"Emergency Fund" thought process?

[stephenson]

Have read many threads on this topic, but when spouse and I began the discussion, we started considering which components of our assets and income would offset a market downturn, or a major event need like medical emergency.

We have income from military healthcare and retirement pension, megacorp pension and some non-qual income, and three rental properties ...we discussed various scenarios and while spouse (more conservative) came up with about a year's expenses in case, I offered that we had that much in a CD that would only cost us about $400 to cash out prior to maturity. (also have both taxable equity, IRA and Roth IRA holdings that we won't exhaust at 4% SWR even without the income components)

Confusing or simple? Thoughts, please!

 

[nun]

I retired 2 years before my pension started and had to bridge the gap. I had almost enough in cash in the bank to cover the 2 years spending and also after tax money in mutual funds. Still I wanted to leave nothing to chance so I put 10% into a stable value fund in my 457 plan.

The pension has started and my AA is around 65/35 now but I've left the money in the stable value as I just like having a large buffer to pay for big expenses if the market tanks.

 

[audreyh1]

Theoretically, the fixed income in your portfolio should be sufficient to cover a large emergency unless you have a very high equity allocation.

Personally, I have more than that outside my portfolio because I like to have a big chunk in short term funds to do with as I please (including emergencies).

 

[Blue Collar Guy]

sounds like you already have the plan in place, 400 bucks for a years worth of expenses, sounds like a cheap insurance policy to me. since you 2 already liked the idea of a CD ( i dont) , just keep it in place.

 

[Fedup]

I have large cash and a HELOC account. That should be sufficient for many years.

 

[97guns]

Emergency funds are a gimmick, I used to carry a 10k, 12k, 15k emergency fund and never had the need to use it, finally decided to just throw it all to gold. IMO everything you own should be batched into 1 lump sum,, your net worth

 

[jebmke]

I dropped our emergency fund when my wife retired in 1992. I retired in 2007. We have a fairly conservative allocation (40/60) so I don't feel the need to hold any cash.

 

[stephenson]

BCG,

It isn't that we like the idea of a CD, it was simply that we had about $40K a year ago with no where to put it and NFCU had a 18 pos CD at about 2% or so ...a lot has happened in a year, so I could be wrong on any number except the $40K

 

[stephenson]

BCG - yeah, I was wrong on two out of three numbers ....

1.98% and 20 months ...

 

[jazz4cash]

sounds like you already have the plan in place, 400 bucks for a years worth of expenses, sounds like a cheap insurance policy to me. since you 2 already liked the idea of a CD ( i dont) , just keep it in place.

I agree. E fund is very important in the early years to keep from going off the rails. I always just planned to use credit lines or 401k loans if the need arose. Once you're well into accumulation or nearing ER there are lots of resources available that cost less than keeping a pile of cash at 0 pct. I recently realized I can draw all my CD dividends w/o a penalty. In general the need for an emergency fund is overrated unless you are 100 pct equities.

 

[Blue Collar Guy]

BCG - yeah, I was wrong on two out of three numbers ....

1.98% and 20 months ...

hahaha, its ok, the fact you have an emergency fund of any substance it a tribute to your financial savvy. You are way ahead of many . As a side note im a veteran myself,i only did 2 years, i love the fact you served long enough to collect a well deserved pension.

 

[mystang52]

I'm somewhat of an OCD budgeter, so I put money into sinking funds for cars (repairs or ultimately replacement) and modestly-sized home repairs. But beyond that my "emergency fund" is just our general savings. I agree with the other poster who wrote that an emergency fund is more important for those still growing their nest egg to prevent going off the rails.

 

[Blue Collar Guy]

I'm somewhat of an OCD budgeter, so I put money into sinking funds for cars (repairs or ultimately replacement) and modestly-sized home repairs. But beyond that my "emergency fund" is just our general savings. I agree with the other poster who wrote that an emergency fund is more important for those still growing their nest egg to prevent going off the rails.

+ 1

 

[Sunset]

We have CC's , and some cash earning low 1% we could tap, plus a Heloc, so no real need to keep a dedicated emergency fund.

 

[Danmar]

I agree. E fund is very important in the early years to keep from going off the rails. I always just planned to use credit lines or 401k loans if the need arose. Once you're well into accumulation or nearing ER there are lots of resources available that cost less than keeping a pile of cash at 0 pct. I recently realized I can draw all my CD dividends w/o a penalty. In general the need for an emergency fund is overrated unless you are 100 pct equities.

Agree. E funds are very important for people starting out and whose major risk is job loss. Once retired most people do indeed have access to funds such as helocs, margin loans, fixed income component, etc.

For higher net worth people, I think that regular operating cash management (ie the regular funding of lumpy expenses ) kind of takes over from any E funds concern. I hold enough cash for any likely emergency but that's not why I hold it. It's just for regular lumpy discretionary items like a big trip, new car, or home reno.

 

[Scuba]

We hold 2-3 years of expenses in cash or a short-term bond fund so that we can ride out any market declines without selling investments at a loss. We also have a HELOC and a 0% credit card we can use if need be. Almost 50% of our budgeted spending is discretionary (travel, dining out, entertainment, gifts), so we could easily reduce or eliminate expenses to compensate for unanticipated spending needs and/or a more prolonged market decline.

 

[scrabbler1]

The topic of emergency funds has arisen here from time to time. Many people, including me, have EF money in layers, or tiers, with some money in less risky and more liquid or more easily accessible assets.


As for me, my first tier is a small amount in my local bank's checking account above the minimum balance requirements to avoid monthly fees. I used to keep closer to $750 but have reduced it to around $500. This is money I can take as cash from an ATM or write a personal check at will. I tap into this cushion fairly often but it can be replenished quickly and easily.


My next tier is about $40k I keep in an intermediate-term muni bond fund. This fund pays just over 2% annually and is mostly tax-free. I also have checkwriting privileges on the account which makes it more accessible. I tap into this account on average once a year but have gone 2 or 3 or 4 years without touching it. The principal can vary but not a lot.


After that I have other bond funds and a stock fund I can tap into for larger amounts such as buying a new car once in 15 years.


I don't like keeping large amounts of money tied up in accounts which pay zilch or nearly zilch.

 

[Koolau]

One advantage of FI is that the ducks are typically aligned and getting cash quickly is a phone call or mouse click away. Virtually all of our funds/investments are structured such that they can become cash (emergency fund fodder). Which to tap first depends on how much might be needed and calculating any tax consequences.

For most issues, credit cards work just fine. I'm guessing we have $30K to $50K available on plastic at most times. For more than that, there is the check book which typically contains from $10K to $30K because our expenses are VERY lumpy.

I actually find myself more concerned about issues such as power outages or other disruptions to the 1's and 0's type of money transfer. I was in a store a year ago when the computers went down. Those with cash walked out with their basket of goodies. Others waited or left empty handed. What about bail? Back in 76 I got a speeding ticket in another state and they would not let me leave without posting CASH bail - not even a travelers check. It turned out that once bail was posted, one could then plead guilty and forfeit the bail as the fine. I don't anticipate anything worse than that but anything can happen. So keeping a handful of $20's (and a few small bills) on hand seems useful.

These are my thoughts on emergency funds. YMMV

 

[jazz4cash]

When I think of Emergency Fund, I think in terms of covering living expenses in case of unexpected loss of income (e.g. layoff, etc.). during accumulation phase. Two income families have significantly more insurance vs. single earner households. My goal was one month expenses and then heloc, credit cards and 401k loans. This was effective for us when DW was riffed and took 4 yrs to recover. If you are in retirement using pension, SS, and savings, these sources are much more reliable. In the spend down phase it's more of an AA question vs. emergency fund.

 

[Music Lover]

Credit cards that have no balances with high limits and a HELOC is more than enough.

 

[W2R]

My retirement AA includes 5.5% cash, which I keep in money market at Vanguard and use as needed for rebalancing.

In addition to that 5.5%, I withdraw my full year's spending money in January each year and move it from Vanguard to my local bricks and mortar bank. So, whatever I haven't spent yet is right here at hand to spend in case of emergency.

With interest rates as low as they are, I don't pay as much attention to interest rate on cash savings as I do to convenience. I suppose I should so you may regard that as one of my personal failings. I don't know how long it would take for you to cash out that CD and actually have the money in your hand, but hopefully not long if you need emergency money from it.

 

[USGrant1962]

In my view the only "emergency" that could require a separate fund is a market crash. Otherwise your overall portfolio is your emergency fund.

I keep current year budget in cash and a second year of expenses in series I Bonds under the theory that I can cash them in the event of a market crash. So you could say I have a 2-year emergency fund.

 

[pb4uski]

I have never needed to use an emergency fund. Most emergencies (car repairs, home repairs, etc.) can be covered with credit cards or new financing.

I was lucky in that I had stable jobs... if i had job insecurity then I probably would have felt having and emergency fund more important.

In retirement, I now keep about 5% in cash (online savings) as a peace-of-mind thing since we don't have a steady paycheck coming in but I may shave that down some over time.

 

[calmloki]

We have been savers for decades - when we had loans on the rentals we pushed money as fast as possible. It was good to have goals. Now we only have one loan on a personal house, but since we pay 2.925% and Penfed pays us 3% on about the same amount we fight to not pay it off. Cash tends to build up in envelopes - haven't checked for awhile, but probably 10k worth. Like having cash around just in case (unspecified implausible disaster requiring plastic surgery, new fake ID, running for the border..). Checking accounts normally have 4-40k more than we owe on all the credit cards. Bank savings accounts now are 4-5 times our annual spend. Only get about 1% on them, but they also get tapped for loans we make; right now we could make a pretty good sized loan or I could have a major heart adventure and we could pay in full with a wire transfer.

We also have a California tax free bond we could tap as well as the other Vanguard stuff. Guess we really don't have an emergency fund, just a sloppy pool of bucks that can be tapped within 5 minutes or a week. Really casual and inefficient of me, but we can be sloppy rather than focused on absolute optimal returns now.

 

[Walt34]

We've always had an emergency fund, something both of our parents drilled into us. And we've had to use it. About 18 years ago the aging A/C in the previous house died and needed replacing and when we took the plenum off it was "Oh, man, that heat exchanger does not look good" so it was time to replace the furnace too. Nice to be able to simply write a check for both. We've had similar things happen - had to replace the A/C here, and had to replace the water line from the meter near the street to the house.

When FIL found he hadn't paid his property taxes we were the only ones in the family (some of which have higher incomes than we do) who could write a check for $3k on one day's notice. We did eventually get repaid.

So yes, it is nice to have a stash of cash to quickly and easily deal with things like that. As others have mentioned there are other ways to deal with things like that but this works for us.