Author Topic: Best strategy for Emergency Fund?  (Read 1806 times)

fb132

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Best strategy for Emergency Fund?
« on: July 02, 2015, 05:49:36 AM »
I was wondering, my current strategy of EF is this:

-50% of my income goes towards investments in the beginning of each month (FYI, I use YNAB's rule #4 = using last month's income for this month).
-If at the end of the month, I still have any money leftover after investing 50% of my income, I put that in the Cash Surplus/EF category.
-If it's the opposite, meaning I don't have enough to invest 50% of my income at the beginning of the money, I take some of my Cash Surplus category and use it to make it 50%. If it's empty, well I invest what I can until the CS/EF category is filled up again and it will due to the three paycheck months (twice a year).
-If at the end of the year (in December of course), I still have money left in the Cash Surplus/EF category, I use that money to invest so that it boosts my investments % for the whole year and I restart the whole process the following year, starting in January.

My theory is that, it almost guarantees me that by the end of the year, I would have more than 50% invested while covering my ass if there is an emergency that arises like last year when I needed the roof repair while minimizing the impact it would have on my savings. So Mustachians, is it a good strategy or is there any way to optimize this to make it even better and more solid? In my mind, I think it covers it well, but since this practice hasn't been tested yet, I always wondered if there was a flaw in this plan.

Basically, I want to have a minimum of 50% of my money invested, but I don't want to have a big EF that does little interest for a long time and I am not a big fan of borrowing money from my credit line either if there is an emergency. So with this strategy, my EF can last at most 1 year, then I just restart the whole process at the beginning of each year.

I hope I explained it well.
« Last Edit: July 02, 2015, 05:58:29 AM by fb132 »

MDM

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Re: Best strategy for Emergency Fund?
« Reply #1 on: August 20, 2015, 09:17:56 PM »
It looks reasonable.  It also looks to be something well suited for putting in a spreadsheet to calculate what will happen under different conditions.

If the spreadsheet behaves the same way your mental model predicts, all is likely well. 

If there is a difference, then figure out whether it was a spreadsheet error or you forgot to consider something.

I hope it works for you!

Fuzz

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Re: Best strategy for Emergency Fund?
« Reply #2 on: August 21, 2015, 12:15:48 PM »
I like how you're thinking in terms of percentages of your income. You're planning around the flow of money. I understand your order:

(1) put 50 percent of income in investments.
(2) spend income as the month goes on.
(3) put whatever isn't spent in a savings account.
(4) once a year empty the account; or use the account to top off investments.

I don't really believe in e-funds. You should base your e-fund around your risks. So: are you at risk of losing your job? Do you have credit cards you could use to cover a car repair? Can you get a zero percent credit card? Do you have children or dependents? Do you have health issues? Do you do risky activities that could disable you? Are you self-employed? If your answer to those questions is mostly no, and you have normal American access to credit cards (read: outrageously easy to get a zero percent card for $10K) I would skip the e-fund .

fb132

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Re: Best strategy for Emergency Fund?
« Reply #3 on: August 21, 2015, 01:56:50 PM »
I like how you're thinking in terms of percentages of your income. You're planning around the flow of money. I understand your order:

(1) put 50 percent of income in investments.
(2) spend income as the month goes on.
(3) put whatever isn't spent in a savings account.
(4) once a year empty the account; or use the account to top off investments.

I don't really believe in e-funds. You should base your e-fund around your risks. So: are you at risk of losing your job? Do you have credit cards you could use to cover a car repair? Can you get a zero percent credit card? Do you have children or dependents? Do you have health issues? Do you do risky activities that could disable you? Are you self-employed? If your answer to those questions is mostly no, and you have normal American access to credit cards (read: outrageously easy to get a zero percent card for $10K) I would skip the e-fund .
Yea I skipped it, I wrote this post back when I was unsure, but afterwards I decided to simply invest everything, I mean I live with my parents to help them out financially, I have no children, my job is safe and even if I do lose it, I can always get another one without any problem. The only emergency I can expect is my parents ask me for money to pay some bill they can't pay which is at most 4000$, but it doesn't happen often. My only problem is that my lowest interest rate is my credit line at 5%. i also live in Canada, so we don't get many 0% interest free credit card. I haven't seen one where I live.