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Old 03-02-2012, 05:25 AM   #41
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We are retired. We keep outside of the portfolio our current year budget and one more full year. In addition there are funds to cover large expenses we expect to have over the nex few years: wedding gifts for kids, new car, new roof, etc.
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Old 03-02-2012, 06:08 AM   #42
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When people talk about emergency funds they have a different audience in mind than the audience on these forums...

Emergency fund is basically a way of telling people who are spending above their means to at LEAST have 6-8 months of savings.

Most people on these forums already have large savings and live below their means. Your goal should be to increase savings to the point that interest will cover your yearly expenses.

In terms of emergency funds for someone looking at FIRE, I would say keeping a couple of months in higher liquidity instruments would be fine.
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Old 03-02-2012, 07:21 AM   #43
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When people talk about emergency funds they have a different audience in mind than the audience on these forums...

Emergency fund is basically a way of telling people who are spending above their means to at LEAST have 6-8 months of savings.

Most people on these forums already have large savings and live below their means. Your goal should be to increase savings to the point that interest will cover your yearly expenses.

In terms of emergency funds for someone looking at FIRE, I would say keeping a couple of months in higher liquidity instruments would be fine.
I partially agree but I would also add that emergency funds are for someone like myself as well. My wife and I don't spend above our means but we are only 32 years old but are not fortunate enough to be FIRE yet. I consider an emergency fund critical to use since we are still accumulating funds and would like to have an emergency covered in case something does spring up.
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Old 03-02-2012, 07:29 AM   #44
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[QUOTE=Nords;1167104]It needs to be six-eight months of the expenses that you'd actually bother to pay if you were between jobs.

+ 1 Emergency fund is not 3, 6, 8 months, or whatever of current expenses, but only those monthly expenses that must be paid - food, housing (including utilities), and critically needed clothing.
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Old 03-02-2012, 07:38 AM   #45
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I partially agree but I would also add that emergency funds are for someone like myself as well. My wife and I don't spend above our means but we are only 32 years old but are not fortunate enough to be FIRE yet. I consider an emergency fund critical to use since we are still accumulating funds and would like to have an emergency covered in case something does spring up.

+1
Maintaining an emergency fund is simply good planning, even for those who don't overspend. We are LBYM people but I can't tell you when the furnace is going to blow up or if one of us will find ourselves out of work temporarily.
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Old 03-02-2012, 07:59 AM   #46
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I have long found it odd that so many advisors exclude all non-cash investments from the emergency fund. If I were holding decades of expenses in blue-chip stocks but only 3 months in an emergency fund, Suze would be on my case. IMO if I needed cash I'd simply sell some stocks since they are very liquid. If Suze is concerned those stocks might become inaccessible or worthless, well, whatever financial meltdown caused that would likely also make emergency fund cash held at a bank similarly inaccessible or worthless.
That's pretty close to how I feel too. I figure my stocks and especially my mutual funds are liquid. When I was working I felt reasonably secure about my job, and figured I could sell as needed. It's true that I might be selling into a downturn, but I figure I'd have made up for it by being fully invested the rest of the time. I was also usually coming out ahead on my paycheck so I often had extra cash, and it was more a case of periodically transferring more into my investment account.

Similarly for household emergencies, I have a large credit limit on my cards, so that can tide me over for a month+ to liquidate funds before I owe interest on them.

Now that I'm retired, I have a few months cash set aside for living expenses, which could also be used for emergencies. I actually don't have a specific plan for how much to set aside. I just look at my cash balance once or twice a month when I'm paying a large bill, or know I have a large bill on the horizon like property tax or tuition for DS or a vacation. That's another topic though.

Back when I was married and not in good financial shape, I always felt it was better to try to pay down the cards to avoid/reduce the 18% interest rather than keep a balance to have an emergency fund.
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Old 03-02-2012, 08:47 AM   #47
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I partially agree but I would also add that emergency funds are for someone like myself as well. My wife and I don't spend above our means but we are only 32 years old but are not fortunate enough to be FIRE yet. I consider an emergency fund critical to use since we are still accumulating funds and would like to have an emergency covered in case something does spring up.
Yes - but don't you have a lot of stocks/bonds/CD's?

You can always liquidate them in case of emergency.
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Old 03-02-2012, 09:14 AM   #48
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Yes - but don't you have a lot of stocks/bonds/CD's?

You can always liquidate them in case of emergency.
Yeah, but really, who wanted to be in a position where they *had* to sell equities in February 2009?
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Old 03-02-2012, 09:15 AM   #49
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Yeah, but really, who wanted to be in a position where they *had* to sell equities in February 2009?
I'm not cashing out part of my Roth to pay for a new roof. In that scenario, I would much rather have an emergency fund.
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Old 03-02-2012, 09:48 AM   #50
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I have broken mine down into 2 seperate categories. I have 6 months for each rental house I have to cover incase of no tenants. For the other normal monthly bills, I currently have just over 2 months, I am working on increasing this, but my situation is pretty stable (military that is retiring next year with a pension), so my expected income between my and DW retirement checks covers our proposed expenses. Still I am looking at having 4 months.
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Old 03-02-2012, 10:44 AM   #51
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I'm not clear on what you mean by this.

I think my situation would need to get pretty dire to consider not paying my mortgage, unless I was in a home that was much more than I needed and I was severely underwater.

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After six months I'd be seriously debating whether to continue paying a mortgage.
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Old 03-02-2012, 10:52 AM   #52
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I'm not clear on what you mean by this.

I think my situation would need to get pretty dire to consider not paying my mortgage, unless I was in a home that was much more than I needed and I was severely underwater.
It's called "strategic default", and it is usually done by people who feel hopelessly underwater. Even people with enough income to pay the mortgage sometimes just "walk away" if they owe $300K on a property worth $180K today. On one hand it sounds unethical, but on the other hand, if the situation were reversed you know a lot of banks and mortgage investors would screw the homeowner if they could get away with it.
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Old 03-02-2012, 11:51 AM   #53
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I'm not clear on what you mean by this.
I think my situation would need to get pretty dire to consider not paying my mortgage, unless I was in a home that was much more than I needed and I was severely underwater.
I'm saying that I'd let my mortgage payments slide by a few months while I kept up the job search and considered relocating for employment.

If I had a loan from someone I felt I could communicate with, like a local bank or USAA or NFCU, then I'd share my plans. If it was someone who's less (shall we say) able to communicate like PenFed or BofA, then I'd just stop paying.

I appreciate the "you might lose the house" and "hey, you signed a contract" aspects of that decision. But without a job it's just getting deeper into debt with no likelihood of repayment.
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Old 03-02-2012, 12:50 PM   #54
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Okay, I think you're assuming that the person involved doesn't have large additional savings, and I was assuming that it was actually you or me.

I (and you) have enough assets that I wouldn't consider the disruption involved in defaulting on my mortgage until I'd burned through much of my savings. It would be years before it would even get on my radar.

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I'm saying that I'd let my mortgage payments slide by a few months while I kept up the job search and considered relocating for employment.

If I had a loan from someone I felt I could communicate with, like a local bank or USAA or NFCU, then I'd share my plans. If it was someone who's less (shall we say) able to communicate like PenFed or BofA, then I'd just stop paying.

I appreciate the "you might lose the house" and "hey, you signed a contract" aspects of that decision. But without a job it's just getting deeper into debt with no likelihood of repayment.
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Old 03-02-2012, 03:07 PM   #55
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I opened a bunch of 5 yr cds a couple years ago...3%-ish and if I have to take it out, only pay a 6 month interest penalty on the amount taken.

We also have plenty in a couple rewards checking accounts getting 2.2 & 3.03% if we do 10 transactions monthly in each...can you tell we're conservative? Lots of cash.
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Old 03-05-2012, 11:00 AM   #56
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I have virtually none. I am jamming extra cash into the mortgage rather than hoarding cash.

Mind you, I have an employment contract that guarantee's me a years pay, medical and bonus as long as I am not canned for cause.

I also have about about a year's worth of expenses in stocks that could be liquidated, and about triple that in Roth's.

For me an emergency is loss of employment. A new roof or car I can find a way to cover. In my field there aren't comparable jobs locally, so if I got canned/laid off, my house goes on the market a week later. That would open up my equity (I'd price to sell) and allow me to further cut expenses.
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Old 03-05-2012, 11:10 AM   #57
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I think that emergency fund recommendations are like telling people to eat their five servings of fruit and vegetables a day. THe people giving the advice know that almost nobody will do that, but at least if we try, we'll reduce some of the pizza intake. For a lot of people, the biggest benefit of getting to even a 1-month emergency fund is that it would presumably mean that the credit cards are paid off.
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Old 03-05-2012, 11:35 AM   #58
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We're long time retirees, 10 years for DW, 6 for me. No "emergency" fund whatsoever. A chunk of my FIRE portfolio is liquid although the level varies over time. I have cash available for the next several months of routine expenses. We receive one SS and one mid-size pension check monthly. But there isn't anything labeled "for emergency use only."

I suppose that if I needed a stack-o-money for some unforseen, catastrophic event that went beyond whatever level of cash I had on hand I'd:

1. Liquidate some asset from the portfolio if it looked like a reasonable time and circumstance to do so.

2. Use credit such as a heloc, life insurance policy loan or even a credit card.
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Old 03-05-2012, 12:20 PM   #59
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Read some of the responses. If I were to develop a framework for this issue the first thing I would recognize is that it is a liquidity rather than solvency issue. This is especially true of retirees. Liquidity risk can be defined as " the risk of not having cash on hand to pay your liabilities or expenses as they come due". Keep in mind that source of credit such as secure HELOC would quality as liquidity. When I was working at the Bank this was a real concern as you might imagine. You manage this risk by developing scenarios of what could go wrong and attach rough probabilities to each. Then you match your upcoming liabilities (read expenses for us) to your available source of liquidity by time bucket making sure you take into account any "haircut" that might be required to sell quickly. You then ensure each time bucket out for say 6-12 months is covered. If this is too pedantic I apologize.
In conclusion, for retirees you need to assess the stability of your income streams and the liquidity of your portfolio to ensure you liabilities(expenses) are covered as they come due. I would think if you could do this out a year or so you are probably pretty good.
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Old 03-05-2012, 12:31 PM   #60
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Read some of the responses. If I were to develop a framework for this issue the first thing I would recognize is that it is a liquidity rather than solvency issue. This is especially true of retirees. Liquidity risk can be defined as " the risk of not having cash on hand to pay your liabilities or expenses as they come due". Keep in mind that source of credit such as secure HELOC would quality as liquidity. When I was working at the Bank this was a real concern as you might imagine. You manage this risk by developing scenarios of what could go wrong and attach rough probabilities to each. Then you match your upcoming liabilities (read expenses for us) to your available source of liquidity by time bucket making sure you take into account any "haircut" that might be required to sell quickly. You then ensure each time bucket out for say 6-12 months is covered. If this is too pedantic I apologize.
In conclusion, for retirees you need to assess the stability of your income streams and the liquidity of your portfolio to ensure you liabilities(expenses) are covered as they come due. I would think if you could do this out a year or so you are probably pretty good.
But this thread is about "emergency funds," not predictable liabilities. Isn't the question about how you would handle a totally unexpected, significant and urgent expense?
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