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How Much to the Emergency Fund???
Old 07-25-2008, 03:17 AM   #1
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How Much to the Emergency Fund???

So, I am taking a reappraisal of my whole financial picture.

The first on the list is the Emergency Fund, or as I call it, my "Oh S**t Money". I've always kept about 4-6 months of basic expenses aside for the "emergency". In 8 years, I've never used it. So I considered the amount again from first principles, and arrived at a rather different answer:

I have no car, so no need to consider accidents or repair.

Properties are all apartments so there is no external or structural maintanence or weather damage etc to consider. All are fully insured so no other internal damage or other repairs to consider. Furniture is all new in the rentals so no need to replace under "wear and tear". Possibility that one of TV, Washing Machine, A/C units or water heaters may go pop. So say $500 for that.

Health is good and comprehensive medical coverage provided by employer, no deductibles.

As far as I can see, my only emergency will be getting fired. My emergency fund needs to survive any period of unemployment. With a 3 month notice period, or with 3 months salary in hand, I can last about 8 months at my survival level spending, as it's little more than 30% of net.

So by putting aside emergency money against a period of unemployment, I am betting against myself finding another job within 8 months...mmmmm

In the end, the "Sleep-at-Night-Ometer" says put 2 months expenses aside, just for the sake of it.

Feel free to point out the flaws in the plan.

Singlee
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Old 07-25-2008, 04:37 AM   #2
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I keep a couple years worth of bare bones living expenses, assuming being fired (as opposed to FIREd) and repatriated. I am trying to build this to 3-5 years, but keep finding bargains in the market that I can't resist...and I'm not talking clothes or handbags. However, I want to FIRE in a couple years or so...that's why I'm trying to build the cushion. It would depend, therefore, on when you expect to FIRE, and how much income your portfolio will throw off...fwiw

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Old 07-25-2008, 04:38 AM   #3
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Quote:
Originally Posted by Singleee View Post
....
As far as I can see, my only emergency will be getting fired. My emergency fund needs to survive any period of unemployment. With a 3 month notice period, or with 3 months salary in hand, I can last about 8 months at my survival level spending, as it's little more than 30% of net.
....
I've never had an "emergency" fund, just a budget for current expenses and life savings. I've dipped in the life savings only for special trips and once for re-tooling for a different career because the first one was making me physically ill. I have no idea how much a new career path cost me but I would do it again in a heartbeat. More useful than money during that transition was contacts! Whatever money I have that could be designated for emergencies has been absorbed into the retirement kitty--and retirement at this point is an emergency, but a pleasant one.
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Old 07-25-2008, 05:01 AM   #4
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Rambler, you make a sound point, but I am primarily focussed on the FI rather than the RE, and have probably 7 or 8 years before reaching the former. So building a secure cushion which is partly or wholly insulated from market fluctuations, from which to draw living expenses in retirement, would make sense for someone a few years away from pulling the plug.

However, I don't plan to pull the plug for at least 10 years, FI or not, so having anything more than a minimum amount sat in savings accounts /CD's earning buttons just doesn't make sense to me at this stage. Sure it's nice to see a fat balance at the ATM, but I'd rather it was working than resting.

The conventional wisdom of having an Xmonth expenses buffer doesn't really apply to someone in their thirties, mid-career, with in demand skills and expenses in the lower deciles of their income. These circumstances will evolve over time and review is wise in a few years.

Bugger it, I'm convinced. Two months of expenses "float" is the max, the rest can get out to work!

Singlee
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Old 07-25-2008, 05:06 AM   #5
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If you have 10 years to go, I agree with you. Find as many sound bargains as you can now while the market is down, and keep those dollars working.

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Old 07-25-2008, 11:50 AM   #6
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I agree with taking a hard look at the conventional emergency fund in light of your personal situation. It's not even a slam-dunk to me that your emergency funds need to be all cash: If you have a well-diversified non-retirement portfolio, what's wrong with considering your bonds or commodities (right now, since they're up) as your "emergency funds." As long as you have something liquid that you can sell in a pinch at a profit and without penalties, that serves the same purpose, in my opinion.
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Old 07-25-2008, 12:09 PM   #7
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It's a good point to question your emergency fund. I think the answer, however, will be different for everyone.

My comfort range is about 6 months of living expenses (including COBRA health insurance) mainly to insure against sudden job loss. I like to know that if I lost my job, we could continue living exactly as we do for at least 6 months. We're a single-income family, so that increases the importance of my income.

Frankly, my emergency fund also serves as my "eat sh*t" fund. It's nice to know that, no matter how bad things get at work, I always have the option to walk away today and not worry about how we're going to survive until I get another job. I doubt I'll ever use it for this purpose, but it's nice to know it's there; and sometimes just knowing it's there makes an otherwise intolerable day seem more tolerable.

But it's a good point about getting that money working for you in other ways, especially if you're single and don't have anyone else counting on you, or have higher interest debt, or want to put more to work in this bear market while the sale on stocks is still on ...
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Old 07-25-2008, 05:55 PM   #8
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Originally Posted by Singleee View Post
Rambler, you make a sound point, but I am primarily focussed on the FI rather than the RE, and have probably 7 or 8 years before reaching the former. So building a secure cushion which is partly or wholly insulated from market fluctuations, from which to draw living expenses in retirement, would make sense for someone a few years away from pulling the plug.

However, I don't plan to pull the plug for at least 10 years, FI or not, so having anything more than a minimum amount sat in savings accounts /CD's earning buttons just doesn't make sense to me at this stage. Sure it's nice to see a fat balance at the ATM, but I'd rather it was working than resting.

The conventional wisdom of having an Xmonth expenses buffer doesn't really apply to someone in their thirties, mid-career, with in demand skills and expenses in the lower deciles of their income. These circumstances will evolve over time and review is wise in a few years.

Bugger it, I'm convinced. Two months of expenses "float" is the max, the rest can get out to work!

Singlee
Emergency fund while working and emergency fund while retired to me are two very different things.

OP pointed out that they are working. Your (their) biggest risk is losing a job. I would suggest 3 months expenses in cash, plus 3 more readily available (this is what I do).

I have 3 months expenses in a 90 day CD ladder. I have 3 more months expenses in a moderate mutual fund which is stable year over year (it does not lose money on a yearly basis and the 5-10% return I expect is much better than cash). It should be noted that there are days where the value changes +/- 2%, but year over year, the fund goes up (no negative years for me).

In addition I can add to "emergency fund 2" each month based on a budget for new furniture, new car, new HVAC or similar for whatever unexpected expenses come up. This budget is important because the cash flow from the "misc mid term expenses" can fund many of the smaller expenses which are tough to plan for.

When retired you want cash so you don't sell when the market is down, the EF would need to be measured in "years expenses", not "months expenses".
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Old 07-25-2008, 06:41 PM   #9
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Before I was able to FIRE, I kept between 3 to 6 months (usually) of living expenses in the form of cash on hand just in case. I called this my cash cushion. My excess free cashflow was invested in the diversified portfolio that eventually allowed me to FIRE.

Now that I'm older and more conservative, I keep 12 months of living expenses on hand (which I call my cash pipeline -- the cash balance I have on hand on December 31 of each year must be enough to cover me for the following 12 months of living expenses).

I'm supplementing this cash pipeline with dividend-paying stocks that put cash into my checking account on a regular basis throughout the year. My goal is to have enough dividend income to cover my basic living expenses (this goal is a ways off right now, but I have a day job again that generates the excess free cashflow I'm using to build this dividend-based portfolio).

I'll also planning on building up a separate liquid capital-preservation fund for my insurance deductibles. One of my projects this weekend is to review my insurance situation to make sure I have the right coverages and to take inventory of my deductibles.
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Old 08-05-2008, 03:46 PM   #10
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When you say "living expenses" I think this is not the right yardstick. Singlee, in 8 years, living expenses have changed alot. You need to have 6months of salary/income put aside. I'm sure if you look at 6 months of expenses versus 6 months of paychecks, there's likely a big difference in the numbers.
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Old 08-05-2008, 07:18 PM   #11
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I've never kept a specific emergency fund.

When I was younger and married, it was all we could do to keep up with the bills. I couldn't see leaving cash in the bank at a low rate while paying 15% or whatever credit card bills. I figured I was better off trying to get the balance down, and a side benefit to that was more room on the credit limit if there truly was an emergency. I acknowledge we didn't have a good plan, but I tried to do the best I could given the situation.

Once I got ahead, I liked to invest it all. I figured then, and still figure, I can tap my investments whenever I need, and if I'm really not ready to sell I can go on margin. But more likely I'd find something to sell, if, after all, it really is an emergency. I'd rather keep the money invested as much as possible and pay a possible price in selling when I didn't plan to rather than lose out on potential gain just to keep cash on hand that I may never need.

I do set aside cash when I know I have some large expenses coming, but that's really just advance planning, not a ready emergency fund.

In my mind an emergency fund is needed more for a family that has all of their money tied up in their homes and 401K, and has a pension for retirement, and not a lot else saved up. In other words, not being very liquid. I feel that with most of my money in stocks and bonds, it is pretty liquid and available in emergencies. My situation was a bit unique in that I went from a broken plan to getting pretty well ahead within 2-3 years, so I didn't have a lot of time where I was only a bit liquid.
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Old 08-05-2008, 07:42 PM   #12
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$5K-$10K is a nice size of emergency fund for me, ideally. That is somewhere between 6-12 months' minimal expenses (3-12 months' expenses if I loosen up a little). Like some others, I really couldn't afford an emergency fund until recently and I took chances.

When I was paying off my house (2002-2006), every few months I would skim off nearly all of what I had in the bank and send it towards the mortgage company, to apply to my principal. I figured that that way, I had a decent sized emergency fund in the bank most of the time.

However, the rest of the time I didn't, and in 2005 Katrina entered the Gulf as I was mailing off $8,000 to my mortgage company. Oh well.

So, cleverly shutting the barn door after the horse was gone, I opened a $50K HELOC on my house (to use only as an emergency fund) before hurricane season, 2006 could get underway.

Tonight, I closed my HELOC. I never used it even once, and now I have enough resources with enough liquidity that I don't need it for an emergency fund. I have been grinning all night and thinking that some people here will probably think I am nuts to close my HELOC! I know they are harder to get, these days. However, I neither need nor want it.
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Old 08-05-2008, 08:52 PM   #13
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I did this kind of the other way around. I also mostly budgeted based on cash flow and invested whatever wasn't used. I kept open credit accounts (with near zero balances) and a HELOC which I could run up if needed in an emergency to smooth things over until I could get my income restarted. However all the talk recently of freezing HELOCs, even those with lots of available equity has scared me into accumulating a cash emergency fund for the first time. I'm not happy with the interest it earns (and I did a good job of shopping for the best deal I could get) but I'm feeling much safer that even if my HELOC gets frozen for inscruitable bankers whims, I will have cash available to get me through any reasonable "emergency"
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Old 08-06-2008, 05:51 AM   #14
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I have 3 more months expenses in a moderate mutual fund which is stable year over year (it does not lose money on a yearly basis and the 5-10% return I expect is much better than cash).
A stable mutual fund that returns 5-10%? Sounds a little...well, hard to believe.
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Old 08-06-2008, 07:47 AM   #15
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I've got $50K total in an ING account. I figure this would give me a year of expeneses if I really had to go that long. Its my sleep at night fund or my scr*w you fund.
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Old 08-06-2008, 11:00 AM   #16
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We're saving for our next house / relocation / emergency fund. Normally I would want it to cover enough to get us through with our standard expenses * the number of months I expect us both to be unemployed if we were fired. Under those circumstances, it's pretty high just because the odds of both of us being fired is low (and being laid off comes with a severance package and unemployment) and we can get work pretty fast in a good economy. I'm comfortable with too much buffer, though.
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Old 08-06-2008, 11:12 AM   #17
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A stable mutual fund that returns 5-10%? Sounds a little...well, hard to believe.
Thats because it is. The fund has lost money three years out of 25, has returned less than a few percent in many more years, and sports a standard deviation of 1.93.

Composed of commodities, precious metals, foreign bonds and more than a third in equities.

If these are your thing, putting 10-15% of your money into it might be considered a good diversifier. But I would never put short term money into it or think of it as a money market replacement.

This is the sort of grossly misleading information that does a great disservice to the community.
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Old 08-06-2008, 04:16 PM   #18
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Before I FIRE'd, I never had an cash emergency fund. I was 100% invested in the market nearly all the time, and I still think that's a reasonable thing if you have many years of expenses invested.

Make sure that you have enough that you are sure you'll have 3-6 months even if the market drops a lot. Going this route requires having the cojones to sell when the market has declined if you happen to need your e-fund, and you have to first make sure you're willing to take those losses. If your job is stable it might be a risk worth taking.
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