Emergency Fund amounts

[Hamlet]

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.

After six months I'd be seriously debating whether to continue paying a mortgage.

 

[ziggy29]

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.

 

[Nords]

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.

 

[Hamlet]

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.

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.

 

[Surewhitey]

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.

 

[Sesq]

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.

 

[BigNick]

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.

 

[youbet]

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.

 

[Danmar]

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.

 

[youbet]

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?

 

[BigMoneyJim]

(Quoting myself)

My big semi-realistic fears during protracted unemployment are having to drain the IRAs and 401(k) while NAVs are down and taxes+penalties eat up nearly half the withdrawals. And also now losing the house.

My concept of an emergency fund is for loss of income since I'm still working and need to work, although I have a significant nest egg. Housing bills and COBRA health insurance payments are the two biggies. Most everything else can be reduced by action or credit.

I forgot to add that on two occasions when I felt like a loss of income was reasonably probable and imminent I moved $10k-$20k of my retirement funds into safer investment classes to protect against sudden loss of NAV coinciding with loss of income. In both cases I moved the money back into my target AA after the perceived danger passed.

 

[Sue J]

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?

While not a significant number, DH broke a tooth on Saturday. We have dental insurance but it only pays 25% of major restorative work after a $50 deductible. Certainly unexpected and while he's not in pain, it's urgent.

Our portion may be $400-$600 and the cash is readily accessible.

Not all emergencies are loss of income.

 

[obgyn65]

I am also very conservative and aim to keep one year of expenses on my BoA checking account.

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.

 

[freebird5825]

FIREd with survivor pension and fixed annuity as income.

Emergency funds:
- savings accounts with 4 months bare bones expenses
- 8 months bare bones expenses in a NY TE money market fund with Vanguard
- ability to tap into 30 day TE dividends in VWALX to replenish savings accounts, or write a check if really necessary
- EE paper bonds maturing in 2013

 

[FUEGO]

While not a significant number, DH broke a tooth on Saturday. We have dental insurance but it only pays 25% of major restorative work after a $50 deductible. Certainly unexpected and while he's not in pain, it's urgent.

Our portion may be $400-$600 and the cash is readily accessible.

Not all emergencies are loss of income.

This is just a general comment, not directed at Sue J:

In my personal finances, I wouldn't classify this expense as an "emergency". I expect to incur expenses for these type events on a routine basis. Other examples are appliances or electronics failing requiring replacement, treatment of injuries of illnesses, replacement of items due to damage or loss, and non-routine car repairs. Any one of these items can be a few hundred dollars or more, and they happen throughout the course of the year.

I assume most FI people or those close to it don't really worry too much about paying for these comparatively minor expenses. I expect a few of these one time expenses each year and they are included in my budget as routine spending even though the expenses are lumpy.

 

[Bluemoon]

Since I live on my pensions & SS I'm not concerned about loss of income. I feel comfortable keeping about 9 months expenses in 2 savings acounts (1 pays 3%). In case of a need to come up with some large $ I always have my CD ladder & I Bonds to fall back on. My expenses for last year were almost exactly what I had planned them to be.

 

[HornedToad10]

This is just a general comment, not directed at Sue J:

In my personal finances, I wouldn't classify this expense as an "emergency". I expect to incur expenses for these type events on a routine basis. Other examples are appliances or electronics failing requiring replacement, treatment of injuries of illnesses, replacement of items due to damage or loss, and non-routine car repairs. Any one of these items can be a few hundred dollars or more, and they happen throughout the course of the year.

I assume most FI people or those close to it don't really worry too much about paying for these comparatively minor expenses. I expect a few of these one time expenses each year and they are included in my budget as routine spending even though the expenses are lumpy.

I think it's mainly a matter of labeling. I have a checking account and savings account. I consider the savings account my emergency fund but it's really more of just a slush fund for cash. Savings go in each month, lumpy expenses, emergency's and vacation comes out of it and I generally just keep the amount in the savings account over 3 months of expenses.

 

[jannyf]

Speaking from experience, I lost my job in early '09 & DH and I were totally not prepared for it. Looking back, it took me 9 months to secure employment that was about $5k less than my old job. Since I'm still working, we have that cushion in the bank now, plus some since we are saving for a new house. However, since that financial fiasco in '09, we have paid off everything, including our current residence - a 1100 square foot condo.

I think you need to evaluate your situation, your job market, etc & make your plan from there.

 

[Sue J]

I think it's mainly a matter of labeling. I have a checking account and savings account. I consider the savings account my emergency fund but it's really more of just a slush fund for cash. Savings go in each month, lumpy expenses, emergency's and vacation comes out of it and I generally just keep the amount in the savings account over 3 months of expenses.

That's pretty much what we do with monthly income and expenses, too. Anything above expected monthly expenses goes into the savings and it builds up until it's needed for.....whatever.

DH's tooth turned out to be only $395 for our portion. The dentist gave him a discount on a Cerec crown. The worst part of this "emergency" was that he couldn't chew for a few days and had to blend food into a slurry. If he had still been working this would have been awful and he would have been miserable. But he's retired so this turned into a fun experiment to see what he could put in the blender and not get grossed out.

 

[Kronk]

I figure all money in after-tax savings is emergency money. HSA and Roth money is desperate emergency. Selling the house is last-ditch survival. As it stands I'd probably have nearly 2 years before I hit the desperate stage.

Really not sure how much value an "emergency fund" has to me. Anything short of losing my job is really just an inconvenience. $20,000 for a new roof? Sets back FIRE, but I can get the cash to do it. Seems like most of the pre-retirees on this board would be in that type of situation. I see no need for a specific account earmarked for "emergencies".

 

[Sirka]

Keeping a couple of months of cash

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.

+1
... and Master card for everything else.

 

[iam21177]

Just under 14 months of living expenses at this point, removing the non-essentials.

 

[seabourne]

I have about 2-3 months between checking and savings accounts, and one ROTH account with about 2.5 months cash. I intend to get to about 9 months in savings account and invest the ROTH money, but it was a compromise between making sure that I fully funded my ROTH for the year and keeping emergency money available. If i need more than the 3 months outside, I can pull the ROTH cash and have 60 to still get money back in. Until I get a comfortable amount in the outside accounts, I'm not comfortable having it all invested in the ROTH due to liquidity concerns.

Looking at my net worth, if you ignore retirement accounts, I'm about skint - underwater on the mortgage, soft second worth about what the property is in total, and maybe 3 months living expenses.

Include the retirement, and I'm actually doing pretty well...

 

[youbet]

Enough to buy a case of whatever beer is on sale at Binny's Beverage Depot. By the time I drink that, everything should have worked itself out just fine....... So, say $13. Should be plenty.

 

[73ss454]

Everything I have is an emergency fund, no?