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Emergency money re-visited
Old 05-16-2012, 08:40 AM   #1
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Emergency money re-visited

Most of us have x month's worth of expenses saved up in case we lose our job. We have about 6 month's worth of expenses saved up. I feel comfortable with that number.

Lately, I've been rethinking that amount. What would happen if another (or multiple) negative financial event occur at the same time - car dies, roof caves-in, health crisis, etc. You know, the proverbial Murphy's Law. Isn't that the true meaning of an emergency? We should call our stash "Murphy's Emergency Money."

I'm thinking of doubling our effort and save about 12 month's worth of expenses. I don't want to be lulled into a false sense of security.

I'd really like to hear what you guys people think. If anyone have any experiences regarding the use of emergency money, I'd like to hear your story. Thanks.
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Old 05-16-2012, 08:57 AM   #2
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When I was w*rking, we had some money in taxable accounts (MM mutual funds) that was our primary "emergency" fund. We also had retirement savings in a 401k.

The 401k was also the secondary emergency fund. The worst crises is getting fired. If that happened, I could get at the 401k money. Since our income would be down in the year that I went after the 401k, the tax penalty wouldn't seem so bad.

In situations where I'd continue working, my employer had a 401k loan program that we might have used. Some companies have hardship withdrawal options.

Of course, if I'm going to use my 401k as an emergency fund, I probably don't want to be 100% in the most volatile stock fund.

And, no, we never had an emergency that would have used up a 6 month emergency fund.
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Old 05-16-2012, 09:00 AM   #3
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One of the best things to happen to me financially was to loose my job in a massive layoff when I was about 30 years old. I had the proverbial 3 months of emergency money available but after that I was going to go right into foreclosure. I was one of the lucky (good? Nah!) few that got other jobs almost immediately but it successfully scared the living cr*p out of me. I switched to a minimum of 1 year in "safe" available funds. It also inspired me to start worrying/studying about personal finances and investing. It inspired me to be FI before I was 50 (but for some reason I keep my day job ).
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Old 05-16-2012, 09:27 AM   #4
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I think of my whole net worth as emergency money.
The order of my "lines of defense" is:
1. cash in the checking account ( 1-2 months)
2. lowering expenses (our discretionary budget is about 25% of our total spending)
3. cash in the high interest checking ( about 4 months of current expenses, 6 months of lowered expenses)
4a. Roth IRA contributions (but not earnings) can be withdrawn without penalty ( about 1 year of lowered expenses)
4b. investments in taxable account, might come before Roth in the order of priority if I can sell losers.
5. raiding kids 529s (should get at least few months)
6. selling the house and moving to a cheaper place (a boat maybe )
7. sending DW to work (this might move up the list when the kids are older)
8. cashing or using 72T withdrawals for tax deferred investments
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Old 05-16-2012, 09:35 AM   #5
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Here's a good recent thread on "emergency funds."

If you Google 6 month emergency fund, there are tons of articles from the last few years that suggest 6 months is no longer enough, in this tepid economy with high unemployment/difficulty in finding a job (if laid off). Depends on your career/skills and your expenses/debt, but it seems 9-12 months is desirable these days.
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Old 05-16-2012, 09:36 AM   #6
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The last few years have left me increasingly paranoid. I know it's probably not going to be an optimal long-term move but we have enough in liquid savings to get through more than 2 years with no other income streams, and that includes a changed budget where health insurance easily becomes the largest expense.

There's a good chance I might be in a position to decrease my paranoia (and our liquid cash) within the next year or so. But not yet.
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
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Old 05-16-2012, 09:40 AM   #7
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One can always conjure up worst-case financial scenarios. Certainly one year's worth of safe funds is better than 6 months, and 2 years is better than one year etc. As sailor noted, though, there are often other sources of $$$$ above and beyond the specifically-slated Emergency Fund.
If Murphy's Law struck you, do you have other sources of savings/cash to access? Also, many "catastrophes" may not be a major short-term cash drain - new roof, new car (or used car) can probably be financed; thus, they would require a much smaller initial cash outlay.
If not already done, you may want to consider getting an equity line of credit. I've had one for 20 years...and never used it. But besides my Emergency Fund I always viewed that LOC as an option to tide me over if my own Murphy's Law struck.
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Old 05-16-2012, 11:46 AM   #8
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I was always happy to consider my taxable brokerage account as my emergency fund. We probably had 3 to 6 months cash hanging around but reserved/budgeted for long-term expenses like appliances, roof replacement, house painting, and cars. Not specifically an emergency fund, but it gave us confidence that we would be able to handle an emergency.
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Old 05-16-2012, 11:50 AM   #9
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What if 3 emergencies happen at the same time? Better have 18 months then, because just 12 months would give you a false sense of security.

As others have said, you CAN touch other money in case of emergency. The main thing is that you have money invested elsewhere, and aren't just spending everything except for a small emergency fund. Obviously that's not the crowd here.

Personally, I'd rather optimize my investments and keep a small emergency fund, and live with the risk that in an emergency I might have to pull out funds at a bad time. Unless the emergency was economy related (loss of job), there's at least as good of a chance that I'd have to pull from my investments at or near their high.

There's also other ways to deal with catastrophes and reduce your risks. Keep your work skills and contacts current, so that if you lose your job, you have a better chance of getting another one than if you allow yourself to be put into an unmarketable niche. Stay insured. Keep your car maintained. Live healthy.
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Old 05-16-2012, 12:32 PM   #10
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I am retired and live off a pension, so the job loss emergency is the biggest potential problem taken off the list. For me it is relatively simple. I do have about 3 months of living expenses of dead money sitting in savings. If something else happened I could bust open some I-Bonds. But in reality, for me before I retired I made sure I had adequate monthly cash flow to finance any money that I may need to borrow. Once I was comfortable with the fact I could, I retired. I don't like to loan myself money, because Im afraid I will not be as aggressive paying it back as I would a bank or a low rate CC cash transfer which I get offers from about twice a week.
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Old 05-16-2012, 12:59 PM   #11
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While I was working, I viewed my taxable investments as my emergency fund. If I had to sell funds at a loss, so be it. It worked well as we never had an emergency and so I never had to tap into them and I remained fully invested.

Now that I am RE, we are living off savings and taxable investments until my pension kicks in and we begin SS (planned for age 70). When I RE'd in February, I had a half of year of expenses in my regular savings and just over a year's worth of living expenses in a .8% internet savings account.

About a month ago I rebalanced and added a little over a year's worth of expenses to the Vanguard ST Inv Grade fund, so I now have 2-3 years of living expenses in relatively stable and highly liquid funds. This is much more cash than I am used to carrying but since this withdrawal thing is new to me I'm groping in the dark a bit and it helps me to sleep better at night.

As I get more comfortable with the withdrawal phase I hope to be able to carry less cash and be more fully invested. I have had all dividends reinvested in the past and still do, but i am reconsidering this now that I am RE'd.
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Old 05-16-2012, 01:04 PM   #12
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Living in retirement changes the dynamics. I'm still pulling in a paycheck but it's irrelevant since I'm FI and old enough to tap my IRAs without penalty. In my fixed income, it's set up to have 1 year of additional living expenses mature every December.
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius
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Old 05-17-2012, 04:35 AM   #13
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I think the same way as you do about emergency money, but I still try to keep tens of thousands of dollars in my checking account. Call me paranoid if you want :-)
Originally Posted by sailor
I think of my whole net worth as emergency money.
The order of my "lines of defense" is:
1. cash in the checking account ( 1-2 months)
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
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Old 05-17-2012, 11:30 AM   #14
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There is also the possibility of using a credit line on your home instead of selling stocks or bonds. We have about 6 months worth of living expenses in cash, but over the 6 months, another 3 months or so would come in from interest and dividends, so I guess we effectively have 8 or 9 months. When we retire the mortgage, which we may or may not do this summer, we're going to increase the credit line on the house to what amounts to a couple of years worth of living expenses. Our plan is to live off interest, dividends and social security without ever having to invade principal unless we want to. As part of that, I feel like a year's worth of expenses in cash will be enough. If that doesn't work out, we can tap the credit line for any real emergencies so we aren't forced to sell anything at a bad time. We're close!
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