Emergency Fund

[W2R]

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Originally Posted by bbbamI At this point, I'm thinking an emergency fund of 30 years living expenses....

Plus enough extra to cover inflation?

[Notmuchlonger]

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Originally Posted by Want2retire Plus enough extra to cover inflation?

What inflation. We will be in a recession for the next 30.

[growing_older]

I also used an untapped HELOC as part of my emergency fund. Then they started freezing and restricting them based on sweeping generalizations that might or might not apply to me. I figured I couldn't take the risk that the HELOC would be unavailable just when I needed it, so I borrowed enough on it that I have a comfortable emergency fund and parked the money in CDs. If I pay off the HELOC before I have an emergency, then all is well and I have my emergency fund. If an emergency hits while I still owe on the HELOC, then I'll be very glad I have cash in hand and don't have to worry if I can access it or not. If rates move strongly against me before either of those happen, then I'll have an opportunity to either stay the course or pay off the HELOC with the CDs and think of another plan.

[Lawrence of Suburbia]

I think that 3-6 months' living expenses is a relic of recent good times' conventional wisdom. I'd advise anybody just getting their financial house in order now to have at least a year of living expenses, plus a few thousand extra to cover a big unexpected hit (like a medical expense, or car blowing up.*) IMHO we've got a lot more jobs to be lost, and therefore a lot less jobs to be available, so a big cushion is a must. If you've any credit card debt, get rid of it. Debt of any kind will be poison if the recession morphs into a full-blown depression.


*And not "minimum" living expenses; make an accounting of everything you need to get by during a typical month: rent/mortgage, all utilities, insurance, groceries, gas, auto maintenance, prescriptions, etc. If you do owe on a credit card debt and such, retire that debt now if possible.

**This should be in a savings account, CD, money-market fund or such. Liquid and accessible. A high interest rate is not important. It should not be in a stock and/or bond-owning mutual fund, a variable-life policy, or anything else tricky.

[Lawrence of Suburbia]

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Originally Posted by bbbamI At this point, I'm thinking an emergency fund of 30 years living expenses.

That's about how I'm saving for retirement...seriously!

My cash savings equal about 15% of my total portfolio. As my portfolio (hopefully!) increases over time, I hope to keep the cash portion at around 15-20% until it equals about 3-4 years' living expenses. That's the point in time at which I might retire.

[SecondCor521]

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Originally Posted by Lawrence of Suburbia Debt of any kind will be poison if the recession morphs into a full-blown depression.

You're right. However, if inflation returns, my fixed interest rate debt will be a good thing. The pundits I read can't seem to make up their mind which is going to happen, but if you ask me a depression is unlikely. I admit freely that I tend towards relentless and sometimes unfounded optimism. I also try to remind myself that probably upwards of 90% of the pundits two years ago were not predicting we'd be where we are now, so I take their predictions with a rather large grain of salt.

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Originally Posted by Lawrence of Suburbia *And not "minimum" living expenses; make an accounting of everything you need to get by during a typical month: rent/mortgage, all utilities, insurance, groceries, gas, auto maintenance, prescriptions, etc. If you do owe on a credit card debt and such, retire that debt now if possible.

I use the average of the last 6 months actual in Quicken. That gives me something of a cushion: When unemployed I would not have income/SS/medicare taxes to pay (currently run 18% of my expenses) but I would have job hunting expenses.

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Originally Posted by Lawrence of Suburbia **This should be in a savings account, CD, money-market fund or such. Liquid and accessible. A high interest rate is not important. It should not be in a stock and/or bond-owning mutual fund, a variable-life policy, or anything else tricky.

I agree that it should be liquid and accessible. I don't see a problem with having a portion of it in a taxable mutual fund, particularly if the emergency fund in total is overfunded.

For example, if I figure I need 6 months of expenses at $5K per month, that's $30K required. I personally would feel quite comfortable if I had $15K in a savings account and $30K in a taxable Vanguard balanced index mutual fund of some sort. In fact, except for the specific numbers I just used, that is pretty much my current situation and I feel comfortable with it.

As always, JMHO and YMMV.

2Cor521

[youbet]

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Originally Posted by ziggy29 I guess it depends on your risk tolerance. I could buy something like a Ginnie Mae fund for part of it because of its security and relative stability, but I for one can't consider using debt as an "emergency fund." In the right situation, taking on home equity debt may have its place, but I personally couldn't sleep at night if my "emergency fund" included a need to borrow money. I'd agree the ability to borrow in the short term could add an extra worst-case cushion to the amount of time someone could sustain a huge expense or a job loss, but I wouldn't think of that as part of an "emergency fund." It's more like worst case access to borrowed capital.

Yes, I'd say it would depend on your risk tolerance. I'm just as uncomfortable with keeping many tens of thousands of dollars in cash for years and years as I am with the thought of having to sell, say, VFIIX while it's down 5% - 10% to cover an emergency. Keeping cash in an emergency fund you never need to use has an opportunity cost. Not having cash and having to sell a bond or bond fund or whatever while it's down a few percent has a cost too. You have to decide which is more painful to you.

I'm 61 yo and, thankfully, have never had an emergency needing more than the relatively small amount of cash I hold. All emergencies have been solved at least long enough for me to rearrange my finances to cover without selling anything at a painful loss or at great inconvience. I know this could change. Maybe I'll suddenly need $100k cash next week....... Admittedly, I'd be in a bind for most of it and would wind up selling investments at a loss and that I didn't plan of selling at this time. But, so far in life, that kind of big surprise hasn't happened. If I wanted to insure against that eventuality with a whopper emergency fund of true cash I'd have to get $100k together and bear a pretty big opportunity cost of holding it.

Ya pays yer money, ya takes yer chances......

Remember, not having a big emergency fund doesn't mean you can't cover big emergencies, it just means you may have to liquidate some investments at an awkward time or incur temporary debt.

Oh yeah, I don't consider a few $k for an unexpected car repair or that sort of thing an "emergency." I have those sort of things covered no problem. I'm talking EMERGENCY, as in $$$$$$ here. New engine for the youbet famly vehicle = minor liquidity issue for the normal budget. Needing to charter a plane to get DS home from Asia where he's fallen ill = emergency.

EDIT: one other thought...... Many of us are currently holding larger than normal cash allocations in our investment portfolios. This cash is not to be confused with an emergency fund since it's purpose is to be instantly available for investment when you decide it's the right time. However, in a true big-time emergency this cash could be grabbed and you simply go solve your AA problem later when the life or death crisis has passed.

[ERD50]

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Originally Posted by youbet It's naive and an oversimplification to think of an emergency fund as being only cash..... Here's an example. If I had a significant position in the Vanguard GNMA fund and a HELOC lined up on the house, I'd probably keep no more than 3 or 4 months of expenses in true cash. If all my investments were in volatile equities and I was a renter, I'd probably keep a year or more in true cash.

Thanks, saved me some typing

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Originally Posted by Sue J But last September we stopped paying any extra on debt and saved it all instead. When he signs his contract we will pay off a $6000 credit card ....

Isn't this a non-helpful "shell game" to say you have an "emergency fund" while you have credit card debt?

Why would anyone "save" money in a low interest rate savings account while they have outstanding CC debt? This makes no sense to me.

Let's say I have that $6,000 CC debt, and I "save" $5,000 and put in a savings account. Do I feel good because I have a bank statement that says I have $5,000? I'm kidding myself.

So let's say I apply the $5,000 to the CC. I wipe out some CC interest and I'm ahead of the game. Am I "poor" because I don't have a bank statement that says I have $5,000 even though I have $5,000 less in "bad debt"? No.

OK, so an emergency comes up, a $1,500 car repair. Take it from savings, and you still have the $6,000 CC debt. If you have no savings because you paid down the CC to $1,000, put it on the CC. You are still ahead with only $2,500 CC debt and no savings.

Unless your CC company does not charge you interest. Then never mind

-ERD50

[ERD50]

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Originally Posted by youbet Keeping cash in an emergency fund you never need to use has an opportunity cost. Not having cash and having to sell a bond or bond fund or whatever while it's down a few percent has a cost too. You have to decide which is more painful to you.

And since bond funds go up *and* down in value, there is a reasonable chance that if you had to liquidate some, it would be above what you paid. No pain at all.

People seem to keep looking at that non-cash "emergency fund" in the "glass half empty" view. Heck, if that is the case, we should always be in cash all the time with all of our investments. OK, sounds pretty good the past few years, but see where FireCalc gets you with all cash.

-ERD50

[Bimmerbill]

I had a decent little emergency fund saved up but recently decided to pay off as much of my debt as I could. I listen to Dave Ramsey and sort of follow his plan, but don't do the zero based budget.

I work for the fed gov't, so no chance of me being suddenly laid off. If layoffs were to happen, there would be a lot of warning as well as programs to find me another position. If all else fails the job has a pretty hefty severance.

I am close to paying off all of my non house debt tho and will build up a cash cushion once that happens.

[W2R]

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Originally Posted by ERD50 And since bond funds go up *and* down in value, there is a reasonable chance that if you had to liquidate some, it would be above what you paid. No pain at all. People seem to keep looking at that non-cash "emergency fund" in the "glass half empty" view. Heck, if that is the case, we should always be in cash all the time with all of our investments. OK, sounds pretty good the past few years, but see where FireCalc gets you with all cash. -ERD50

I was thinking along the same lines yesterday, while sitting on an unreasonably high pool of cash (12+ years expenses in MM).

In fact, I agreed with you so much that I took 1/4th of it and bought VBMFX (Vanguard Total Bond Fund). I did the computations and it looks like I would have been slightly ahead by now if I had put it into VBMFX last July instead of MM.

I intend to move considerably more out of MM and into bonds at some point fairly soon.

[ziggy29]

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Originally Posted by ERD50 Why would anyone "save" money in a low interest rate savings account while they have outstanding CC debt? This makes no sense to me. Let's say I have that $6,000 CC debt, and I "save" $5,000 and put in a savings account. Do I feel good because I have a bank statement that says I have $5,000? I'm kidding myself. So let's say I apply the $5,000 to the CC. I wipe out some CC interest and I'm ahead of the game. Am I "poor" because I don't have a bank statement that says I have $5,000 even though I have $5,000 less in "bad debt"? No. OK, so an emergency comes up, a $1,500 car repair. Take it from savings, and you still have the $6,000 CC debt. If you have no savings because you paid down the CC to $1,000, put it on the CC. You are still ahead with only $2,500 CC debt and no savings.

But what if you pay off the CC and then they slash your credit line to the bone at the same time you lose your job (and thus losing access to more credit)?

In a terrible job market there's no substitute for liquidity in the form of real cash in the bank -- not just potential cash that can be raised by future borrowing. Having said all that, I'd be inclined to use as much extra cash flow as I could to pay down the CC -- but I wouldn't cut my cash savings to the bone in this economy unless I had a ridiculously secure job or income stream.

[ERD50]

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Originally Posted by ziggy29 But what if you pay off the CC and then they slash your credit line to the bone at the same time you lose your job (and thus losing access to more credit)?

OK, I guess that is a possibility. So I guess some cash could make sense, even with the CC debt.

I still think it is a little strange to think of it as "savings", when the bad debt is sitting there to offset it.

-ERD50

[ziggy29]

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Originally Posted by ERD50 I still think it is a little strange to think of it as "savings", when the bad debt is sitting there to offset it.

Perhaps "reserves" would be a more appropriate word for this situation.

[FIREd]

I have just about 2 years worth of expenses in what I would consider my emergency fund. I don't have a Suze Orman-style dedicated emergency fund anymore, i.e. 8 months in cash sitting in a FDIC-insured savings account, but rather just a bunch of money sitting in more or less stable investments which can be tap very quickly.
My "emergency fund" includes cash sitting in money market funds and CDs (4 months-worth of expenses) but also and mostly money sitting in a short term muni bond fund (4 months) and an intermediate term muni bond fund (16 months).

[se012101]

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Originally Posted by Sue J Dave Ramsey says that your "baby emergency fund" should be $1000 until you get out of debt.

I think that is totally crazy. If a person so much as misses a single paycheck, they are in serious trouble. Paying down debt is important, but there is a sensible middle point of aggressiveness depending on the security of a person's job, and also on the number of people depending on them. A person's comfort and lack of worry also has a value, though it is hard to quantify in dollars and cents.

My wife and my philosophy is to decide on the magic number, for us it's 12k, representing about 3-4 months expenses (though w/ the house and one car paid off, we could stretch it out to 6 months) and simply reprogram ourselves to consider that to be the zero balance. Could that 12k have earned or saved us something over the years? Sure! But to us what it could earn is a reasonable amount to pay for a bit of peace of mind, no matter how eager we are to pursue our financial goals.

[Bimmerbill]

I agree about having a bit of cash in the bank. I keep a bit extra in my accounts over and above what I use to pay monthly bills and really want to get back to a dedicated emergency fund.

A lot of the Dave Ramsey folks are seriously cash poor. For a lot of them the $1000 represents A LOT of money and takes months to save up. This is even true for some of the high wage earners!

Heck, I just hit my garage with my car and need to fork over my $1000 deductable. Its gonna hurt!

[ziggy29]

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Originally Posted by Bimmerbill Heck, I just hit my garage with my car and need to fork over my $1000 deductable. Its gonna hurt!

It would have hurt worse if you had my homeowners insurance. My deductible is 2% of the insured value -- currently about $2,700 based on replacement value...

[Alan]

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Originally Posted by SecondCor521 I use the average of the last 6 months actual in Quicken. That gives me something of a cushion: When unemployed I would not have income/SS/medicare taxes to pay (currently run 18% of my expenses) but I would have job hunting expenses.

You would also, probably, have a big increase in Health Insurance. I pay $80/month in Health insurance premiums through work - DW is ESR'ed so no option of employer insurance there. If I lose my job, COBRA would cost >$700/month as we still have an excellent plan at work. 90% of people that lose their jobs don't take up COBRA and go uninsured because they simply can't afford it.

[ziggy29]

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Originally Posted by Alan COBRA would cost >$700/month as we still have an excellent plan at work. 90% of people that lose their jobs don't take up COBRA and go uninsured because they simply can't afford it.

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.