Emergency fund changes due to economy?

[Urchina]

We just got our emergency fund to 3 months' basic expenses. (Yeah, us!) Before the recession I was planning on having 6 months as a good EF; now I'm leaning towards an EF of a year. The only real change has been the economic outlook. I think that the recession and market crash have made me more nervous about our family's finances and more interested in a large EF.

Have others here had a similar reaction? How many months are you targeting for your emergency fund, and has it changed because of the recent economic issues?

And, should the economy take off and things get better, do you think that you'll reduce the size of your EF accordingly?

 

[Lusitan]

My emergency fund has fluctuated over time, but I'm at 6 months of living expenses right now. I am diverting some of the money I would otherwise invest (outside of my tax-favored retirement plans) into bulking up the emergency fund, and will probably continue to do so until it covers 12 months of expenses.

If past is prologue, yes, I will probably reduce the size of my EF down the road when the job outlook looks better. But I don't expect that will happen for several years.

 

[Meadbh]

We just got our emergency fund to 3 months' basic expenses. (Yeah, us!) Before the recession I was planning on having 6 months as a good EF; now I'm leaning towards an EF of a year. The only real change has been the economic outlook. I think that the recession and market crash have made me more nervous about our family's finances and more interested in a large EF.

Have others here had a similar reaction? How many months are you targeting for your emergency fund, and has it changed because of the recent economic issues?

And, should the economy take off and things get better, do you think that you'll reduce the size of your EF accordingly?

I agree. While I don't realistically expect to lose my job, stranger things have happened. I am currently allocating more than half of my monthly savings to cash or cash equivalents. After accumulating 1 year's expenses, I plan to keep going and building my cash and ultimately bond asset allocation.

In Canada as of 2009 we now have a Roth equivalent called the Tax Free Savings Account, into which anyone over 18 can put post tax funds of up to $5000 per year. Any earnings are tax free in perpetuity and the money can be withdrawn anytime. I have put $5000 into a 5 year GIC (CD) at 4.25%. So while this is not part of my emergency fund, it is part of my cash allocation. I plan to start a GIC ladder inside my TFSA.

 

[brewer12345]

I always had a multi-layered liquidity plan: some cash, some CDs I could cash in, a huge untapped HELOC, margin loan availability on my taxable account, etc. Definately came in handy when I was left without a seat when the music stopped last year. Now that I have a job where I have about as close to zero a chance of being laid off as exists, I am less worried about it, but I still maintain my multi-layered plan.

 

[Meadbh]

I always had a multi-layered liquidity plan: some cash, some CDs I could cash in, a huge untapped HELOC, margin loan availability on my taxable account, etc. Definately came in handy when I was left without a seat when the music stopped last year. Now that I have a job where I have about as close to zero a chance of being laid off as exists, I am less worried about it, but I still maintain my multi-layered plan.

Brewer, you are the poster child for an emergency fund!

 

[ziggy29]

IMO, if you have the ability to do it, I think the usual recommendation for an emergency fund should be doubled. In other words, if you used to believe in 3-6 months, make it 6-12 months.

 

[Alan]

We just got our emergency fund to 3 months' basic expenses. (Yeah, us!) Before the recession I was planning on having 6 months as a good EF; now I'm leaning towards an EF of a year. The only real change has been the economic outlook. I think that the recession and market crash have made me more nervous about our family's finances and more interested in a large EF.

Have others here had a similar reaction? How many months are you targeting for your emergency fund, and has it changed because of the recent economic issues?

And, should the economy take off and things get better, do you think that you'll reduce the size of your EF accordingly?

Up until age 38, never had no stinkin emergency fund

Then I grew up.

Today I have 2 yrs emergency fund (laid off in my 50's might take a while to get a new job).

If the economy picks up I won't change.

 

[DAYDREAMER]

15 years of emergency fund right now. I think that should cover it till the upturn in the market.

 

[Linney]

My employer started doing regular mass layoffs and that was my inspiration to get started on an emergency fund. At first, having 6 months of living expenses seemed like enough. As the layoffs continued in ensuing years, I upped that to 12 months.

Sure felt nice to have that 12 month emergency fund in place before the crash of 2008! I don't think I will reduce it even when the economy picks up -- my employer still has a propensity towards doing large layoffs and there is a peace of mind which comes with a sizeable cash cushion.

A couple of final notes: First, part of the reason for the large amount is that we only have my income to live on -- my spouse doesn't have a job so there is no second income to fall back on. Second, my emergency fund dollars are placed into a variety of different vehicles though not as diversified as brewer has.

 

[aaronc879]

Although I just reduced my e-fund to fully fund my '09 Roth IRA, I do plan on building my e-fund to 1 year of expenses by the end of this year. I work in blue collar manufacturing which is losing jobs faster than just about anything else so I think a full year is justified. I don't have a college degree and these days it's very difficult to find a decent job without one.

 

[brewer12345]

So this brings up another question: what's an e-fund?

I don't mean to be facetious, I just don't think of the way I plan for this solely in terms of how much cash I have in a savings account. Sure, actual cash on hand is an impotant component of this, but its only a piece of a liquidity plan. Personally, I much prefer to have multiple sources of liquidity, especially when they cost little or nothing until used. So on top of savings account balances, I have multi-year CDs that can be cashed in for a nominal penalty, margin loan availability on my taxable account (free until I use it), a HELOC (free until I use it), untapped credit cards (free until I use it), 401k loan availability (free until I use it), and taxable assets I could sell in a pnch. Sure, some of these sources of liquidity could evaproate when you need them, but not all, and I would be certain to tap any I had doubts about pretty quickly (drew down a wad of HELOC money shortly before I got laid off and put it in a money market fund).

 

[Dawg52]

So this brings up another question: what's an e-fund?

I don't mean to be facetious, I just don't think of the way I plan for this solely in terms of how much cash I have in a savings account. Sure, actual cash on hand is an impotant component of this, but its only a piece of a liquidity plan. Personally, I much prefer to have multiple sources of liquidity, especially when they cost little or nothing until used. So on top of savings account balances, I have multi-year CDs that can be cashed in for a nominal penalty, margin loan availability on my taxable account (free until I use it), a HELOC (free until I use it), untapped credit cards (free until I use it), 401k loan availability (free until I use it), and taxable assets I could sell in a pnch. Sure, some of these sources of liquidity could evaproate when you need them, but not all, and I would be certain to tap any I had doubts about pretty quickly (drew down a wad of HELOC money shortly before I got laid off and put it in a money market fund).

Pretty much the same philosophy here. I don't have one cd from bank xxx that I call my emergency fund. Just a number of cd's and bonds that can protect me from tapping into my equities for many years.

 

[Walt34]

Even though we have a COLA'd pension we're still increasing the savings. That's DW more than me, although I also feel there's no such thing as having too much available.

But at the same time, I don't want to be one of those people who dies with a million in the bank. The trick is to time the spending so you die flat broke.

 

[Alan]

But at the same time, I don't want to be one of those people who dies with a million in the bank. The trick is to time the spending so you die flat broke.

Usually a tough call unless you plan suicide.

My mother did a variation on this. She always bought some stuff on pay-as-you-go catalogs and once she had been diagnosed with terminal cancer she bought a whole load of stuff including furniture and small appliances that Dad would use. She had always paid the extra penny on the dollar insurance so no change there in what she did. When she died we sent in a copy of the death certificate to each company and the debts were paid off.

 

[Lusitan]

So this brings up another question: what's an e-fund?

Interesting question.

To me, and emergency fund (e-fund) is a source of money I can tap into that will not increase my required monthly expenses nor put my mid/long term financial health at a disadvantage.

I have one stash of cash that I think of as my "e-fund", but I suppose I have multiple layers within my overall emergency plan:

(1) My traditional "e-fund" money. This is enough to cover X number of months of post-layoff living expenses (which includes COBRA health insurance premiums). Right now this account is somewhere between 6 and 12 months as I work toward beefing it up to 12 months. I have this money in laddered CDs, with one reaching maturity every month. In theory, this gives me a slightly better interest rate overall than leaving it in a savings account.

(2) My other investments that I could tap into if needed: short term savings earmarked for another goal (e.g. down payment on a future house purchase), long term taxable investments, retirement fund investments (401K, IRAs), and 529 plan.

(3) sources of credit: home equity line of credit (untapped), credit cards

(4) contingency stuff: life insurance, disability insurance

There are many financial emergencies to prepare for, but I guess the one that is always foremost in my mind is losing my income through a layoff. That's the one I want to make sure I'm reasonably prepared for with my "e-fund".

In terms of my ability to handle other larger or more serious financial emergencies, I know in the back of my mind that I have numerous sources of savings / credit I can tap into. But I don't think of those as part of my e-fund, per say.

I should probably call my "e-fund" a "temporary loss of income fund", but that's too unwieldy

 

[ziggy29]

So this brings up another question: what's an e-fund?

For me personally, an emergency fund is cash and cash equivalents outside of a retirement account.

My savings accounts, CDs and savings bonds are part of it.

I don't consider debt or lines of credit to be an emergency fund personally. They may be useful to have in some situations where you need a large chunk of cash, but I don't rely on them or consider them as part of mine.

In a real emergency, there are also other options such as your Roth IRA contributions (which can be withdrawn tax and penalty-free). In fact, I'll bet a lot of Roths are worth less today than the sum of the contributions in them, and in that case you could theoretically sell everything and cash out of it without tax consequence. This to me is a last-resort emergency source of cash, but it is there.

 

[Bestwifeever]

I agree re not using a heloc or available credit on credit cards as part of your emergency fund. Those can be frozen or cancelled, but most importantly, they have to be paid back, adding more financial stress rather than relieving it.

 

[Alan]

What I count as emergency funds are my money-market accounts, CD's and I-Bonds.

CC borrowing or any other debt producing vehicle is not an emergency fund by my definition.

 

[FIREd]

So this brings up another question: what's an e-fund?

I personally consider any liquid investment with a somewhat stable value part of my EF (savings account, MMFs, CDs, bonds). I have very little "cash" sitting around, just about 2 months worth of expenses in a MMF and CDs. But there are plenty of other resources I can tap in case I needed it. I have about 10 months worth of expenses in municipal bonds. I also have, in my taxable account, several years worth of expenses in stocks. If I needed that money in a down market, I could simply do an exchange with my IRA, i.e. sell the stocks in the taxable account and convert them to cash or bonds while selling the bonds in my IRA and convert them to stocks. That way I don't lock in my losses yet still get to enjoy the tax break. So ultimately, I would consider as my EF the sum of all cash and bonds I own (in taxable and tax-deferred accounts) and it represents about 4-5 years worth of living expenses right about now.

I don't count lines of credit as part of my EF.

 

[freebird5825]

2 months expenses in cash in savings
ability to request a short term loan from dh2b, @ zero interest
6 months expenses in money market
over $10K in EE and I bonds
immediate check writing privileges on 2 separate muni bond funds

 

[ProspectiveBum]

We have 12 months of basic expenses in a [-]high-yield[/-] savings account. Unless the absolute worst case scenario happened (DW and I both lost our jobs, and neither of us received unemployment insurance) those funds would actually cover us for quite a bit longer than that. We do have ~$40k available on our credit cards, but that would be a last resort.

As the markets have gone down, I've stopped putting any money into the EF, and have been putting money into a taxable MF account. My early returns are less than stellar , but I'll continue DCAing into that account unless one of us loses our job.

 

[Urchina]

Thanks for the posts, everyone. I find this interesting, something akin to walking in the neighborhood at dusk before people have closed their blinds -- you get to see a glimpse of a lot of different living rooms. In this case, EFs.

To answer the question, what is an EF, for me it's money you can use to keep from getting in debt when your normal income stream dries up. It's designed to buy you time to re-establish an income stream. The more streams you have and/or the more secure they are, the smaller your EF needs to be.

Our EF is currently in a savings account (used to be high-yield but...). Once we have 6 months' saved we'll start a CD ladder, with a goal of moving towards a 12-month CD ladder. We also have Roths and a taxable MF if we really, really need it.

 

[lhamo]

Our EF is also our house fund -- we intend to pay cash for a pretty decent apartment here in Beijing as soon as our residency status allows us to do so (restrictions on how long you have to have official residency here before you can pruchase real estate), so we have a significant amount in high-interest (?) liquid accounts. About 15 years of our current living expenses, which we could cut considerably if needed.

DH is 50, so he could start drawing SS and tapping retirement funds before our liquid savings ran out.

Funnily enough, I still feel nervous about our financial situation. I have a serious case of bag lady syndrome, I think.

Hopefully the property market in Beijing will continue to drop, and we'll be able to buy a nice place with less than what we have saved. Then our living costs will drop considerably.

lhamo

 

[saluki9]

I take a similar approach to Brewer. We keep 4 months of expenses in CDs, 4 months in a High Yield savings account, and 4 months or so in the Vanguard Short term Corporate. Add onto that the HELOC and Margin loan.

 

[virginia]

My emergency fund has decreased. My job is really secure so I took about half of my emergency savings and bought some of the blue light specials on Wall Street this week
My attitude about having cash has changed though over the past year. When the market was doing well, I should have been putting cash away. I would have felt pretty stupid if the financial problem was much worse. I have quite a bit of money "saved" but mostly all in investments. Having more FDIC insured in the bank is where I should have been heading during that time.