Emergency Funds?

[hellodeli1]

I totally agree that an emergency fund should be kept in very liquid vehicles -- cash, CDs, and the like. Having an emergency fund in stocks or even funds is risky because by the very nature of the fund, it is something that you may need to tap into at any time -- and that time may not coincide with an opportune time in the market. Having standing stop loss orders may be a way to fight this, but it seems like a good way to have your money churn a bit.

Also, there were some questions as to why you would have a substantial sum, say $15,000 in an EF. Well, it all amounts to your personal expenses and tolerance for risk. If your expenses for 6 months total 15k, it would certainly be wise to have all of that available in your EF -- say, if you lost your job and had to cover your expenses for a duration of time.

Personally, I keep a decent amount in cash and more in staggered 1 year CDs, so every month, I have a CD that matures that I could tap into should I need it, if not, it just renews to another 1 year term. It also helps flatten spikes and dips in near term interest rates.

[maat55]

steve

scanner said he didn't understand how some of us can keep a smaller EF than 10k when he is using his to pay what I consider to be normal bills. I don't remember him stating that he had a loss in income to pay the bills he did with his EF. I can have a 5k EF and still have a tax fund and add up to his 10k. I don't consider paying 3500 in cc monthly bills an emergeny. He chooses to use his EF and thats his preference, but not everyone uses their EF for those purposes. Now if I have a loss of income, then I would use my EF to pay those bills if needed.

If I seem a little irratic, I've been painting all day in a closed inviroment.

[LivingAlmostLarge]

I'm the same, most expenses we can cash flow so we never touch the EF. It's gotta be more than $10k for us to start touching it.

hmm...I'll mull more.

[maat55]

Using your EF as a capitalized checking account that you reimburse or as a never touch it unless there's an emergency account, does not matter.

It reminds me of trying to loose weight. I've lost 12lbs since jan. 1. I vowed not to eat pastries, chips, cookies, drink beer at the golf course or any regular pop this year. In addition, I try to limit my food intake a little.

The point is, like with my EF, The don'ts, help me advoid calories in a lot of situations. Thus, 12lbs lighter.

Some people set a limit for what they will use their EF for and some just use it and replenish it. Both systems can work.

[buzz]

If I may jump off-topic for a moment, I went on a similar diet to maat55. No Pepsi, lay off the sweets, don't overeat. I've lost 11 lbs so far. I am shooting for 1 lb/wk all year. Wish me luck.

Back on topic...

I have been keeping a 6 month EF in savings, but I think I will reduce that to 3 months, max. I am starting to question whether the the likelihood of an extreme emergency that would require half a year's expenses justifies having that much tied up in cash.

I keep 0% CC transfer offers handy for major unexpected expenses. That would extend payments over 1 yr+. Together with unemployment and disability coverage, most minor dilemmas should be covered. In case of a true emergency, I would eventually have to cash in some stocks.

Like any investment decision, it is a balance of safety vs. risk. If the market continues to erode and I can pick up some good values at 30-40% or more off their 2007 prices, I think I will be raiding the EF.

[maat55]

buzz

I'm also interested in putting a lower limit on my EF so that I can invest part of it into better investments. I would want this additional investment to be liquidable if needed without tax or penalty pressures. I'm looking for ideas.

[buzz]

maat55

I'm no expert in tax matters. I would probably just look for a tax-efficient ETF to park in. If someone has a better idea, I'm all ears.

[Taribor]

Originally Posted by hellodeli1

I totally agree that an emergency fund should be kept in very liquid vehicles -- cash, CDs, and the like. Having an emergency fund in stocks or even funds is risky because by the very nature of the fund, it is something that you may need to tap into at any time -- and that time may not coincide with an opportune time in the market. Having standing stop loss orders may be a way to fight this, but it seems like a good way to have your money churn a bit.

Also, there were some questions as to why you would have a substantial sum, say $15,000 in an EF. Well, it all amounts to your personal expenses and tolerance for risk. If your expenses for 6 months total 15k, it would certainly be wise to have all of that available in your EF -- say, if you lost your job and had to cover your expenses for a duration of time.

Personally, I keep a decent amount in cash and more in staggered 1 year CDs, so every month, I have a CD that matures that I could tap into should I need it, if not, it just renews to another 1 year term. It also helps flatten spikes and dips in near term interest rates.

I don't see how a CD is considered "liquid" and stocks are not. If you have 12,000 EF and per your plan, $1000 matures each month, then wouldn't that mean you really only have access to $1000 of your emergency fund at any given time? I've never used CD's so my question is probably an ignorant one

Everyone is different, but for me, once I am up in a stock, and I have a stop loss in to protect most of my paper gains, then I really don't care what the market is doing if I need to cash out. I don't consider it an investment or retirment, just an emergency fund; if I cash out then so be it. If I still own the stock and my stop loss has not kicked, then I am doing well regardless if it happens to be up or down that particular day/week/month.

When I get to $20k on a particular stock/fund/investment, half becomes permanent investment and the other half is allocated as the new emergency fund. It is liquid within three days and if my stop loss kicks in, then it sits in a tax-free money market account while I look for my next investment.

For example: Johnson & Johnson I bought at $58 a couple years(?) back and left it alone. It got up to 67-68 and I had my loss set at 66. When 66 hit, rather than get greedy, I sold and let it sit in my MM account. At any time I had access to that money and when it sold, I made three times what ING would have paid me. Heck the dividends alone come close to matching a typical savings account.

I understand this is obviously not for everyone and may be considered risky, but so is crossing the street if you don't look both ways. I pick my stocks carefully and only go for dividend producing, well established companies (JNJ, GE, etc..).

I've tapped into it twice over the years; once for a new HVAC and once for a new roof, and both times I was very happy with how it worked out. I took out what I needed and left the rest alone. I'll also mention that this EF is for *EMERGENCIES*, which for me personally does not include car insurance, etc. I have a very stable job and can switch agencies very easily if I ever needed so, so this fund is more for large housing expenses, so I don't need to be nearly as liquid (even though in my opinion I am) as most people.

The bottom line is to have access to money in case of emergency, the vehicle you choose to hold it is secondary in my opinion.

[maat55]

I've found that you can use your Roth IRA as an EF, as long as you only withdraw the contributions. I think I will put 5000k in a MMF and the rest in my Roth.

[buzz]

Originally Posted by maat55

I've found that you can use your Roth IRA as an EF, as long as you only withdraw the contributions. I think I will put 5000k in a MMF and the rest in my Roth.

That's a nice healthy EF.

[maat55]

buzz

Is your response, sarcasm or genuine?

[buzz]

I have nothing but respect for a $5 Million EF!

[disneysteve]

Originally Posted by maat55

I've found that you can use your Roth IRA as an EF, as long as you only withdraw the contributions. I think I will put 5000k in a MMF and the rest in my Roth.

I'm not a fan of using the Roth as your EF unless you have an adequate retirement plan not including the Roth assets. While it is true that you can withdraw Roth contributions at any time, you can not put them back. Once they are out, they are out for good and are no longer growing toward your retirement nest egg.

[disneysteve]

Originally Posted by maat55

steve

scanner said he didn't understand how some of us can keep a smaller EF than 10k when he is using his to pay what I consider to be normal bills.

I read his comments differently. I took it to mean that he needs a larger EF because his monthly expenses are so high. Therefore, if he were to need to tap that EF to cover his expenses (due to an interruption in income), less than 10K wouldn't cut it.

[Dinadur]

Personally I try to keep a 1-2k cash "buffer" in my checking account but I have some stocks in a taxable brokerage account should I really find myself in a bind. I think when I am able to significantly increase my savings I would like to keep some gold coins in a safe at home as all purpose emergency money... that would certainly be the most hardcore emergency fund that you can get...

[maat55]

You think my EF of 5000k is a little much, ok I'll drop it to 5k and donate the rest to the republican party.

[jIM_Ohio]

Originally Posted by Taribor

I don't see how a CD is considered "liquid" and stocks are not. If you have 12,000 EF and per your plan, $1000 matures each month, then wouldn't that mean you really only have access to $1000 of your emergency fund at any given time? I've never used CD's so my question is probably an ignorant one

Speaking as someone who used 90 day CDs for an EF, here is the way it works with my bank and budget.

Budget- february paychecks accumulate and pay for bills in March. Meaning we have one months bills on hand at most times, more or less. I get paid 2X month, wife gets paid every other week. So there is some balance and planning needed to make this happen (takes 5 bank accounts), but 3 of the 5 bank accounts have next months bills in them (the exceptions are the cash account and car payments).

In addition, my IRA contributions are $875/month. 401k is another $1000/month. We can increase budget by about $1800 of cash flow by turning off retirement accounts. Meaning if we knew of the problem, we would first try to solve it within cash flow (and not touch EF).

bank- the CDs mature every 30 days, then roll into another 90 day CD. We have 3 90 day CDs, one maturing every 30 days. We have a 10 day "look back" period (I think that is what they call it), where I can access the CD 10 days after it matures without penalty.

So I have a 20 day window each month where no CD is technically available without penalty. The CD is 4k, the interest it generates is around $80. I will forgo the $80 to get access to the $4000 if I need money in that 20 days, assuming the cash flow issues above were not good solutions.

We also just opened an account in PRPFX- a moderate mutual fund, to accumulate long term monies for house payoff and house repair (like roof, gutters etc...).

[kork13]

Originally Posted by jIM_Ohio

the CDs mature every 30 days, then roll into another 90 day CD. We have 3 90 day CDs, one maturing every 30 days. We have a 10 day "look back" period (I think that is what they call it), where I can access the CD 10 days after it matures without penalty.

Jim, using CDs as an emergency fund sounds interesting to me... but how do you arrange for those CDs to 'roll over'? Can/will banks do this automatically for you? I'm just getting started with my career (graduating college soon), and am looking at holding about $5-7k as my emergency fund... but I'm not sure how I should go about it. Currently I have $3k in a standard savings account, but CDs, if I could make them work for me, would probably gain interest a little better.

In your example, is it correct that you could reduce risk by having them mature at shorter intervals, like by having one of six $1k 90-day CDs mature every 20 days?

For the benefit of this conversation, what I like about the idea of using CDs is that if it becomes necessary to tap my emergency fund, it generally would not require more than $1-2k (month of expenses, insurance deductible, etc.) to cover the emergency in any given month. So if necessary, I would be able to pull the current CD, then if the emergency continues beyond that 1 month, I could just continue to progressively pull out the others, and all the while they're still gaining interest.

[disneysteve]

Originally Posted by kork13

Jim, using CDs as an emergency fund sounds interesting to me... but how do you arrange for those CDs to 'roll over'? Can/will banks do this automatically for you?

I'm not Jim, but I can answer your question. Yes, CDs will roll over automatically unless you instruct the bank otherwise. The bank will send you a notice before the CD is due to mature to remind you of the maturity date and give you instructions on what to do if you want to cash out. If you take no action, the CD renews at the prevailing rate.

[noppenbd]

For those that are interested in something less risky than a 60-40 mutual fund, consider a tax-free municipal bond fund. Although they have been a little volatile lately they are generally stable, earning 3-5% a year tax free. This is equivalent to earning 5-7% in a taxable account. I am using MUB, an municipal bond ETF. I have half of my EF in this (3 months worth).