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Real world importance of that emergency fund
Old 05-04-2015, 08:08 PM   #1
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Real world importance of that emergency fund

Six months ago I was flying high. My wife and I came back to our birth cities after spending a year on-island in Hawaii. The grass was looking extremely green.

We used the proceeds from the sale of our last home to put a nice down payment on a large 3000 sq ft house in a nice neighborhood. Rather than paying $4000 to ship both vehicles back home we decided to spend $1000 to rent a car when relocating from Hawaii and we would both buy newer vehicles when we got back to our "home town". I bought a new truck (instead of keeping the few year old truck) and she bought a new car which she needs to get around for work. We were finally feeling financially sound and decided to have a child. My wife was waiting for her job to become available with her old company so she had a few months off but eventually went back to work in September,

Then it came, the infamous call on the drive home from work from my consulting agency stating that the contract would not require my services any more. I was fired...well laid-off technically.

Here we were, two high-flying professionals who just bought a house, 2 new cars and my wife was pregnant.


The perfect storm.

Buying a new home, 2 new cars and gearing up for our first child depleted our savings...well almost.

Somehow, some way after these massive purchases and a complacent view on our futures we found ourselves sacrificing in ways we weren't used to.

Thankfully my wife had some money saved in her account,($4000) and I had some money saved in mine ($2500).

Fast forward four months later and I am finally gainfully employed after passing up the first (and only job offer) I received. We have about $4000 saved after I burned through a bunch of unemployment benefits, all of my savings and some of my wifes.

Now comes the hospital bills from the delivery and birth of our new child. They total about $4000-50000 after insurance. Thank GOODNESS for the insurance or they would be much more than that, roughly $20,000-25,000 in hospital charges were submitted to the insurance company for less than 3days in the hospital.

We get a 10% discount if we pay a majority of the bills in full, which is about a $400 savings. Our accounts will be empty when we are done paying the hospital bills. The bills we have leftover will be paid by my wifes taxable brokerage account that I had bought some AAPL and UNP stocks in prior to our relocation andy anything else is going on a 0% 18month credit card.

Now it's time to start building up our emergency fund again.

My point of the story is, even with four months of emergency funds the perfect storm can come along any day and drain you in less time than you may thing.

My dad is impressed at how we managed to "hand in there" without having to borrow money. I am just thankful we had a decent emergency fund after four massive financial events within the past six months.

Two critical facts that prevented our financial collapse were

1.) My wife carried the health insurance that covered most of our medical bills AND
2.) I did not get fired, but was laid off and had worked as a full time employee long enough that I qulified for unemployment insurance

Had I been fired, or had we not had health insurance we would be in debt...instead our investment accounts and retirement accounts have essentially remained unchanged experiencing some small growth in a pitter putter market this year.

Let this be a lesson for those who don't think they need an emergency fund.


For those with no pity, I understand I could have sold both vehicles, eliminated some monthly debt payments by doing so and then bought vehicles again later when we got back on our feet but I learned after moving from Hawaii that it will cost quite a bit in taxes and registration every time you buy a vehicle.

For those who can sympathize, We haven't missed a single payment for any of our financial obligations and we are now getting back on our feet.

Now it's time to weather the daycare payments.
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Old 05-04-2015, 08:16 PM   #2
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You've done very well with it and can at last catch your breath and enjoy that new baby! Congrats on managing so well, and on having the reserves to weather this storm.
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Old 05-04-2015, 08:27 PM   #3
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An emergency fund: because sh1t happens. A salutary tale indeed. Glad you are picking yourself up off the floor!
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Old 05-04-2015, 08:32 PM   #4
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An emergency fund: because sh1t happens. A salutary tale indeed. Glad you are picking yourself up off the floor!
+1

Thanks for sharing your story, particularly since it has a happy ending.
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Old 05-04-2015, 11:04 PM   #5
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Congrats on the baby!
My Wife and I just had a boy (1 month old) at the finest private clinic in Lima,Peru. The retail cost for a Cesarean,( four Doctors in attendance) 3 days in a private room without insurance is approximately $4,000. As the Doctors are all coworkers of my Wife our out of pocket cost was $1661.00 and a few bottles of bubbly. The best part is we can pay it over 3 months interest free.
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Old 05-05-2015, 08:10 AM   #6
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Well done kgtest! This is exactly what I had feared before I purchased my house in 1997. I had first saved 20% down payment + One year expenses to run the house(50K) + 15K for furniture…all together about 110K. I had prepared for the worst but thank god neither of us had lost job. I've carried on that habit and always have around 60K in emergency fund. It helped me tremendously when I lost my job in 2008 - luckily I was able to find another job after 2.5 months.
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Old 05-05-2015, 10:02 AM   #7
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Congratulations on the baby, kgtest! You and your wife must be over the moon with happiness.

(And congrats to you, also, NYEXPAT).

I hear you on the emergency fund... We just hit out-of-pocket of $6k for this year's medical for my sons and myself. More is going to hit soon since this doesn't include the ER visit and the latest specialists for older son's broken face, or the visit to the doctors last Thursday or the orthopedist later today. I only budgeted $5k for the year - but have a "slush fund"... Good thing I have that slush fund. (My budget for OOP was based on the past 5 years... but this year was exceptional, LOL)
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Old 05-05-2015, 10:59 AM   #8
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Murphy happens. Even those with substantial investments should have an emergency fund because they might otherwise be forced to sell securities in a 2008-09 style market if Murphy knocks on the door at the wrong time.
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Old 05-05-2015, 12:42 PM   #9
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Intellectually, we all know we should have an emergency fund, but it's always helpful be reminded just how essential it is. Glad things are looking up and congrats on the little one!
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Old 05-05-2015, 01:20 PM   #10
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Murphy happens. Even those with substantial investments should have an emergency fund because they might otherwise be forced to sell securities in a 2008-09 style market if Murphy knocks on the door at the wrong time.
Disagree. It's a personal choice. If you've stayed fully invested through the run-ups, you may very well be ahead of the game even if bad things happen at the worst time and you have to see securities at a low. And unless your AA is 100/0 or close to it, you can sell bonds while stocks are low. Even if your bonds are only in an IRA you can sell stocks from taxable and exchange the same amount from bonds to stocks in your IRA, being especially careful to watch for wash sales because the tax loss write-off is lost in an IRA.

I am very comfortable without an emergency fund as long as I am liquid enough to convert investments to cash if I need to, so that I don't have to take on debt or take an early withdrawal penalty from an IRA. I would never tell someone who wants to have an emergency fund that they shouldn't. But likewise, don't tell me that I should.

I would even say that while the OP's story sounds like a perfect case for an emergency fund, with the nice returns over the last year or two there was opportunity lost with that money, and this certainly wasn't a 2008-9 style market to be forced to sell out of.
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Old 05-05-2015, 01:29 PM   #11
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Disagree. It's a personal choice. If you've stayed fully invested through the run-ups, you may very well be ahead of the game even if bad things happen at the worst time and you have to see securities at a low. And unless your AA is 100/0 or close to it, you can sell bonds while stocks are low. ....
I will agree with your disagreement!

That is, assuming one has a significant nest-egg. With that, it's normally plenty liquid, and IMO, better to keep it invested and take the chance that you might need to pull it and that might be during a downswing.

But I get the impression the OP does not have significant savings outside the nest-egg. In that case, I think it makes sense to keep an emergency fund in very low volatility investments/savings. The odds of you needing it are higher at this time, and you have fewer options.

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Old 05-05-2015, 01:30 PM   #12
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kgtest, ya done good. And congrats on the baby!

You too, NYEXPAT.
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Old 05-05-2015, 01:41 PM   #13
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That is, assuming one has a significant nest-egg. With that, it's normally plenty liquid, and IMO, better to keep it invested and take the chance that you might need to pull it and that might be during a downswing.

But I get the impression the OP does not have significant savings outside the nest-egg. In that case, I think it makes sense to keep an emergency fund in very low volatility investments/savings. The odds of you needing it are higher at this time, and you have fewer options.
Certainly true for the right situation. I guess if you have enough savvy and diversification to manage the potential tax hit from selling, it could be true. That said, almost *no* financial advice or recommendation is one-size-fits-all.
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Old 05-05-2015, 02:38 PM   #14
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I always heard an emergency fund was a good idea but I have never had one. In my head I figure an emergency is a short-term thing so I do not want a pile of cash doing nothing for long periods.

We also have had two incomes but our core expenses are covered easily by one.
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Old 05-05-2015, 05:03 PM   #15
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I always heard an emergency fund was a good idea but I have never had one. In my head I figure an emergency is a short-term thing so I do not want a pile of cash doing nothing for long periods.
I agree. My emergency fund is a very large line of credit with a $0 balance. In the event of a real emergency that can't be covered by a credit card that will be paid off in full when the bill comes due, I can use that.
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Old 05-05-2015, 05:28 PM   #16
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Whether the emergency fund is in cash, line of credit, or securities one is comfortable liquidating at any time or value, the important thing is to have it and to know how and when to access it. For younger folks without a large asset base to tap, or enough house equity to qualify for a line of credit, cash is the main option.

Good job, kgtest, and thanks for sharing. You can bet that some folks here with kids your age will be sharing this story. Enjoy that baby - before you know it you be paying for college instead of daycare!
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Old 05-05-2015, 08:30 PM   #17
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Thank you for your support folks! This forum has been life-chaning in itself and it is great to know I have the support of even complete strangers.

I have been through a lot in my life, but down and out professionally hit me in a different way. I am great at my trade but sometimes it takes a while to find a job. The boy and mom are doing well and he has changed our lives for the better...I actually have a real purpose to succeed now. I love my new job too!

I just wanted to share my story in the hopes that it would help others...it can happen to anyone.
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FIRE in 2031 @ 50yrs old (+/- 2yrs) w/ a hypothetical $2.5mil portfolio, 3 appreciated homes worth $1.0mil and rental income to fund my gap years until RMD. Assets will go to an inherited IRA where I plan on watching the investments grow until I die or the trust gets executed.
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Old 05-05-2015, 08:34 PM   #18
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Congrats on the baby!
My Wife and I just had a boy (1 month old) at the finest private clinic in Lima,Peru. The retail cost for a Cesarean,( four Doctors in attendance) 3 days in a private room without insurance is approximately $4,000. As the Doctors are all coworkers of my Wife our out of pocket cost was $1661.00 and a few bottles of bubbly. The best part is we can pay it over 3 months interest free.

Wow, that is incredible. Unfortunately we did not qualify for any discounted medical charges since the hospital bases the need for assistance off of your prior years tax returns. Timing is everything I guess.

Congratulations on the baby boy, isn't it amazing?
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FIRE in 2031 @ 50yrs old (+/- 2yrs) w/ a hypothetical $2.5mil portfolio, 3 appreciated homes worth $1.0mil and rental income to fund my gap years until RMD. Assets will go to an inherited IRA where I plan on watching the investments grow until I die or the trust gets executed.
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Old 05-05-2015, 09:56 PM   #19
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Whether the emergency fund is in cash, line of credit, or securities one is comfortable liquidating at any time or value, the important thing is to have it and to know how and when to access it. For younger folks without a large asset base to tap, or enough house equity to qualify for a line of credit, cash is the main option.

Good job, kgtest, and thanks for sharing. You can bet that some folks here with kids your age will be sharing this story. Enjoy that baby - before you know it you be paying for college instead of daycare!
I agree that different methods can be used and what works for one may not be the best for others. The important point is you should have some source of emergency funds you can tap when needed.

Congrats kgtest on the new son. Star now diverting a bit towards college savings when you get caught back up on the emergency fund.
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Old 05-06-2015, 03:16 AM   #20
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Great to be able to weather the storm, isn't it?

In August of 2013, I was also layed off. I stayed on Cobra through the end of that year then switched to an ACA plan in Jan 2014. Was on unemployment from the time I was layed off until benefits expired in February of 2014. Between unemployment and our emergency fund, we were able to go until the end of June of 2014 without having to dip into any other funds. But as luck would have it, I started working again in June 2014!

From then until the end of 2014, I concentrated on rebuilding the emergency fund, forgoing 401K for that year. Because I work in an industry that tends to be volitile, I learned a long time ago to make all of my 401K deposits at the beginning of each year by having the maximum withheld. Get it over with and away from the times of the year when layoffs traditionally occur.
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