Emergency Fund

[armor99]

Wow... this is a really great thread. Let me add my own thoughts to this one. I had a crushing layoff very early in my career. In a way I am glad of it, because I think it helped to form the way I feel about money, savings, etc.

I think the conventional wisdom of 3-6months especially in this economy is way too small. I would think closer to 9-12 months. And as some other people said, have an extra few grand socked away for that inevitable unexpected lightning bolt that may find you. A major medical expense or car problem can happen at any time, and certainly cannot be put off until financial times are better.

I think the most important thing about planning for life's eventualities like loosing your job in a bad economy, is not to develop a "but that will NEVER happen" attitude. I have personally seen way too many friends bring themselves to the brink of financial ruin because of it. Their attitude was...,"why buy insurance... I am healthy now.... why do preventative maintenance on my car it runs just fine .. etc."

I guess the only other thing that I might suggest is remembering never to under-estimate the power of a favor in business. Every now and again... go that extra mile and exceed someones expectation. People will remember that... and something as simple as that can make the difference. I left my previous job around 3 years ago. Due to the tech nature of it... to this day on occasion I will get a phone call from people working there, asking me questions about the systems that I worked on.

My original intention was to ask to be compensated (like a tech support call) when they needed help. But ultimately, I decided that in this work climate, being owed a favor is far more valuble than cash. So the deal I made was I would help them out whenever needed, even spend an hour or so on weekends if the need was great enough. And I would do it all for free. But in return, the people I am helping would start sending around e-mails letting the managers there know what I have been doing for them.

The hope is that should the job I have now go south... I might be able to return to the previous job. That is the thought anyway... I hope I never have to test it ...

 

[Moemg]

I think the most important thing about planning for life's eventualities like loosing your job in a bad economy, is not to develop a "but that will NEVER happen" attitude. I have personally seen way too many friends bring themselves to the brink of financial ruin because of it. Their attitude was...,"why buy insurance... I am healthy now.... why do preventative maintenance on my car it runs just fine .. etc."

..

The one life event I see people not having planning for is death of a spouse or partner . Reading the threads I'll see budgets posted with their pension , their wife's pension and both SS payments . Since the average age for widows is 55 in the US this is something that really needs to be addressed . Not only the loss of income but the immediate needs such as funeral expenses . Sorry to be a downer but this is as likely as losing a job.

 

[ziggy29]

The one life event I see people not having planning for is death of a spouse or partner . Reading the threads I'll see budgets posted with their pension , their wife's pension and both SS payments . Since the average age for widows is 55 in the US this is something that really needs to be addressed . Not only the loss of income but the immediate needs such as funeral expenses . Sorry to be a downer but this is as likely as losing a job.

Agreed, but that's more relevant to life insurance than an emergency fund, IMO.

 

[Zoocat]

Since the average age for widows is 55 in the US this is something that really needs to be addressed . Not only the loss of income but the immediate needs such as funeral expenses . Sorry to be a downer but this is as likely as losing a job.

Is that right? I'm surprised that it's so young. I know there are lots of divorces at that age, mine included. Divorce is also an adverse event that few plan for in their budgets. But I understand why. I can't imagine happy couples sitting down to plan their yearly budgets and trying to estimate line item number 20 -- "divorce expenses."

 

[doxeyweb]

emergency fund

We currently keep 12 months of expenses split between Ibonds and a Money Market account.
With young children..you never know what kind of emergency may come up...in addition to loss of employment.

 

[tuixiu]

Even the one versus two incomes rule that is thrown around for deciding 3-6 months of expenses is too general.

Both real estate agents?
One in advertising, one in IT but for same company?

Examples like that surely should consider replacement of lost income needing a larger buffer than two incomes that have completely different careers in different companies.

 

[ziggy29]

Examples like that surely should consider replacement of lost income needing a larger buffer than two incomes that have completely different careers in different companies.

True. Whether investing or cash flow management, diversification matters! Single company risk and sector risk can impact a household's income stream just as it can impact their portfolio.

 

[DFrancis]

emergency Fund

I based mine on 6 months worth of living expenses. We live on one salary and invest/save the bulk of the other salary.

 

[Texas Proud]

In a job market like this one, liquidity is critical. If I had good cash flow, I'd rather have $20,000 in the bank and $15,000 in debts than $5,000 in the bank with no debt.

In a more robust job market, I'd pay off the debt licketysplit. But in this market, it's all about the cash.

But is there really any difference in the two? YES... if you have $15,000 debt you are paying interest at probably a high rate to make you feel good that you have $20,000 in the bank...

In reality, on #2 you have $5,000 in the bank and $15,000 of ready credit that you can tap... so still $20,000 to spend...

Now, if you are a person who would run up your debt again... well then there really is not the two options you listed... but based on the two the second is better IMO...

 

[Texas Proud]

In the general case, true, but I believe that recent laws will leave Uncle Sam paying 65% of COBRA for up to nine months for folks laid off through the end of 2009.

Not quite true.... our company was just informed that WE would have to pick up the extra cost of COBRA for our employees... not the gvmt...

 

[samclem]

But is there really any difference in the two? YES... if you have $15,000 debt you are paying interest at probably a high rate to make you feel good that you have $20,000 in the bank...

In reality, on #2 you have $5,000 in the bank and $15,000 of ready credit that you can tap... so still $20,000 to spend...

Now, if you are a person who would run up your debt again... well then there really is not the two options you listed... but based on the two the second is better IMO...

I'm with Ziggy on this one. If you lose your job, it could take months to find a new one. At a time like that, it could be tough to get new credit. That "ready credit" may not be available-that's in large part what our current financial mess is about. I'd much rather have enough dough in the bank to make the house payments and keep food on the table for 5-6 months (even though I'm paying interest on that $15K debt, that's a small pittance compared to my other issues/concerns at that point).

 

[Texas Proud]

I'm with Ziggy on this one. If you lose your job, it could take months to find a new one. At a time like that, it could be tough to get new credit. That "ready credit" may not be available-that's in large part what our current financial mess is about. I'd much rather have enough dough in the bank to make the house payments and keep food on the table for 5-6 months (even though I'm paying interest on that $15K debt, that's a small pittance compared to my other issues/concerns at that point).

I got in this thread late and went from the front to the back... saw the responses to this along the way...

BUT, you do pay a cost to have that debt (at least most do, unless you are juggling zero rate CCs).... something like $2,000 per year or more... I would much rather not pay up front for the possibility that I will need it...

Since I have never been in that situation, maybe credit would be hard to get... but right now I have maybe 10 times that amount and even if I lost some of it, I would not lose it all... and there is another approach...
if you lose your job, take out the $15,000 in credit RIGHT NOW and put it in the bank before they cut your credit.. you will likely pay a fee for this, but it is still cheaper than paying on debt for years...

 

[Lawrence of Suburbia]

I have three years' living expenses. These days, I'd suggest at least one years' worth. We may be heading into difficult times.

 

[growing_older]

BUT, you do pay a cost to have that debt (at least most do, unless you are juggling zero rate CCs).... something like $2,000 per year or more... I would much rather not pay up front for the possibility that I will need it...

Ordinarily I would not want to pay up front for exercising credit, only to not necessarily need it. However, these don't seem to be ordinary times and there are plenty of stories of folks who went to exercise their credit when they needed it, only to find it had dried up, or lenders were closing lines of credit preemptively.

I'm not sure about your cost figures. Ordinarily I maintain an untapped HELOC as a source of emergency funds. As credit conditions deteriorated, I decided to tap the line for about 3 years living expenses to avoid the possible situation of wanting to exercise the credit but not being able to. I have to say it's been great for my peace of mind to know that the funds are not theoretically available but are actually in a deposit account in my name. In fact the "emergency" I was preparing for (job loss during tough market to find new employment) actually happened to me yesterday. I am able to sort through my options without panic. I am able to have confidence that I have resources to sustain me while I plan for any transition. I am MUCH more secure than I would be if I had to go and try to tap credit now or after my other resources were depleted - and hope it would still work.

Actual cost has been negligible. HELOC rates are very low and I was able to park the funds in CDs that paid more than my cost of funds. As rates have continued to drop it may be hard to find that anymore, but if you are tapping the credit just to keep the money on hand, you should still be able to get some kind of safe return on it that will reduce (or eliminate) your cost of borrowing. Even better if you are juggling zero rate CC, but that seemed more chancy and more effort than I wanted to make sure the arrangements didn't fall apart.

 

[lucija]

I agree with posters who had mentioned that nothing can replace cash on hand... it may be true that you have access to sufficient credit today, but will that be the case two months from now what you actually need the money?

We still maintain our traditional 9 months of living expenses (including health care) as our emergency funds. However, in our case with both of our jobs more or less on the chopping block at all times, we have swapped out a portion of our fixed income out of our IRAs/401(k)s and keep it as cash/near cash. This accounts for an additional 1 1/2 years of living expenses. Once things pick up a bit, these funds will be swapped back into tax advantaged accounts (overall AA remained unchanged throughout) -- having a tax inefficient portfolio for a while seemed a small price to pay for additional security.

 

[freebird5825]

I have three years' living expenses. These days, I'd suggest at least one years' worth. We may be heading into difficult times.

One of the things I have not squirelled away is a large size money market fund. I have instant check writing privileges on 2 nicely sized VG muni bond funds, so I am covered for the near term.
I'm lucky enough to have steady income, so covering my expenses has not been a huge issue. Yet.
I also can quickly divert monthly muni MF dividends and periodic cap gains into my savings account instead of re-investing them. It hasn't come to that yet TG.
I just re-started a monthly DCA into an existing but empty VG NY TE money market fund account. This is a proactive move just in case inflation goes bonkers, i.e. double digits.
This is in addition to my usual DCA (munis and stock MFs). I will continue accumulating as long as I am able to meet expenses, which is going well. Whew!!!!

 

[caninelover]

I keep a year's worth of an emergency fund. I would likely get an 8-9 month severance as well, and even with that I get a little anxious. I would not want to rely on a line of credit - too much risk it could change, plus - when you get another job you have all that debt to pay off. I would rather keep the cash and pay as I go.