Author Topic: Do you always need an emergency fund?  (Read 15568 times)

bigchrisb

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Do you always need an emergency fund?
« on: November 14, 2013, 07:11:41 PM »
For a lot of people, the emergency fund is a bit of a sacred cow.  I don't have one, but wanted to hear your thoughts.

First about me:
- Income: averages from the last 18 months, approx $17.5k/month.  Its a bit lumpy. Of that, about $4k/month is passive (dividends from investment)
- Expenses: averages from the last 18 months: Interest $3.5k/month (margin loans, business loans), core living $1.6k/month, discretionary living expenses $1k/month, discretionary travel $2.1k month. Average savings / debt reduction a touch over $9k/month.
- Total net worth approx $1.2m
- Access to cash: combined credit limits on cards, $8k, available head room on margin loan $110k
- 31, with a partner (stable relationship, but not financially merged, nor co-dependent) and no dependents.

I keep almost no cash (a few hundred in my transaction account), and any spare going straight against the margin loan.  I figure my rings of protection in the event of an emergency are:
- If its less than 8k, I use the credit cards, and divert the following month's savings into wiping clean the cards.  I've used this for unexpected expenses before.
- If its larger, I can withdraw against my margin loan (at 7.5% - also the opportunity cost of having cash set aside)
- If its ongoing, then cut the discretionary travel and discretionary living expenses.  That means an ongoing $1k/month shortfall between my dividends and my interest+core living expenses bill, which will slowly erode assets.

I guess what I'm trying to argue, is that a high savings rate combined with some passive income means you can afford to have less invested in low return cash?

Your thoughts & face punches welcome!

Argyle

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Re: Do you always need an emergency fund?
« Reply #1 on: November 14, 2013, 07:19:05 PM »
I can see some scenarios in which you could run into trouble.  For instance, let's say you got hit by a car while crossing the street.  This actually happened to my mother.  You break both legs and get so banged up so badly that you're out of commission for 2-3 months.  The expenses can add up fast, and you're not working to make them back the next month.

Or the economy goes south, and suddenly you're unemployed and your investments are down too, and it's a bad time to sell them.

Or your furnace goes and suddenly you need $6000 for a new one.  And maybe meanwhile a pipe froze. 

In general it's always better to pay big expenses (and small ones) with money you already have, not money you have to borrow.  Sure, none of these things might happen.  (Though in your lifetime the chances are excellent that something unexpected will happen.)  You also have health insurance for big expenses, right?  Keeping some money in an accessible account is a variant on insurance.  You're self-insuring.

I used not to have a very big emergency fund, but I have to say that being caught out a couple of times make me a believer.

brewer12345

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Re: Do you always need an emergency fund?
« Reply #2 on: November 14, 2013, 07:31:00 PM »
The bulk of your access to cash is via borrowing on a margin loan. What happens if we get a quick, nasty downdraft in the markets?

happy

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Re: Do you always need an emergency fund?
« Reply #3 on: November 14, 2013, 09:08:03 PM »
I don't have an emergency fund either.

I think it depends on your circumstances.

For me I have a line of credit @5.13%, a credit card with a high limit, and the capacity to redraw from my mortgage also @5.13%. Whatever cash I have is offset against the mortgage.

If I have a large unexpected expense, I use the credit card and pay it off when its due.  In the unlikely event the expense can't be paid off  within the period, I shuttle it into the LOC. If it exceeded the LOC I could redraw on the mortgage.

I am 5 figures ahead on my mortgage payments....I either make an emergency fund that just sits there offsetting the mortgage,  or maybe put it in a term deposit but I won't make the mortgage interest rate. The extra payments on the mortgage are my emergency fund if you like.

I am at my frugal best with a little pressure...ie if I have $10k sitting there staring at me I feel less pressure to keep hold of the purse strings. If my cash account is <$2k, then I am constantly aware I can't spend anything.

If I am run over by a bus, well I have 4 months sick leave at full pay, as well as a couple of months of other leave.

I'm extremely  unlikely to be sacked outright.  Circumstances at work could change and become undesirable to the extent I might want to resign, but I'd have a few months to get re-organised.


BigChris, you could I'm sure get a bigger limit on your credit card...  you would then be unable to pay it off in one month, but then could shuffle it into the margin loan. If I were in your shoes I'd also try to build up a nice store of sick leave and annual leave, if your workplace allows you to do so (in case of random bus events).  You don't have a house as far as I recall, so no unexpected expensive building repairs such as exploding furnaces/frozen pipes (doh!..yes its an American forum).

Brewer is right, but to be safe from a margin call, you'd probably need as much as cash  in the EF as the size of the margin loan. (go figure in that case if you ask me)  Your biggest risk is the margin loan which you are prepared to take, as we've discussed elsewhere. The best emergency fund is to decrease the margin loan IMO.

bigchrisb

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Re: Do you always need an emergency fund?
« Reply #4 on: November 14, 2013, 09:35:59 PM »
Interesting points thus far - thanks for the perspectives!

Seems like the issues raised so far have been:
- Unable to work for a period due to health.  I've taken pretty limited sick leave over the time I've been with my employer, and ahve a little over 16 weeks of accrued sick leave.  While my annual leave balance is close to zero, I've got about 6 weeks of accrued long service leave.  So, were I to have some really serious health issues, I could in theory take almost 6 months off on full pay.  I figure that has that angle covered.

- Major repairs.  My most major repair lately was a bit over $2000 in repairing my car from hitting a kangaroo (my efforts at DIY smash repairs were not particularly successful!).  I don't own my a home, and I don't have any particularly expensive non-investment assets.  So aside from health (covered above), I don't see where this kind of expense is going to come from?  But then again, I don't want to tempt Murphy, and who knows what may come around the corner.

- Loss of job and market crash.  If my employer were to go bust, and there were a major market crash (I reckon there is a lot of potential correlation here!), then I'm potentially up the proverbial creek.  I'm a director of the company, so have pretty good visibility of its financial health, so should have a bit of foresight on this.  That said, its this combination of events (loss of employer and a margin loan wipeout) is one of my biggest fears.  I've got some un-margined stock in a holding company that I could sell and draw down, but it would still force a sale at the worst time! I think the only real way out of that though is paying out the margin loan, which without paying a whole lot of capital gains tax will be a ~7 year path.

happy

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Re: Do you always need an emergency fund?
« Reply #5 on: November 15, 2013, 01:52:53 AM »
Chris,  in the case of  some version of event 3 i.e. job loss and/or market crash, can you walk us through some scenarios...ie how much does the market have to drop before you get a margin call and what would you do? If you lost your job ie your company went broke, what would you do? And would having some cash put aside help? If so how much? With a net worth of 1.2 I'm guessing you'd be poorer, but having 10k or 20k of cash won't make much difference.


fiveoclockshadow

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Re: Do you always need an emergency fund?
« Reply #6 on: November 15, 2013, 09:24:36 AM »
Hmmmm.... It sounds like you are making some classic behavioral errors here.

What is the upside of having no emergency fund?  You become slightly richer in the best case.

What is the downside of having no emergency fund?  Severe wealth destruction in the worst case.

Design your portfolio for the worst case, not the best case.  You want to cut down on tail risks and when done appropriately the only real cost to doing this is losing out on the positive tails.  Who needs the positive tails?  Marginal benefit from extreme wealth is essentially zero - that is in fact the whole point to this site.  On the other hand marginal benefit from having just a little more on the poverty side is huge.

Running without an emergency fund you are seeking to boost your best case gains slightly in exactly the situation in which there is little benefit to those gains.  You are doing this at the risk of even less wealth in the worst case which is exactly the situation in which you want every dollar you can get.

Not a smart move...

You should also examine what catastrophic insurance coverages you aren't presently carrying (I'm guessing based on your post you hardly carry any at all).  That pedestrian accident can be much worse than six months in the hospital (long term care/disability) even if you aren't the one hit but rather the one doing the hitting (liability).

KingCoin

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Re: Do you always need an emergency fund?
« Reply #7 on: November 16, 2013, 08:12:03 AM »
What makes up your $1.2mm in net worth?

Cyrano

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Re: Do you always need an emergency fund?
« Reply #8 on: November 16, 2013, 08:14:48 AM »
Limit your downside risk. Being broke is hard. But dying with an unspent million in the bank is less impressive than it sounds.

bigchrisb

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Re: Do you always need an emergency fund?
« Reply #9 on: November 16, 2013, 06:45:58 PM »
A lot of thought provoking insight, particularly from fiveoclockshadow - thanks.

To people's questions:
> What makes up your $1.2mm in net worth?
Lots of detail and history here: https://www.networthiq.com/people/bigchrisb/2013/11
In summary: $1.1M of Australian stocks, REITS and international stocks split between my retirement accounts, a company account and my own name, and $600k in an unlisted company. Plus rats and mice (first home saver account, cash, car) less $575k of margin and business loans.

> Margin and risk? 
I've always been a bit of a calculated risk taker, all the way from a kid playing monopoly. While I've had my share of issues (including margin calls in the past), investment debt has been good to me on balance. I've kept a log of my net benefit/loss from investment debt, and at the moment I'm about $620k ahead than if I had had not used debt for investment.

> Scenarios?
Job loss:  Likelihood - low.  I'm an owner of my employer. If this happened, I'd sell stock and zero out the margin loans & business loan.  Would nominally leave me with no debt. I'd be reliant on selling some stock to live off to support my living costs, say $2k/month while I hunted for a new

Market crash: Likelihood - medium. A 37% crash in shares would wipe out my margin portfolio. It would also wipe down the shares in my investment company to about 87k. If I'm still employed, I can prop this up somewhat by my income.  If I lost my job at the same time, I'd be in a bit of trouble - I'd need to sell stock from the company to clear the company loan, leaving me with about $20k of stock to get through until I find a new job (10 months).  More than that and I'd be in dire straights, breaking into retirement funds, or drastic action like moving back in with parents.

Company collapse: Likelihood - low/medium.  At the moment we are in a fairly stable position - it would take 6 months of zero revenue to bankrupt the company.  We have enough work on current contracts to pay expenses for another 6-9 months. i.e. it would take zero new revenue for 1 year plus, or a catastrophic un-insured event to cause this. In this event, I'd be in the same basket as job loss above, but with some potentially greater liabilities.

Insurances:
I've got health insurance, and a TPD/life insurance policy through my super. I also have high deductible insurance for my car.  I don't see any point in life insurance, as I don't have any dependents.

Credit balances:
I've had much higher available balances in the past, but just don't see the merit in them at the moment.  I have two no-fee cards that I use for transaction convenience, but if I need access to more cash, I use the margin loan as a line of credit. 

I think much of my current state of mind comes down to being somewhat uncomfortable with the amount of leverage I've got, but not wanting to sponsor the ATO with capital gains taxes by selling assets to clear it :S
 

happy

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Re: Do you always need an emergency fund?
« Reply #10 on: November 17, 2013, 05:43:14 AM »
All I can think to say is YMMV!

I guess its a matter of when you want to call it quits with your higher risk strategy. How much would you lose in CGT to get rid of the margin loan?  At 1.2 mm....if you went to 1mm, is that enough of a nest egg to accumulate at a slower less risky rate? Tax minimisation is not the end game. I mean thats enough for many folks here to retire quite happily.....starting to remind me of "Deal or No Deal?" With your salary and spending rate you'll still accumulate pretty nicely.

dmn

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Re: Do you always need an emergency fund?
« Reply #11 on: November 17, 2013, 09:26:25 AM »
I would question whether avoiding capital gains tax is worth staying exposed to the huge downside risk of losing *everything*. A 40% crash in shares is very much possible, and you could not ride it out if you get margin calls. With 1.2 million $ net worth on the line, you have a lot to lose. If I was you, I would liquidate enough stocks to pay off the margin loans, even if that means paying a significant amount of capital gains tax. Better to lock in the gains from your high-risk strategy and take a guaranteed million dollars.

Another Reader

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Re: Do you always need an emergency fund?
« Reply #12 on: November 17, 2013, 09:36:21 AM »
You have built a large enough investment base and have a high enough income to allow compounding and continued additions from salary to do the heavy lifting now.  In your shoes, I would reduce or kill the margin loan and take the money off the table.  The risk of losing everything is just too high.  Then I would start another, separate account with a little risk capital and see what I could do with that, with the proviso the existing investment base would not be at risk.

Your situation is like that of a lot of flippers and other high leverage real estate investors.  It's all good until the market shifts.  Once they lose it all, the next time around they divide their capital between leveraged investments and stable rentals, usually free and clear.  You have the opportunity to learn the lesson before you crash and burn.

Jack

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Re: Do you always need an emergency fund?
« Reply #13 on: November 17, 2013, 12:19:46 PM »
Betterment has an interesting article about emergency funds and how you can accomplish the same goal better. They're pushing their "safety net fund," but they give enough info that you could DIY it with an equivalent asset allocation at Vanguard or wherever.

bigchrisb

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Re: Do you always need an emergency fund?
« Reply #14 on: November 17, 2013, 07:25:07 PM »
Perhaps I should state my exposure in a different way:
Of my capital:
45% is invested in my employer
25% is geared through a margin loan
13% is in superannuation
12.5% is unencumbered shares held in a separate company
About 5% is other bits and pieces

So, 45% of net worth is at risk if my employer folded. 25% is at risk to the broader market.

However, this discussion has morphed from the initial post about emergency funds into a debate about investing with leverage.  Perhaps that should be a topic for another post. 

Let me re-phrase my question on emergency funds.  If your monthly savings rate is high enough (i.e. capacity to absorb emergency through reducing savings that month), and you have some passive income (say enough to cover your core living costs), then what is the benefit to holding cash?  Particularly if there is an opportunity cost of this through paying additional interest on debt?

happy

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Re: Do you always need an emergency fund?
« Reply #15 on: November 18, 2013, 12:09:00 AM »
None.  (Unless it helps you sleep better, but no logical reason)
Of course some may chose to keep cash as part of their AA but thats OT too.

steveo

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Re: Do you always need an emergency fund?
« Reply #16 on: November 18, 2013, 12:51:59 AM »
Let me re-phrase my question on emergency funds.  If your monthly savings rate is high enough (i.e. capacity to absorb emergency through reducing savings that month), and you have some passive income (say enough to cover your core living costs), then what is the benefit to holding cash?  Particularly if there is an opportunity cost of this through paying additional interest on debt?

I don't think that there is a valid reason unless it is part of your portfolio in that you hold a percentage of your assets in cash. An example would be the permanent portfolio. I personally don't believe that this is a valid option if you are in debt. I think the money would be better served in paying down debt hopefully with the ability to redraw those funds if required.

There was a thread about this recently and someone did the figures and showed it was better to pay off your debt. The other side of the argument is more about feeling secure if you lose your job or some other emergency reason and the cash is available. I don't see that this reason is valid if you have the ability to redraw your money.

marty998

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Re: Do you always need an emergency fund?
« Reply #17 on: November 18, 2013, 03:58:13 AM »
No reason to hold cash imho. Cannot see a situation where either credit cards or withdrawing funds from my offset account would not be sufficient to tide me over.

BCB, I dunno if you are shit-stirring with this thread, but it's obvious you learned long ago how to keep your financial house in order.

I've stated on these boards many times my ambivalence towards Emergency Funds. Works for some, not necessarily appropriate in all cases. Not something I've found necessary for myself.

marty998

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Re: Do you always need an emergency fund?
« Reply #18 on: November 18, 2013, 04:01:23 AM »

Or your furnace goes and suddenly you need $6000 for a new one.  And maybe meanwhile a pipe froze. 


We don't need furnaces down here. We actually have a sun that works.

happy

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Re: Do you always need an emergency fund?
« Reply #19 on: November 18, 2013, 04:23:31 AM »
Quote
BCB, I dunno if you are shit-stirring with this thread, but it's obvious you learned long ago how to keep your financial house in order.

+1

but shit stirring or not, I love hearing about what you are doing as I am in awe of your acheivement and risk tolerance. I don't hang out with Aussie share investors, and to be honest when I start reading some of the investment newsletters etc, there are a ton of conflicting opinions, which makes it really hard to sort the wheat from the chaff. 

bigchrisb

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Re: Do you always need an emergency fund?
« Reply #20 on: November 18, 2013, 05:27:35 PM »
Quote
BCB, I dunno if you are shit-stirring with this thread, but it's obvious you learned long ago how to keep your financial house in order.

+1

No, not trying to shit stir.  Emergency funds seem to be an unquestioned mantra among much of the personal finance community.  I don't have one, and based on my situation, personally struggle to justify one.  I'm not convinced that wealth management and early retirement is a fixed formula for all people in all situations.  However, as its something that a lot of people feel very strongly about, I wanted to see what rationale people gave, and hence if there was an element that I hadn't thought through. 

Argyle

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Re: Do you always need an emergency fund?
« Reply #21 on: November 18, 2013, 07:32:54 PM »
I think the rationale is that you are almost always in a safer position when you have no debt.  You're relying on debt to get ahead.  That may work -- or may not.  But it's a risk.  For me the peace of mind of not having debt is very valuable.  You seem to have a high tolerance for risk, and undoubtedly that means you have peace of mind despite debt and the possibility of higher debt.  The way I look at it, more people have gotten in trouble by saying, "Debt is okay for me because I know what I'm doing and I'll be fine."  Some of them are right; some of them are wrong but lucky; many of them will get themselves in trouble.  As the saying goes, "Many people fail because they conclude that fundamentals simply do not apply in their case."   Time will tell which choice was the right one for you.

steveo

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Re: Do you always need an emergency fund?
« Reply #22 on: November 19, 2013, 12:08:44 AM »
I think the rationale is that you are almost always in a safer position when you have no debt.

I completely agree with your statement regarding debt however people have an emergency fund and debt. In my opinion the money would be better off paying down your debt.

In saying that I do save some money set aside from the mortgage basically to utilise if required. This stops me thinking of the mortgage as something to withdraw money from.

happy

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Re: Do you always need an emergency fund?
« Reply #23 on: November 19, 2013, 12:10:17 AM »

pom

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Re: Do you always need an emergency fund?
« Reply #24 on: November 19, 2013, 05:47:09 AM »
I keep almost nothing myself, just about one month pay.

I don't live my life based on doomsday scenarios but I sleep well because I have:

- unused vacation
- plenty of unused credit card space, actually all of it is unused.
- half decent regular dividend payments
- rent that comes in every month

But most importantly a great family and many friends. They are my last line of defense which I never used and hope I never will but I know that I would have the use of spare couches for months, maybe years until I have to sleep outside.

So I keep my stash invested and productive.

RootofGood

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Re: Do you always need an emergency fund?
« Reply #25 on: November 19, 2013, 02:40:44 PM »
E-funds are awesome for people that aren't very wealthy or spend almost all their money. 

For people that spend way less than what they make, they don't make as much sense. 

We never had an e-fund.  We only kept $3k or so in cash in order to pay the month's bills.

If the $hit hit the fan, the first line of defense would be cutting spending.  Next, get unemployment benefits.  I also carried a big chunk of vacation hours that I would get paid for.  In our household, we also have 2 income earners and live on less than 1 salary.  Losing 1 job wouldn't be a problem.  We also get about $9k in dividends and interest each year.

Well, the $hit hit the fan when I was unexpectedly let go in August.  I received a big chunk of vacation pay and my final paycheck of $5400 after tax (pay lags working time by 2 weeks, and I had six weeks of vacation time).  Then I switched my dividends to pay me instead of reinvesting automatically.  And I received unemployment benefits.  Add all these up, and it will be over $20k of income in the first year of unemployment (on top of what my wife makes). 

I also knew we could liquidate our six figure taxable accounts and live for quite a while on those.

Now I keep around $10k in cash to cover a few months of expenses plus a small emergency.  Not exactly an e-fund, it's just cash management in retirement. 

Kazimieras

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Re: Do you always need an emergency fund?
« Reply #26 on: November 20, 2013, 10:56:31 AM »
+1 to fiveoclockshadow's comments.

bigchrisb, you are being very efficient with your money. However, I would point out and argue you're not assessing your risk properly. Your current efficient plan works on a continual cash flow, which is a very sane way to do it. However, like fiveoclockshadow said, when things go bad, they go bad. So here's an example of your situation, and I have seen it, in 2008. Business starts to dry up a bit, so average income is higher, but recent income is in decline, following shortly by a knee-jerk reaction of a lot of business just stopping. Your costs are fixed, and so you need to continue to pay them, but with what? So first there are dividends. Yes they pay and yes companies are unlikely to repeal dividends, but it does happen. If you happened to own yellow media stock (they made the yellow pages), their dividends were cut to 0, which then sent their stock tumbling. So if there is a systemic shock like we had in 2008, those passive investments may not be available (plus do you really want to sell at the low point?). So next in line is your margin and credit. Unless those are secured lines, many banks in 2008 just cut people off from their existing margins or lines of credit. You may think you can go to the bank to say "look I have income", but remember, it is a systemic shock and your income is also dipping. Plus rationality tends to go out of the window during these times. You speak of using assets, but in that event you have very little liquid assets. You could sell your investments at a huge loss, which works... but is dumb.

So you are being efficient, but your risk profile has increased significantly on large events. So how risky a person are you? I am more conservative in nature, but I also know a good deal when I see one. In 2008 when the world went to hell and back, I had a reasonblely sized pile of cash. Prices dropped on assets, such as properties/stocks, and I was able to buy them with "my emergency fund" (in this case emergency buying). A few years later I am much better off because I had that cash on hand. There is something to be said for liquidity, even Warren Buffet touts having cash on hand since it let him make some great buys when the world goes to hell.

Siamond

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Re: Do you always need an emergency fund?
« Reply #27 on: November 20, 2013, 11:27:50 AM »
Betterment has an interesting article about emergency funds and how you can accomplish the same goal better. They're pushing their "safety net fund," but they give enough info that you could DIY it with an equivalent asset allocation at Vanguard or wherever.

Well, to extend this line of reasoning, as long as you have a solid and diversified portfolio, reverse-balancing it to withdraw emergency money when you have an unexpected large (and hopefully rare) emergency is indeed my approach. Plus the credit card(s) to buffer things for a couple of weeks when needs be. No cash, no EF. And in the mean time, my money is growing, instead of losing value of an emergency fund to inflation.

None of my asset classes are tagged 'emergency'. Again, just reverse- balancing will do the trick, sell whatever is at the higher point. Might be bonds, might be domestic stock, might be international, whatever is higher. Yeah, in the very unlikely event that the market crashes with all assets somehow correlating -which is NOT the rule- and I have a severe emergency at that point, I might sell low, but overall, backtesting shows that I'll come up the better in the long run.

It's actually ironic, because one has to be somewhat wealthy to play that game. When you're young with very little savings, then yeah, this doesn't work, and an emergency fund is in order. Not fair, I know.

aj_yooper

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Re: Do you always need an emergency fund?
« Reply #28 on: November 20, 2013, 12:17:23 PM »
+1 to fiveoclockshadow

IMO, you have already made your nut so further gains are nice, but not crucial.  William Bernstein, in talking about retirement wrote the following:

"Waring and Siegel’s conclusions apply just as well, however, to the individual retiree, who, according to the authors, should have two buckets of assets: a “liability matching portfolio” (LMP) that is structured to provide an adequate lifetime income and a “risk portfolio” (RP) of funds in excess of the LMP that serves for luxuries and bequests."[ 12]

Bernstein, William J (2012-06-18). The Ages of the Investor: A Critical Look at Life-cycle Investing (Investing for Adults) (p. 24). Efficient Frontier Publications. Kindle Edition.

So, following that lead, I would suggest partitioning your investments so you have a risk portfolio with a margin loan, if you must (currently your employer, at 70% with your leverage), and a liability matching portfolio (currently 30%) that is invested in assets separate from your current business, say real estate, equities, bonds, other businesses, and liquid assets sufficient  to cover 2 years of expenses.  I would get the LMP and the RP more in balance so you can diversify your current risks. 

You are currently OK at juggling knives, but conditions change.  YMMV


potm

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Re: Do you always need an emergency fund?
« Reply #29 on: November 24, 2013, 08:26:42 PM »
With the size of your margin loan you should be able to negotiate a much better interest rate.
Mine is 6.47% and my loan is no where near what yours is.
Just call them up and ask for a discount. If they are not willing threaten to take your business elsewhere.
Failing that call up some other providers and see what they can do for you.
The advertised rates are only there for those not willing to ask for better.
With the amount u have, they'll be throwing themselves at you.

nsarwark

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Re: Do you always need an emergency fund?
« Reply #30 on: November 25, 2013, 08:20:33 AM »
I don't like having much cash, preferring having sufficient space on cards and HELOC to weather emergencies.  It's worked for an unexpected surgery for my son that hit close in time to a vacancy in my rental property and about $6K in rehab repairs.  It's a slower process of getting back to equilibrium than having the cash, though.  So it comes down to whether you'd rather have the opportunity cost of having money parked in cash just in case of an emergency or the interest cost of paying down credit used for the emergency.  I prefer the latter.  YMMV.

-Nick

willn

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Re: Do you always need an emergency fund?
« Reply #31 on: November 25, 2013, 12:21:18 PM »
Quote
BCB, I dunno if you are shit-stirring with this thread, but it's obvious you learned long ago how to keep your financial house in order.

+1

No, not trying to shit stir.  Emergency funds seem to be an unquestioned mantra among much of the personal finance community.  I don't have one, and based on my situation, personally struggle to justify one.  I'm not convinced that wealth management and early retirement is a fixed formula for all people in all situations.  However, as its something that a lot of people feel very strongly about, I wanted to see what rationale people gave, and hence if there was an element that I hadn't thought through.

Clearly its not a fixed formula, and some intangibles come into play here. Perhaps your spouse who has a different view of risk, insists on having cash.  Etc.

The issue I see in your situation is that 8K in available credit isn't much--although its 8K more in credit than I have.   And a margin loan is by no means a stable source of cash.  During a systemic crisis it could be closed at any moment.  And assets become worth less in a systemic crisis, so liquidating them won't be an attractive option.  So overall I think your risk is probably more than you realize.



bigchrisb

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Re: Do you always need an emergency fund?
« Reply #32 on: November 25, 2013, 04:39:13 PM »
Thanks on the margin loan interest rate suggestion.  To clarify, $400k is fixed at 6.8% (should be able to get this lower in June), but $110k is variable at 7.49%.  I'm going to try to get this dropped, or change part of the loan to a different provider.

Good points about the tail risks too - I can see an argument to this, and its certainly a big risk with having that much gearing in my asset allocation, and I see significant potential for that to blow up should several events come all at once.

I can see an argument for splitting between risk and non-risk portfolios too (such as raised by aj_yooper). In a way I've been doing this, with transitioning some assets into the ungeared portfolio in my investment company.  I've been doing this at the rate that makes sense from a tax minimisation perspective though, as opposed to a risk minimisation perspective.  I can see the age old "don't make investment choices based on tax alone" ringing through loud and clear there! 


bigchrisb

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Re: Do you always need an emergency fund?
« Reply #33 on: November 26, 2013, 08:07:12 PM »
Just a follow-up on the interest rate.  With a few calls and emails to my current and other margin lenders, I got the rate dropped to 5.69%.  At the end of the day, I was quite prepared to move brokers based on rate, so quite effective.  Will have to re-evaluate when the fixed loan expires in June.

Strawberrykiwi75

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Re: Do you always need an emergency fund?
« Reply #34 on: December 10, 2013, 03:28:54 PM »
I noticed that most of you guys talk about using your emergency fund for things like illness & redundancy. I wondered if these people have income protection, and if not, why?

I'm buying a house tomorrow (hopefully, it's an auction), and I intend to have an emergency fund of about $8000. This will offset against part of my home loan. I then have a credit card with a $5000 low interest limit (5.99% versus standard Kiwi CC rates of 20%), and I have sickness and injury insurance. I don't have redundancy insurance as I only signed a permanent contract 2 months ago and can't see them making me redundant that quickly! I wondered if this plan is ok, and if not, what should I change?


Daleth

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Re: Do you always need an emergency fund?
« Reply #35 on: December 10, 2013, 07:28:55 PM »
Well, to extend this line of reasoning, as long as you have a solid and diversified portfolio, reverse-balancing it to withdraw emergency money when you have an unexpected large (and hopefully rare) emergency is indeed my approach. Plus the credit card(s) to buffer things for a couple of weeks when needs be. No cash, no EF. And in the mean time, my money is growing, instead of losing value of an emergency fund to inflation.

The OP has 45% of his assets invested in his own company. That's not exactly diversified...


brewer12345

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Re: Do you always need an emergency fund?
« Reply #36 on: December 10, 2013, 08:35:15 PM »
I noticed that most of you guys talk about using your emergency fund for things like illness & redundancy. I wondered if these people have income protection, and if not, why?

I'm buying a house tomorrow (hopefully, it's an auction), and I intend to have an emergency fund of about $8000. This will offset against part of my home loan. I then have a credit card with a $5000 low interest limit (5.99% versus standard Kiwi CC rates of 20%), and I have sickness and injury insurance. I don't have redundancy insurance as I only signed a permanent contract 2 months ago and can't see them making me redundant that quickly! I wondered if this plan is ok, and if not, what should I change?

I don't know what the system is like in NZ.  Perhaps you guys have a better safety net than we do in the US, but here we are largely left to our own devices ifthings go pear-shaped.  There is an unemployment insurance system which is basically a dole of a modest amount of money per month, and that is about it.  Things go bump and the world is an unpredictable place.  More is better when it comes to disaster-proofing.

bigchrisb

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Re: Do you always need an emergency fund?
« Reply #37 on: December 10, 2013, 09:07:53 PM »

The OP has 45% of his assets invested in his own company. That's not exactly diversified...

Very true.  But isn't that a question of asset allocation, as opposed to access to liquidity in an emergency?  Pretend I didn't have the ownership in the company at all - the remaining 55% is still 13 years of my current lifestyle costs, and 26 years lifestyle cost if I scrapped the travelling.

daverobev

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Re: Do you always need an emergency fund?
« Reply #38 on: December 10, 2013, 09:30:10 PM »

The OP has 45% of his assets invested in his own company. That's not exactly diversified...

Very true.  But isn't that a question of asset allocation, as opposed to access to liquidity in an emergency?  Pretend I didn't have the ownership in the company at all - the remaining 55% is still 13 years of my current lifestyle costs, and 26 years lifestyle cost if I scrapped the travelling.

Yes but AA and liquidity are tied in an emergency - isn't the Oz economy likely to down turn as a resource based one? Are you tied into that? It's cyclical.

If you have your (whatever) portfolio on margin and it's properly diversified, chances are it *won't* drop by that much even in a 2007/8 scenario.

I don't need an emergency fund. I have low expenses, and multiple income streams.

No, that's not true. I do need some slush money - for my rental properties. But, as long as I have a line of credit, I'm better off putting the 'cash' into that LoC than keeping it in a separate account.

For you, shouldn't your 'emergency fund' be things that are countercyclical to your other holdings?

I don't like debt, so I guess I'm a bad person to ask. Debt = risk. But, I don't like inefficiency either, so I don't much like emergency funds!

In truth, there are two kinds of people - those who will bounce back from financial setbacks, and those who will be traumatised by them. OP I think you are in the former camp. My wife has a friend who has 4-5 houses that she rents to students and has mortgages left right and center. Not for me - one thing at a time, get this thing, pay it off; then move on to the next thing.

You will, undoubtedly, die a richer man than me.

chucklesmcgee

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Re: Do you always need an emergency fund?
« Reply #39 on: December 13, 2013, 10:59:06 AM »
Hmmmm.... It sounds like you are making some classic behavioral errors here.

What is the upside of having no emergency fund?  You become slightly richer in the best case.

What is the downside of having no emergency fund?  Severe wealth destruction in the worst case.

No, choosing to have an emergency fund in this case is a classic behavioral error of risk aversion. If he can tolerate the consequences of not having a fund, it's worth it not to. Judging by his extensive assets, he could always sell stocks to cover an emergency.

chucklesmcgee

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Re: Do you always need an emergency fund?
« Reply #40 on: December 13, 2013, 11:18:32 AM »
No, not trying to shit stir.  Emergency funds seem to be an unquestioned mantra among much of the personal finance community.  I don't have one, and based on my situation, personally struggle to justify one.  I'm not convinced that wealth management and early retirement is a fixed formula for all people in all situations.  However, as its something that a lot of people feel very strongly about, I wanted to see what rationale people gave, and hence if there was an element that I hadn't thought through.

No, I think you've thought through this enough. An emergency fund is a sort of vestige of personal finance 1.0, the most noobish level of personal finance. I would hope most MMMers have transcended this.

Insights of PF1.0- "Gosh you probably should have some money available to pay for something unexpected! Other ideas of PF1.0 are "Gee whiz, you probably want to make sure you have enough set aside to pay all your bills this month! If you buy those shoes you won't be able to pay your utility bill!" "And hmm, maybe you should put something towards retirement." PF1.0ers live in the world of the now and most immediate gratification. Everything they don't spend right away is earmarked for some specific purpose, be it "those new shoes", "Christmas" "Hawaii vacation" or the nebulous "retirement". PF1.0ers stumble through their financial life, hoping to have enough for the next month or so. There's no push to acquire a stache.

But as a MMMer, once you've built up enough of a stache, the idea of having an emergency fund- an ultra liquid, low-interest account allowing you immediate access becomes silly. No emergency really requires a mountain of cash instantly. You have ample assets outside of special retirement accounts and more than enough time to liquidate them. "Savings" accounts waste away to inflation over the years. Best not to have the expense.

Argyle

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Re: Do you always need an emergency fund?
« Reply #41 on: December 13, 2013, 04:25:00 PM »
Well, it also depends on how risk-averse you are.  I have an emergency fund because I hate debt, and emergencies come up every once in a while and I don't want to go into debt to deal with them.  Maybe I lose out on a bit of income because I've got that fund waiting and not invested in the market.  That's okay by me, because I'm frugal and live under my income and I don't need every last penny working for me in that way in order to be able to make it.  I can afford an emergency fund.

Right now my emergency fund is invested in a CD earning 3.8% interest, back from when they were offering them at that rate.  Back in the day, I've even had CDs at 10% interest.  So it's not as if a CD is automatically a terrible deal.  But even if my emergency fund were at .8% interest, I'd have a good store of ready cash available.  Because my investments are in there for the long term, not just till my car gets crunched or my tooth needs a crown or whatever.

brewer12345

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Re: Do you always need an emergency fund?
« Reply #42 on: December 13, 2013, 08:24:09 PM »
Judging by his extensive assets, he could always sell stocks to cover an emergency.

Haaaahahahahahaha!!!  Pull the other one, its got bells on.

His equities are leveraged.  Not only do equities periodically take a huge dump (right on investors' heads), but leverage added to the mix means that unless his timing is awfully perspicacious he will not be in control of the liquidity raising when the massive dump comes around the next time.