How much in emergency fund?

[Dr.Crusher]

I'm thinking 12 months expenses, which is 40K? It feels like a ton of money but:

1) DH is self-employed and works part-time so we can't count on that income. My company is doing well right now but there is zero job security in the drug industry.

2) I want to put 80 to 90% of my nest egg into equities. I think having a big cash cushion will help me sleep at night.

3) We have kids and again, a big cash cushion will help me sleep at night.

Where would you put the efund? Is there any way to set up CD's to automatically reinvest money when they mature? We have Wells Fargo if anyone has specific suggestions.

 

[growing_older]

A 12 month cash cushion is not unreasonable for a family with concerns about employment stability. You are probably earning close to zero at Wells Fargo. If you decide to use CDs, you might want to look elsewhere to get a little better rate. Granted the rate you earn is not the point of the emergency fund, you are sacrificing return for stability and safety, but Wells Fargo rates are so bad you should look elsewhere.

 

[arebelspy]

So eying to consider when having a large emergency fund like that is it's very likely you won't need to access it all at once.

If you have a year's expenses, you'll need it over the course of a year (and likely if something like a job loss happened, you'd cut expenses and it'd last even longer).

Thus something like laddered CDs with differing expiration dates (3 month, 6 month, etc) can work well too, rather than having it all in cash. 3 month's cash should be more than sufficient, with a CD equivalent to 3 month's worth of expenses maturing every 3 months. In any case, if you absolutely had to you could take the penalty for caning out early.

CD rates aren't terrific right now, but if having a year's emergency fund is something you'll do for the next 20+ years, it's something to consider.

 

[Alan]

For a long term efund you may consider I-Bonds, currently paying 4.6% and rates are set evry 6 months according to inflation, but can never go negative.

When you buy a bond you can't touch it for a year, then if you cash it in within 5 years of purchase you lose 3 months interest. You could buy $5-10k a year over the next few years. We used I-Bonds as our efund while working.

Now that we are retired we still have our I-Bonds, representing 4 years of withdrawals, to be used to avoid selling equities in a long bear market. (If I lose my private pension then it is ~18 months of expenses, but I reckon my pension is more secure than my job was).

 

[RunningBum]

I never kept an emergency fund while I was working. I figured I could just sell my taxable stocks if there was an emergency. 3 day settlement should be quick enough, and I could always take a margin loan if I really needed it immediately. It might be during a downturn in the market and not an ideal time to sell, but I didn't see why I should keep money out of the market for an event that might never occur.

In my younger days my goal was to just keep up with credit card debt, and couldn't even do that for awhile. There was a time when I had that under control and increased my retirement savings rather than build an emergency fund, but I felt my job was secure enough to do so.

In retirement, I don't have a specific strategy (yet) but I have been keeping a few months up to a year in cash, since I know for certain I will need it for living expenses.

 

[Chelhxi]

We have about 12 months expenses in cash (making 2%-Canadian credit unions), but I consider this an emergency fund AND a buy another vehicle with cash fund, as well as a freedom fund if we need/decide to move or quit working temporarily.

The chances of two reasonably healthy working adults who can live off of one income needing the full amount is pretty remote, but it makes us feel better to have it.

 

[devans0]

I tried the same all-in strategy when I was young. Life's events managed to conspire to hit exactly when markets were at ebb points, forcing me to sell low.
I now have an 18-24 month emergency fund. I am able to get 4.5% so I keep my emergency fund maxed to that interest rate. There is a limit in the amount that the CU will allow for that interest payout, and I have to jump through some other hoops to qualify.

 

[scrabbler1]

We have had several threads here and in Bogleheads about emergency funds. Some of us, including me, have used short-term or, in my case, intermediate-term muni bond funds to hold our "emergency" or equivalent funds. There is some risk of principal in an intermediate muni bond fund, but having tax-free interest is very nice. It is my first layer of easily accessible funds (via check or electronic transfer into my local bank's checking account) after the small amount (~$1,500) I keep in my local bank's checking account as a cushion against small, unforeseen expenses.

 

[growing_older]

I too have used the two tier approach to an emergency fund. A few thousand dollars in a money market account will cover any short term emergencies. The bulk of the emergency fund, if it is ever needed, would likely be for some kind of employment problem or medical issue which could allow a few days (or months) to access the funds. A longer term CD for which I am willing to pay the fee if surrendered gives a significantly higher rate of return and since I am unlikely to actually access these funds, I prefer to get the slightly higher yield. I've heard of similar approaches using bond funds or even balanced equity funds where the people were willing to take greater risk and had large enough emergency funds that they likely could even absorb losses if emergencies were ill timed, yet still have enough set aside to cover them.

 

[Grainiac]

We have two semi-secure j*bs. Either salary alone covers all of our expenses and more. Our emergency fund covers 16 months of expenses, and is 85% in Vanguard Inflation Protected Securities Fund and 15% in I-Bonds. While the VIPSX certainly comes with a risk to the principal, it has also given us about 6% annualized return over the past 10 years, and I feel we are fine considering our current situation.

 

[arebelspy]

I realized we all kind of ignored your question of "how much" for emergency fund (or at least barely touched on it) and went straight to where to keep it.

Bottom line on that is keep what makes you comfortable and lets you rest well at night. If your job situation, etc. means you want a year's worth of savings, go for it.

 

[Rich_by_the_Bay]

If you are thinking you might really need this money to live on and support your family in a worst case scenario, even a little volatility can bite you hard and even fairly stable allocations can occasionally get squirrely.

I'd stick with an FDIC-insured option like CDs or savings maybe with a portion in MMF. This is not the money you want to take chances with -- do that with your equities.

For convenience we use an on-line bank savings account recently paying 1.04%. Probably could do a tad better by shopping but too lazy.

Being retired, it is really no longer an emergency fund but more like a buffer fund so we can make infrequent expensive purchases like cars, new roof, etc without rippling too much into our cash portfolio account, or maybe even to make a rare opportunistic stock fund purchase during a recession (or not).

 

[Meadbh]

Throughout my recent move and temporary unemployment, I've kept a significant cash reserve. Now that the dust has settled, properties and furniture have been bought, sold and paid off, and cash flow will shortly resume, the cash remaining in my personal checking and savings accounts is what I hope and expect will cover my personal expenses till the end of the calendar year. This will be a good RE budget exercise and discipline. If I am successful in keeping to this budget, SWR should not be an issue in ER.

From now on, I will have no salary; all income will be corporate. My corporation will be paying me dividends as needed, and I hope to delay the next dividend till 2012. My corporation is where my "emergency funds" now reside. At present the corporation has 2-3 years' expenses (including taxes) in liquid assets, approximately half in a savings account and half in a long term GIC ladder (CDs in the US) with average interest rates in the 4% range. The way the markets are gyrating lately, and with interest rates likely going up, I may add to those GICs.

So the bottom line is that if I got fired in the morning, I should be able to survive for approximately 3 years without dipping into equities.

 

[Dr.Crusher]

We have about 12 months expenses in cash (making 2%-Canadian credit unions), but I consider this an emergency fund AND a buy another vehicle with cash fund, as well as a freedom fund if we need/decide to move or quit working temporarily.

The chances of two reasonably healthy working adults who can live off of one income needing the full amount is pretty remote, but it makes us feel better to have it.

I think this is almost exactly our philosophy on E-funds.

Thank you everyone for all the suggestions! I'll look into CD's and consider I-bonds and Muni-funds (I think Wells even offers them) but I think we will probably go with FDIC insured.

 

[growing_older]

If you are thinking you might really need this money to live on and support your family in a worst case scenario, even a little volatility can bite you hard and even fairly stable allocations can occasionally get squirrely.

This argument is often advanced for why an emergency fund should be saved in safe and accessible accounts. But on the other hand if the probability is low that you will use this money, then even a few years in a higher yielding investment can put you in a position that you have so much larger asset base that even inopportune timing still leaves you with more that you would have had by taking the low yield choice. A lot depends on how much you need exactly the amount you have set aside and how likely you could weather your particular emergency with some portion of your emergency fund.

In an extreme example, by moving my 6 month cash emergency fund into equities, in a couple decades I have a 24 month emergency fund, then a 48 month fund, etc. I probably had some risk in the early years, but after that I'm so far ahead it no longer matters. If I were to do this I'd likely keep a small (thousands) fund in easily accessible cash for small typical emergencies.

Having a 6 month emergency fund doesn't mean I expect to need 6 months of cash, it means I expect to need no more than 6 months of cash. If I ever use some, it will likely be a month or two at the most. I can decide to take what risks I want to gain better rewards with the unlikely to be needed portion.

 

[LOL!]

It's amusing how folks get all heated up about emergency funds. One persistent idea is that it needs to be in cash or FDIC-insured accounts as if one would have to withdraw 12-months of expenses all at once on a Tuesday afternoon.

More logical is a multi-tiered emergency fund as some have already mentioned. Maybe the Tuesday afternoon needs could be in cash, but the next month and the next quarter needs could even be in short-term bond funds. For a 12-month emergency fund, I would suggest that most of it be in a short-term bond fund in your tax-advantaged accounts*. If you felt the bond fund could drop by 10% at any time, then just make that tier of your emergency fund 10% larger than it would be if you held it in cash. So instead of 10-months of expenses, you have 11 months of expenses in that tier.

Retired folks should be able to use their entire portfolio as an emergency fund, so the concept really doesn't apply to them.

*One would need to have a large taxable account or put your e-fund in your Roth IRA to do this successfully. See, for example, http://www.bogleheads.org/wiki/Placing_Cash_Needs_in_a_Tax-Advantaged_Account

 

[Alan]

Please start another thread for a completely different topic. It makes searching for past info a lot easier. Stock options? Yeah, go check out that emergency funds thread, duh.

I used that post to start a new thread since it is whole new topic.

http://www.early-retirement.org/forums/f28/stock-options-57189.html

 

[Nords]

I'm thinking 12 months expenses, which is 40K? It feels like a ton of money but:

1) DH is self-employed and works part-time so we can't count on that income. My company is doing well right now but there is zero job security in the drug industry.

2) I want to put 80 to 90% of my nest egg into equities. I think having a big cash cushion will help me sleep at night.

3) We have kids and again, a big cash cushion will help me sleep at night.

Where would you put the efund? Is there any way to set up CD's to automatically reinvest money when they mature? We have Wells Fargo if anyone has specific suggestions.

What's the basis for your monthly expenses? If your spouse lost his job, would you continue to spend next month the way you spent last month? Or would you cut back on a few things? What would be your new "unemployment" monthly spending?

Even Suze Orman, that paragon of conservative financial management above all common sense, only recommends eight months-- and she advocates eight months of necessity/non-discretionary expenses, not everything in the budget.

We used PenFed five-year CDs. Anyone can join, they can be purchased in as little as $1000 increments, and they used to only have a six-month early-redemption penalty (I think it's gone up to a year). You can earn a higher interest rate than a one-year CD, and in an emergency you can break into only the CDs that you need.

 

[chinaco]

As they say... it depends.

But it seems that an often quoted amount is 3 to 6 months of living expenses. But IMO... it depends on the type of emergency for which one is trying to prepare.

If it is a job loss, that amount would assume that one will land a job within 3 or 6 months.


While DW and I were both still working, we kept anywhere from $15k to $20k for general emergencies. Since DW and I worked for strong Mega Corps that were in completely different industries (and tended to provide severance if they cut back on the work force).... we felt the risk was very low that we would both lose our jobs at the same time and we could live easily on one of our salaries... we did not hold a years salary in a short-term investments most of the time.

When DW FIREd... I began holding about a years worth of normal spending .. part in a money market fund and part at our bank.

But at the time, I was in the middle of a multi-year restructuring of the portfolio in preparation for both of us FIREing... the withdrawal phase.

 

[scrabbler1]

Growing_older and LOL!, good posts about the relative needs one might have to need to tap into an emergency fund, the relative investment returns of the fund, and the muti-tiered approach. This is why I have my first main layer in an intermediate-tier muni bond fund. It is part of the bond portion of my overall AA and I have rarely had to tap into it, only for larger iems when my cash flow from working could not cover the bill. (I was sure to replace it in the month or two which followed.) This fund also has checkwriting privileges which make the money more readily accessible in a pinch.

I also consider as part of my rate of return any fees I avoid by having some money in an account such as my local bank's checking account. That, along with any banking conveniences such as free ATM withdrawals, online banking, electronic payments and deposits, and having a local branch walking distance from where I live (and, when I was working, near my office) were well worth the small amount of interest foregone by investing the money elsewhere.