Emergency Fund--Where Do You Keep It?

[Villanelle]

Ours is only a few thousand and it is in our checking account. And really, that probably more of a convenience so I never have to worry about balancing the account ASAP or the timing of any withdraws. 

DH's job is super super stable (I don't currently work) so that's all we feel we need.  We also have access to a HELOC, which could serve as emergency funding if necessary.  Everything else in invested.  (And since a good amount of that is in non-retirment accounts, we could access it if necessary, though of course that's not ideal.)

We have enough leftover money each month, as well as the ability to cut much more of our fancypants spending each month, that we could come up with a very large amount in a very short time. If Dh's job (military) was less stable or we lived closer to the edge, I'd feel a need for more of a cushion, but for now, we don't even really think in terms of "emergency fund".

[starbuck]

We also keep our 'emergency fund' in a taxable brokerage account. We used to keep a separate cash EF, but a few years ago other posters on this forum convinced me that it was silly. We don't have kids, we both have very very secure employment, generous health benefits, and routinely save 60-70% of our monthly income. Things like home repairs or a car wouldn't qualify as emergencies in our household. Since I couldn't figure out what WOULD qualify as an emergency, it was easy to do away with it.

I've slowly done away with the 'saving to spend' accounts too, like for a vacation or a replacement car. The $4k we had set aside for vacations was never used, because we would just pay for tickets and expenses as they came with our take home pay, and invest a little less that month. Neither of us use the car to commute to work, so we'd have time to move money around to purchase a used one, so that got invested as well.

At this point, our brokerage account can cover +2 years of living expenses.

[plainjane]

i guess i just dont understand what these crisis's people have that are emergencies and they need immediate access to cash are.  when you're saving 50-60% of your take home pay a month.  if the fridge breaks or the car needs some maintenance etc. you should be able to adjust your savings/put it on a credit card and then get your money out of your brokerage accounts.  and if push really comes to shove you can get money out of accounts for large medical expenses without penalties. 
but does anyone have an example of why you need this account and what the benefit really is?

My emergency fund isn't for if the fridge breaks - that is easy to cover on a credit card and then I have an account for "stuff the house will need" that in the past covered a new roof, a new furnace,  etc.

My emergency fund is for if both me and my partner both lose our jobs.  If we both lose our jobs, then that means the economy is on a downswing.  When the economy is on the downswing it generally takes longer to get a new job (lots more people looking, fewer companies hiring, more people going independent, and fewer clients putting money towards the type of thing I do).  When the economy is on a downswing, the market is generally lower as well, and I don't want to lock in losses. 

This isn't about the market crashing and having nothing left, it's about not selling low if we can avoid it.  Once our mortgage is paid off then we'll probably reduce the amount in the emergency fund because we will have lower fixed expenses, but until then, I just have shifted my asset allocation.

[mochila]

i guess i just dont understand what these crisis's people have that are emergencies and they need immediate access to cash are.
<snip>
but does anyone have an example of why you need this account and what the benefit really is?

I don't refer to cash reserves as an "emergency fund," which I agree is a bit melodramatic. My last real emergency was a potentially catastrophic illness two years ago, but that had me updating my will, assigning powers of attorney, and making arrangements for disposing my remains.

Since then, I've accumulated the cash in what I call a horrible account out of laziness more than anything. The brokerage account and two of my retirement accounts are tipped to seed a scholarship fund if I pop off before I can use them for my own nefarious ends.

[boarder42]

i guess i'm just not worried about losing my job.  and even if i were keeping "cash" on hand while missing out on the market gains it could be making in the event you lose your job just so its there.  i'm mean its costing you money to keep that kinda money around so you're "Not selling low strategy" doesnt really make a whole lot of sense.  since by putting it in an account that grows lower than inflation you are in fact selling low on your money.

[renter4evah?]

i guess i just dont understand what these crisis's people have that are emergencies and they need immediate access to cash are.  when you're saving 50-60% of your take home pay a month.  if the fridge breaks or the car needs some maintenance etc. you should be able to adjust your savings/put it on a credit card and then get your money out of your brokerage accounts.  and if push really comes to shove you can get money out of accounts for large medical expenses without penalties. 

but does anyone have an example of why you need this account and what the benefit really is?

I keep one in case I ever need income replacement--like if I get laid off or something.

[SantaFeSteve]

i guess i just dont understand what these crisis's people have that are emergencies and they need immediate access to cash are.  when you're saving 50-60% of your take home pay a month.  if the fridge breaks or the car needs some maintenance etc. you should be able to adjust your savings/put it on a credit card and then get your money out of your brokerage accounts.  and if push really comes to shove you can get money out of accounts for large medical expenses without penalties. 

but does anyone have an example of why you need this account and what the benefit really is?

Since my wife and I are not yet FI, do not have a significant balance in our taxable investment accounts, and she is generally a little more conservative, we keep several thousand dollars in savings to help with any unexpected expenses.  Yes, our expectations for what we might need that money for probably don't match the Oxford Dictionary definition of Emergency, but that's what we call it.  I am assuming many people here are the same.  We keep that money available as a buffer of sorts.  It helps my wife feel comfortable if/when we have something unexpected, like a large vet bill.  That savings is a buffer that allows us to maintain our budget in a fairly uniform manner even when something unexpected happens. 

If we experience a true emergency, then there is the HELOC, the Roth contributions, taxable investments, some gold, the spare change in the piggy bank, etc... you get the idea. 

[johnny847]

i guess i'm just not worried about losing my job.  and even if i were keeping "cash" on hand while missing out on the market gains it could be making in the event you lose your job just so its there.  i'm mean its costing you money to keep that kinda money around so you're "Not selling low strategy" doesnt really make a whole lot of sense.  since by putting it in an account that grows lower than inflation you are in fact selling low on your money.

I don't recall if you were part of the thread I was a part of earlier about emergency funds, but I've changed my views on emergency funds to align more closely with yours.

The way I look at it is this

Assume that the chance of needing money in some kind of unpredictable emergency in any given year is 15%. Also suppose that the chance of the stock market being in the dumps in any given year is 10%.
We can dispute these assumptions all day long. I've chosen these arbitrarily and people should decide for themselves what they think is appropriate.

Then if we assume the two events mentioned above are independent of each other, in any given year, the chance of needing money in an emergency and the stock market having recently experienced a crash is 15% * 10% = 1.5%. The chance of you going ten consecutive years without this occurring is (1-.015)^10 =  86%. In the meantime, that's a lot of investment gain that you're missing out on to avoid something that only has a 14% chance of occurring.

Now clearly, many people operate under the assumption that if the stock market crashes, then there is a decent to high probability that you will lose your job and need to dip into your emergency fund and/or investment portfolio. Assume that there is an 60% chance that if the stock market crashes, you will lose your job and need to draw on an emergency fund and/or investment portfolio (again, replace this probability with whatever you like).
In this scenario, you'll need emergency money in a crashed stock market in one of two situations: you have an emergency that can include job loss, but that job loss is not because of a stock market crash, and the stock market crashes (probability of this is 1.5% like before), or the stock market crashes and you lose your job (probability of this is 15% * 60% = 9%). So overall, the probability of needing emergency money in a crashed stock market is 10.5%. The chance of you going ten consecutive years without this occurring is sadly only 33%.

So clearly you get vastly different results depending on what assumptions you make. And these assumptions aren't reliable. But,

• I think everybody should consider what you're giving up by holding an emergency fund. When I started out, I just blindly followed the conventional wisdom (well, conventional on Bogleheads forums, perhaps not conventional here) of you want 6-12 months of expenses in your emergency fund. And in order to try to understand what you're giving up, you're going to have to make some assumptions.
• Realize that at least some of the significant decisions that we make are based on probabilities, not certainties, and that deciding how much money, if any, to keep in an emergency fund is one such decision. The most notable example of such a decision that comes to mind right now is using cFIREsim to decide if you're ready to FIRE. I don't think very many, if any, people here actually shoot for a 100% success rate with cFIREsim. I don't think that's very constructive. Also, cFIREsim is backtesting your input against historical data. While cFIREsim uses a lot of historical data, and if you're looking at 80%+ success rate on cFIREsim you'll probably be fine, there's certainly no guarantee that the future will behave like the past.

I think emergency funds are a great tool for those who are starting out on their way to financial responsibility and FIRE. But as you amass more wealth, and get a better understanding of what your cash flows are like (because I think some "emergencies" predictable), an emergency fund becomes less and less useful.

[boarder42]

good analysis.  I'm sure i could do math to take this one step further but i already understand i dont need one.  People who feel they do can add market gains to that equation.  Just because the market falls sometime in the next 10 years doesnt mean you'll be selling for a loss.  in all likelihood even if 2008 happens you will probably be selling for a gain.  My Job consulting engineering at a good firm is almost bullet proof.  i mean i have to break the law or something like that to get let go from this place.  even in 2010 when the 2008 crash hit engineering we only had the first layoff since our company became employee owned and it was tough and they only laid off around .1% of employees

[johnny847]

good analysis.  I'm sure i could do math to take this one step further but i already understand i dont need one.  People who feel they do can add market gains to that equation.  Just because the market falls sometime in the next 10 years doesnt mean you'll be selling for a loss.  in all likelihood even if 2008 happens you will probably be selling for a gain.  My Job consulting engineering at a good firm is almost bullet proof.  i mean i have to break the law or something like that to get let go from this place.  even in 2010 when the 2008 crash hit engineering we only had the first layoff since our company became employee owned and it was tough and they only laid off around .1% of employees

Ah true, I forgot to add in an assumption of whether the stock market crash will actually force you to sell at a loss. Though as I think you're implying, to first order approximation, I think it's ok to not include that in the analysis.

[greenmimama]

Hello,

I'm wondering where the best place is to hold my Emergency Fund money? Should I put it in an interest-gaining savings account like Barclay's with 1% APY? Do the taxes on the interest even make these accounts worth it? Where do you all keep your Emergency Funds?

I would like an account where I can contribute to both a "saving for goals" fund and a designated "emergency" fund. Is something like this possible? I can't create an account within my bank account to delineate what the money is for, plus I only get .1% interest.

Thanks!

Look at lake michigan credit union checking. They give you 3% interest on up to 15,000. All you have to do is direct deposit or ACH into the account once a month and use the debit card 10 times. (I just pay my comcast bill in 10 different transactions with it)

How do you have that set up? one bill broken up into 10 payments? I'm intrigued, because I have the LMCU account and we have no reason to use our debit card, I would love a simple solution

[johnny847]

Hello,

I'm wondering where the best place is to hold my Emergency Fund money? Should I put it in an interest-gaining savings account like Barclay's with 1% APY? Do the taxes on the interest even make these accounts worth it? Where do you all keep your Emergency Funds?

I would like an account where I can contribute to both a "saving for goals" fund and a designated "emergency" fund. Is something like this possible? I can't create an account within my bank account to delineate what the money is for, plus I only get .1% interest.

Thanks!

Look at lake michigan credit union checking. They give you 3% interest on up to 15,000. All you have to do is direct deposit or ACH into the account once a month and use the debit card 10 times. (I just pay my comcast bill in 10 different transactions with it)

How do you have that set up? one bill broken up into 10 payments? I'm intrigued, because I have the LMCU account and we have no reason to use our debit card, I would love a simple solution

I don't want to steal your thunder themagicman, but I thought I should mention:
For those of you who don't have a bill that you can pay 10 times, and have an Amex Serve, you can schedule online debit card loads of your Amex Serve. I schedule daily loads of $1.50 from my Consumers Credit Union (similar to LMCU, they give 3% on first $10k if you meet some requirements that are all a piece of cake aside from 12 debit transactions) debit card to my Amex Serve. I then either pay bill CC bills with that money, or just transfer it bank to my CCU account.

I don't think it's worth the hassle of setting up an Amex Serve just for this purpose. But, the Amex Serve is quite helpful in manufactured spending, so if you've been wanting to get in on that, I think it's worth it.

[Villanelle]

For those who list possible job loss as one of the driving factors, don't forget that except in cases of gross negligence on your part(so increase the E fund before you start embezzling), you will get unemployment benefits for a decent amount of time. (For Americans, at least.) During that time, you can slash expenses, and try to tap other possible sources of income or money as well.  It's an additional buffer, certainly.  In very few cases would you go from full work income to nada, unless you are working in some capacity where you don't have UI. 

When DH leaves the military, we will probably get slightly more conservative with our portfolio, which will be our response to the slight increase in risk of job loss.  That's it.  Then again, he'll have a monthly pension check which will likely cover most of what our bare bones budget would be, so maybe we won't even do that.