Question on Emergency Fund and Possible Investments

[62caster]

Hi all,

I currently have about 20k in my emergency fund (monthly expenses are about 4k). I'm currently employed and my job is stable. I figure I could probably get away with taking out 5k or so to invest. Would you agree? If so, I was thinking of putting it into an S&P fund (used to have some invested in SPY and did pretty well). Thoughts?

Thanks!

 

[retire2020]

I would not do it. I've followed minimum six months expense in cash(I keep one year now) since 2008 crash. Cover other emergency besides job loss.
Huge market crash in 2008 and to top that I had lost my job. That emergency fund really helped me get through that difficult period.

 

[pb4uski]

I think you need to make a "policy decision" as to how much of an emergency fund you want to carry (either in terms of $x or x months of expenses or x months of take-home pay) and then stick with it.

Another thing you could do is haircut any emergency funds that are in riskier assets so if you put $5k in the S&P that in your mind your emergency fund is really only $17.5k with a 50% haircut (not $20k).

No right answer, but you already knew that....

 

[Animorph]

I was happy to let my taxable brokerage account serve as my emergency fund. Just realize that if the stock market crashes at the same time you lose your job, perhaps due to a recession like 2008, you may be selling S&P 500 fund shares at a crappy price. One the other hand, if things go OK for a decade or so you may double the size of your emergency fund. Then you can afford to sell at half price.

 

[frank2009]

If your job is stable it may be OK. You have to be comfortable with a 15K emergency fund. Some things to consider: Do you have credit card debt? I'd put the 5K towards that before investing. Do you have any large expenses like a new car or home improvements within the next 5 years?

I couldn't stand putting money into a savings account or money market fund. Although safe, they are sure losers to inflation. My solution was to put my E fund into Vanguards target retirement income fund. There is some risk involved but it should stay ahead of inflation over time. A reasonable compromise that you may want to consider.

 

[RetireAge50]

We have never had an emergency fund.
I'm thinking over time the money is better invested. Not worried about the short term as much.

 

[H2ODude]

I think a big issue is job stability as well as access to other somewhat more fluctuating, yet liquid, assets as others have said. When just starting out, we tried to get to 6 months. Then, with a stable job and accumulated assets not locked up in IRA, sort of let that drift down to a minimal amount. Now retired we do keep a good chunk of cash but it's not as much for emergency as a buffer for needed income that isn't subject to market whims.

 

[62caster]

I appreciate all the feedback here... I do not have any credit card debt, but I do have about 12k spread evenly across 4 student loans (interest rates vary from 5.75-6.5). I've debated taking 3k and paying off one of those, but that would only give me about $45 extra per month in terms of cash flow.

 

[Options]

My entire life I have never needed an emergency fund. At most, I've had to let a credit card balance not get paid off in full a couple of times (but then promptly paid it off the next month--I hate paying interest of any sort). I guess it comes from having LBMM all these years. In retirement, I suppose my ROTH could serve as an "emergency fund", but I doubt I'd ever need it.

 

[Mulligan]

We have never had an emergency fund.
I'm thinking over time the money is better invested. Not worried about the short term as much.

I always felt my jobs were stable despite frequent changes, so I never had an emergency fund either. Though I never had a lot to begin with! CC access checks were always available if needed. Now retired, I still have a bit too much in savings. My plan is for my IBonds to be my emergency fund when I get the nerve to finally clean out the dusty old savings account.


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[Totoro]

I appreciate all the feedback here... I do not have any credit card debt, but I do have about 12k spread evenly across 4 student loans (interest rates vary from 5.75-6.5). I've debated taking 3k and paying off one of those, but that would only give me about $45 extra per month in terms of cash flow.

From my perspective and many others on-line

1. First build a solid cash reserve. I'd say minimum 6 months, preferably a year.
2. Pay off any loan costing you more than 3%.
3. Then build up an even bigger cash reserve, a year or even two.
4. Only then start investing the surplus.

No time right now to detail my reasoning, but it's driven by safety + investment horizon.

So in other words: don't invest in the stock market yet, do use your surplus to pay off student debts asap.

 

[jerome len]

I always keep a little cash around....a couple of grand now. I remember, years ago, when my Mom needed transportation from one hospital to another.......the ambulance wouldn't move her before they got a $100 since she needed emergency brain surgery and they wouldn't take a chance on not getting paid if she died........wow, I had to drive 6 miles home, grab the cash and rush back....what a nightmare. Today, we have credit cards, debit cards BUT sometimes you just need cash! Other than that my money is invested, always enough in a MM or short term bond fund if I need it. Another thought.....years ago I started a parts business and when employee pay day arrived I had a lot of parts but no cash......not one counterman wanted to take home a fender or bumper....they all wanted cash. So, I still believe cash is king.......nothing is as scary as a "dollar short" when any emergency arises.