Author Topic: When is it time to start saving in your Emergency Fund?  (Read 2848 times)

Leonidas

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When is it time to start saving in your Emergency Fund?
« on: June 29, 2017, 08:15:17 AM »
So been reading through the blog from the first post forward and have maybe the first 2 years down. I started working out a debt repayment schedule for the Student Loan, two Credit Cards with balances, and one Line of Credit. It looks like I can be free of the LoC and both CC with one more 0% APR transfer at 3% of the balance. This would be accomplished by 11/01/2019. At that time, is it better to aggressively repay on the SL with all of the monthly allocated funds for debt service or is this when I should start putting funds into the Emergency Account?

Thought is to split the amount equally between the SL and EF. That would have me paying 9% over the minimum on the SL until the EF is stocked. Then all debt payment would go to SL. SL is a fixed 5.25%, I can look at a refi once I pay the other debt service off as I can handle payments for the much shorter term.

Thoughts?

Zamboni

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Re: When is it time to start saving in your Emergency Fund?
« Reply #1 on: June 29, 2017, 08:23:05 AM »
You need to have a small EF ASAP. So I guess my answer is "now." YMMV.

Lady SA

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Re: When is it time to start saving in your Emergency Fund?
« Reply #2 on: June 29, 2017, 08:31:45 AM »
Having at least a month or two of buffer is pretty important. My DH and I did it this way--after living expenses, we had a set amount left over each month to allocate toward debt and savings. First things first, $500 went to the EF. Then we are paying extra toward our highest interest debt and mins on the rest (avalanche method). Because our debt interest rates were around 5%, it was a tossup between paying off the debt and also saving in a taxable brokerage account. So as of now, ~$250 monthly goes toward our brokerage until our loans are paid off in 2019.

Currently we are up to 4 months of EF (4 months of living expenses) and will keep putting in $500 per month until we reach 6. After that, the $500 will either go toward loan payments or savings, depending on how we feel at that point.

Check out https://forum.mrmoneymustache.com/investor-alley/investment-order/
« Last Edit: June 29, 2017, 08:35:36 AM by Lady Smartass »

ketchup

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Re: When is it time to start saving in your Emergency Fund?
« Reply #3 on: June 29, 2017, 08:36:44 AM »
Now.  Yesterday. 

If you're in debt-payoff mode you're already in a bit of a house of cards situation, and an emergency cropping up could make it all come tumbling down.  You need that buffer at a minimum.

As for how much, play the what if game to figure out what would let you sleep at night.  What if your car's transmission goes out tomorrow?  What if your kid breaks his arm?  What if your landlord says you need to move out next week?  Whatever applies to you.  Each unlikely thing has a very small chance of occurring, but the chance of one of many unlikely things occurring is pretty high.

Leonidas

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Re: When is it time to start saving in your Emergency Fund?
« Reply #4 on: June 29, 2017, 08:45:27 AM »
Now.  Yesterday. 

If you're in debt-payoff mode you're already in a bit of a house of cards situation, and an emergency cropping up could make it all come tumbling down.  You need that buffer at a minimum.

As for how much, play the what if game to figure out what would let you sleep at night.  What if your car's transmission goes out tomorrow?  What if your kid breaks his arm?  What if your landlord says you need to move out next week?  Whatever applies to you.  Each unlikely thing has a very small chance of occurring, but the chance of one of many unlikely things occurring is pretty high.
The first scenario is the most likely, 1997 Civic Hatchback with 275k on the clock. That has been my concern as I am torn on getting rid of it while it stills runs but needs some work. I have a guy that has mentioned several times he would like to buy it from me as a weekend race car toy. I could take the cash from that and go back to motorcycling to work for an average gain of 10 mpg.
Having at least a month or two of buffer is pretty important. My DH and I did it this way--after living expenses, we had a set amount left over each month to allocate toward debt and savings. First things first, $500 went to the EF. Then we are paying extra toward our highest interest debt and mins on the rest (avalanche method). Because our debt interest rates were around 5%, it was a tossup between paying off the debt and also saving in a taxable brokerage account. So as of now, ~$250 monthly goes toward our brokerage until our loans are paid off in 2019.

Currently we are up to 4 months of EF (4 months of living expenses) and will keep putting in $500 per month until we reach 6. After that, the $500 will either go toward loan payments or savings, depending on how we feel at that point.

Check out https://forum.mrmoneymustache.com/investor-alley/investment-order/
Thanks for the link! That is very helpful!

ketchup

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Re: When is it time to start saving in your Emergency Fund?
« Reply #5 on: June 29, 2017, 08:53:48 AM »
Now.  Yesterday. 

If you're in debt-payoff mode you're already in a bit of a house of cards situation, and an emergency cropping up could make it all come tumbling down.  You need that buffer at a minimum.

As for how much, play the what if game to figure out what would let you sleep at night.  What if your car's transmission goes out tomorrow?  What if your kid breaks his arm?  What if your landlord says you need to move out next week?  Whatever applies to you.  Each unlikely thing has a very small chance of occurring, but the chance of one of many unlikely things occurring is pretty high.
The first scenario is the most likely, 1997 Civic Hatchback with 275k on the clock. That has been my concern as I am torn on getting rid of it while it stills runs but needs some work. I have a guy that has mentioned several times he would like to buy it from me as a weekend race car toy. I could take the cash from that and go back to motorcycling to work for an average gain of 10 mpg.
Do you already have a motorcycle or would you be buying one?  Depending on your climate, is a motorcycle practical 365 days per year?  Do you do other things you'll find yourself wanting a car for?

10MPG up from a Civic probably means going from 35MPG to 45MPG (or similar), and that's not saving you much gas unless you do a ton of miles.  It'd be a nice bonus if it otherwise pencils out, but I wouldn't have that be a reason.

If the (non-dollars) cost of the car breaking down is pretty low (you're not that far from work, or you have public transportation as an option), I'd probably just hold onto it and keep driving (and keep up on all maintenance!), but have a plan for what to do when it does give out.

HipGnosis

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Re: When is it time to start saving in your Emergency Fund?
« Reply #6 on: June 29, 2017, 08:59:55 AM »
The text book answer is: ASAP/now.
But, the math answer is: it depends how much available credit you have on the credit cards.
If you've got $1,500 (or so) in available credit, that can be the bulk of your 'emergency fund' (I call it 'life fund' because emergencies may happen but life does happen).  You still want/need $200-$300 in savings - which also should prevent any monthly account fees.   Some people need this in a separate account.
Note that this is only viable if you can/will only use the credit for actual emergencies.  I've heard that some people put the cards in a bag or container of water and put it in the freezer.

swaayze

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Re: When is it time to start saving in your Emergency Fund?
« Reply #7 on: June 29, 2017, 09:16:46 AM »
The available cc credit thing works (or Roth IRA contributions withdrawals or maybe even 401k loans) BUT the last thing you'll feel good about in a real emergency is having to borrow money. I'd say get at least a minimal amount saved starting today!

Leonidas

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Re: When is it time to start saving in your Emergency Fund?
« Reply #8 on: June 29, 2017, 09:18:41 AM »
Do you already have a motorcycle or would you be buying one?  Depending on your climate, is a motorcycle practical 365 days per year?  Do you do other things you'll find yourself wanting a car for?

10MPG up from a Civic probably means going from 35MPG to 45MPG (or similar), and that's not saving you much gas unless you do a ton of miles.  It'd be a nice bonus if it otherwise pencils out, but I wouldn't have that be a reason.

If the (non-dollars) cost of the car breaking down is pretty low (you're not that far from work, or you have public transportation as an option), I'd probably just hold onto it and keep driving (and keep up on all maintenance!), but have a plan for what to do when it does give out.
I would be taking the money from the sale of the Civic to purchase the motorcycle for cash. As to weather, we seldom get snow/ice, rain is the worst offender and when I had a bike before, I used the car on those days. I would need to pickup a pair of rain pants to round out a complete set of gear to ride in any temp down to the 20's. I rode all winter a couple of years ago on the old motorcycle I had.

We have a 2007 Hyundai Entourage that is payed for that I can use for any hauling or the like. My wife drives that as transport for her and our 3 kids. She works at the school they attend so they all ride in that 5 days a week to/from school.

Mpg would go from 30 to 40-ish, and work is ~8k miles a year of round trips. Work is ~17 miles from home. The housing market near the office is ~2-3x what I pay here. No public transportation is available unfortunately.
The text book answer is: ASAP/now.
But, the math answer is: it depends how much available credit you have on the credit cards.
If you've got $1,500 (or so) in available credit, that can be the bulk of your 'emergency fund' (I call it 'life fund' because emergencies may happen but life does happen).  You still want/need $200-$300 in savings - which also should prevent any monthly account fees.   Some people need this in a separate account.
Note that this is only viable if you can/will only use the credit for actual emergencies.  I've heard that some people put the cards in a bag or container of water and put it in the freezer.
I have ~100k free on cards. I have several 15 year old accounts etc that I leave open and randomly use for 0% transfers if the terms are agreeable.

I think we have ~500 in actual savings. I have not done the money for 15 years as I was a huge spender and my wife was/is not so I let her take the reigns. Reading the blog really got me thinking about my bad habits and I am serious about turning this ship around. ER is nice but my major focus is getting rid of the "optional" debt(CC,LoC,SL) and then looking towards structuring retirement.

Leonidas

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Re: When is it time to start saving in your Emergency Fund?
« Reply #9 on: June 29, 2017, 09:20:02 AM »
The available cc credit thing works (or Roth IRA contributions withdrawals or maybe even 401k loans) BUT the last thing you'll feel good about in a real emergency is having to borrow money. I'd say get at least a minimal amount saved starting today!
No IRA or 401k available unfortunately.

Schaefer Light

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Re: When is it time to start saving in your Emergency Fund?
« Reply #10 on: June 29, 2017, 09:43:52 AM »
The available cc credit thing works (or Roth IRA contributions withdrawals or maybe even 401k loans) BUT the last thing you'll feel good about in a real emergency is having to borrow money. I'd say get at least a minimal amount saved starting today!
No IRA or 401k available unfortunately.

Then my vote would be to pay the minimum on the student loans until you've built up your emergency fund to a satisfactory level.  What that level is will depend on your tolerance for risk and how well you can sleep at night given how much you have in savings.

Fire2025

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Re: When is it time to start saving in your Emergency Fund?
« Reply #11 on: June 29, 2017, 10:59:43 AM »
Similar point of view to HipGnosis;
Quote
But, the math answer is: it depends how much available credit you have on the credit cards.
If you've got $1,500 (or so) in available credit, that can be the bulk of your 'emergency fund' (I call it 'life fund' because emergencies may happen but life does happen).  You still want/need $200-$300 in savings - which also should prevent any monthly account fees.   Some people need this in a separate account.
Note that this is only viable if you can/will only use the credit for actual emergencies.  I've heard that some people put the cards in a bag or container of water and put it in the freezer.

I use my available CC balances for the "instant" emergency and my Roth for anything else. 

But I'm weird here.  I've always been poor and the idea of an emergency fund is a little strange to me.  I'm also older, so I want my money "working" not sitting idle somewhere.

Lady SA

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Re: When is it time to start saving in your Emergency Fund?
« Reply #12 on: June 29, 2017, 11:14:30 AM »
The available cc credit thing works (or Roth IRA contributions withdrawals or maybe even 401k loans) BUT the last thing you'll feel good about in a real emergency is having to borrow money. I'd say get at least a minimal amount saved starting today!
No IRA or 401k available unfortunately.

Your job may not provide a 401k, but you can open an IRA on your own at Vanguard, so that option is always available.

Leonidas

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Re: When is it time to start saving in your Emergency Fund?
« Reply #13 on: June 29, 2017, 11:19:53 AM »
Your job may not provide a 401k, but you can open an IRA on your own at Vanguard, so that option is always available.
I should have phrased that better, I have made zero contributions to any type of retirement/investment portfolio. Work has ESPP and options through Vanguard, I have always told myself I couldn't afford to save for retirement until I got other things out of the way. 15 years later in the same company and kicking myself now...

Lady SA

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Re: When is it time to start saving in your Emergency Fund?
« Reply #14 on: June 29, 2017, 02:02:14 PM »
Your job may not provide a 401k, but you can open an IRA on your own at Vanguard, so that option is always available.
I should have phrased that better, I have made zero contributions to any type of retirement/investment portfolio. Work has ESPP and options through Vanguard, I have always told myself I couldn't afford to save for retirement until I got other things out of the way. 15 years later in the same company and kicking myself now...

With zero retirement contributions, you are missing out on time in the market. I personally wouldn't throw 100% of your resources at debt, you should balance that with saving a bit for your future, too.
For us personally, at this point in time with our student loans, our balance works out to still be almost 60-40 in favor of saving instead (we have access to a 401k so this makes saving much easier).

I have always told myself I couldn't afford to save for retirement until I got other things out of the way. 15 years later in the same company and kicking myself now...

You should start saving for retirement now, even if its just a couple hundred a month. You may benefit from starting a case study in the Case Studies section of the forum. We can help find additional ways to streamline to free up cash to allocate toward EF, debts, and retirement. All 3 of these are very important but we can provide much better advice if you provide more detailed info on your situation in a case study.