Emergency Funds?

[maat55]

Back when I was living on the edge, my IRA was my EF, I thank Dave Ramsey for stopping that stupidity.

[disneysteve]

I have about 2 months of expenses in my online MMF. I have about another 1-1/2 months in a CD. The rest is spread around a number of places including small amounts in 2 other money market funds (one in my brokerage account and one in my insurance account) but otherwise invested in the market. We also have some Series I bonds, but I'm planning on cashing those in this summer to pay for our daughter's Bat Mitzvah expenses. And yes, we do keep physical cash on hand for immediate needs if the banking system is offline, like in a natural disaster.

One thing that I think people often forget is that you won't ever need your 6-months worth of expenses all at once. You'll need it gradually over a 6 month period. It doesn't all need to be instantly accessible. Plus, you can always use a credit card until you retrieve your money and then pay off the account.

Someone asked about using a HELOC for an EF. Here's my problem with that. You have some major emergency - a job loss, a serious illness, etc. If you have to borrow to cover expenses, how will you make the payments?

[Scanner]

I personally don't know how you guys live on less than 10K in cushion.

Last month. . .I had to pay our tax bill ($2300 for 1 quarter) and a credit card bill of $3500, representing our household expense and I put a quarterly payment of my car ins. on there.

So our account went from $13000 to about $8500 in one week (it's back up around 12K today).

I guess it depends. . .for some of you living in cheap COL areas, like Racoon Butt, Alabama. . .you won't need much more than 5K on hand.

That's not Scanner's World

[PrincessPerky]

Originally Posted by Scanner

I guess it depends. . .for some of you living in cheap COL areas. . .you won't need much more than 5K on hand.

That's not Scanner's World

I don't live in Scanners world..I don't spend 5K a month!

[maat55]

Some of us don't consider taxes, household expenses and insurance emergency's. Those are things we prepare for outside the EF.

[Scanner]

$1023 for mortgage
$350 for utilities
$120 for auto ins.
$700/month for property tax

That's just a start - we haven't even gotten into household expenses. The c/c bill was a little high - Christmas. . .but $2000-2500 is norm - that's groceries, gas, haircuts, clothes, etc.

I should post my c/c bill one month and have you guys hack at it

[maat55]

I can't believe the property tax some of you pay. Thank God I live in Oklahoma where the winds come sweeping down the plains. Sorry, couldn't stop myself.

[Spud]

Scanner - You seem to be in a similar situation as we are.

Maat55 - Although those expenses aren't necessarily emergencies, shouldn't you take them into account when building your emergency fund? Or do you transfer money around every time you need to make a large-ish payment?

[Scanner]

We could live more frugally - I am going to post my c/c bill and let you guys sock it to me/us.

Our consumption is definitely relective of a high stress lifestyle and although we pay it every month, we have shed tears at times on why we seem to live a zero sum game at times.

[disneysteve]

Originally Posted by Scanner

$1023 for mortgage
$350 for utilities
$120 for auto ins.
$700/month for property tax

That's just a start - we haven't even gotten into household expenses. The c/c bill was a little high - Christmas. . .but $2000-2500 is norm - that's groceries, gas, haircuts, clothes, etc.

And this coming from the guy who said a $40,000 income in retirement would be plenty.

[maat55]

You can do it either way, save outside the EF or use it and replenish. Scanners point was that if you use your EF to pay these type of expenses, you will need to have it bigger. I separate the EF from normal expenses.

[Scanner]

I don't plan to live in a McMansion when I am retired. . .that being said. . . I just worked on my c/c bill. . .I'll post it under Personal Finance although it's so pornographic. . .it may be appropriate under Frugal.

[PrincessPerky]

Originally Posted by maat55

You can do it either way, save outside the EF or use it and replenish. Scanners point was that if you use your EF to pay these type of expenses, you will need to have it bigger. I separate the EF from normal expenses.

We have those types in the same savings account, but on paper there is 'escrow' and 'EF' so the same place different purpose...however we have auto instant transfer availible from checking to saving and vice versa....

[Snave]

Originally Posted by sweeps

An argument for having a cash EF is you don't want to cash out your stocks and mutual funds at an inopportune time. Usually you will lose your job during a recession -- the exact time your stock holdings may have dropped. Essentially you'd be taking a double hit to your net worth by liquidating your stocks when they are temporarily down.

I understand this logic, but how many times do you lose a job. Believe me, I know it can happen. It happened to me this past year. But, it was the first time in 10 years. Had I had that money in a money market account waiting for the day I lost my job, I would have lost out on a lot of money. Agreed that a recession and a job loss could (and most likely would) happen in the same year, but again, I have made so much more in the last 10 years in MF and individual stocks that a 10% downturn like this year. Here are the numbers: 15K at 4% for 10 years = 22K. 15K at 10% for 10 years = 40K - 10% loss during teh recession year (like now) = 36K. I just guess that I will take my chances.

Or, it could be that I just don't have as many "emergencies" as others do.

[myrdale]

My EF is my money market account. It's only about $10k but slowly growing. I do make mortgage payments from this account so as to get a little interest off the money before I give it to the bank.

I only keep $2k in checking but that is for food/bills/life.

I plan on starting some investment this year I want a CD and IRA but I wouldnt have considered either to be emergency fund. I did like the idea of 3 CD's on alternate 90 day cycles though.

[sweeps]

Snave: I hear ya. First, everyone seems to have a different definition for emergency fund. An emergency fund just for losing a job has to be handled differently than an emergency fund that is for anything unexpected that pops up.

Also, are you loaded, or are you scraping by. If you have hundreds of thousands of dollars in mutual funds, you have nothing to worry about. If every dime is expended every month, a rock-solid cash fund is going to be really important.

How stable is your job? Your industry? Is there a 2nd income in your household? Do children depend on you putting food on the table, or is it just you who could live on Ramen noodles for a while if things really get rough.

I think you see where I'm going with this...

[disneysteve]

Originally Posted by maat55

Some of us don't consider taxes, household expenses and insurance emergency's. Those are things we prepare for outside the EF.

I think Scanner's point was that if there were to be an interruption in his income, all of those things would still need to be paid and he'd need to have a stash of money with which to pay them. That's what an emergency fund is for. I don't think he meant that he pays those things from his EF normally.

[disneysteve]

Originally Posted by Snave

I understand this logic, but how many times do you lose a job.

The problem is that you may not have any warning that it is going to happen, so you always need to be prepared. The other issue is that job loss is not the only potential emergency. For example, my wife had very unexpected gallbladder surgery in Sept. 2006. Our responsibility after insurance was over $2,000. I know lots and lots of people who would have had no way to come up with that amount without resorting to debt. Less than a year later, she had hand surgery. That cost us another $800. Add in copays for doctor visits and therapy and we spent about $3,000 in 10 months that wasn't expected or budgeted for. It is those kinds of things that an EF is for also.

[scfr]

Beyond keeping some cash on hand in a high-yielding MMA for irregular expenses or "minor emergencies," I think that CDs are a great place to keep a big chunk of your EF.

In the event of a real emergency, you can cash out your CD early. You will probably lose a big chunk (if not all) of the interest you have earned, but you will probably won't lose your principal. [Of course, read the fine print before opening a CD to be sure.]

There is a psychological barrier to cashing in the CD early, because you don't want to lose all of that lovely interest you have earned. It forces you to distinguish between a real emergency (death of sole income-earning spouse, 　long-term unemployment, major medical emergency, etc) and a simple urge to access the money (great sale at Macy's).　

When I first started saving, I stuffed money away in CDs. I knew the money was there if I ever really, really needed it (which was a big help psychologically), but I knew it was a good idea to put it somewhere that was slightly hands-off. I still keep money in CDs. It's been over 20 years and I've yet to cash one in early.

[Snowgirl]

I think it really depends on how tight you are in your regular budget. For example, if we a had 2k$-3k$ roof emergency, we would take most of it from our cash flow, cutting back "wants" for 2-3 months and maybe raiding the vacation or TV fund. We wouldn't touch the emergency fund proper. Thus I don't consider the emergency fund a big priority for us, because we have a good cash flow, a big dual income, and spare room in the budget. We haven't always had one, and we'll probably use a big chunk on non-urgent home improvements in the spring (windows, living room remodel), instead of waiting another year. In the meanwhile, our real emergency fund will be our personal line of credit.

Medical emergencies are not a factor here because we have universal healthcare, personal insurance for "extras". We also have unemployment (small payout) & disability insurance, so a real emergency would only be a job loss. That's why we don't feel too bad not having much cash laying around.