Author Topic: Emergency Savings Funds  (Read 11404 times)

Moldy

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Emergency Savings Funds
« on: December 12, 2012, 04:51:21 PM »
New guy here (first post) and I would like to say this is a great site and I am exciting to be a part of it. Very good logic and advice shared.

I'm not sure if this question has been debated to pieces or not, but here's my question...

My emergency fund is $10K- Where do I put it?

Right now, it is in a bank savings account collecting an annual interest percentage that does not even resemble what I consider acceptable, especially with the inflation factor. To me, and I think the majority of others, I need these funds set aside some where "safe" but I need (want) an annual ROI at around 3 percent and I need the money to be readily (to some extent) available. I've bounced many ideas around in my head, on paper, and after an research was conducted I end up back at square one....

So, any and all advice is greatly appricated. Thanks, and I look forward to this discussion.

Moldy

Kriegsspiel

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Re: Emergency Savings Funds
« Reply #1 on: December 12, 2012, 05:12:30 PM »
New guy here (first post) and I would like to say this is a great site and I am exciting to be a part of it. Very good logic and advice shared.

Hello.

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My emergency fund is $10K- Where do I put it?

I have mine in a savings account.  Think about what you need it for.

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Right now, it is in a bank savings account collecting an annual interest percentage that does not even resemble what I consider acceptable, especially with the inflation factor. To me, and I think the majority of others, I need these funds set aside some where "safe" but I need (want) an annual ROI at around 3 percent and I need the money to be readily (to some extent) available. I've bounced many ideas around in my head, on paper, and after an research was conducted I end up back at square one....

I'd say reevaluate your expectations for the growth of the money you have set aside for emergencies.

matchewed

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Re: Emergency Savings Funds
« Reply #2 on: December 12, 2012, 05:37:08 PM »
Emergency money tends to need to be more liquid. A savings account is about as liquid as it gets without the money being underneath a mattress. I understand the feeling of seeing the practically non-existent interest accumulating in the savings account but remember that it is only temporary; at some point interest rates will go up.

IMO - The savings account is the right spot.

The_Dude

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Re: Emergency Savings Funds
« Reply #3 on: December 12, 2012, 06:45:48 PM »
Put it in an Ally 5 year CD.  Yeah those rates are terrible too but last time I checked they were ~ twice the savings account rate so after 6 months, even with the early withdrawal penalty you were money ahead. 

kiwichick

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Re: Emergency Savings Funds
« Reply #4 on: December 12, 2012, 07:03:24 PM »
You have quite a high EF. Is it mainly to cover job loss? If so, one idea is to invest in term deposits (called CDs in US/Canada??) and structure them in a way so money is always coming available when you need it.

For example, if your expenses came to $2000 a month, you could have $2000 in a bank account and invest $2000 in a 1-month term deposit, $2000 in 2-month TD, $2000 in 3-month TD and $2000 in 4-month TD. Then, when each deposit matures, re-invest the money in a 4-month term deposit. This way every month you'll have money maturing and can just roll it over into another TD if you don't need it, but you should still earn a higher interest rate than a standard bank account.

Psychstache

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Re: Emergency Savings Funds
« Reply #5 on: December 12, 2012, 08:00:07 PM »
You could look for deals at some of your local or regional banks. I have my EF in a checking account earning 4% interest. There are some hoops to jump through to make sure you get the interest (one DD or ACH per month, X number of transactions), but I have never had to do anything out of my ordinary routine to meet the reqs. Can't get much more liquid than a checking account.

Will

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Re: Emergency Savings Funds
« Reply #6 on: December 12, 2012, 09:30:45 PM »
I think some good points were made in this article I found over on http://www.ira-basics.com/using-a-roth-ira-as-your-emergency-fund/

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Using a Roth IRA as an Emergency Fund

All financial planners and accountants recommend that you always have a savings account at your local bank with sufficient money to use in an emergency, and cover any unforeseen expenses. This is one of the first rules of financial planning. The amount you keep in the account is subject to opinion, but usually ranges between 3 to 6 months take-home salary. The purpose of this range is to cover normal monthly expenses in case the person loses his job and has no income coming in. The normal timeframe for an average person to find a new job is 3 to 6 months.

If a person remains employed, but has an unforeseen expense, such as a large medical expense not covered by insurance, then this fund can then be used for that purpose. After either a layoff or unforeseen expense, the first priority should be to build the emergency fund back up to where it should be.

People began to latch on to the fact that contributions can always be taken out of a Roth IRA tax free. Since many were contributing the maximum $5,000 per year, these accounts grew rapidly. So, if you have a Roth IRA that has a significant balance, say $50,000, why do you need an emergency fund in a saving account. Should an emergency occur, you can merely make a tax free withdrawal from the Roth IRA. A lot of people followed this thinking and just used their emergency fund for other purposes, such as a new car, a vacation, a new room on the house, etc.

The problem is many people did not stop to think if they should, in fact, use the Roth IRA as a cash emergency fund. Several points to consider:

Is the money in the Roth IRA your primary savings for retirement? If the Roth is your primary means of saving for retirement, and not a supplement to some other retirement plan, you will be losing asset growth for retirement. Withdrawing principal will cause you to lose future investment earning on the amount withdrawn. If the unforeseen expense is large, you might even be risking your ability to retire when you planned.
What is your Roth IRA invested in? Some people forget what type of investments they have in their Roth IRA. They may have invested the assets all in stocks and bonds or specialty mutual funds. If the Roth is used as an emergency fund, you may be forced to withdraw funds at exactly the wrong time, such as a down stock market.
You cannot undo a withdrawal Ė if you make a withdrawal from a Roth IRA, you cannot simply put the money back in later on. Any contributions, either new or repayment of an emergency withdrawal, are subject to the annual $5,000 limit. If you have been making, and plan to continue making, the maximum $5,000 contributions, a large withdrawal can never find its way back into the Roth IRA. You will lose all future tax free growth on the amount withdrawn.
Suggestions

You should always have an emergency savings account for the unbudgeted expenses that arise each year. These might include washing machine finally gives out, new set of car tires, roof starts leaking, etc. While these may seem expensive items, they will occur each year and you should plan for them away from your retirement accounts.

If you want to use the Roth IRA as an emergency fund, make sure you use it only for true emergencies. Many people are not financially disciplined and once they make their first withdrawal from the Roth IRA, it is easy to make a second withdrawal. Once you make the second withdrawal, you begin to use the Roth IRA like your checking account. Then, when you reach your 50ís, you realize you have almost nothing saved for retirement.

For the disciplined, financially minded person, using the Roth IRA as an emergency fund can actually increase your overall financial situation. Your emergency money will grow tax free and if you donít have any emergencies, the money will be an added bonus at retirement. This assumes, of course, that you do not go out and spend the amount in your current emergency savings account. You should invest that after tax money in other long term investments.

michael

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Re: Emergency Savings Funds
« Reply #7 on: December 12, 2012, 09:54:41 PM »
I asked this question over in the Investor Alley last week: http://www.mrmoneymustache.com/forum/investor-alley/to-keep-something-liquid-where/

There is a good discussion there about how much and how quickly you need access to the money, and ideas for where to keep it. I really like the point that Posthumane made about using the money in the event of a job loss: while you may want an entire 6+ month allotment, you don't actually need the entire amount to be available on the first day of unemployment. Even if you lost your job on the last day of the month, you'd only need one month's rent/expenses available quickly, while the rest could be gained over time while you were recovering. This would allow a pretty effective use of index funds as the reservoir, where you could sell bits just as you need the income in an emergency.

smedleyb over there also reminded me of the HELOC method. There are other avenues to attain a line of credit and simply not use it until you need it. If you are able to go that route, it'd allow your money to be working for you while still giving you pretty quick access to emergency credit.

NWstubble

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Re: Emergency Savings Funds
« Reply #8 on: December 12, 2012, 10:10:03 PM »

frugal_engineer

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Re: Emergency Savings Funds
« Reply #9 on: December 13, 2012, 06:45:14 AM »
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My emergency fund is $10K- Where do I put it?

$5k in savings account, $5k in index funds (approximately).  If you make 6% on your invested amount you will get your 3% return your looking for and still have plenty of money available quickly, and rest available within a week or so.

trammatic

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Re: Emergency Savings Funds
« Reply #10 on: December 13, 2012, 06:46:46 AM »
I personally use MMM's "no liquid" emergency fund.  Have an available HELOC (with a 0 balance), and put all extra cash into your highest % debt, or if they're all nonexistant or reasonable, into an investment account.

Bakari

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Re: Emergency Savings Funds
« Reply #11 on: December 13, 2012, 10:38:35 AM »
Just how liquid does it need to be?
You can withdraw money from a market investment account anytime.  Takes 2-4 days for the bank transfer.

You can always ride out short term market dips (and the few days of bank transfer time) with a credit card, which, as long as you pay it off in full within a month, has no interest or fees.

There is some risk to the method, since you may need to withdraw when the market happens to be down, but then again, you would only do it in an emergency, and most of the time there is no emergency.

chucklesmcgee

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Re: Emergency Savings Funds
« Reply #12 on: December 13, 2012, 11:41:26 AM »
Just how liquid does it need to be?
You can withdraw money from a market investment account anytime.  Takes 2-4 days for the bank transfer.

You can always ride out short term market dips (and the few days of bank transfer time) with a credit card, which, as long as you pay it off in full within a month, has no interest or fees.

There is some risk to the method, since you may need to withdraw when the market happens to be down, but then again, you would only do it in an emergency, and most of the time there is no emergency.

I agree. I don't quite get people's obsession with an "emergency" fund. I see it as an outgrowth of an anti-mustachian philosophy- you spend most of your money or more than it with credit cards, put 5% of your income away to retire in a 401k plan when you're like 65 or 70,  then put some money away for an emergency and put some money away for that vacation you "deserve". A specific "emergency" fund becomes unnecessary when you're just saving for FI, period. Even after a year or two on a very modest salary of $30k or so and a slightly mustachian lifestyle you should be able to have at least 5-10k sacked away, which should cover nearly any emergency. And a year or so after that your savings should be so big that even an enormous recession and market collapse won't impair your ability to stay current should an emergency hit at the same time.

A low-interest emergency fund is really probably appropriate only for people living on the edge or just getting started savings.

Moldy

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Re: Emergency Savings Funds
« Reply #13 on: December 13, 2012, 02:43:53 PM »
Thanks for the responses. I'm still left to make a decision, which I havent made clear to myself yet, but your opinions and suggestions have helped. 

Moldy

Crash87

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Re: Emergency Savings Funds
« Reply #14 on: December 13, 2012, 06:01:38 PM »
I keep mine in a Kasasa checking account. It pays 3.01% on the first $15k. The requirement to get the 3.01% is that I must use my debit card 15 times a month. If I don't make my debits the interest rate drops. Make my debits or not, there are no fees. Google Kasasa and check out the website to see what credit unions are available to you and the various interest rates/debit requirements if you're interested.

Richard3

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Re: Emergency Savings Funds
« Reply #15 on: December 13, 2012, 06:07:46 PM »
I use a credit card as my emergency "fund". If I have to use it, I can then liquidate shares or access money market accounts, or whatever. It's an emergency, I'll eat the transaction fee to liquidate some index trackers.

Note - I am single, not a home owner, not in debt, and have pretty good insurance.

eyePod

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Re: Emergency Savings Funds
« Reply #16 on: December 16, 2012, 06:01:45 AM »
I personally use MMM's "no liquid" emergency fund.  Have an available HELOC (with a 0 balance), and put all extra cash into your highest % debt, or if they're all nonexistant or reasonable, into an investment account.

Not owning a home kind of puts a wrench in that one!

k9

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Re: Emergency Savings Funds
« Reply #17 on: December 17, 2012, 08:26:04 AM »
If you want some more yield, the best is to put some of it on an index fund, with the associated risks, of course, but since this is money that probably will not be used more than once every 5-10 years, I think that's OK. Just 20% on a stock index and 80% in savings account should give you enough security + some room for a possibly better yield. Or maybe 50-50 as was advised by someone else. Well, that's not really "emergency-fund" like, now. Hmm, maybe the problem is you have too much aside just for emergencies. Just keep some of it as pure cash for very urgent and likely emergencies (you will very probably meet a 3000$ emergency in the next 5 years, but you only MIGHT meet one than needs 10k), and invest the remaining sum in an easy to liquidate asset (i.e., stocks in a taxable account can be sold in a matter of minutes, that is way better than real estate).

As for all of those (including MMM) advising using debt (HELOC, credit card & others) as an emergency fund... It doesn't stop surprising me. Debt is really the american way of life, even the most frugal people in that country seem to use it as an everyday tool. Lost your main source of income ? No problem, man ! Just borrow some money to your future self and everything will be all right :)

canisius

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Re: Emergency Savings Funds
« Reply #18 on: December 17, 2012, 08:51:59 AM »
I agree that you need to keep it liquid and find a good balance.  We used to keep all of ours except for last paycheck in funds; however, there was one istance where we needed it literally that momeny and the banks were closed.  However, it's also silly to keep such a large amount not earning interest  and in effect losing money.  What we'll probably do, after we dig ourselves out of this situation, is keep about $1500 in the savings account and the rest (3 months of expenses) in tax free municipal / state bond indexes.

cbr shadow

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Re: Emergency Savings Funds
« Reply #19 on: December 17, 2012, 10:09:50 AM »
K9, I dont think anyone here is saying to use a credit card for long-term emergency funds..  They're saying that it's probably worth putting your emergency fund money into an investment where you'll make more money at the risk that if an emergency does come up that you'll use a credit card for a short period of time while you get access to your money.
If you thought MMM was saying to build up a bunch of debt on a credit card for a long period of time I'm not surprised you were shocked lol
I dont think MMM readers are always against having credit cards. Actually I bet it's quite the opposite where people like myself want to take advantage of the rewards by putting EVERYTHING on our credit cards and pay them off at the end of the month.

Bakari

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Re: Emergency Savings Funds
« Reply #20 on: December 17, 2012, 10:32:55 AM »
K9, I dont think anyone here is saying to use a credit card for long-term emergency funds..  They're saying that it's probably worth putting your emergency fund money into an investment where you'll make more money at the risk that if an emergency does come up that you'll use a credit card for a short period of time while you get access to your money.

Exactly, the debt isn't the emergency fund, its the liquidity.
It only works if you have as much or more savings as your credit limit, but if you had a cash reserve anyway that is getting replaced by credit, you do.  Any investment, even real estate, can be liquidated in some number of months, allowing you to pay off the credit, which is immediately accessible.

RadicalPersonalFinance

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Re: Emergency Savings Funds
« Reply #21 on: December 17, 2012, 10:41:49 AM »
I keep some:

1. In cash in case of a major storm which knocks out the power grid/ATMs
2. In a bank account for overdraft protection and quick, unplanned purchases for good deals / bulk buys
3. And most in my life insurance policies' cash values.  It's 100% liquid (24-hour wire transfer), completely creditor-protected / judgement-proof / bankruptcy-proof (unlike checking/savings/CDs/brokerage accounts), tax-deferred and tax-free (but more liquid than my IRAs/HSAs/etc.) ,and guaranteed to grow every year (dividend rate was just under 6% last year).  Obviously, you have to need and want life insurance though...YMMV.

k9

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Re: Emergency Savings Funds
« Reply #22 on: December 17, 2012, 04:04:24 PM »
Okay, I think I get it. The idea is to resort to debt, even given its expensiveness, to provide liquidity until you sold your yielding assets to recover it. The overall cost would be smaller. That's an interesting idea, but I wouldn't be comfortable with it though (because it forces you to rely on a credit of some sort, which is not that easy to get where I live).

Blackbomber

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Re: Emergency Savings Funds
« Reply #23 on: December 17, 2012, 04:28:26 PM »
No fee credit card with 10k limit (pretty easy to come by if your rating is decent). But the idea is not to pay interest. It's an interest free 30 day (roughly) advance to give you time to liquidate other assets. In 30 days you can be approved for a HELOC, get a 401k loan, sell investments, etc. And the chance of needing all 10k at once would be pretty slim for me. So imagine I have an unexpected furnace repair costing 600 this month. I put it on the card, and pay it out of my regular income. Next month a medical bill of 1000. I use my (now zero balance) card to front that, then sell $400 worth of ETFs, add that to the 600 I should be saving, and pay it off. Then I'm good for a while. Yes, I wasn't able to save for two months. And yes, I sold some investments at an inopportune time (but I could have actually gotten a loan from Scottrade, secured by my portfolio, and held my position). But that beats getting low returns on a big pile of cash forever. These numbers are all random, and not representative of my situation, just an example. But the strategy is real. I rely on my credit card as an emergency advance while I liquidate other investments, or procure a low interest rate loan.