rethinking the "emergency fund"

[UpandComer]

I guess it just all boils down to your comfort level. If you listen to folks like Suze Orman, they always tell you to have 6-8 months living expenses in some sort of liquid investment. *To most folks that means cash on hand. *Now, I'm starting to see the wisdom in what the doubters are saying. *Rather than setting a target for 6 months living expense, I'm limiting it to a dollar amount ($10K). After I amass that much in my savings account I'll start putting my $$ in investments that may yield higher returns.

[Marshac]

I'm limiting it to a dollar amount ($10K).

I think that for a lot of people, $10k is the reserve.... I know it is for me. I don't think anyone was advocating sitting on top of $100k in a checking account yielding .25% interest.

[cute fuzzy bunny]

You might be surprised to find out how much a lot of people DO have sitting in a checking or savings account...

[Marshac]

You might be surprised to find out how much a lot of people DO have sitting in a checking or savings account...

Lets find out... i'll start:

Checking: today was pay-day, so I probably have about $2500 in there....by monday (automatic EFTs to other accounts) it should be down to about $900.

Savings: ~$10-12k in various accounts.

[flipstress]

I have heard some stories of banks dragging their feet and taking several days to provide cash from redeemed I-Bonds. *When in a money crunch a few days can seem like an eternity.

Thanks for the warning, fire5soon. I did call my credit union and I asked how long it would take to redeem my paper I-bonds. The customer-service rep estimated 3-5 minutes per bond, if all goes well. (Hmmm, now I wonder what possible horrible things could go wrong with redeeming I-bonds? ...)

Now, I assume that if I went with Treasury Direct and established an account to purchase new I-bonds, I could redeem those electronically overnight via their online services.

I'm guessing that TIPS pay a higher rate of interest thatn I-BONDs do at present. What is the advantage of IBonds over TIPS?

[cute fuzzy bunny]

With tips you have to pay taxes on the inflation adjustment amount every year, even though you dont get it until the bond matures and you turn it in.

With ibonds all the gains are tax deferred until you cash in the bond.

If used for education purposes, ibonds gains are usually tax free.

Tips can be sold on the secondary market, ibonds cant.

Tips deflate in value if deflation occurs, and for long periods of deflation, a tips bond may not pay its face value when turned in. Ibonds either guarantee face value or dont deflate, I forget which.

Tips deflate in value if deflation occurs, and for long periods of deflation, a tips bond may not pay its face value when turned in.

TH,

Just pulled this off of the Treasury Site.

"What happens to TIPS if deflation occurs?

The inflation-adjusted principal is adjusted downward, and your interest payments will be less than they would be if inflation occurred or if the Consumer Price Index remained the same. You have this safeguard: at maturity, if the inflation-adjusted principal is less than the security's original face value, we pay you the original face value."

[cute fuzzy bunny]

Shows you should never listen to me. I had it a little mixed up. Tips go up on inflation, and do go down on deflation but your original principal is guaranteed. Ibonds go up with inflation but do not go down with deflation.

[UpandComer]

I think that for a lot of people, $10k is the reserve.... I know it is for me. I don't think anyone was advocating sitting on top of $100k in a checking account yielding .25% interest.

Ah....well for me 6-9 months emergency cash is actually $12K-18K. *So $10K is a downward revision. On one of the boards I frequent, one guy actually had $50K in a savings account as his emergency fund.

I actualy keep my EF in an ING savings account which pays 2.2%. But as you have to wait up to 3 days to get you cash, it may have the same "liquidity" as a mutual fund and less liquidity than the I bonds!! *

I can get around $150,000 on my credit cards alone,
so I guess that could be considered an "emergency fund" until I worked something else out.

John Galt

[KB]

I have 24K in a MM acct paying 2.5%. I like keeping 25K, but I just paid off the landscapers for my new backyard . Next paycheck I'll be back to 'full'.

I have 45K credit available through credit cards. I'd love to have a LOC, but am not willing to have any leins against my mortgage free home.

[mickeyd]

Z-Z-Z-Z-Z-Z$$$$ is what I use my emergency fund for.

It helps me get a great nights sleep. I probably have more than 6 months of expenses in my "fund". I have about 50% in MMF and 50% in ST bond fund.

If I need a car, car repair, new windows for the house, vacation trip w/ Mrs. mickeyd, hot investment that I can not pass up... it is immediately there for me to dig into. Seems to work well. zzzzzzzzzz

[azanon]

TH and I sort of talked about this in another thread, but "if" you're not maxing your Roths yet because you can't afford to or whatever, then it might be a neat idea to just finish off your Roth's with that money earmarked as "potential" emergency funds.

The reason is that Roth IRAs allow you to withdraw contributions penality free regardless of your age and regardless of the reason for doing so. * If it turns out you dont have an emergency, then you'll be getting tax free growth in the process. *The only potential downside is if your Roth is in a volatile investment that might cause you to have to use the emergency funds with the prices are low.

[azanon]

But i agree with TH also in that most of us savy folks have all sorts of investment accounts we can get to with little/no penality and/or could just use credit cards. *Like TH, i have full insurance coverage for all the major types.

That being said: * For convinence, my wife and I just have a Janus money market fund we keep about 5K or so in, which comes in handy for unexpected expenses. *Last time i had to use it was late last year when my compressor in my ac rusted out and was $1300 dollar repair. *Its nice to be able to just cut a quick MM check and not have it disrupt our normal expenses. * I dont feel like i'm losing that much earnings potential just keeping 5-10K in a MM fund.

But 3-6 months of gross (which would be ole about 22-45K for me)? *That's silly, IMHO, for reasons i stated in paragraph 1 and reasons TH stated. Anything that's going to cost me that much i'm already planning for (for example, my 529 plan for my son's college)