taking a crappy job in the mean time.
And if all that turned out badly and I still didn't have a job after depleting my emergency fund, then I would tap my ROTH contributions with no tax penalty.
If it makes you feel better or more secure to have an EF....then have it. I do. I have a 3 month EF. I don't think I really need all that but for me....the peace of mind is worth forgoing the interest I would earn on that particular amount. Plus....my husband's business is like a rollercoaster sometimes he doesn't get paid for 6 months....then he gets paid like $30,000. So the EF serves to get us through the lean times while preserving our standard of living. So for me....it is worth it. But I have all my debt paid off long ago except mortgage at 3.625%
Maybe you should try a split approach? If you are currently allotting $600 a month towards student loans, maybe put $300 towards them and $300 towards EF/Furnace until you get it up to whatever amount you think feels comfortable. Then switch back to all student loans when you feel secure.
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I wonder if I should have more of an EF. We have about 3k earmarked as an EF, all our retirement is in tax-advantaged vehicles that I'd rather not pull from, we don't have much home equity, and currently about 9k ahead in YNAB but I'll probably be rolling that into a new furnace in not too long. But I've been aggressively paying down student loans instead of aggressively saving. Student loans are not springy debt. We don't have a ton of extra money each month and it took a while to build the EF we do have. I am the sole breadwinner. If we had an emergency I'd put our student loans in forbearance, but even so I expect about 3.5-4k expenses per month, so I have not even one month in an EF. I feel like my job is pretty stable. This preys on my mind, but so do the student loans. I wonder if I should save the 9k in an EF instead and restart the furnace fund.
Everyone is different, but, in your situation, this is what I would do:
1. Put your furnace fund money ($9k) into an emergency fund. This will be almost 3 months of expenses which is not too much for a sole breadwinner with a mortgage. For me, I would keep building the EF to closer to 6-12 months so your family and house are protected.
2. Start saving money for a new furnace by paying lower amounts on your student loans. It sounds like you know you will need a new furnace and the SL won't go away, if you take a little longer. I have used the 0% loans sometimes available to replace stuff, but be aware of the very hefty interest charges if you do not pay before the grace period. If the furnace goes and your repair fund is not done, use your emergency fund.
I also use YNAB and appreciate how it helps keep the $s focused on their jobs. Without YNAB it is easy to have the $ have multiple jobs-spending it twice or so.
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We don't keep a large emergency fund either and we're okay with that. Gasp! But here's the thing...you said the magic words, "We live off half our income." We do too. When you have that savings power you know that within the next month or two you could easily take care of any emergencies that could happen. In the meantime I would put it on the credit card. (Note I do not typically advocate putting charges on your credit card that you don't have the cash in the bank to cover.) But I would if I had to. The funny thing is that has never actually happened either. Or if one of us lost our jobs it would just mean no additional savings and our expenses would immediately drop (i.e. daycare)
We typically have a few thousand in the bank at all times but I recently drained our savings down to $500 in paying off some student loans. Mr. Crackin' commented about our lack of an emergency fund and we had this exact same conversation. I told him not to get arrested in the next couple of weeks. :) After all, that's really the only thing I can think of that we would absolutely have to have cash right then! And bond money is NOT an approved expense in the Crackin' household!
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Thanks for your comments on my post, horsepoor, thd7t, dess1313, JustGettingStarted1980, missj, and ajyooper. It's helped me to think through our situation better. I talked to my husband and he agrees with me that a fatter EF would not go amiss. So we will probably put some of the money towards the furnace and save some of it and then work on feeding the EF until it gets probably closer to 10k. A few k one way or another honestly won't make much difference to the student loans (total balance somewhere around $170k, ugh) and it would make me feel a lot better about my employment situation or something huge blowing a gasket.
The current plan is to start shopping around for a furnace replacement in September. It is hard to wait for this, I want to move on it now, but it's still prime cooling season. I appreciate hearing that there are a range of prices and we will definitely get a range of quotes.