I sleep better now that I have an emergency fund

[El_Viajero]

A couple of years ago, I followed the advice of several other MMM fans and transferred my emergency fund to a tax-advantaged investment account at Vanguard. In my case, this was a SEP IRA.

The logic made sense. It wasn't earning much of anything in a checking or savings account, so I should invest it instead. I've got my finances under control, so I have no need for an emergency fund. Those things are for novices.

Well, it didn't work out that well for me.

I lost a big client in late 2015 and had to swallow my pride and do grunt work for lower-paying companies before things picked back up. In my line of work, this sort of thing happens. During the few months I wasn't earning as much, I started getting nervous about not having cash around. I could access the money in my various tax-advantaged investment accounts, but I'd pay penalties and lose out on any gains (might even take on some unwanted losses).

I started to miss having easy access to cash in spite of the fact that it wouldn't be earning as much in a savings account as with VTSAX, et al. For me, the best solution was to reestablish my emergency fund. As soon I picked up some more work and started earning a little more money, I stuffed it in the savings account at my credit union. I started feeling less anxious once the account balance hit $5K. Once it got to $10K, I stopped adding to savings and started contributing extra cash to investments again.

My situation isn't typical. I'm self-employed and have irregular, unpredictable income. I don't have a secure job with a high salary and an employer who desperately needs me. If I did, I might not need the emergency fund. But, alas...

Anyway, that's just my $0.02 (or $10K?) on the emergency fund "issue." Liquidity helps me sleep better at night.

[amyj05]

Liquidity helps me sleep better at night.

I agree 100%. I also keep my emergency fund in my credit union account simply for the ease of access to it - if and when I ever need it.

[Digital Dogma]

I feel the same way too, even down to your figures of 5 to 10k.  Come time for my IRA contributions, Ill run that number up to 12k or 13k before I max out my IRA for the year. That puts me comfortably back to the 5k-10k range.

Maximally efficient? No, but it lowers my resting stress level, so I should be able to harvest a few more years worth of dividends before I die of a heart attack :)

[OurTown]

Liquidity helps me sleep better at night.

I agree 100%. I also keep my emergency fund in my credit union account simply for the ease of access to it - if and when I ever need it.

We do this too both for ease of access and difficulty of access.  Ease of access: it is liquid and we can get at it if we really need to.  Difficulty of access:  no checkbook, no card, no online login (!), you have to go to the physical brick and mortar office and make a counter withdrawal.  Ergo, no frivolous justifications to raid the emergency fund.

[El_Viajero]

I agree 100%. I also keep my emergency fund in my credit union account simply for the ease of access to it - if and when I ever need it.

I'll add this: I think it's a good idea to keep the emergency savings account and your regular checking/spending account at different financial institutions. The reason: What if your debit card was stolen and the bank froze your accounts? That might constitute an emergency, but you can't get to the funds.

[MustachianKentuckian]

Being able to sleep well at night is priceless!  I also split mine between my regular bank savings and credit union.  Like PP, the credit union is good because it's not easily accessible.  But, I also like having some in an account that is easily accessible in case I was to have some kind of emergency and needed cash quickly and couldn't get to the credit union.  Probably an unlikely scenario but you never know.  Most of it is at the credit union where I get a better rate.

[Gunny]

I keep about 8% of my stash in cash.  although I'm ERd and receiving a pension that covers my living expenses and don't really need that much cash, I like having it.  I use it to cash flow travel, and emergencies like HVAC repairs, as well as making cash purchases of items like a used vehicle when needed.  Having immediate cash really helps me make wise purchases.  If I know I will be buying a car (or whatever) within the next few months, having instant access to cash allows me to take advantage of a really good deal should one crop up.  Also having cash in hand makes bargaining in my favor easier.  I also like having this chunk so I can buy stocks at reduced prices in the wake of a market plunge.  My cash is in a high yield savings account (relatively speaking) and I do not try and keep the balance at a ceiling.  As spend it, the account shrinks.  I do have a bottom balance, though.  Once I hit that, I'll recharge the account by liquidating other assets. To what level will be decided when the time comes.  I'll let my spending history dictate to what amount I'll recharge my account. 

[MisterTwoForty]

I agree that having an emergency fund can help you sleep better at night.  I have a minimum balance I like to keep in my savings account that I mentally set at absolute zero.  If we get below that, we tighten up and replenish the account as fast as possible.

Early in 2016 I only had maybe 2 months of cash on hand.  My wife and I made the decision to pay off all our debt (except for our house) and early in 2016 we made the last payment to our second mortgage.  We then decided we wanted to have 6 months of cash in a money market savings account for 'emergencies'. 

Fast forward about 6 months of saving and I lost my job unexpectedly.  I'm sure glad that we had saved 6 months worth of expenses as it helped my wife and I sleep better at night.  Literally, one week after I lost my job we had officially fully funded our emergency fund.

I only ended up being out of a job about 2 months and we didn't end up tapping the emergency fund, but it sure did ease any possible tensions we may have.  Everyone's experiences may differ, but for my family, it was the right choice.

Some feel that you are better off to have the money invested.  I personally felt that if I were to need to draw from those accounts before FIRE, it would be in a down economy and I would not want to sell investments to fund my daily living. 

[amyj05]

I'll add this: I think it's a good idea to keep the emergency savings account and your regular checking/spending account at different financial institutions. The reason: What if your debit card was stolen and the bank froze your accounts? That might constitute an emergency, but you can't get to the funds.

Liquidity helps me sleep better at night.


We do this too both for ease of access and difficulty of access.  Ease of access: it is liquid and we can get at it if we really need to.  Difficulty of access:  no checkbook, no card, no online login (!), you have to go to the physical brick and mortar office and make a counter withdrawal.  Ergo, no frivolous justifications to raid the emergency fund.

I understand where you're both coming from. I have a regular checking account at the credit union and I have a money market savings account with them as well, which is where I keep my emergency fund. I don't have a debit card or checks for the MM account but in the event of a real emergency, I can use online banking to transfer money from the MM account to the checking account.

[MilesTeg]

A couple of years ago, I followed the advice of several other MMM fans and transferred my emergency fund to a tax-advantaged investment account at Vanguard. In my case, this was a SEP IRA.

The logic made sense. It wasn't earning much of anything in a checking or savings account, so I should invest it instead. I've got my finances under control, so I have no need for an emergency fund. Those things are for novices.

Well, it didn't work out that well for me.

I lost a big client in late 2015 and had to swallow my pride and do grunt work for lower-paying companies before things picked back up. In my line of work, this sort of thing happens. During the few months I wasn't earning as much, I started getting nervous about not having cash around. I could access the money in my various tax-advantaged investment accounts, but I'd pay penalties and lose out on any gains (might even take on some unwanted losses).

I started to miss having easy access to cash in spite of the fact that it wouldn't be earning as much in a savings account as with VTSAX, et al. For me, the best solution was to reestablish my emergency fund. As soon I picked up some more work and started earning a little more money, I stuffed it in the savings account at my credit union. I started feeling less anxious once the account balance hit $5K. Once it got to $10K, I stopped adding to savings and started contributing extra cash to investments again.

My situation isn't typical. I'm self-employed and have irregular, unpredictable income. I don't have a secure job with a high salary and an employer who desperately needs me. If I did, I might not need the emergency fund. But, alas...

Anyway, that's just my $0.02 (or $10K?) on the emergency fund "issue." Liquidity helps me sleep better at night.

There's no reason you need to put your emergency fund in a place that makes it difficult to access those funds. Just put your emergency stash in a regular account in a low risk investment vehicle.

We don't technically keep any emergency funds on hand. Everything is in some investment (typically vanguard index). The real 'emergency fund' is credit cards with an instant cash advance -> checking account with a limit of $30,000). We keep enough liquid on hand only to cover monthly expenses (which actually mostly funnel through a credit card anyway so that COH is all for mortgage + CC payoff. In the event of an emergency that we would need to put on the CC above and beyond what we could payoff in a month or two (incurring a bit of interest) we would liquidate some of those funds and put them to use. To liquidate funds is typically a 2 days (for things with no settlement period + time for an ACH) or 4-5 days (for investments with a settlement period + time for an ACH).

[Quidnon?]

I consider my contributions to my roth ira to be the larger portion of my emergency fund, as well as the portion of my HSA that I have reimbursable receipts for.  However, I also have a rolling set of 3 month bank cd's; $1000 each week for 16 weeks total; which provide me a self-made unemployment income should I need it.  I also have access to 401K loans, but try to avoid disturbing them.  Overall, I have access to about 80,000 within a week's time, without any penalty, should I absolutely need it all.  I consider that enough.

[index]

We keep 22k in emergency penalty free cash. 8k in municipal tax free bonds, 5k in vgi, 6k in a 5 year CD at 2% , and 3k in I bonds. We don't touch this unless we b absolutely need it and so far we never have since establishing it 5 years ago. We also have 8 to 15k of cash on hand in a savings account used to pay for short term big expenses like vacations, or renovations. We contribute 300 per week to this account and spend it as needed. We sleep very well with this system and honestly don't miss the extra 1 to 2k in returns it could generate; once you got b critical mass and your nest egg is 10x your spending, you wont miss it.

[Dicey]

Frankly, I'm a lot more on board with having a comfortable EF than I am with prepaying a low-interest, fixed rate mortgage before maxing out all available retirement investment options. I'm aware that's a minority viewpoint to many around here, but I'm older and I know from experience that shit, such as what you experienced, happens.

The other thing that doesn't get as much attention is that in retirement, it's a good idea to have enough liquid assets to live on for two to three years. In the event that you hit a market downturn, you can avoid tapping into your investments when their value is down. I'd expect it's a hell of a lot easier to amass such an amount by starting and growing your EF in the years approaching FIRE.

[Lanthiriel]

I also am on board with having an emergency fund. My happy number is $20k, which I haven't quite hit, but I'm close. I can't think of very many things that that amount of cash wouldn't cover, and that helps me sleep at night.

[Mezzie]

I have always prioritized having an emergency fund (even when I was a kid on a quarter allowance -- I saved half), and will likely always do so. I just spent $4,000 from mine on an emergency repair and am glad I didn't have to go through any hassle to get the money I needed. I'll rebuild over the next several months to our ideal amount. I really doubt any argument could convince me investing it would be a better idea; I need the sense of security.

[HeadedWest2029]

I've settled on:
3 months expenses in online savings (Ally)
3 months expenses in bonds in a taxable account (plus international and domestic equity index funds...raid whatever has been doing well)
Important consideration is your risk level regarding insurance
I have HDHP, liability only car insurance, and $2k home deductible.  Would rather optimize insurance and suffer a bit of cash drag, especially with markets being pricey.
There's also ROTH IRA contributions if things really go off the rails.

[Greenback Reproduction Specialist]

Congrats! I know the feeling : )

We are currently working on building ours up a little higher.

[OurTown]

I also am on board with having an emergency fund. My happy number is $20k, which I haven't quite hit, but I'm close. I can't think of very many things that that amount of cash wouldn't cover, and that helps me sleep at night.

$20,000 is the balance for my emergency fund as well.  If this had been a true emergency, however, I also have about $18,000 in my spendable "layaway" account, and about $2,000 to $3,000 in my "annual expenses" account (kind of like a mortgage escrow account). 

[engineerjourney]

I also bought into the no need for an emergency fund in savings/checking and then regretted it recently.  Working on building up one now.  I always thought a couple days to get access to money wouldn't matter since I could float it on a credit card... too bad not everything can be charged on a credit card!  A lot of smaller businesses/trades will charge you an extra 3% fee if you use a credit card or not accept it at all.  The fee can be worth it if you absolutely have to but really sucky to write a check and know it was going to make you delay your mortgage payment a couple days (within the grace period thankfully) until you had the cash flow...  Trying to figure out how to get access to $$ is really shitty to deal with when you are most likely stressed the crap out due to the emergency circumstances.  Lesson learned for me, having an easily accessible emergency fund is what I need. 

[Cativa]

Peace of mind is priceless.

We have a tiny emergency fund (less than $2K) in a savings account and the rest is in CDs to get a slightly higher interest rate.  We never have to worry that DH will be laid off and we won't be able to make the mortgage, a medical bill, or what-have-you - which is a huge weight off our minds.

The emergency fund right now is about 3 months of current income.  The goal is to let it grow to two years of FIRE living expenses.  That way, when we leave the rat race, we'll have a buffer to prevent us having to sell stock in a bear market.

It'll never make us rich, but for us, its worth it.

[Laserjet3051]

Peace of mind is priceless.

We have a tiny emergency fund (less than $2K) in a savings account and the rest is in CDs to get a slightly higher interest rate.  We never have to worry that DH will be laid off and we won't be able to make the mortgage, a medical bill, or what-have-you - which is a huge weight off our minds.

The emergency fund right now is about 3 months of current income.  The goal is to let it grow to two years of FIRE living expenses.  That way, when we leave the rat race, we'll have a buffer to prevent us having to sell stock in a bear market.

It'll never make us rich, but for us, its worth it.

I am not familiar with any circumstance which would afford one guaranteed future employment under any circumstance. What country do you live in? Or is this just a case of naive hubris and/or inapropriate risk assessment?

Never? Really?

[libertarian4321]

I have always kept a decent amount of cash available.

You never know when you might need it.  Or when a family member might need it.  I've given temporary no-interest loans (up to tens of thousands of dollars) to my parents, relatives, and even trusted friends from time to time because I know they are responsible and will pay it back).

I'm sure I've missed out on investment gains because of it, but I don't regret it at all.

[VoteCthulu]

I've never lost any sleep over it, but I usually keep at least 5k in cash just so I don't have to micro-manage my bills month to month. When I fire I'll probably withdraw my annual expenses once a year for the same reason.

[khangaroo]

$10k is the magic number for me. That should last me well for 6 months with all my monthly expenses.

I also like round numbers.

In the last 4.5 years since I started on my FIRE journey, I haven't had an emergency that needed quick cash but it's awesome knowing that I have it if I need it. *knock on wood*

[TheAnonOne]

I just keep 10k in my checking account, at the end of the month, I pay all of my bills and every two weeks anything over 10k goes into vanguard.

It helps with the ups and downs. Its probably only 2 to 4 months of expenses, but that's enough time to pull cash out of my taxable accounts if need be.

[Cativa]

Peace of mind is priceless.

We have a tiny emergency fund (less than $2K) in a savings account and the rest is in CDs to get a slightly higher interest rate.  We never have to worry that DH will be laid off and we won't be able to make the mortgage, a medical bill, or what-have-you - which is a huge weight off our minds.

The emergency fund right now is about 3 months of current income.  The goal is to let it grow to two years of FIRE living expenses.  That way, when we leave the rat race, we'll have a buffer to prevent us having to sell stock in a bear market.

It'll never make us rich, but for us, its worth it.

I am not familiar with any circumstance which would afford one guaranteed future employment under any circumstance. What country do you live in? Or is this just a case of naive hubris and/or inapropriate risk assessment?

Never? Really?

No, what I meant was, if he DID get laid off, we don't have to worry about not making the mortgage because we have sufficient funds stashed away to muddle through.

Perhaps before slapping the label "naïve" on someone, you should read all the way to the period at the end of the sentence.

[OurTown]

I have a fire safe at the house . . . with nothing in it, ha ha.  Anyway, I've considered stashing about $1,000 in cash in there to have on hand in the aftermath of a natural disaster.  For instance, when Memphis gets hit with the next New Madrid earthquake.

[Quidnon?]

I have a fire safe at the house . . . with nothing in it, ha ha.  Anyway, I've considered stashing about $1,000 in cash in there to have on hand in the aftermath of a natural disaster.  For instance, when Memphis gets hit with the next New Madrid earthquake.

Go to your bank and buy a $200 case of nickles.  They are resistant to heat and water damage.  They are legal tender.  Their current commodity melt value is slightly higher than their face value.  And they are way more divisible than a $100 bill during a crisis, or even a $5 bill.

The case that they come in is pretty cool, too.  They come in a sealed, double wall cardboard box, with small holes across the top to allow you to measure the depth of the space between the top of the box and the top of the nickels, without the ability to get them out of the box without visible damage to the box.  I have three such boxes in my basement.

[HoundDog]

I lost a big client in late 2015 and had to swallow my pride and do grunt work for lower-paying companies before things picked back up. In my line of work, this sort of thing happens.

Just out of curiosity, what type of work do you do?

[OurTown]

I have a fire safe at the house . . . with nothing in it, ha ha.  Anyway, I've considered stashing about $1,000 in cash in there to have on hand in the aftermath of a natural disaster.  For instance, when Memphis gets hit with the next New Madrid earthquake.

Go to your bank and buy a $200 case of nickles.  They are resistant to heat and water damage.  They are legal tender.  Their current commodity melt value is slightly higher than their face value.  And they are way more divisible than a $100 bill during a crisis, or even a $5 bill.

The case that they come in is pretty cool, too.  They come in a sealed, double wall cardboard box, with small holes across the top to allow you to measure the depth of the space between the top of the box and the top of the nickels, without the ability to get them out of the box without visible damage to the box.  I have three such boxes in my basement.

That's an interesting concept.  We had a slightly off-center client come in and pay us in a case of un-circulated quarters once.   

[Serve&Volley88]

As someone whose emergency fund has been drained to $1K in recent months (root canal, crown, HVAC work), I can assure you that I'll be anxious until that cash buffer is back in the $5K+ range. It's such a nice thing to have.

[Quidnon?]

I have a fire safe at the house . . . with nothing in it, ha ha.  Anyway, I've considered stashing about $1,000 in cash in there to have on hand in the aftermath of a natural disaster.  For instance, when Memphis gets hit with the next New Madrid earthquake.

Go to your bank and buy a $200 case of nickles.  They are resistant to heat and water damage.  They are legal tender.  Their current commodity melt value is slightly higher than their face value.  And they are way more divisible than a $100 bill during a crisis, or even a $5 bill.

The case that they come in is pretty cool, too.  They come in a sealed, double wall cardboard box, with small holes across the top to allow you to measure the depth of the space between the top of the box and the top of the nickels, without the ability to get them out of the box without visible damage to the box.  I have three such boxes in my basement.

That's an interesting concept.  We had a slightly off-center client come in and pay us in a case of un-circulated quarters once.   

A case of quarters would work also, but they don't have a metal content value that is nearly as close to the actual face value.  That is only important in some rather extreme crisis conditions, but it would cost nothing more to get the nickles than the quarters anyway.

[bryan995]

To echo the OP.

I keep 1 months expenses in my checking as a buffer.

Then I keep 3 months expenses in my savings.
Then I am working towards 8 months expenses in a taxable account (60/40 stock/bond).
(giving us 1 full year of emergency expenses to handle the unexpected - or a extended vacation!)

Everything else goes into 90%+ stock investments.

Because I am also hoping to buy a home in < 18months I am also holding my downpayment in savings.
Missing out on some potential gains but I would hate for a big drop to occur and then be forced to the sidelines during a potential housing sale.

[MsPeacock]

I agree 100%. I also keep my emergency fund in my credit union account simply for the ease of access to it - if and when I ever need it.

I'll add this: I think it's a good idea to keep the emergency savings account and your regular checking/spending account at different financial institutions. The reason: What if your debit card was stolen and the bank froze your accounts? That might constitute an emergency, but you can't get to the funds.

Your savings account should not be linked to the debit card/ATM card for your checking account. Either don't have a debit card for your savings account (best option) or have a separate ATM card.

I am in agreement that having cash in a savings account helps me feel more at ease.