Emergency Fund - do you have one?

[disneysteve]

Originally Posted by Elgin526

It doesn't make sense to have a large EF while we have debt.

Not to argue, but just to offer an alternative point of view, many people feel just the opposite. When you are in debt is when it is most important to have a good EF. Otherwise, when an emergency arises, you are more likely to take on additional debt. What good is working on paying down your credit cards, for example, if as soon as an unexpected expense comes along, the only means you have to cover it is to charge it to your CC?

You mention health, disability and life insurance, all very good things to have. But what if you lose your job? How will you support yourself without an adequate EF? When I was jobless a few years ago, we lived just fine on our savings (and a little ebay income). If not for that EF, we either would have been forced to liquidate investments or rack up new debt to cover living expenses for 3 months.

[frugalmomof1]

I don't have a designated emergency fund, but I have enough saved for at least 6 months of expenses...probably more like 8 or 9 months.
One of my goals is to fund my eloan savings account with 6 months of expenses, but I have some debt that I want to take care of first.

[Elgin526]

Originally Posted by disneysteve

Not to argue, but just to offer an alternative point of view, many people feel just the opposite. When you are in debt is when it is most important to have a good EF. Otherwise, when an emergency arises, you are more likely to take on additional debt. What good is working on paying down your credit cards, for example, if as soon as an unexpected expense comes along, the only means you have to cover it is to charge it to your CC?

You mention health, disability and life insurance, all very good things to have. But what if you lose your job? How will you support yourself without an adequate EF? When I was jobless a few years ago, we lived just fine on our savings (and a little ebay income). If not for that EF, we either would have been forced to liquidate investments or rack up new debt to cover living expenses for 3 months.

True, with a small emergency fund, if a BIG emergency happened I'd have to go further into debt. But, if that emergency didn't happen I've paid off my debt sooner, and saved interest while doing it. I'm betting on the BIG emergency not happening in the short term. I'm talking about having a small EF for a period of about 2 or 3 years or so, not decades. My EF fund right now is at $2800, which will cover anything short of a disaster. Car repairs, roof leaks, that sort of thing.

As for job loss, well, there is unemployment for one. Second, if either I or my husband lost our job, the one that is unemployed A) due to our professions, should be able to find work in a short amount of time and B) if a new decent paying job can't be found for some reason, an $8 an hour job or two would earn enough money to keep our heads above water once the unemployment ran out as long as the other person still had a "real" job. If we both lost our jobs at around the same time (extremely unlikely) and we both couldn't find decent paying work (also unlikely), then we'd have a problem. But if push came to shove, we could sell the house, pay off all of our debt (and I mean ALL of it, we've got the equity to do it) and we could actually live off of both of us making as little as $8 an hour full time (cheap apartment and bare minimum expenses. Not fun but what choice would we have?). In a situation where we both lost our jobs and couldn't find new work, unless we had a huge emergency fund, we'd face losing the house anyway, it would just take a little longer to get to that point.

Now our goal once we pay of the consumer debt is to max out the EF fund to six months worth of living expenses. Long term it's the safest bet, I completely agree with you there. But why keep $10k in the bank while having $16k worth of debt? Pay off half the $16k and then work like mad to pay off the the $8k that remains while keeping $2k in the bank. Once the $8k is paid off, you've got a ton of cash left over each month and you can replenish your savings in no time.

Read Dave Ramsey's "Total Money Makeover", he basicly says the same thing (only he recomends having only $1000 in an EF fund while repaying debt, but the book is several years old, inflation you know! ). He says on average people who follow his plan are out of debt (except their house if they have one) in 2-3 years, so again we're talking a short time frame to be "working without a net" so to speak. You'd like this guy, Steve, when he says cut the "wants" out of the budget he really means it! I don't care for his investment advice, but his getting out of debt advice is spot on.

Anyway, generally speaking, anyone with a large amount of debt likely has no savings at all, anyway. They'd have to pay the minimum on their debt while saving up 3-6 months living expenses, and only then start paying down the debt. If they are in that kind of financial distress, likely they aren't good savers to begin with. They'd likely put money in savings each week, only to then take out again on things that aren't really emergencies. Meanwhile their debt isn't really being paid down because they are only paying the minimum. If they just pay their extra money towards the debt, they can't get that money back again. It forces them to stay on budget as long as they are paying what they should for debt reduction. By the time they've paid off their debt, they are now "trained" to stay on budget, afterall they've been doing it for a couple of years now, they've learned that disapline. Saving up an EF should be a piece of cake and likely won't take too long.

Now of course, this is what DH and I feel comfortable with, for other's, they want that peace of mind of a fully funded (or at least a large) EF. Maybe they are in an uncertain industry, maybe they have young kids (DH and I don't have kids, though we plan to!). Everyone should do what feels best to them. Numbers wise, it doesn't pay to have a ton in savings while paying high interest debt (although our debt is 0% at the moment) if your time frame for debt repayment is relatively short. Odds are that the BIG emergency won't happen in a short time frame. And if it does, at least your debt is a lot smaller, it will take less money to 'stay afloat' until the crisis passes.

[Broken Arrow]

Just for the sake of conversation, I think emergency funds should reflect the realistic mishaps that that you are likely to face. Even then, I concede that it is still a highly subjective matter.

The other thing is to crunch numbers and see what's the best way to come out ahead. Also, it doesn't have to be either-or, but can be some kind of mix between the two.

Just thinking out loud.

[disneysteve]

Originally Posted by Broken Arrow

Just for the sake of conversation, I think emergency funds should reflect the realistic mishaps that that you are likely to face.

Also, it doesn't have to be either-or, but can be some kind of mix between the two.

Just thinking out loud.

I think you're right. For example, I don't worry too much about a disability that keeps me from working, because I have excellent disability coverage. I just need to provide for the waiting period before my benefits start.

I'm also not particularly concerned about a sudden job loss due to the nature of my job. When I was out of work before, it was a planned situation as I quit. I knew a couple of months in advance that I was going to be giving notice, so we started making some changes to our finances to prepare for the period of unemployemnt - stopped extra loan payments, froze auto-investment contributions, cut back on discretionary spending, and otherwise beefed up our cash positions.

And I agree that it should be a mix of EF funding and debt reduction. Paying down debt is great, but you should also have at least a modest EF, as elgin described, so you aren't forced to rack up new debt for small emergencies.

[scfr]

Originally Posted by humandraydel

(in case of losing my job, the only emergency I can think of).

You may want to see my thread titled something like "Emergency Fund ... please start one today!" for some insight on what other types of emergencies you may face someday

[laceshawl]

I have a "dire situation only" fund which I could make last for 2 months if I suddenly found myself without income. The only other situation in which I would use that money is having to travel to visit a sick relative (a lot of my family live overseas) I want to build that up to $5000 in 2007, which I could make last 6 months if need be.

I also have what Mary Hunt calls a "Freedom Fund" where I put money aside for unexpected spending like the frig conking out. This is mostly used for repairs on the house and appliances, and when I had a car I put money in that for car repairs too. I try to not let that get below a $1000, so working on building that one up too.

Things like going to a restaurant with suddenly arriving friends are either paid for out of budgeted entertainment expenses, or I don't go.

[rusty@saving]

we started an emergency fund...and it has been a need for sure! in the last 5 months, we have literally put $2000 into both vehicles.'
without the emergency fund we would be deeper into debt like you would not beleive!

[gbh1935]

I got about 6 months in my emergency fund, but I have always wondered if it would be better spent on paying down debt?

[disneysteve]

Originally Posted by gbh1935

I got about 6 months in my emergency fund, but I have always wondered if it would be better spent on paying down debt?

I'm of the belief that your EF is what will keep you from ever going into debt again. If you work with no EF, you have no cushion, no safety net. If something unexpected happens, you have no choice but to take on additional debt. That's not the position you want to be in.

[vsjhoc]

Originally Posted by gbh1935

I got about 6 months in my emergency fund, but I have always wondered if it would be better spent on paying down debt?

I think it all depends on how much debt you have, and what kind of progress you are making in paying it off.

You will find on this site that there is an ongoing battle (excuse me, "discussion") between those who think you need to put the most $ first in the EF, vs. those who are very debt-adverse and just want to make it go away. The answer is ... you need to do both, of course!

[lillyb]

We've got 3 months of expenses saved, but we're also paying down our last debt. When that's paid (should be around July) we may up the amount to cover 6 months of expenses. I also keep a bit in the checking for those little things, like a blown tire etc., instead of a million sinking funds. When I use it I just write it in the next budget to replace it. I like it simple and don't want to mess with money in 200 different 'categories'. Been working great for over a year now.

[s.saver]

I really like this EF idea. I obviously don't have on however I do have 3 months of expenses saved as well as a year of house payments. I am wondering to everyone that has multiple EF's do you keep this all in savings and allocate on paper what is for where?

[Broken Arrow]

My EF is two-part. A "Baby" (tiny) Emergency Fund is simply in cash and stashed at home. They address the contingency of needing money immediately, and nothing's faster than cash at home. It also addresses the unlikely event that I am unable to access money via ATMs for example.

The rest of it (Full Emergency Fund) is placed away in a high interest savings account. It would take at least two business days to transfer that money for it to be available, but unless I need it, it's making me a little bit of money at least. Of course, two days can be a long time, depending on the nature of the emergency, but that's why I have a Baby one.

If necessary, I can also use my credit card as a supplement, though I'd rather not if it can be helped. I rather not carry a balance, regardless of the reason.

[Aleta]

I just finished reading The Wealthy Barber and what I liked best about the book was that it was in story book form explaining finances. Also, he makes it quite plain that one size does not fit all. He gives the pros and cons on renting or buying. He also talks about emergency funds.

As for my self, my husband is self-employed without benefits that most of you have and we don't have workman's comp, sick-pay, etc. We have to as business owners save more than most of you.

As for the cash thing, I agree with Broken Arrow. You have to have a baby emergency fund at home. There ARE believe it or not things that you have to pay cash for. Also, in case of hurricanes, there is a problem with the ATM's. By the way, I have never used an ATM and I guess that I should to have the experience in case I needed to do that.

Everyone here has different circumstances that would address how much to save. I don't believe in saving your whole gross income. In case of an emergency, there are definitely things that you would do without. You're not going to fund something like that, but on the other hand you might want to be able to at least fund a small present for your children's birthday.