Author Topic: How big is your emergency fund? What to do with excess?  (Read 7339 times)

Cooperstown

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How big is your emergency fund? What to do with excess?
« on: September 15, 2012, 07:35:35 AM »
Good morning,

After reading quite a bit on investing here and jcollins I've convinced my wife to scrap our FA and open vanguard accounts for our IRA's.  I also wanted to supplement that with some of the $35k sitting in checking accounts getting 2-3% interest, but she is not comfortable with going that route just yet. With that said our combined income is ~$67k a year and we are expecting our first child next January.  I know babies are expensive as are hospital bills, however, with my wife's job we have a $500 annual deductible and because we used to take insurance through my employer we have about $6k in an HSA that will be used for that deductible for many years to come. 

My question comes in since I cannot convince her to invest, how much should I keep around as an emergency fund?  I think the next best option to investing would paying down or mortgage faster.  We currently have ~$96k in principal @4.5%.  We are also considering refinancing but I just don't know if it's worth it, we could probably get down to ~3.65 which would save us about $70 a month so break even would be about 2 years down the road.

I'm curious to hear what those with a more senior mustache would do!

arebelspy

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Re: How big is your emergency fund? What to do with excess?
« Reply #1 on: September 15, 2012, 08:13:31 AM »
My emergency fund is $0.  But that's another discussion.

For you, you need to find out what you should have based on need. I.e. kid on the way, save a chunk for unexpected medical.  What are you current and projected expenses?  How many months do you want in savings?  How stable are your jobs?  How much is your savings each month?

We are also considering refinancing but I just don't know if it's worth it, we could probably get down to ~3.65 which would save us about $70 a month so break even would be about 2 years down the road.

Wait, so you can deal with a small hassle now to, a few years from now, start saving $70/mo. for the next 30 years?  And you aren't, because that's "not worth it"? 

Unleash Your Inner Hasselhoff, dude!
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

PJ

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Re: How big is your emergency fund? What to do with excess?
« Reply #2 on: September 15, 2012, 02:13:38 PM »
Thank you so much for linking to that article, arebelspy!  I've been lurking for a while, but this hit me like a ton of bricks and motivated me to finally register so I could respond.  I've read a lot of the archived articles, but hadn't come across the Hasselhoff one yet (or maybe wasn't ready to take it in yet?) 

MMM said:  "Whenever I hear people explaining some of the biggest expenses of their lives, they are usually expressed in terms of emotions, hassle, and fear of the unknown. They are afraid of making changes in their lives because they are imagining a great tsunami of pain and inconvenience washing over them as soon as they try to change the status quo.
 
Oh no! I can’t deal with the hassle! My life is already hard enough!
 
But guess what? You’re already IN the tsunami, Sukka!"


I definitely resemble that remark!  MMM has once again given me a lot to think about! 
 
Now, let's go see what else I can comment on ...

arebelspy

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Re: How big is your emergency fund? What to do with excess?
« Reply #3 on: September 15, 2012, 02:44:55 PM »
Welcome PJ.  Glad it helped you.  :)

I make the same excuses, then have to remind myself that I can put up with a little hassle to improve my situation.  It's a good motivator.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Jaherman99

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Re: How big is your emergency fund? What to do with excess?
« Reply #4 on: September 15, 2012, 03:53:02 PM »
Not many people feel comfortable without a good cushion, especially if you've been around long enough to get let go from a position you felt secure about.  Having a few months of expenses around can equal a lot of piece of mind.  I personally keep 3 months of expenses in savings.  My fiancée is more risk averse, and wants 8, so that's what I'll keep so that she doesn't stress. 

The rest goes to my 401 k up to the match, then my Roth, then to after tax investments.

Cooperstown

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Re: How big is your emergency fund? What to do with excess?
« Reply #5 on: September 15, 2012, 06:30:37 PM »
Awesome, thanks for the link.  I'll be making some phone calls on Monday and seeing what rates are available in the area.  As for expenses, it's been hard to say this last month because were starting to get things for the baby.  On average prior to baby expenses ~$2200, projected expenses once we have all the baby stuff will probably go to ~$3200(day care alone is $816 a month).  My job is very stable.  Her job is in a district that has continued to grow during years other districts have cut positions so she should be set.  I honestly do not know how many months we want in savings, this is the part I'm struggling with.  I want to be safe, but I don't have a clue on what the norm is, 8-12 months seems reasonable and if either of us lost our job our expenses could easily drop to the $1500-1800 with little effort.  As for savings we are currently at ~30%, but that will change as expenses go up.  Realistically I'd like to keep it at 20% or more after the baby is born and I do not think that will be an issue.


Lars

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Re: How big is your emergency fund? What to do with excess?
« Reply #6 on: September 15, 2012, 06:54:17 PM »
My question comes in since I cannot convince her to invest, how much should I keep around as an emergency fund?  I think the next best option to investing would paying down or mortgage faster.  We currently have ~$96k in principal @4.5%.  We are also considering refinancing but I just don't know if it's worth it, we could probably get down to ~3.65 which would save us about $70 a month so break even would be about 2 years down the road.

Based on your earlier case study, I would be more than comfortable with $15k in your situation (6 months expenses plus 3k for irregular car and home expenses) but thats me. I found it helpful to make a list of emergencies I was preparing and figure out what I needed to address each one - I felt more prepared and it helped take the emotion out of the number.
As you consider refinancing, consider that saving $70 a month will likely allow you to reach FI at least 3 month sooner (Crazy how a small amount adds up over the years.) 3.65% seems like a 30 year rate.  If you pay down the mortgage 20k and refinance into a 15 year mortgage at around 3%, you'll save even more than 70/month on interest (although cash flow will be roughtly the same as now.) Since your wife isn't keen on investment, it seems likely you'll be paying down your mortgage far less than 30 years anyway so you might as well get the benefit of even lower interest.

Cooperstown

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Re: How big is your emergency fund? What to do with excess?
« Reply #7 on: September 15, 2012, 08:35:53 PM »
My question comes in since I cannot convince her to invest, how much should I keep around as an emergency fund?  I think the next best option to investing would paying down or mortgage faster.  We currently have ~$96k in principal @4.5%.  We are also considering refinancing but I just don't know if it's worth it, we could probably get down to ~3.65 which would save us about $70 a month so break even would be about 2 years down the road.

Based on your earlier case study, I would be more than comfortable with $15k in your situation (6 months expenses plus 3k for irregular car and home expenses) but thats me. I found it helpful to make a list of emergencies I was preparing and figure out what I needed to address each one - I felt more prepared and it helped take the emotion out of the number.
As you consider refinancing, consider that saving $70 a month will likely allow you to reach FI at least 3 month sooner (Crazy how a small amount adds up over the years.) 3.65% seems like a 30 year rate.  If you pay down the mortgage 20k and refinance into a 15 year mortgage at around 3%, you'll save even more than 70/month on interest (although cash flow will be roughtly the same as now.) Since your wife isn't keen on investment, it seems likely you'll be paying down your mortgage far less than 30 years anyway so you might as well get the benefit of even lower interest.

She wants to see how the IRA's we have in place with a financial advisor(yeah she convinced me this was a good idea until I educated myself) will do in vanguard funds on their own.  So for now were in a holding pattern before really putting a lot into vanguard accounts.  With that said you bring up a very good point and yes the $70 a month was on a 30 year.  The number I used was from before I had time to look at the post QE3 rates which are actually lower.  Based on the numbers I'm seeing if we refi into a 30 year it will be $100 a month or we could drop to a 20 year and pay the same as now.

Safe bet would probably be go with the 30 year which we can get for roughly 3.5% and pay down the mortgage this next year until I can convince the wife that we invest on our own.  This would also give us the biggest cushion to gauge new expenses with the baby and the flexibility to pay it down faster if we wanted to.  I'd also like to refi into biweekly payments, I don't know the exact math on how much it helps, but I know it does help a noticeable amount.

yolfer

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Re: How big is your emergency fund? What to do with excess?
« Reply #8 on: September 18, 2012, 05:06:38 PM »
My question comes in since I cannot convince her to invest, how much should I keep around as an emergency fund?  I think the next best option to investing would paying down or mortgage faster.  We currently have ~$96k in principal @4.5%.  We are also considering refinancing but I just don't know if it's worth it, we could probably get down to ~3.65 which would save us about $70 a month so break even would be about 2 years down the road.

I'm curious to hear what those with a more senior mustache would do!

True Mustachians will probably scoff at this, but we keep 2 months' expenses in a money market account*, at the same Credit Union as our checking account, so we have immediate access to it. I can't think of a situation that would require immediate access to that much cash, but that's the point of an "emergency" fund. It's there if we need it for an unforeseen event. We have kids and I'm the only breadwinner, so that's why we horde so much cash.

We also have 3 months' expenses invested in a Vanguard bond fund (VBTLX), to have a bit of money in a less-risky investment should we need it in the medium-term. The rest is in Vanguard index funds (per MMM's post on how to invest).

* Earning an awesome -2.7% real interest rate :)

Emerald

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Re: How big is your emergency fund? What to do with excess?
« Reply #9 on: September 18, 2012, 05:37:30 PM »
I have an 8 month emergency fund in savings.  I'm not wiling to risk the fund,  but I tend to be more conservative than others.   

travelbug

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Re: How big is your emergency fund? What to do with excess?
« Reply #10 on: September 19, 2012, 10:00:24 PM »
We keep around $5000 accessible to us, but other than that we have no emergency fund.

In your situation (I am Australian so don't totally understand the US banking system) can you have what we call an offset account to your mortgage? It is a savings account that you can access but whatever money you have in this, you pay no interest on your mortage on.

I would take the 35k from your savings and pop it on the mortgage, you have an immediate 1.2%+ saving.

And honestly, babies don't hav eto cost that much. For the first two years or so they just want mum and dad and simple foods.


AJ

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Re: How big is your emergency fund? What to do with excess?
« Reply #11 on: September 19, 2012, 10:03:50 PM »
In your situation (I am Australian so don't totally understand the US banking system) can you have what we call an offset account to your mortgage? It is a savings account that you can access but whatever money you have in this, you pay no interest on your mortage on.

I've heard of these, and I really hope they become more popular in the states. I have never seen one offered, though maybe others have...?

frugal rph

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Re: How big is your emergency fund? What to do with excess?
« Reply #12 on: September 20, 2012, 08:52:26 AM »
We keep at least 8 months of expenses in an emergency fund.  We are risk adverse, and I know this money could be working harder for us, but it allows me to sleep well at night.  I would rather pay down my mortgage faster than allocate more to investing, but that is just my opinion.  You never know how you are going to feel when the baby is here, so I would keep a nice financial cushion for now.  Also keep in mind that the baby will be sick A LOT the first year or so in daycare and one or both of you may have to miss a lot of work.

Go ahead and refinance now!  You will have much less time and energy for annoying tasks like this once the baby is here!

mechanic baird

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Re: How big is your emergency fund? What to do with excess?
« Reply #13 on: September 20, 2012, 09:32:19 AM »
I used to have $90K in emergency fund.. Ever started reading here, I dropped it to $3000. Huge change!
But yes, you must educate yourself about investing and it takes a bit time. The easiest way is to split your money in a few lots, say 6 equally, and then buy the simplest Vanguard ETF such as VOO that mirrors S&P 500 once a month. Or if you wanna be safer, divide it up into 12 slots and use one year time to buy.. This will enable you to catch some bottoms if the market shall tank later since the risk is very high right now.

The reason why I favor Vanguard ETF vs Vanguard funds is because ETF automatically has the Admire share price, which is a lot lower. So it's cheaper to buy ETF. Secondly, if you ever sell some shares in mutual fund, you are subject to 90 day blockout so you can't get back in. ETF allows you to trade the day of, like a stock. Plus, all Vanguard ETFs are commission free.

You need to set up a money market fund with them first, and then attach a brokerage account with it. Happy trading.

kisserofsinners

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Re: How big is your emergency fund? What to do with excess?
« Reply #14 on: September 20, 2012, 01:50:01 PM »
As we have a big financial goal, our emergency fund is pretty minimal, $1500. This is only for truly unforeseen emergencies. It is separate of $500 for medical/dental and an ever fluctuating amount to cover other regular pop ups, Car, vacation, etc.

I also want to reinforce that you gotta look at your situation to really get the best plan for you. :)

Good Luck