Author Topic: Proper Emergency Amount and Fund Allocation  (Read 1972 times)

CatInTheHat

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Proper Emergency Amount and Fund Allocation
« on: March 07, 2017, 07:06:07 PM »
Hello L&G.  Here is the situation.  I am in the process of purchasing an old home and the mortgage, taxes, & insurance on the 30 year fixed is about $2200/month (but planning to make 2x payments to get rid of it in 14-15yrs).  My wife and I both work and earn about 185k/yr, split about 80k/105k excluding small bonuses.  After the dust settles on closing, I should have about 60k in cash leftover.  I was anticipating an emergency fund of 40k which should float the full boat for 8 months at 5k a month comfortably, plus 10k car emergency fund (i currently drive a 99 and my wife just walks/bikes).  A side note too is we have a condo in calgary, AB which is rented, but is a potential liability with the down market.  I have about 25k in funny money in the bank up north to cover a years mortgage there in case things really head south. 

My question is... do you feel this emergency fund of 8 full months of expenses + car fund to total 50k is too much with 2x people working?  Im not planning to move the CAD money lower than that at this point until we ditch the condo.  Even if I lost my job, we could still float the boat on my wife's salary nearly indefinitely while I find something else.  Do you feel we should scale it back and try to make some money off the cash?

Second, what do I do with my emergency fund?  I have my cash in a capital one account paying 1%.  Even if I am convinced to reduce the E-fund, I don't see myself buying into the market too aggressively with the market so hot right now.  Maybe I could buy in slowly over a full year or something. Not sure what to do here.
 
Thanks. 
« Last Edit: March 07, 2017, 07:08:55 PM by CatInTheHat »

lthenderson

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Re: Proper Emergency Amount and Fund Allocation
« Reply #1 on: March 08, 2017, 08:25:04 AM »
I don't think 50k emergency fund when you are buying an old home and have an old car is unreasonable. In general, I've never known a person who has gone through a true emergency (and that includes myself) that every thought when the dust settled that they really had too much money in their emergency fund to start with.  They all without exception have increased their emergency fund. I can also think of a handful of friends who ended up losing houses during the recession because their emergency fund wasn't big enough.

I'm also conservative with my emergency fund and keep it in a plain savings account where I can have access instantaneously. Having to sell stocks, bonds, etc. at the end of the market day, waiting for the funds to be put into your account and then getting a check issued, sometimes taking several days to a week, isn't quick enough in a true emergency.

MsSindy

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Re: Proper Emergency Amount and Fund Allocation
« Reply #2 on: March 08, 2017, 08:58:22 AM »
For emergency funds, I apply the following logic:
 - If we can live off of one income, how likely would it be to lose both incomes at once?
 - What catastrophic scenario could occur that would have me deplete my $50k ...and how fast could I replenish it?
 - How devastated would you be to pull out money from your investments (maybe they were 'down' a little and you'd be losing $$)

For my situation, we can live off of one salary (if we budgeted well), and the likelihood of DH getting laid off is slim to none.... although anything is possible.  The biggest emergency that I could foresee wouldn't cost us more than a couple thousand dollars, and we have enough cash flow to float that, so I don't keep a true emergency fund..... and I sleep extremely well at night, knowing that I could tap investments if I REALLY needed to.

Now, when DH was at his old job and things were looking dicey, I started slowly building up an emergency fund because the true risk was greater.  Once he switched jobs, we immediately invested it.

Retire-Canada

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Re: Proper Emergency Amount and Fund Allocation
« Reply #3 on: March 08, 2017, 10:30:42 AM »
My question is... do you feel this emergency fund of 8 full months of expenses + car fund to total 50k is too much with 2x people working?  Im not planning to move the CAD money lower than that at this point until we ditch the condo.  Even if I lost my job, we could still float the boat on my wife's salary nearly indefinitely while I find something else.  Do you feel we should scale it back and try to make some money off the cash?

Yes I wouldn't hold that much cash. I'm just not rich enough for that. Get a LOC or a HELOC or both then invest the cash. Between the two of you either person could float the COL on their salary so you'll have lots of redundancy. If you need to draw on the LOC and if you really need to sell some stocks invested in the market. After a reasonably short time even a 30% drop in the market will mean you'd still have more money than holding cash if you had to sell at a bad time.

Instead of paying double on the mortgage why not put the second payment in a taxable investment account? If you get enough to pay off the mortgage you can and before then you'll have a huge war chest to weather any storm that comes your way. You'll most likely be able to pay the mortgage off faster this way and it will be less expensive.
« Last Edit: March 08, 2017, 10:39:43 AM by Retire-Canada »

TheAnonOne

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Re: Proper Emergency Amount and Fund Allocation
« Reply #4 on: March 08, 2017, 10:34:11 AM »
We spend 3000 a month, and keep a 10k balance in our checking. At the end of the month when everything is paid, any amount over 10k goes into taxable investments.

I use to keep 20k. Though, now my stash is about 300k and it doesn't feel like much could go wrong enough to make a dent in that.

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natb2347

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Re: Proper Emergency Amount and Fund Allocation
« Reply #5 on: March 08, 2017, 12:37:39 PM »
I'm keeping mine in a Betterment Safety Net Fund.  I calculated the amount I would need for 6 months and will add 30% on top until I reach the goal then it just hangs out there until I ever need it growing more than it would over time in any savings account.  I have a husband who is employed so if anything happens, he can cover the major bills until I get back on my feet.  But piece of mind is so nice to have.    I do keep a buffer of anywhere from $500-1000 in my checking to cover anything out of the ordinary in expenses for the month or to get quick access to in a true emergency where I need some cash ASAP and my CC won't cover it.  Works for me.

Aggie1999

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Re: Proper Emergency Amount and Fund Allocation
« Reply #6 on: March 08, 2017, 12:53:19 PM »
$50k in an emergency fund would have lost around $10k in growth over the last 4 years had it been kept in a savings account versus index funds. Way to much "loss" for my blood. Who knows if that would continue, but keeping money in a bank account is a guaranteed loss at today's interests rates.

If you truly feel you need that much in emergency funds, why not work on converting it over to I-bonds. At least you get an interest rate tied to inflation. I doubt bank account interest will go up any useful amount any time soon.

lthenderson

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Re: Proper Emergency Amount and Fund Allocation
« Reply #7 on: March 08, 2017, 02:04:32 PM »
$50k in an emergency fund would have lost around $10k in growth over the last 4 years had it been kept in a savings account versus index funds. Way to much "loss" for my blood. Who knows if that would continue, but keeping money in a bank account is a guaranteed loss at today's interests rates.

Or it would have resulted in $20k loss if invested in index funds during the last economic recession which also cancelled out a lot of jobs at the same time. The problem is that emergencies happen more often during the bad times and not during the good times.

Aggie1999

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Re: Proper Emergency Amount and Fund Allocation
« Reply #8 on: March 08, 2017, 02:28:57 PM »
$50k in an emergency fund would have lost around $10k in growth over the last 4 years had it been kept in a savings account versus index funds. Way to much "loss" for my blood. Who knows if that would continue, but keeping money in a bank account is a guaranteed loss at today's interests rates.

Or it would have resulted in $20k loss if invested in index funds during the last economic recession which also cancelled out a lot of jobs at the same time. The problem is that emergencies happen more often during the bad times and not during the good times.

Thus the second part of my post which you left off in the quote.

CatInTheHat

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Re: Proper Emergency Amount and Fund Allocation
« Reply #9 on: March 08, 2017, 07:05:38 PM »
Thanks for the input guys.  I still have more thinking, but I think I'm going to scale the cash back 50% and work the remainder into the market over a period of a year.