How big is your emergency reserve?

[celticmyst08]

My husband and I have around 3 months of expenses plus ~$1000 in an HSA. Our goal was to have $10k but now I'm pretty satisfied with where we are. We both work and have no kids so I think we don't need as big of an e-fund as some. Also, we have such a surplus of cash each month (saving ~65%) that we could just cancel a couple investment contributions if we needed anything beyond our savings account / HSA.

[Kris]

My husband and I have around 3 months of expenses plus ~$1000 in an HSA. Our goal was to have $10k but now I'm pretty satisfied with where we are. We both work and have no kids so I think we don't need as big of an e-fund as some. Also, we have such a surplus of cash each month (saving ~65%) that we could just cancel a couple investment contributions if we needed anything beyond our savings account / HSA.

Yeah, I think that where you are in the process of FIRE can change your need (or perceived need) to have much of an emergency fund.  We used to have the standard 6 months, but over time we have so much in net worth and we've cut our expenses to the point that it ended up seeming less important to have so much available cash.  So that's when we decided to open a Vanguard account to put the emergency stash into. 

[morning owl]

A good way to get a sense of the opportunity cost vs. the safety net of having cash is by plugging different asset allocations into cfiresim, and using 'variable spending' as the spending plan. I put a value in for the 'floor' and keep the ceiling the same as my yearly withdrawal. What this does is it lets me see what my withdrawals would look like in the case of a bad market, so I can compare the scenarios of 10:90 cash:equities vs 100% equities.  (Or 10:10:80 cash: bonds: equities, etc.)

In the 100% equities scenario, I would need to lower my spending for the first few years in the worst markets, but my ending portfolios are far greater no matter what the market is like. In the 10% cash scenario, I'm able to spend more money in the early years in the case of a bad market, but my end portfolio is considerably less all around. There's no clear 'winner' for me, as I don't really care if my end portfolio is 23MM vs 12MM -- what matters to me is that my expenses are covered in the long run and I don't run out of money. Perhaps having that extra security up front is worth it, once my portfolio gets to a certain size.

In other words -- as long as I have enough money, I'm fine with having a percentage of it in cash if it buys me more security in a down market. If I was cutting it very close with my FIRE stash, and wasn't sure I could make it last the rest of my life, then I'd go all in in equities, as the fear of running out of money would for me outweigh the fear of a market crash. As it is now I feel the safest AND most productive thing is to keep a bit of cash.

[brooklynguy]

Morning owl, I don't follow your cfiresim analysis.  In the modeling you described, cfiresim will keep your allocation constant (in the 90/10 stock/cash allocation, it will keep rebalancing you back into that allocation), so I don't see how it allows you to model the use of your cash buffer during downturns as you seemed to describe.  What it does do is allow you to see the overall suboptimality of holding cash because of the performance drag it has on your portfolio.

[morning owl]

I do see the performance drag in the cash scenario. But the spending rate I'm talking about is when I select "variable spending" in my spending plan, and allow for a floor spending value. In my particular example, my yearly spending is 60k, with a 40k spending floor and a 60k ceiling. Depending on the market that year, cfiresim will calculate the optimal amount I can spend. That's how I'm understanding it anyway, correct me if I'm wrong.

When I run the simulations, for the all-equities scenario the lowest yearly spend rate is about 44k in the first 5 years of a bad market. For the 10% cash scenario, I can spend about 46k. Not a huge difference, but I interpret this to mean that in order for my stash to last a full 60ish years, if I don't have the cash buffer then I'll have to spend less in the early years of a bad market. Perhaps this is common sense, but cfiresim illustrates it quite clearly. The only variables I'm changing are the asset allocations of cash and equities, so apparently that is what's making the difference in my spend rate.

[NoraLenderbee]

And the money is not "doing nothing".  It is playing defense, while the rest of the money plays offense.

Exactly. That's an excellent (and pithy) description.

We have about a year's expenses. It's a combination of emergency fund and short-term savings. When our truck got totaled in an accident, and we decided to replace it, having the money meant we just had to focus on finding the best deal. We didn't need to borrow money, sell investments, or scramble for cash. When my mother died, my husband and I could go to the funeral, which required cross-country plane flights, hotel, and car rental at short notice. That was 5K we could come up with at a moment's notice, with no worries.

It's quite common for job loss to coincide with a down market and generally shitty economy. "If I need money, I'll just sell a Vanguard fund" sounds good now, but it will really, really suck if you have no income coming in and have to sell at a loss. I've lived through enough downturns not to be too sanguine.

Edit: Fixed quoting.

[Tabaxus]

I have ~$130k sitting in cash or CDs, so a few years' expenses.  I am planning to buy a house "soon but don't know exactly when or exactly where," so I can't really have it in the market and don't have any way to know how much of the cash is house money and how much of it is emergency fund.

[Pooperman]

$6500 in emergency money/bill money. If that fails, $6500 in a Roth. If that fails, $1k in silver, $1.5k in a taxable account. If all of that fails, $40k in credit cards. Annual expenses in the $35k range. Base is lower at around $25k. Total emergency fund is about $65k.

[Neustache]

@kite - I kind of like the idea of using a Roth as an emergency fund.  It's my understanding you can withdraw contributions penalty free.  I might consider fully funding my husband's Roth and then opening a t. IRA for me.  I've got around 5K in contributions in our current Roth...if I max that out this year I'll have a 10K emergency fund if needed.  Then following years I could just fully fund t. IRAs.  This seems to match my risk tolerance and the need for liquid cash that won't be taxed. 

[Roland of Gilead]

Now that we have retired early, we keep about 2 years expenses in cash.   I never use our HSA for medical expenses, I pay those out of pocket so the HSA can grow tax free.  I guess it could be used in the future during an emergency because past year's expenses can be taken out any time in the future with no tax due.

[brooklynguy]

I do see the performance drag in the cash scenario. But the spending rate I'm talking about is when I select "variable spending" in my spending plan, and allow for a floor spending value. In my particular example, my yearly spending is 60k, with a 40k spending floor and a 60k ceiling. Depending on the market that year, cfiresim will calculate the optimal amount I can spend. That's how I'm understanding it anyway, correct me if I'm wrong.

When I run the simulations, for the all-equities scenario the lowest yearly spend rate is about 44k in the first 5 years of a bad market. For the 10% cash scenario, I can spend about 46k. Not a huge difference, but I interpret this to mean that in order for my stash to last a full 60ish years, if I don't have the cash buffer then I'll have to spend less in the early years of a bad market. Perhaps this is common sense, but cfiresim illustrates it quite clearly. The only variables I'm changing are the asset allocations of cash and equities, so apparently that is what's making the difference in my spend rate.

With the "Variable Spending Plan" option, cFIREsim is not calculating the optimal amount you can spend.  It is implementing the spending plan according to the rules you give it -- a variable spending plan setting with "yearly spending" of $60k, a "floor" of $40k, and a "Z-value" of 0.5 (the default setting), tells cFIREsim that the spending in any given year will be:

The greater of:

(1 + ([percentage that your portfolio is up] * 0.5)) * $60k  [if the market has gone up]

(1 - ([percentage that your portfolio is up down] * 0.5)) * $60k  [if the market has gone down]

and

$40k

In English, this means the spending plan will vary with market swings (and the higher you set the "Z-value," the more reactive your spending will be to market swings), but never to an amount lower than the floor (or higher than the ceiling, if you were to set one).

The reason you are seeing lower decreases in spending during bad markets is because the cash buffer is reducing the volatility of your portfolio -- the portfolio drops less during bad markets (and your spending, which varies with market performance, therefore drops less), but your portfolio also increases less during good markets.

If you set your allocation to 100% cash, your spending would remain incredibly stable with a variable spending plan.  But, unless you have grossly oversaved, you will also end up running out of money.

[Edited to correct typo in formula]

[Retired To Win]

Big "newsflash" here...

After critically thinking about all the replies to my original post, I have fundamentally changed my basic attitude towards an emergency reserve fund.

Up to now, I have always recommended a minimum of six months' worth of expenses as an emergency reserve. Set in stone.    (And always made sure to note that I keep one-year's worth.)  But no more.

My basic premise on emergency reserves is now that "it depends."  (Don't scoff!)  That each person's situation has to be analyzed on an individual basis, taking into account (1) that person's sources of income, (2) the stability of that income, (3) the person's access to (reasonably priced) credit, (4) and any particular basic or regular expenses that would likely require cash payment.

Now... I am going to analyze my own situation based on that new premise.

Stay tuned!

(P.S. -- I'm going to have to update several of the articles on my blog because of this!)

[HawkeyeNFO]

My basic premise on emergency reserves is now that "it depends."  .....That each person's situation has to be analyzed on an individual basis....

"It depends" is true for just about everything in personal finance.  The way I run my finances might not work for someone else's situation. 

It's just like the people who say "don't spend more than __% of your budget on housing."  What a load of bullshit that is, because again, everyone's situation is different.  As RTW is talking about, you have to smartly analyze several factors.

[matchewed]

Big "newsflash" here...

After critically thinking about all the replies to my original post, I have fundamentally changed my basic attitude towards an emergency reserve fund.

Up to now, I have always recommended a minimum of six months' worth of expenses as an emergency reserve. Set in stone.    (And always made sure to note that I keep one-year's worth.)  But no more.

My basic premise on emergency reserves is now that "it depends."  (Don't scoff!)  That each person's situation has to be analyzed on an individual basis, taking into account (1) that person's sources of income, (2) the stability of that income, (3) the person's access to (reasonably priced) credit, (4) and any particular basic or regular expenses that would likely require cash payment.

Now... I am going to analyze my own situation based on that new premise.

Stay tuned!

(P.S. -- I'm going to have to update several of the articles on my blog because of this!)

I would probably add a 5) with emergency expense. Things to consider: car replacement, emergency travel, medical expenses...etc. But that's my take on it.

[morning owl]

I do see the performance drag in the cash scenario. But the spending rate I'm talking about is when I select "variable spending" in my spending plan, and allow for a floor spending value. In my particular example, my yearly spending is 60k, with a 40k spending floor and a 60k ceiling. Depending on the market that year, cfiresim will calculate the optimal amount I can spend. That's how I'm understanding it anyway, correct me if I'm wrong.

When I run the simulations, for the all-equities scenario the lowest yearly spend rate is about 44k in the first 5 years of a bad market. For the 10% cash scenario, I can spend about 46k. Not a huge difference, but I interpret this to mean that in order for my stash to last a full 60ish years, if I don't have the cash buffer then I'll have to spend less in the early years of a bad market. Perhaps this is common sense, but cfiresim illustrates it quite clearly. The only variables I'm changing are the asset allocations of cash and equities, so apparently that is what's making the difference in my spend rate.

With the "Variable Spending Plan" option, cFIREsim is not calculating the optimal amount you can spend.  It is implementing the spending plan according to the rules you give it -- a variable spending plan setting with "yearly spending" of $60k, a "floor" of $40k, and a "Z-value" of 0.5 (the default setting), tells cFIREsim that the spending in any given year will be:

The greater of:

(1 + ([percentage that your portfolio is up] * 0.5)) * $60k  [if the market has gone up]

(1 - ([percentage that your portfolio is up down] * 0.5)) * $60k  [if the market has gone down]

and

$40k

In English, this means the spending plan will vary with market swings (and the higher you set the "Z-value," the more reactive your spending will be to market swings), but never to an amount lower than the floor (or higher than the ceiling, if you were to set one).

The reason you are seeing lower decreases in spending during bad markets is because the cash buffer is reducing the volatility of your portfolio -- the portfolio drops less during bad markets (and your spending, which varies with market performance, therefore drops less), but your portfolio also increases less during good markets.

If you set your allocation to 100% cash, your spending would remain incredibly stable with a variable spending plan.  But, unless you have grossly oversaved, you will also end up running out of money.

[Edited to correct typo in formula]

Thanks brooklynguy, that totally makes sense. I had intuited that, but couldn't fully explain the math behind it.

This explanation doesn't contradict what I was saying though. I like to keep a percentage of cash to reduce volatility in the case of bad markets, at the expense of greater returns in my end portfolio. Obviously it's much easier to run out of money with 100% cash, but when I run my numbers through cfiresim I still come out with 100% success at a 10:90 ratio of cash to equities. For me, that little bit of cash security is worth the performance drag. My financial goals involve stability rather than leaving behind millions to my cat when I die. As usual with all things financial, YMMV. But if anyone want to check this out on cfiresim this is a good way to test the variables.

[ZiziPB]

I keep 6 months of basic living expenses in my EFund (savings account and a CD that I could break easily).  I also have over $15K in my HSA (some of it invested) and a small cushion (~$2K) in the checking account.  A bit on the high side but this is designed to cover me in case of a job loss.  It would take me at least 6 months (if not longer) to find a new position.

[BBub]

I love the variety of answers on this thread.

Personally I shoot for $10k cash reserve, or about 3 months basic living exp.  It's variable though.  We got down to $2,500 recently while frontloading retirement accts in the 1st quarter.  $10k is probably a bit on the conservative side for us but makes me comfortable, and it's a flexible figure.  We'll go above and below it at times, then either scrape money off to fund investments or scurry to build it back up to $10k.  We have 2 incomes and could live on a fraction of either in the event of a single job loss.

In retirement, I believe we'll keep a significant cash buffer - prob 2 years on average, but with some flexibility built in.  If an opportunity comes up we can draw it down, then scurry to build it back up. Even if it means OMY to get there I plan to start RE with 2 yrs cash, and the gameplan will be to roughly maintain a pipeline with 2 yrs cash then income from investments will continually replenish that cash.  Obviously my RE cash management strategy is not very well formulated at this point, but I envision a sort of mix between being a conservative wuss and a greedy opportunist.

[teacherwithamustache]

Savings Acct: 6 months living expense

Checking Acct 1: 4 months living expense

Checking Acct 2 (brokerage acct): 3-5 months living expense depending on investments

House Go Bag:  $5,000 cash, about $7500 gold coins, (2) .44 Magnums, (1) AR-15,  2500 rd's of ammo each, 10 years worth of wife's medication, 500 water purification tabs= 5000 gallons water, Anti biotics (I dont know how much this is wives lone go bag responsibility), (2) hunting knives, tackle box, fold up fishing pole, cigarette lighter.

Buried Bag on family land 100 miles away
(250) MRE's, (A lot) ammo, Water purification filter, 10 years worth of wifes medication,  Treasure map to Grand Pa's stash on land which makes my go bag look like pocket change.

[Retired To Win]

...

House Go Bag:  $5,000 cash, about $7500 gold coins, (2) .44 Magnums, (1) AR-15,  2500 rd's of ammo each, 10 years worth of wife's medication, 500 water purification tabs= 5000 gallons water, Antibiotics (I don't know how much this is wive's lone go bag responsibility), (2) hunting knives, tackle box, fold up fishing pole, cigarette lighter.

Buried Bag on family land 100 miles away
(250) MRE's, (A lot) ammo, Water purification filter, 10 years worth of wife's medication,  Treasure map to Grand Pa's stash on land which makes my go bag look like pocket change....

Well...yea.  I can check off a lot of those "emergency reserve" categories, too.  I just wasn't looking for this particular thread to take off down that side road.

[NorCal]

Situation matters.  My reserve started much higher, but has progressively decreased as other assets have increased.  Currently, I have:

$1K cash in a safe (if an earthquake knocks out power, you need cash).
1 month living expenses in our checking account (rolling balance)
2 months living expenses in a savings account
Credit cards are all paid when the statement comes out.  I can float them an extra month at no expense in an emergency
3 months living expenses available on credit cards (although this would be a MAJOR emergency for me to draw down on)

Beyond this, I have other brokerage assets I could draw down on, but would rather not.

Before I had these other assets, I kept 6 months in cash.

[sleepyguy]

In Canada we have something called TSFA which you put your post-tax dollars in and grows tax free forever.  You can also withdraw at any moment without penalty and "catch-up" later.

We're using it as our part of our FIRE plan but because of it's flexibility it's also our emergency money (we have a basic checquing account with $5-7k or so as well).  It hasn't been going on for too long (at 0% growth the max per person currently is 41k) but we have about 4yrs of expenses if we really needed to buckle down (both losing jobs, etc, etc).

[plainjane]

In Canada we have something called TSFA which you put your post-tax dollars in and grows tax free forever.  You can also withdraw at any moment without penalty and "catch-up" later.

We're using it as our part of our FIRE plan but because of it's flexibility it's also our emergency money (we have a basic checquing account with $5-7k or so as well).  It hasn't been going on for too long (at 0% growth the max per person currently is 41k) but we have about 4yrs of expenses if we really needed to buckle down (both losing jobs, etc, etc).

You guys should really consider whether you need the full 41k in savings.  Perhaps go with 20k if you need a big buffer to feel comfortable and shift the rest to a couple of index funds?

[sleepyguy]

We currently have over 100k (41k each... and a few yrs growth).  Mind you these are already invested 100% in Canadian index (due to tax efficiency).  Our entire TSFA is 100% invested in equities.

This is separate to our RRSP (Canadian version of 401k), which is invested with pre-tax dollars.

In Canada we have something called TSFA which you put your post-tax dollars in and grows tax free forever.  You can also withdraw at any moment without penalty and "catch-up" later.

We're using it as our part of our FIRE plan but because of it's flexibility it's also our emergency money (we have a basic checquing account with $5-7k or so as well).  It hasn't been going on for too long (at 0% growth the max per person currently is 41k) but we have about 4yrs of expenses if we really needed to buckle down (both losing jobs, etc, etc).

You guys should really consider whether you need the full 41k in savings.  Perhaps go with 20k if you need a big buffer to feel comfortable and shift the rest to a couple of index funds?

[starbuck]

Agreed, the variety of answers are very interesting!

Our goal is very different from our reality right now. I'm in the camp that generally scoffs at EFs (see caveats below that make this a comfortable decision for me.) A $1,000 in checking as a 'zero' balance, and the rest is invested. BUT we've been sitting on a lot of cash for other reasons and oh how it chafes! A large large chunk ($50k) set aside for spouse's schooling before he landed his dream job in the same field, and another $15k for planned renovations on our fixer upper. The $15K will actually be spent this summer since our timeline just got seriously compressed, but I was about to invest it in our taxable account until all my plans got thrown out. Expecting our first kid at the end of the year, plus a cross country move, plus possibly losing one of two incomes, plus selling our house in the near future means that we're going to be sitting on at least some of this cash until everything shakes out in the next 12 months. Argh.

But none of this was earmarked for emergency savings. If we didn't have that mound of cash pathetically lying around, I probably would start setting aside some over the next 12 months, but it's still things we can plan for (or take from our taxable account.)

I think our new goal is 2.5% of liquid assets will be held in cash, or $20k, whichever is lower. Maybe a cap of $15k if I'm able to transfer jobs when we move next January.

Caveats:
-DINKs with lots of job security (federal)
-No reliance on personal autos to get to work
-Easily living off of a portion of 1 income
-Great health insurance, & very handy at DIY
-Quite a large stash at this point in our MMM journey

[Mr Dorothy Dollar]

We don't have an emergency fund. We have mitigated the need for funds by living fairly modest below what the lower of two incomes could support so a single job loss would not create a nonadjustable hardship. Further, having access to credit which is a few times yearly combined salary makes a safety net not needed for a major one time hit, like medical.  To have need of a fund would require two job losses and a credit market drying up. I don't see this happening for long with two engineering degrees, JD, and the union. In other words we have eliminated the risk down to the point where the economy would have to crash putting most of the USA in a far worse position.   

[NorCal]

Almost everyone here seems to be forgetting a critical part of the emergency fund.  You need to have some money in physical CASH that is easily accessible.

Having three years expenses in emergency savings does you no good if an earthquake, hurricane, or tornado knocks out the electricity to ATM's and retail stores for a week.

It doesn't have to be a huge chunk of money.  But it is important.

[BBub]

I like that idea. I'll consider sticking $1k cash in my safe.  We experience the occasional major storm down here.  Power outages are not uncommon, and during the worst of disasters we have disruptions to infrastructure, floods, downed trees, long lines at the gas pump, etc.  I'm not so worried about actual survival, but having a little folding money in the safe wouldn't be a bad thing in a situation like that.

[Retired To Win]

Almost everyone here seems to be forgetting a critical part of the emergency fund.  You need to have some money in physical CASH that is easily accessible.

Having three years expenses in emergency savings does you no good if an earthquake, hurricane, or tornado knocks out the electricity to ATM's and retail stores for a week.

It doesn't have to be a huge chunk of money.  But it is important.

Not forgetting it; just not mentioning it.  I keep $2000 in cash and $400 face value in silver dimes squirreled around the house.  Just in case of this... just in case of that.  ;)  And my wife keeps another $1000 or so in cash here and there.

[Rural]

Almost everyone here seems to be forgetting a critical part of the emergency fund.  You need to have some money in physical CASH that is easily accessible.

Having three years expenses in emergency savings does you no good if an earthquake, hurricane, or tornado knocks out the electricity to ATM's and retail stores for a week.

It doesn't have to be a huge chunk of money.  But it is important.

I'm not convinced it has to be much at all beyond enough in the wallet for gas to get home. If a natural disaster knocks out power for a week (or three), I'm not going anywhere, and there wouldn't be anything to buy if I did, anyway. Depends on your circumstances, I guess.

[Retired To Win]

Almost everyone here seems to be forgetting a critical part of the emergency fund.  You need to have some money in physical CASH that is easily accessible.

Having three years expenses in emergency savings does you no good if an earthquake, hurricane, or tornado knocks out the electricity to ATM's and retail stores for a week.

It doesn't have to be a huge chunk of money.  But it is important.

I'm not convinced it has to be much at all beyond enough in the wallet for gas to get home. If a natural disaster knocks out power for a week (or three), I'm not going anywhere, and there wouldn't be anything to buy if I did, anyway...

I don't think you have actually lived through the aftermath of a natural disaster.  I have.  And your conclusions don't track with my experience.  Retail businesses will try to open asap.  But they very likely will do so not having power and/or computing access.  And "opportunity" street vendors offering anything from bottled water to portable electric generators will crop up fast, too.  Normal way of doing business then becomes ONLY cash.  If you have no cash, you get to not be able to buy.

And this can go on for a fairly long time...

[Psychstache]

about $50 in a savings acct and a couple thousand in checking to cover bill float. Not a fan of having idle monies sitting around.

Fifty dollars in a savings account???

Well, there's enough of you that don't give much credence to emergency cash reserves to at least make me want to think things through to reconfirm my pro-reserve conclusion.  So I shall do that, just to double check my thinking.

I think someone else pointed it out, but there is a big difference given that some people are in accumulation phase and some are ER. I might feel different if I was retired, but I feel fine given that we have some layers for responding to emergencies with our current savings/savings rate.

[Rural]

Almost everyone here seems to be forgetting a critical part of the emergency fund.  You need to have some money in physical CASH that is easily accessible.

Having three years expenses in emergency savings does you no good if an earthquake, hurricane, or tornado knocks out the electricity to ATM's and retail stores for a week.

It doesn't have to be a huge chunk of money.  But it is important.

I'm not convinced it has to be much at all beyond enough in the wallet for gas to get home. If a natural disaster knocks out power for a week (or three), I'm not going anywhere, and there wouldn't be anything to buy if I did, anyway...

I don't think you have actually lived through the aftermath of a natural disaster.  I have.  And your conclusions don't track with my experience.  Retail businesses will try to open asap.  But they very likely will do so not having power and/or computing access.  And "opportunity" street vendors offering anything from bottled water to portable electric generators will crop up fast, too.  Normal way of doing business then becomes ONLY cash.  If you have no cash, you get to not be able to buy.

And this can go on for a fairly long time...

I have indeed, but never in a city, which is why I said what I did about it depending on your circumstances. We have wood and kerosene for cooking, a good pantry, and a potable(ish) spring if water supplies are cut, plus the ability to distill the water if need be (no nitrates to concentrate here, at least). The house is earth sheltered and passive solar heated; without power we'd have humidity but temps not over 75 or under 55 regardless of weather.


I wouldn't go anywhere.


Plus, assuming the stores do open, which I think you're right about, there are very limited supplies in this area if roads are cut off - stores will sell out in a few hours. Fuel will be in demand for generators, but a generator is not a necessity for us, and in fact I'd worry about the noise of one drawing people we'd rather it didn't draw if the situation went on for an extended time. We'd lose the contents of the freezer, whatever I didn't can on the woodstove, but we wouldn't die of that, nor would we starve.


The one thing I've been thinking might be good to have that we don't is a supply of antibiotics. If roads are cut off, money won't help us with that (ten miles to a drug store, 40 to a hospital).


So we're better with supplies and the ability to get home than with cash.

[Faraday]

About six months in local cash accounts at the credit union with terribly low yields under 1%. Then another 4 months in online accounts with much better yields (3-4%) that I can quickly pull into the local cash accounts.

You can talk about the zombie apocalypse all you want, but job loss is the "disaster" that happens most frequently. I've been through this three times, having the misfortune of working for 3 companies that closed their doors. I'm hearing rumors at my current employer, so I've been reviewing the "process" I follow if it ever happens to me so I'll be prepared if I'm affected.

It needs to be said that getting your expenses down to mustachian levels as you journey to FI also works to prepare you for disasters ranging from job loss to hurricanes/earthquakes. Talk about Z.O. is premature if you have not yet eliminated consuma sucka spending.

We lived through both hurricanes Fran and Floyd. After the first 24 hours roads were cleared, so we were able to drive outside the affected zone to an area with power. We then had full access to gasoline, power, internet and money.

One thing I remember clearly from those disasters is that the consuma sucka creditors will hound you while you are dealing with disaster. It's a mess, a real mess.  Today, I've only got power, phone and mortgage. Those three creditors want to keep me as a long-term customer, so they are much easier to work with in times of disaster.

Know what I wish I had even more than reserve? Side gigs. I need to develop part-time gigs that help backfill or replace the loss of main income streams.  It's harder to think of that stuff when you are faced with possibly losing your main gig.

(I'm not looking for side-gig advice, I know what to do. I've just not done it yet. :-( )

[NorCal]

I have indeed, but never in a city, which is why I said what I did about it depending on your circumstances. We have wood and kerosene for cooking, a good pantry, and a potable(ish) spring if water supplies are cut, plus the ability to distill the water if need be (no nitrates to concentrate here, at least). The house is earth sheltered and passive solar heated; without power we'd have humidity but temps not over 75 or under 55 regardless of weather.


I wouldn't go anywhere.


Plus, assuming the stores do open, which I think you're right about, there are very limited supplies in this area if roads are cut off - stores will sell out in a few hours. Fuel will be in demand for generators, but a generator is not a necessity for us, and in fact I'd worry about the noise of one drawing people we'd rather it didn't draw if the situation went on for an extended time. We'd lose the contents of the freezer, whatever I didn't can on the woodstove, but we wouldn't die of that, nor would we starve.


The one thing I've been thinking might be good to have that we don't is a supply of antibiotics. If roads are cut off, money won't help us with that (ten miles to a drug store, 40 to a hospital).


So we're better with supplies and the ability to get home than with cash.

You've clearly thought about this for your personal situation.  The difference between emergency needs in the city vs country is significant!

[ender]

You've clearly thought about this for your personal situation.  The difference between emergency needs in the city vs country is significant!

Anyone living in remotely rural areas where snow is common has to think about this.

A good sized snowstorm (or ice/snow mix) can shut down roads for several days on a fairly regular occurrence in winter months. Oftentimes this takes out power too, especially if you have an ice/snow mix, which is probably the worst - ice takes down lines and then snow buries roads and prevents travel. The mix keeps them dangerous for some time.

Emergency needs in rural vs city areas are significantly different.

[Albert]

I probably should have more cash than I do (ca 300$ at the moment), but it's just difficult to imagine any serious disaster striking this place.

[Nords]

about $50 in a savings acct and a couple thousand in checking to cover bill float. Not a fan of having idle monies sitting around.

Fifty dollars in a savings account???

Well, there's enough of you that don't give much credence to emergency cash reserves to at least make me want to think things through to reconfirm my pro-reserve conclusion.  So I shall do that, just to double check my thinking.

I guess I'll play devils advocate then.  There is one point that I didn't see discussed in the above replies...you aren't in accumulation mode, you are in drawdown mode.  In accumulation mode, you use an emergency fund to cover unexpected expenses until your paycheck can make up the difference.  When you are retired and in drawdown mode, your stash is your sole source of income.  That emergency fund is now part of your withdrawal plan too.  How you withdraw from your stash doesn't get as much discussion around here but is really the fundamental question at play.  How do you withdraw money from your stash to cover your expenses (expected and unexpected) with the least damage to your stash.  There seems to be 2 schools of thought on this.  1-keep everything invested in your chosen asset allocation and withdraw what you need as you need it regardless of market performance.   2- divide your stash into buckets.  The first bucket is one to two years of cash that you live off of.  The second bucket is your investments that you liquidate strategically as market performance dictates to refill the first bucket.  This allows you to weather market down turns without selling at low prices. 

That's the simplified version.  Nords had a really great post on his site about draw down strategies.  He is far more articulate than the mess that I just typed up :). You may want to check that out before you make any decisions about your EF.

The rest of this thread seems to adequately cover all the aspects of emergency funds and natural disasters, so I'll just address the drawdown corner.

The majority of bear markets last for less than two years, so we keep two years' excess expenses (not spending!) in cash.  That's the amount of cash we'd need after pension, net rent, interest income, and equity dividends.  For a variety of reasons, the required amount has dwindled slowly over the years.  Our income is rising more rapidly than our spending, but we're working on that "problem".

Our first year's spending cash is in a money market earning a truly pitiful amount in exchange for its total liquidity.  To make up for that, we prudently chase yield by putting the second year of cash in a ladder of three-year CDs.  It's the sweet spot between APY and early-redemption penalties, although five-year CDs may accomplish the same result with slightly higher yield. 

At the end of the first year if the market is up, we replenish the money-market part of the stash.  If the market is down then we redeem the CDs as necessary, which might mean early redemptions if our timing is bad.  If the bear market is even longer than two years then we start cashing in the stocks which have lost the least.  Of course we'd also do this as part of rebalancing, so there'd be a flurry of money shuffling around into different assets to harvest capital losses as well as cap gains.  We'd come out of the recovery wealthier than we started, and with a much higher cost basis.

Keep in mind that human behavioral psychology would cause most people to spend less as the bear market gets worse.  In our case it would mean that we'd pursue discounted travel bargains instead of sticking with our original flexible itinerary.  I'm just as happy to visit Thailand on sale ("again") or go holoholo as I would be to defer touring Europe for another year.  Instead of spending on first-class seats I'd chew through the frequent-flyer miles and do more Space A military flights.  Instead of luxury hotels & resorts we'd rent apartments... and so on.

We "tested" this system during the 2001-02 and 2008-09 recessions.  No complaints.  We slept well at night.

This post takes readers through the scenario in explicit detail:
http://the-military-guide.com/2014/02/20/how-should-i-invest-during-retirement/

As for the natural disaster with cash, it'd be several weeks before we even needed to leave the house... let alone spend money.  The key is having a stockpile of survival resources before the emergency happens-- not keeping a bunch of cash on hand to rush out and buy it.

[Gin1984]

Nords, I found both your article and post very interesting.

[Faraday]

...
As for the natural disaster with cash, it'd be several weeks before we even needed to leave the house... let alone spend money.  The key is having a stockpile of survival resources before the emergency happens-- not keeping a bunch of cash on hand to rush out and buy it.

+1 to Nords remarks. Having a little bit of cash on hand is good for the later stages of the disaster, but having the stockpile is the crucial thing.  Personally, I also prefer the ability to make light at night and being able to run a microwave oven and window air conditioner.  On my shopping list is one of the small "SunDanzer" type DC powered freezers, but I've not seen one of those for cheap on Craigslist yet! :-) 

Having food and water on-site is important.  After living through disasters, I know I'm not interested in "going out and seeking" anything, be it food, gasoline, water, whatever.  That's just asking for trouble.

Having on-site food and water doesn't have to be as complicated as a cellar room - you could simply be buying the types of foodstuffs for your pantry that are canned or long-lived and rotating through gallon jugs of spring or distilled water. You just have to stay on it and rotate the food through.

Currently I do not have a gasoline generator, I have two of these:
http://www.northerntool.com/shop/tools/product_200511894_200511894
They will go on sale for $59 each. Plus the usual coupons, you can get them for about $50 each. I use them to keep a 12v deep cycle marine battery charged up. This system can provide 12VDC or two outlets of 120VAC at 300 watts.

These are too small to run an air conditioner, freezer or microwave. But they work just fine to charge a 12V battery that runs cellphones, tablets, rechargeable flashlights, radios, TV, small computers and several CFL's.

Of course, a bicycle with even just a little grocery-hauling capability is powerful thing. With a bicycle you can easily get by pretty big trees across the road and get around fairly quickly an area of at-least a 10 mile radius.

[Nords]

Nords, I found both your article and post very interesting.

Thanks!  I get that question a lot, and the post was inspired by an e-mail from one of this forum's members.

[Villanelle]

We have almost no emergency reserve.  We are still in accumulation mode, and DH's job is about as stable as they come.

We keep some cash on hand, though I often wonder if it should be more.  But as a % of net worth, it would still be very minimal. 

We have ~90k in a HELOC (well less than the equity of the home, so we have little worry about losing it).  A good amount in taxable accounts.  Our various checking and savings accounts have enough to get us through ~3 months, I'd guess, if we stopped any non-essential spending immediately. 

[EarlyRetirementGuy]

I keep a standard float amount of about £3000 in my personal account and another £1500 in a joint household account. This should cover about 3 months worth of my half of expenses.

Fortunately in the UK we have good redundancy payments and if worst came to worse; either my partner or I could cover the whole household expenses with just one of our incomes.

Reading through this thread has made me think about physical reserves as well. Perhaps not so far as electricity generators etc but it might be wise to stockpile a bit of water/food and money in cash form.

[rhony]

Being an Indian citizen with an american green card, I can earn 8.5% interest Pa in savings accounts in India. I have about 100k USD in an emergency fund in one of those accounts. It's my expenses for 1 year

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[Calvawt]

I keep barely a month in cash.  I would float any large expenses on a credit card, then pay in full the next month. N


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[Nords]

[ As for the natural disaster with cash, it'd be several weeks before we even needed to leave the house... let alone spend money.  The key is having a stockpile of survival resources before the emergency happens-- not keeping a bunch of cash on hand to rush out and buy it.

One word: Tsunami! OK maybe two more words: hurricanes, erupting volcanos, and floods :-)! Having stockpiles of food is great but having some available cash that you can take with you  if your house is demolished or you are cut off from it for awhile is something people need to consider having too. You and I have both seen the aftermath of a lot of natural disasters where people were displaced from their homes for days, weeks, months, or forever. Being able to fund a week or 2 of cash-only hotels or transport out of the area to somewhere safer should be part of everyone's plans (she says from earthquake, flood , and wildfire prone Calif ).

On the serious side of that issue, this is why we live in the center of the island instead of by the beach.

When we renovated our familyroom four years ago, we brought it up to hurricane code.  Between that and our small "panic room", I feel safer handling the hurricane in place instead of at the local Civic Defense shelter.  Even if we were burned out by a fire or lost the house in an earthquake then I'd still hope to be able to camp on our property.  With our climate we can view electricity as a convenience or a luxury, not a necessity.

A few years ago my spouse had a Reserve drill billet as a Navy Emergency Preparedness Liaison Officer.  She worked with the Army EPLOs, the state Civil Defense staff, and FEMA.  They mobilized all over the Pacific and the West Coast for hurricanes, earthquakes, flooding, and wildfires.  (No tsunami while she was in the billet.)  The training courses and the exercises were quite the eye-opening experience even for this over-prepared control-freak nuclear engineer.

We have bug-out cash, but unless we have to leave the island we'd prefer to stay on our property.

[Retired To Win]

I have been trying to keep most of my emergency fund money tied up in mutual funds.  I understand that it may not be immediate for me to get the money, but three days and I could have a good chunk of that money.

You don't think this approach defeats part of the purpose of having an emergency cash reserve?

Honestly, I am a little amazed that so many of the folks commenting on this thread are willing to cash out part of their investments NOT based on what makes investment sense to them but as a FORCED reaction to an emergency need for cash.

How come??

[Zinsch]

What's wrong with that?
Hint: I already replied to that concern in this thread.

[mancityfan]

Not as big as we would like. $10,000 in credit union/savings accounts. Roughly 2 months of expenses. Looking to grow our emergency fund in the coming year.

[plainjane]

What's wrong with that?
Hint: I already replied to that concern in this thread.

And I am still shocked by the number of people who don't think that their emergency (e.g. long term job loss before FI) is more than likely going to co-incide with a financial downturn.  People don't seem to believe that the lower-paying jobs they think they will be able to turn to, or their side gigs, will have a glut of people going into them because of low barriers and that the number of people buying the goods/services will also contract.  Which is why I think it's all very well to be optimistic, but your emergency fund isn't part of that.

[Villanelle]

I have been trying to keep most of my emergency fund money tied up in mutual funds.  I understand that it may not be immediate for me to get the money, but three days and I could have a good chunk of that money.

You don't think this approach defeats part of the purpose of having an emergency cash reserve?

Honestly, I am a little amazed that so many of the folks commenting on this thread are willing to cash out part of their investments NOT based on what makes investment sense to them but as a FORCED reaction to an emergency need for cash.

How come??

To me, this is like asking why someone is okay with a FIRE calc result showing "only" a 92% success rate.  It's all personal comfort levels, and varying situations.

We have a ton of flexibility, a HELOC that could probably be 2.5 years or more living expenses, and a few other flexes. (For example, or mortgage payment on what is now our rental property goes to my parents, who don't need it.  In a giant catastrophe, I suspect they'd waive it entirely, but I'd avoid that and instead ask to refi to re-amortize.  If we did something stupid, this wouldn't be an option, but if there was a great depression or something, I'm sure they'd be game.)  As I mentioned, DH's job-military, is very stable, and he's past most of the wickets that might leave him open to being forced out for probably 8+ years.

If all those things fail, and if we eat through the few months of expenses we have in cash, then we'd take the hit to the portfolio.  You choose instead to take the hit to the portfolio now and in small bits, missing out on growth of that money.  Given the likelihood of all the above failing, to me, that's a bigger risk than I take when considering cashing out my portfolio as a distant option.

When we get closer to retirement, we've talked about growing the amount in a savings account to probably ~6 months, and setting up a CD ladder with 18 to 24 months of expenses.   While we are still accumulating, we deem the growth we get on having the money invested to be more important, given what we see as very low chances of all the other fail safes actually failing.