How is your emergency fund set up?

[LiseE]

We are a dual income family .. we'll we were until a few weeks ago when my hubby's job was eliminated.  Because we have two incomes we don't have a fully stocked (6-8 months worth of expenses) socked away since we were able to live off of one income and use the other to paydown our mortgage.

So hubby got a significant severance package and we will now sock this away in an emergency fund since we're on one salary now.  While we both have 401K's we don't have a separate brokerage account and I thought this might be a good time to open one with the severance money.

Thoughts?  How do you all manage your emergency funds?  Seems like an awful lot of money to be sitting in a bank account earning 1%.

[2Birds1Stone]

If the severance is earmarked for emergency fund.....I would throw it into a high yield online savings account.

[zephyr911]

Thoughts?  How do you all manage your emergency funds?  Seems like an awful lot of money to be sitting in a bank account earning 1%.

Reasons we don't have a cash e-fund: see above.

This is an interesting subject and comes up often here - the key is to thoroughly evaluate your own situation and minimize risk while maximizing returns. The more stable your income, the more secure your job, the higher your SR, the less cash you need to sit on. The lower all of those factors go, the more cushion you should have. With most pay coming from secure and predictable govt work, I will zero my account without blinking, while DW holds onto a grand or two. Either one of us could pay all the bills if one were suddenly funemployed. Surprise expenses would be paid out of our 25k in free credit, which starts 30-60 days of interest-free float while we figure out what's next - pay it out of cash flow, liquidate an investment, find a balance transfer at 0%, etc.

Meanwhile, all of our money is invested, pushing the snowball toward the comma club. Six months of expenses at typical stock returns - over a grand a year! I'm not foregoing that kind of gain to avoid potentially spending a few hundred on interest.

But if (when) we're secure enough to ramp down income for a more carefree lifestyle, you can bet your ass we'll build a cash cushion for the lean months, and have a layered plan (A/B/C/D) for bigger surprises.

[MasterStache]

Wife and I both have stable jobs. We use springy debt as emergency. No need for large sums of money sitting somewhere losing value. We have quite a bit in taxable accounts, HSA account, etc. Can always hit up CCs and do 0% balance transfers until it's paid off. Good to have flexibility.

[protostache]

Our household income is currently coming completely from my small business, which in turn currently only has two regular consulting clients and a steady but small stream of product revenue. Because of this we generally have a larger than normal cash position (typically six months of budgeted expenses), and right now we're preparing to welcome a baby in July so we're sitting on way more cash than normal (more than a year's expenses). Almost all of that sits in a savings account at our primary bank earning 0.7% interest.

Later this fall once the baby is here and everything is more settled we'll be throwing large chunks of this cash at various things, including backdoor and mega backdoor Roths, a 529, and a taxable account.

[Bertram]

So hubby got a significant severance package and we will now sock this away in an emergency fund since we're on one salary now.  While we both have 401K's we don't have a separate brokerage account and I thought this might be a good time to open one with the severance money.

Thoughts?  How do you all manage your emergency funds?  Seems like an awful lot of money to be sitting in a bank account earning 1%.

Would you make a window braker for your car out of wax to save on manufacturing and weight and run the risk of it being melted away when you need it?

Size your emergency stash as small as necessary (but not smaller) and keep it in cash.
Put the rest in a brokerage account.

Or put all of it in a brokerage account if you can live with it that in a worst case you will withdraw in a -40% down market.

Both are viable strategies, it depends onw which risk you are comfortable with. Most people are risk averse and will prefer to avoid higher losses even it means foegoing small gains.

[2buttons]

I have been wrestling with this question a lot lately.

We are debt free, except the mortgage.

We have 3 months in a cash e-fund, a sinking fund for cars and repairs that would cover another month if I had to tap that, a few other smaller sinking funds for home maintenance, travel, and gifts that amount to another half a month's mortgage payment.  We also have about 2 months of expenses in a taxable brokerage account to earn some cash.  I am in the midst of opening a HELOC, which is free by the way, to have an added layer of cushion should disaster strike.

Our plan is to bump up our cash a bit, and add some additional to the taxable account to add some additional safety there as well, and then focus on a split of accelerating mortgage pay down as well as dropping cash into the investment account. 

I think you are going to find that everyone has a different plan, and it all depends on your risk tolerance. I am a bit more conservative, but I am self employed and wife has a steady gov job.

[Paul der Krake]

We have a couple years worth of expenses in a taxable account, but it would take an incredibly unlucky series of disasters for me to consider selling.

In order of preference, emergencies come out of:
- normal monthly cashflow
- 1% savings account
- HSA (if medical emergency)
- everything else.

The last option would require a mistake of epic proportion on our part, like becoming public enemy #1 by killing a toddler live on national TV.

So far, every curveball thrown at us has been dealt with using funds from option 1.

[BarkyardBQ]

I agree with zephyr and Paul.

We started with 10k cash, then through some mental gymnastics decided it was better to keep everything invested as long as possible. With two state education jobs (secure and stable) the risk of one of us losing a job is pretty low, but we would be fine losing one of them. Almost all monthly cash flow is shoveled into 2x457/403 accounts. In the event of a costly emergency, we would just put it on a credit card and stop or adjust contributions to pay it off. All of this gave us the confidence to invest all additional cash into taxable account, which can now cover over a year of expenses. It can take a 20-30% hit and we'd still be fine, it's the last thing we would do to get by, but it's there. It's 50/50 VTSAX and VTIAX.

[wkumtrider]

This is a good topic.  I have a little over $100,000 in a money market account making 0.75% interest.  I do have a taxable account I plan to move this to (already has a little over $80,000 in it).  I know I need to be face punched for the money in the money market, but I'm learning.

[caracarn]

Currently staring loss of my current job in the face (last day is Friday), so we have our emergency fund sitting in savings account earning 1% right now.  I have severance coming and praying that one of the job opportunities I have been interviewing for the last few months comes to an offer in the next few weeks.  If that happens most everything will be swept to a taxable account at Betterment to keep the emergency fund invested but we felt at this point it made little sense to place the emergency fund (which tripled in size with a bonus received a few weeks back) into investment account in the case really bad things happen and we burn through severance and still have no replacement job.

[susanna]

I don't think there's one right way to do it since it's a personal preference. Our tiers are:
1% regular savings account
Ladder of series I savings bonds
As a last resort, a small portion of a Roth IRA in a Vanguard Lifestrategy fund - this is not counted toward retirement allocation

[Vertical Mode]

I usually keep 3-6 months' expenses in cash in a high-yield (lol) savings account. Mostly, I would expect this to cover rent since I can't pay that by CC, everything else I'd use a card as a source of springy debt and then reimburse myself either from the savings account or taxable investments. I try to keep this only to what I feel I REALLY need, but having some cash readily accessible in the savings account just in case brings me peace of mind.

Currently padding the savings account a little more to cover about a year's expenses, actually; not because I feel like I need a larger cash buffer right now, but the office is implementing a 401k match and depending on the particulars of the plan it may make sense to frontload next year (so larger savings buffer may enable me to 100% frontload if desirable).

[gillstone]

We effectively have three funds available to handle emergencies, largely due to a compromise with DW who dislikes investing in general.

- We keep 6 months mortgage payments on hand with the bank that holds our mortgage (and they really do hold and service our mortgage, its a big part of why we went with them)

- We keep an account at Ally that holds enough to cover a year of mortgage expenses OR a replacement vehicle OR a major house expense (a roof, a furnace, a refrigerator and a deck have all been paid out from this account)

- Finally, we keep a brokerage that we sweep to when those accounts exceed agreed thresholds.

[TravelJunkyQC]

I have a combination as well (like many here):
5,000$ line of credit available (kept at zero)
Approx. 5,000$ cash in various accounts
TFSA accounts that are accessible, but that I have earmarked for my future (mostly in government bonds, hence they would be the first to be taken in case of emergency, instead of investments).

First two options would last me a year on a bare-bones budget though, and my bonds have been there long enough that they currently make more than my line of credit interest rate.

[The Fake Cheap]

Thoughts?  How do you all manage your emergency funds?  Seems like an awful lot of money to be sitting in a bank account earning 1%.

Reasons we don't have a cash e-fund: see above.

This is an interesting subject and comes up often here - the key is to thoroughly evaluate your own situation and minimize risk while maximizing returns. The more stable your income, the more secure your job, the higher your SR, the less cash you need to sit on. The lower all of those factors go, the more cushion you should have. With most pay coming from secure and predictable govt work, I will zero my account without blinking, while DW holds onto a grand or two. Either one of us could pay all the bills if one were suddenly funemployed. Surprise expenses would be paid out of our 25k in free credit, which starts 30-60 days of interest-free float while we figure out what's next - pay it out of cash flow, liquidate an investment, find a balance transfer at 0%, etc.

Meanwhile, all of our money is invested, pushing the snowball toward the comma club. Six months of expenses at typical stock returns - over a grand a year! I'm not foregoing that kind of gain to avoid potentially spending a few hundred on interest.

But if (when) we're secure enough to ramp down income for a more carefree lifestyle, you can bet your ass we'll build a cash cushion for the lean months, and have a layered plan (A/B/C/D) for bigger surprises.

Personally not a huge fan of the emergency fund.  It does make sense for some people, but I would say those are a minority.  Basically my thoughts echo Zephyer's.

[BookWorm22]

This is a wonderful discussion.  We have followed Dave Ramsey for a few years so of course he advocates a 3-6 month emergency fund and sinking funds for anticipated expenses.  Our emergency fund of $6k is sitting at Capital One 360.  We have other sinking funds there including the starts ($9k) of a vehicle replacement fund.  I keep wondering if we would be better served investing more and having less just sitting around not doing much.

[Urchina]

Like many others here, we use a layered strategy:
1. Cash flow what we can
2. 3 months cash expenses in an online bank (we use CapitalOne360). We are moving towards 6 months of this since we could not live on my salaries alone, and would like the opportunity to make decisions deliberately if something happened to DH's job or his ability to work.
3. Sinking fund for major expenses (car repairs, home repairs, annual insurance and property tax payments) -- we could tap these in an emergency.
4. Credit cards
5. 529's for the kids
6. Roth IRAs / 401(k) loans

I've considered moving some of our emergency fund into a bond fund in our taxable account, but need to do more research on the tax implications before I do that. We haven't held bond funds in our taxable accounts yet, preferring the more tax-efficient stock index funds.