Author Topic: So I had to use all my emergency funds, how to build it back up?  (Read 4583 times)

ransom132

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I just spent every money I had in my EF to pay off a couple of emergencies I just got. Before I read MMM, I was following Dave Ramsey's baby step...however it pains me to see that if I were to build up my EF once again, I would have to stop investing and put 100% of my available money towards my EF for 6 months. So what is the better solution, should I put 50/50??? Meaning 50% of my available funds into Investments and 50% towards my EF or is there a better solution. Or maybe I should stick with DR solution, so that once I have my EF in place again, I can invest 50%+ of my income asap.

Just for your info, I make about 2K$ per month and after all my expenses, I have about 1.1K$ left that I can use to either invest, save or do both. What is the best solution for my situation?
« Last Edit: June 20, 2016, 06:14:49 PM by ransom132 »

Lia-Aimee

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Re: So I had to use all my emergency funds, how to build it back up?
« Reply #1 on: June 20, 2016, 06:18:42 PM »
It depends how badly you'd hurt if you had another emergency pop up before the fund was fully replenished.

If your non-emergency fund money is relatively easily accessible (ROTH IRA or CMA) and you'd have enough for emergencies if, say, the market dipped 50-75%, then you can slowly build up your emergency fund while you keep investing. If all your other financial assets are in a 401k, for example, you may want to build up the emergency fund fully before continuing to invest.




ransom132

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Re: So I had to use all my emergency funds, how to build it back up?
« Reply #2 on: June 20, 2016, 06:24:01 PM »
It depends how badly you'd hurt if you had another emergency pop up before the fund was fully replenished.

If your non-emergency fund money is relatively easily accessible (ROTH IRA or CMA) and you'd have enough for emergencies if, say, the market dipped 50-75%, then you can slowly build up your emergency fund while you keep investing. If all your other financial assets are in a 401k, for example, you may want to build up the emergency fund fully before continuing to invest.

I forgot to add that I am canadian, therefore RRSP and TFSA apply to me. The TFSA can be withdrawn at anytime without any penalties, the drawback is that my investments in the TFSA is 90% equities and 10% bonds and so far the returns have been negative since I started investing there (I started last year during the greece crises, I am using the Canadian Couch potato way of investing) so if I were to get hit by an emergency right now, I would have to withdraw at a loss.

I usually get hit with an emergency situation on average once a year.

Lia-Aimee

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Re: So I had to use all my emergency funds, how to build it back up?
« Reply #3 on: June 20, 2016, 07:04:43 PM »
If an emergency hits and you don't have any liquid cash, what will you do in that moment? If you have access to a line of credit, have big credit card limits, etc. you can focus a bit less on building up the emergency fund than if you do not. You may still have to sell your stocks in your TFSA at a loss, but there's no need to do that until the emergency actually occurs (and fingers crossed at that point they'll be at a gain.)


The other question to ask yourself is if another emergency occurs tomorrow and you do have to sell at a loss, how much of your net worth is that? Selling 50% of your net worth at a loss is much more painful than selling 5% at a loss.



Personally, if I averaged an annual emergency that drained the bulk of my emergency fund, I'd build it up fully before investing (maybe keep it in a high interest savings account or a cashable GIC if the rates ever improve.)

ransom132

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Re: So I had to use all my emergency funds, how to build it back up?
« Reply #4 on: June 20, 2016, 07:10:17 PM »
If an emergency hits and you don't have any liquid cash, what will you do in that moment? If you have access to a line of credit, have big credit card limits, etc. you can focus a bit less on building up the emergency fund than if you do not. You may still have to sell your stocks in your TFSA at a loss, but there's no need to do that until the emergency actually occurs (and fingers crossed at that point they'll be at a gain.)


The other question to ask yourself is if another emergency occurs tomorrow and you do have to sell at a loss, how much of your net worth is that? Selling 50% of your net worth at a loss is much more painful than selling 5% at a loss.



Personally, if I averaged an annual emergency that drained the bulk of my emergency fund, I'd build it up fully before investing (maybe keep it in a high interest savings account or a cashable GIC if the rates ever improve.)
Right now I have about 30K$ invested in the TFSA. I also have a credit line in which I can withdraw at most 10K$. I usually get hit with 1-2K$ per year on average when it comes to using my EF (Sometimes as low as 300$ in one year or as high as 5K$ 2 years ago when I had to repair my roof asap). The problem I get is that I cannot build my EF to it's fullest...whenever I get hit with an EF, it wipes me out almost completely. The good news is that so far i didn't need to borrow from my credit line so far, the bad is that my EF is never fully funded and I would like to reach a point where I can invest at 100% of my available funds.
« Last Edit: June 20, 2016, 07:12:35 PM by ransom132 »

ransom132

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Re: So I had to use all my emergency funds, how to build it back up?
« Reply #5 on: June 20, 2016, 07:20:37 PM »
I get the impression the best solution would be that out of the 1.1K$ of available funds, I should put 200$ per month in EF and the rest in investments. Does that sound like a good plan?

human

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Re: So I had to use all my emergency funds, how to build it back up?
« Reply #6 on: June 20, 2016, 08:57:48 PM »
Maybe I missed but exactly how much do you need in the EF?

I'm lucky in that I have a credit card at 9.9% that I keep for emergencies, but I've never had an emergency pop up. I keep maybe two months of expenses on hand.

I feel you on losses, I'm Canadian as well and I'm down since starting to invest last year as well. My bank shows me as down 5 % but I reinvest dividends that go to cash.

Back on topic, it seems your expenses are 900 a month it would take 4.5 months for you to sock away one month's expenses.

I think the elephant in the room is home ownership. Could you sell and rent? One reason why I don't own a home is because of all the crazy expenses involved.

JAYSLOL

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Re: So I had to use all my emergency funds, how to build it back up?
« Reply #7 on: June 20, 2016, 09:04:43 PM »
I just spent every money I had in my EF to pay off a couple of emergencies I just got. Before I read MMM, I was following Dave Ramsey's baby step...however it pains me to see that if I were to build up my EF once again, I would have to stop investing and put 100% of my available money towards my EF for 6 months. So what is the better solution, should I put 50/50??? Meaning 50% of my available funds into Investments and 50% towards my EF or is there a better solution. Or maybe I should stick with DR solution, so that once I have my EF in place again, I can invest 50%+ of my income asap.

Just for your info, I make about 2K$ per month and after all my expenses, I have about 1.1K$ left that I can use to either invest, save or do both. What is the best solution for my situation?

Also Canadian.  Your TFSA will work well as an EF.  Also feel free to keep ~$1k above what you need in your checking account at any given time and/or a small amount of cash at home for emergencies where you need quick access.  Other than that, your TFSA can cover all emergencies from now on, so keep on investing in it and your RRSP (if you are maxing your TFSA first with your income).

Choices

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Re: So I had to use all my emergency funds, how to build it back up?
« Reply #8 on: June 20, 2016, 11:57:32 PM »
Aren't you so glad you had an emergency fund this time around? Build it back up!

If you're having frequent "emergencies" it might be worth exploring the definition of emergency. How many of them are forseeable?
Even though new tires, new brakes, medical bills, etc. are sporadic, they're also forseeable and can often be budgeted for.

ransom132

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Re: So I had to use all my emergency funds, how to build it back up?
« Reply #9 on: June 21, 2016, 04:58:59 AM »
I just spent every money I had in my EF to pay off a couple of emergencies I just got. Before I read MMM, I was following Dave Ramsey's baby step...however it pains me to see that if I were to build up my EF once again, I would have to stop investing and put 100% of my available money towards my EF for 6 months. So what is the better solution, should I put 50/50??? Meaning 50% of my available funds into Investments and 50% towards my EF or is there a better solution. Or maybe I should stick with DR solution, so that once I have my EF in place again, I can invest 50%+ of my income asap.

Just for your info, I make about 2K$ per month and after all my expenses, I have about 1.1K$ left that I can use to either invest, save or do both. What is the best solution for my situation?

Also Canadian.  Your TFSA will work well as an EF.  Also feel free to keep ~$1k above what you need in your checking account at any given time and/or a small amount of cash at home for emergencies where you need quick access.  Other than that, your TFSA can cover all emergencies from now on, so keep on investing in it and your RRSP (if you are maxing your TFSA first with your income).

So I guess my plan of 200$/mont for EF should be enough while my TFSA can cover big emergencies (thankfully I never had to withdraw my investment funds as of now).

RetiredAt63

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Re: So I had to use all my emergency funds, how to build it back up?
« Reply #10 on: June 21, 2016, 05:44:25 AM »
Check the tax rules for TFSAs, you can't put the money back in the TFSA in the same year you took it out unless you have contribution room.

Emergencies are emergencies - new roof, etc. are variable expenses - unpredictable in the short term but predictable in the long term.  Maybe you need 2 funds - one for true emergencies (Fort McMurray type evacuations, sudden major health issue, sudden job loss, etc.), and one for those variable expenses.  Houses, for example, are expected to need 1-2% of total value each year for maintenance - new roof, new deck, whatever - some years you may spend 0% and some years 4%, but the money not spent one year should be saved for the next year. Same for cars - regular maintenance is expected, but some years you will spend a bundle on tires, and some years you won't spend anything.  Some of the banks have savings builder accounts now that pay semi-decent interest (much better than CDs) if you deposit monthly - I have one with BMO that is funding my new roof and major deck repairs, some major landscaping, and some little projects.

Ceridwen

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Re: So I had to use all my emergency funds, how to build it back up?
« Reply #11 on: June 21, 2016, 06:04:46 AM »


Emergencies are emergencies - new roof, etc. are variable expenses - unpredictable in the short term but predictable in the long term.
 

My thoughts exactly.  On average one "emergency" per year? Sounds like you have a very broad definition of what constitutes an emergency, or you are very, very unlucky!

cakie

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Re: So I had to use all my emergency funds, how to build it back up?
« Reply #12 on: June 21, 2016, 07:28:02 AM »
I have a 'buffer' savings account that I keep $1k in - that way, our real emergency fund is not touched. The buffer means we can keep a low amount in our cheque account (<$800). The buffer gets used maybe 4x a year? E.g. used it today to buy $700 of flights for upcoming holiday. Will replenish in a couple of days from next pay ☺ Maybe consider this if you regularly dip into emergency money...makes cash flowing much less stressful.

mskyle

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Re: So I had to use all my emergency funds, how to build it back up?
« Reply #13 on: June 21, 2016, 07:56:01 AM »
I think you need to rebuild the emergency fund ASAP, and you also should probably consider starting some kind of "sinking fund" - like the "buffer" cakie describes. My emergency fund is for if I lose my job or if the house burns down and things of that nature. It's not for car repairs or non-catastrophic medical bills or replacing appliances and things like that.

Investing is great, but day-to-day financial security is more important, imo.

Mmm_Donuts

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Re: So I had to use all my emergency funds, how to build it back up?
« Reply #14 on: June 21, 2016, 08:54:17 AM »
I recommend YNAB for organizing what amount goes where per month. You can categorize your "rainy day" or sinking funds, i.e. the expenses that only happen once or twice a year that are predictable. It's much easier to pay a $1k/ year bill if you are setting aside $83/month for it. It doesn't have to go into an emergency fund account that way, but you know that it's earmarked in your regular savings account for this purpose.

That way you can plan for big expenses, AND have an emergency fund, AND invest, and you know exactly where it's all going on a month by month basis. If you have $1100 a month to play with then you are doing great. If I were you I would get used to putting $458 of that aside every month for my 2017 TFSA contribution, so you have $5500 ready to go in January, and the rest can be diverted into emergency fund and rainy day funds. (Of course, since it's June, you won't have the full 5500, but it would be a good habit to start.) When your emergency fund is full, you can divert the rest to max out your TFSA, if you are behind on contributions so far.

nereo

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Re: So I had to use all my emergency funds, how to build it back up?
« Reply #15 on: June 21, 2016, 08:58:04 AM »
... I make about 2K$ per month and after all my expenses, I have about 1.1K$ left that I can use to either invest, save or do both. What is the best solution for my situation?

You've only given us limited information, but given that you say it will take 6 months to replenish your Efund if you put all investing on hold (so: est. $6,600?), and that you have recently had a few emergencies which have completely depleted this.  It's unclear whether these are true, unpredictable emergencies or if these were just infrequent/delayed costs.

The good news: each month you have a surplus of cash, which is a major step towards FI.

My advice:  in your situation I'd recommend putting everything into your e-fund for at least a month or two.  That will give you a buffer should a third emergency strike.  Then you can slowly scale back the money going into your e-fund each month and re-start your investments (into tax-advantaged accounts first).  "How fast?" is up to you, but in the absence of more information I'll suggest 100/0 (e-fund/investments) the first month, followed by 90/10, 80/20, 70/30 etc.  It immediately gives you some buffer from another unexpected expense while allowing you to still feel like you aren't putting off your investments indefinitely. 
Given your expenses it would look like this:
Month 1: $1,100 total in your e-fund
Month 2: $2090
Month 6: $4950
Month 10: $6050 (e-fund will hold steady at this amount, just over 6 months expenses for you)

from thereon out every time you must use some of the e-fund you scale back investing until it's depleted.  If you're using your e-fund more than once every couple of years (on average) you aren't anticipating infrequent expenses very well.

Alternatively you can just put all investing on hold while you build your E-fund back to a comfortable level.  Given how you are asking this question its apparent that you have some apprehension and so the method above is a good mental median where you can feel you are both preparing yourself for another fiscal shock while not giving up on saving for the future.
Ultimately, choose whichever method feels best to you.

JAYSLOL

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Re: So I had to use all my emergency funds, how to build it back up?
« Reply #16 on: June 21, 2016, 01:07:16 PM »
I just spent every money I had in my EF to pay off a couple of emergencies I just got. Before I read MMM, I was following Dave Ramsey's baby step...however it pains me to see that if I were to build up my EF once again, I would have to stop investing and put 100% of my available money towards my EF for 6 months. So what is the better solution, should I put 50/50??? Meaning 50% of my available funds into Investments and 50% towards my EF or is there a better solution. Or maybe I should stick with DR solution, so that once I have my EF in place again, I can invest 50%+ of my income asap.

Just for your info, I make about 2K$ per month and after all my expenses, I have about 1.1K$ left that I can use to either invest, save or do both. What is the best solution for my situation?

Also Canadian.  Your TFSA will work well as an EF.  Also feel free to keep ~$1k above what you need in your checking account at any given time and/or a small amount of cash at home for emergencies where you need quick access.  Other than that, your TFSA can cover all emergencies from now on, so keep on investing in it and your RRSP (if you are maxing your TFSA first with your income).

So I guess my plan of 200$/mont for EF should be enough while my TFSA can cover big emergencies (thankfully I never had to withdraw my investment funds as of now).

That's what I would do, but if you want a little extra room, throw everything into the EF for the next 1-2 months and then go $200/month from there. 

ransom132

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Re: So I had to use all my emergency funds, how to build it back up?
« Reply #17 on: June 21, 2016, 06:58:50 PM »
... I make about 2K$ per month and after all my expenses, I have about 1.1K$ left that I can use to either invest, save or do both. What is the best solution for my situation?

You've only given us limited information, but given that you say it will take 6 months to replenish your Efund if you put all investing on hold (so: est. $6,600?), and that you have recently had a few emergencies which have completely depleted this.  It's unclear whether these are true, unpredictable emergencies or if these were just infrequent/delayed costs.

The good news: each month you have a surplus of cash, which is a major step towards FI.

My advice:  in your situation I'd recommend putting everything into your e-fund for at least a month or two.  That will give you a buffer should a third emergency strike.  Then you can slowly scale back the money going into your e-fund each month and re-start your investments (into tax-advantaged accounts first).  "How fast?" is up to you, but in the absence of more information I'll suggest 100/0 (e-fund/investments) the first month, followed by 90/10, 80/20, 70/30 etc.  It immediately gives you some buffer from another unexpected expense while allowing you to still feel like you aren't putting off your investments indefinitely. 
Given your expenses it would look like this:
Month 1: $1,100 total in your e-fund
Month 2: $2090
Month 6: $4950
Month 10: $6050 (e-fund will hold steady at this amount, just over 6 months expenses for you)

from thereon out every time you must use some of the e-fund you scale back investing until it's depleted.  If you're using your e-fund more than once every couple of years (on average) you aren't anticipating infrequent expenses very well.

Alternatively you can just put all investing on hold while you build your E-fund back to a comfortable level.  Given how you are asking this question its apparent that you have some apprehension and so the method above is a good mental median where you can feel you are both preparing yourself for another fiscal shock while not giving up on saving for the future.
Ultimately, choose whichever method feels best to you.
That's actually a good idea. By the way, I didn't specify the reason I use my EF because I didn't think it was necessary to mention it, but my emergencies are usually to bail out my parents...for example, the roof repair was for my parents who had a leaking roof and needed to fix it asap, so I bailed them out. It's sad, but my parents suck with money. At least, they don't ask me for money on a regular basis, but unfortunately it will happen once a year on average like I said and I would like to be prepared for it. If it were just me, I wouldn't even need an EF, but it is what it is :( and I don't mind helping them out.

I guess I should rename the EF to "Bailing out my parents fund".

As for someone who suggested to use YNAB, I already do use it. I have all my sinking funds category and that is fine, it is only my EF which annoyed me because I never know how much I should put in without affecting my investments too much.

cakie

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Re: So I had to use all my emergency funds, how to build it back up?
« Reply #18 on: June 21, 2016, 07:32:25 PM »
In that case, i would recommend working out exactly how much financial support you want to provide - set aside every week/fortnight and give them money from that fund when they need it. Be upfront about it with them. Source: was doing this with my mil, now we actually give her the money each fortnight and she saves it!! First time in her life she has proper savings... :) she has learnt slowly, but getting there!