Author Topic: To emergency fund, or not  (Read 4975 times)

bryanth

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To emergency fund, or not
« on: October 30, 2014, 06:04:06 PM »
I am a semi-recent graduate making 50-60k per year as an engineer. Currently I have ~10k in a HYSA netting 0.9%. I am also not worried about any job loss at all, I just got a promotion so things are on the up.  I like having the security of some cash incase I end up relocating in the next couple years, life changes etc.

Do I aim to get this to 15k, leave it, or reduce and invest the rest? Do I keep say 5k in the HYSA and invest the remainder in cds? Any recommendations? I just hate having so much gaining such little interest.

Thanks!

Jags4186

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Re: To emergency fund, or not
« Reply #1 on: October 30, 2014, 06:24:55 PM »
No reason to tie money up in CDs at current rates.  I only keep about 5k cash on hand in my checking account and I live out of that. If I were you I'd throw 5500 into a Roth IRA and then start maxing out my 401k.

nereo

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Re: To emergency fund, or not
« Reply #2 on: October 30, 2014, 06:27:34 PM »
I am a semi-recent graduate making 50-60k per year as an engineer. Currently I have ~10k in a HYSA netting 0.9%. I am also not worried about any job loss at all, I just got a promotion so things are on the up.  I like having the security of some cash incase I end up relocating in the next couple years, life changes etc.

Do I aim to get this to 15k, leave it, or reduce and invest the rest? Do I keep say 5k in the HYSA and invest the remainder in cds? Any recommendations? I just hate having so much gaining such little interest.

Thanks!
How much to keep in an emergency account is entirely a personal decision, but to figure out what is best for you, I'd consider a) your monthly expenses, b) the likelihood of job loss (hint, almost everyone overestimates how safe their job is), and c) whether there are other sources you could count on in an emergency, like a 3% HELOC or savings or other assets.

As for where to put your extra savings - why not a mutual fund.
If you haven't already, please read the jlcollinsnh stock series:  http://jlcollinsnh.com/stock-series/
If you have money saved in CDs then you don't need a lot more money in an emergency fund, since you can liquidate your CDs at any time to get the princible back.  True, you don't get as much as you would if you let them go to maturation, but that's why it would be for emergencies.


surfhb

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Re: To emergency fund, or not
« Reply #3 on: October 30, 2014, 06:30:28 PM »
I am a semi-recent graduate making 50-60k per year as an engineer. Currently I have ~10k in a HYSA netting 0.9%. I am also not worried about any job loss at all, I just got a promotion so things are on the up.  I like having the security of some cash incase I end up relocating in the next couple years, life changes etc.

Do I aim to get this to 15k, leave it, or reduce and invest the rest? Do I keep say 5k in the HYSA and invest the remainder in cds? Any recommendations? I just hate having so much gaining such little interest.

Thanks!

Well, its really not a whole lot of money plus you're young and just starting out.    Id leave it alone and start investing from here on out.

Do you have debt?    That needs to be priority number one

horsepoor

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Re: To emergency fund, or not
« Reply #4 on: October 30, 2014, 08:03:50 PM »
Depends on your situation.  What are your monthly expenses, and what percentage of your net pay is that?  Do you have any dependents?  Do you own a home or rent?  Is your car vital for commuting, but old and at risk of breaking down?  Do you have a high-deductible health insurance plan?  Basically, you need to scenario-plan to figure out the appropriate emergency fund amount for your specific situation.  IMO, those "have X months of expenses/income in an e-fund" rules of thumb are completely pointless.  If your job is secure and you live on 25% of your pay, rent an apartment, have no car and no dependents, there are probably few enough emergency scenarios that could play out that keeping a large e-fund wouldn't make sense.  OTOH, if you own a home with an old roof and a creaky furnace, have three kids and a 15 year old car that you need for your 30 mile commute, and expenses are 80% of your take home, a bigger e-fund makes sense.

Also, as a recent grad, your credit worthiness should be taken into account.  If you can secure credit easily, IMO that can be part of your hedge for a smaller e-fund.  http://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/

jmusic

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Re: To emergency fund, or not
« Reply #5 on: October 31, 2014, 12:17:42 AM »

If you can secure credit easily, IMO that can be part of your hedge for a smaller e-fund.  http://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/

+1

bryanth

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Re: To emergency fund, or not
« Reply #6 on: October 31, 2014, 04:59:13 AM »
My monthly expenses, removing all housing, insurance, car, gas, utilities, and food, is approximately $2400. Unfortunately I live in a rough neighborhood where you can find semi-affordable housing, but shootings, violence, and gangs are pretty common so I would prefer to pay $300/month additional for that safety. In 8 months when my lease is up, I am going to look for a cheaper place though further from work. My net pay per month depends on my 401k %... 6% I net about $3100/month and 15% I net about $2400. I have no dependents and rent an apartment. I have a newish Subaru Outback which is extremely reliable and still under warranty. I also currently live ~3 miles away from work. $200 maximum out of pocket for healthcare. $1500/year max totaled I would pay before company pays the rest.

My credit is 760 and have great credit cards that I originally used to churn, but now are empty and I cycle them weekly just to get some usage on them.

I guess I'm in the middle. I have no dependents, but I also am new enough to a career where the lions share of my salary is going to expenses.

horsepoor

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Re: To emergency fund, or not
« Reply #7 on: October 31, 2014, 09:04:57 AM »
My monthly expenses, removing all housing, insurance, car, gas, utilities, and food, is approximately $2400. Unfortunately I live in a rough neighborhood where you can find semi-affordable housing, but shootings, violence, and gangs are pretty common so I would prefer to pay $300/month additional for that safety. In 8 months when my lease is up, I am going to look for a cheaper place though further from work. My net pay per month depends on my 401k %... 6% I net about $3100/month and 15% I net about $2400. I have no dependents and rent an apartment. I have a newish Subaru Outback which is extremely reliable and still under warranty. I also currently live ~3 miles away from work. $200 maximum out of pocket for healthcare. $1500/year max totaled I would pay before company pays the rest.

My credit is 760 and have great credit cards that I originally used to churn, but now are empty and I cycle them weekly just to get some usage on them.

I guess I'm in the middle. I have no dependents, but I also am new enough to a career where the lions share of my salary is going to expenses.

Do you mean that your monthly expenses for those items is $2,400?  So you have $700 per month cash if you're contributing only 6% to your 401(k).  If I were in your shoes, I think I'd keep about $5K liquid, and then focus on stashing  a higher percentage in the 401(k) to reduce taxes.    You can always reduce the witholding if you get in a situation where you need to free up some cash.  Reducing housing costs would definitely help you feel better about a small EF - do you have, or can you get roommates?

This is tangential, but it doesn't make sense to me that increasing your withholding by 9% reduces your pay check so much - based upon your take home, I'm assuming you don't make $100K.  Have you actually had it at 15%, or is this a WAG?  I make $91K and each percentage I add to my pre-tax contributions only reduces my take-home by like $25.

enpower

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Re: To emergency fund, or not
« Reply #8 on: October 31, 2014, 12:25:09 PM »
I used to follow the advice of having an "emergency fund". I listened to the so called experts and set aside a nice round number of 10k just to be sure. This equated to around 9 months living expenses for me as a single person.

However, over the next 3-4 years in my early 20's I only dipped into that emergency fund once. This was when I needed rather urgent medical tests and minor surgery totalling around $2000.

So I had 10k sat there, earning about 3% interest the whole time. If I had put that into the stock market along with my other investment money, I could have doubled it.

So now I have a credit card with a 10k limit. I use all my money to put into investments and get the best of both worlds.

If I lose my job (unlikely) or if I need any other major emergency that requires thousands of dollars, I just put it on the credit card and pay it off at the end of the month, I could even sell my stock investments if I get really desperate.

In my opinion, and emergency fund, tying up several thousands of dollars in an account earning next to nothing in interest is one of the worst things I did in my early 20's.

NoraLenderbee

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Re: To emergency fund, or not
« Reply #9 on: October 31, 2014, 12:43:44 PM »
I would keep the 10K where it is. Personally, I'd get it up to 15K, but that's up to you.

The purpose of an emergency fund is to give you *immediate* access to money when you have a sudden, urgent need. That could be: your car gets totaled; you break your leg and have to pay a medical bill out of pocket, and wait to be reimbursed by insurance; you lose your job without notice. IMO, you need to have at least 2 months' of expenses available. Unemployment (if you're in the US) doesn't start until you've been out of work 2 weeks. Expenses don't have to include any luxuries, but must cover housing, food, insurance (which might have been paid by your employer), etc., plus anything you can't pay with a credit card, plus the minimums on any loan payments.

If the stock market goes down (even temporarily), you will not want to cash in a mutual fund or sell a stock, because you'll lock in a loss. The e-fund protects your investments against having to sell at a loss.

A credit card can also be an e-fund, as empower describes. But what if at the end of the month you're still out of work (or paying for your emergency), and you can't pay the bill in full? Now you have a CC balance accruing interest on top of your original emergency.

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So I had 10k sat there, earning about 3% interest the whole time. If I had put that into the stock market along with my other investment money, I could have doubled it.

Or you could have halved it. The first rule of investing in the stock market is not to put in money you might need at short notice.

Fuzz

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Re: To emergency fund, or not
« Reply #10 on: November 02, 2014, 06:33:43 PM »
If you're single and renting, it's hard to imagine what you could ever need $15K for, other than a medical expense. Get good insurance.

If I were you, I'd keep about $3K in an e-fund. Also, I'd bike that 2-3 miles to work, and consider getting roommates. Stash some of that in a Roth IRA. I have a higher risk tolerance. But if you don't, that's fine.