Author Topic: Emergency funds strategizing  (Read 1104 times)

GUNDERSON

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Emergency funds strategizing
« on: October 16, 2018, 12:09:39 AM »
I'm curious how folks here think about emergency funds. How do you personally calculate what is the right amount to keep there? What are the possible emergencies you're imagining?

I'm asking in part because, now that I have more money in taxable investment accounts, I find myself being a bit cavalier about the emergency fund-- I think really big emergencies are unlikely (I rent, so not on the hook for sudden plumbing disasters, and my job involves multiple streams of income from different clients, so they're not likely to all dry up at once) -- and I tell myself that if I need to, I can just pull invested money out, since there's a buffer there even with a market drop, and that most likely I won't so it's better off growing. (I, uh, basically shoved my whole emergency fund into the market during the last drop, since I knew I had other income on the way.) Is this the wrong way to think about this? How do other people think about it? Thanks. 


Mrs.Piano

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Re: Emergency funds strategizing
« Reply #1 on: October 16, 2018, 05:48:34 AM »
Mr. Piano certainly feels as you do.  We only keep 6 months of expenses in emergency funds.

Steeze

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Re: Emergency funds strategizing
« Reply #2 on: October 16, 2018, 05:50:10 AM »
To me it depends on your stage in accumulation.

If you are in debt, 1-3 mo. Cash in savings.
If you are just starting to save, 3-6 mo. Cash

Once you have assets in a taxable account, you can start to reduce the cash emergency fund. I reduce my emergency fund by 1$ for every 2$ I have in a taxable account.

I am also making sure I have 10-15% in bonds to cover my expenses so I never have to sell equities low.

The "right amount" is too subjective. Anywhere from 0-5 years seems reasonable depending on the individual and stage in the investing cycle. What ever helps you sleep at night and buy groceries when bad times eventually happen is adequate.

Rosy

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Re: Emergency funds strategizing
« Reply #3 on: October 16, 2018, 07:32:23 AM »
We are shooting to have approx one year+ worth of expenses as a cash cushion (CD) since Mr. R. is very close to retirement and there is an (unlikely) possibility that he could be laid off before we are totally ready.
It will also serve as the emergency fund if we don't want to withdraw from investments.

In addition, we generally float between $5K and $10K as slush emergency funds. We have had home, medical, car and family emergencies that drained the entire $10K.
I was nervous as a cat when that happened and breathed only when it was back up to $5K - I simply need more tangible, I can put my hands on it monetary re-assurance than Mr. R.

Here on MMM you'll see proponents of both sides - people who will barely leave $500 in their checking and rely on the fact that it will only take about seven days or so to pull cash from your investments and others who carry high cash balances up to three years of their income.

I agree that it is your call and to a degree how your partner feels about needing to have cash on hand for emergencies.


GuitarStv

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Re: Emergency funds strategizing
« Reply #4 on: October 16, 2018, 08:10:48 AM »
I don't keep emergency funds (just a few grand in a single bank account shared by my wife and me in order to avoid fees..  I have money invested in a mix of bonds and stocks.  If I need money, I'll withdraw it from my investments.  I withdraw money in a way that re-balances investments, so if stocks are doing poorly this means that bonds are more heavily withdrawn and if bonds are doing poorly this means stocks are more heavily withdrawn.  This is what I expect to be doing during retirement as well.

I'm still working, so often times I can just avoid making my usual retirement contributions to cover unexpected expenses.

If you have a sizable amount saved, I don't see any benefit to keeping emergency funds, rainy day funds, saving up for something (downpayment/roof replacement/new car/etc.).

chasesfish

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Re: Emergency funds strategizing
« Reply #5 on: October 16, 2018, 08:32:46 AM »
Once we surpassed two years worth of expenses in a regular brokerage account, we stopped caring about segregating cash out as an "emergency fund".   I'm also still working with a high savings rate, its rare emergency expenses come up that I can't cash flow out of a couple of months worth of income/savings.

I imagine post-retirement I'll carry some of my cash/short-term bond allocation in the taxable brokerage account.

CindyBS

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Re: Emergency funds strategizing
« Reply #6 on: October 16, 2018, 10:47:18 AM »
I don't keep emergency funds (just a few grand in a single bank account shared by my wife and me in order to avoid fees..  I have money invested in a mix of bonds and stocks.  If I need money, I'll withdraw it from my investments.  I withdraw money in a way that re-balances investments, so if stocks are doing poorly this means that bonds are more heavily withdrawn and if bonds are doing poorly this means stocks are more heavily withdrawn.  This is what I expect to be doing during retirement as well.

I'm still working, so often times I can just avoid making my usual retirement contributions to cover unexpected expenses.

If you have a sizable amount saved, I don't see any benefit to keeping emergency funds, rainy day funds, saving up for something (downpayment/roof replacement/new car/etc.).

I do pretty much the same thing.  We keep $5-$10K liquid at all times, but have so many ways to get money if needed - a lot of medical receipts we can claim against our HSA, 401(k) loans, Stopping 401(k) or HSA deposits if really needed, Taking principle out of roth IRA, credit cards with lots of unused credit, selling things around the house, sign up for part time/short term gig like Uber driving or babysitting, etc. 

ETBen

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Re: Emergency funds strategizing
« Reply #7 on: October 16, 2018, 08:03:09 PM »
I only keep a small amount in savings, around 10k. It would be unlikely that I have a major expense I canít cash flow. So the only real concern is job loss. And while it would be a massive pay cut, I can always get a job a regular nursing job to keep food on the table until I found something comparable to current.

Fomerly known as something

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Re: Emergency funds strategizing
« Reply #8 on: October 19, 2018, 07:44:45 AM »
My emergency fund, my vacation fund, unusually expenses and my sinking cost funds are the "same account(s)."  I'm lazy on budgeting out for these items separately so I basically think of it as cash on hand.  Honestly my "true" emergency fund is about 2 months of bare bone expenses held in I bonds. 

Schaefer Light

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Re: Emergency funds strategizing
« Reply #9 on: October 19, 2018, 09:31:02 AM »
We are shooting to have approx one year+ worth of expenses as a cash cushion (CD) since Mr. R. is very close to retirement and there is an (unlikely) possibility that he could be laid off before we are totally ready.
It will also serve as the emergency fund if we don't want to withdraw from investments.

In addition, we generally float between $5K and $10K as slush emergency funds. We have had home, medical, car and family emergencies that drained the entire $10K.
I was nervous as a cat when that happened and breathed only when it was back up to $5K - I simply need more tangible, I can put my hands on it monetary re-assurance than Mr. R.
I feel the same way.  I like to have 6-12 months in cash plus enough to replace a car/roof or pay for an expensive medical bill.  I was more comfortable with a lower amount when I had a spouse.  And it doesn't help that my job isn't looking very stable right now.

COEE

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Re: Emergency funds strategizing
« Reply #10 on: October 19, 2018, 12:00:19 PM »
While I was in debt, I had 1-2mo of emergency fund in cash and I lived on last months income (using YNAB).  Essentially a 2-3 mo emergency fund - cash.  Once I was out of debt and working on maxing out my retirement contributions (read: no taxable account) I saved up another 3 month emergency fund as well, 6 months in total; all cash.  Now I have a 4 tier emergency fund as follows:

  • Tier 1: 1-2 months cash in checking.
  • Tier 2: 2 months cash in a high yield savings account.
  • Tier 3: 3 months cash in 13-week treasury bills (laddered in 4 week increments).  I consider this part of my bond portfolio.
  • Tier 4: 6 months cash in Series I Savings Bonds (for inflation and deflation protection).  I also consider this to be part of my bond portfolio.

Note that using this strategy their are some distinct advantages and little (no?) disadvantages:
  • Tiers 1, 2, and 4 provide me 9 months cash within 2-3 calendar days.
  • Tier 3 provides an additional 3 months cash in an additional 13 weeks.  Sooner, if I have to sell them on the secondary market, but that's not in the plan.
  • All 4 tiers are guaranteed by the US Government (note FDIC insurance on Tier 1 and 2).
  • Counting tiers 3 and 4 as part of my bond allocation allows me to invest more in stock.
  • If I have to use tiers 3 and 4 for an emergency then I only have to sell stock if it takes me out of the error bands of my desired AA, which is defined in my IPS, which may allow me to continue to hold more stock.
  • I cannot lose principal
« Last Edit: October 19, 2018, 12:04:33 PM by COEE »

diapasoun

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Re: Emergency funds strategizing
« Reply #11 on: October 19, 2018, 12:52:03 PM »
I'm in a field (legal tech) that is highly dependent on the economy going well and am early in the accumulation phase; I'm maxing tax-advantaged accounts this year, but don't yet have anything in taxable. In that sense, drawing from taxable is a moot point for me. I'm still paying off student loans (blessedly low-interest for the most part) as well. I'm single, so no dependents, but I also don't have a familial safety net (no husband, parents could kick me a grand if something happens but not much more -- if anything my parents are more likely to need help than I am).

Given all that, I keep 6 months of regular expenses (16k-18k) in a high-interest savings account; that amount could easily be stretched farther in the case of job loss. That gives me enough time to deal with finding a new job in case of a layoff. That might change in the future; I'm not sure. I'm frequently a little conservative when it comes to what feel like "safety measures" to me, which I recognize.

FatFI2025

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Re: Emergency funds strategizing
« Reply #12 on: October 20, 2018, 09:54:29 AM »
I keep about $40k as emergency funds across checking and brokerage accounts. To calculate what I want to hold in reserve, I take my monthly budget and subtract out all of the savings and extra debt payments, then multiply by six. This six-month reserve is high because this also includes real estate investment reserves.

Of that $40k, $33k is invested in low duration treasury bond ETFs and the remainder is in checking accounts. I could shift more funds from checking to investments, but my RE expenses are pulled from checking and I don't want to worry about running out of funds in that account.

After I work up to one year of expenses in after-tax brokerage accounts, I will shift to a riskier asset mix. The way I look at it is if I have 12 months, then lose 50% of equity value, I'll still have six months to fall back on.