Emergency Funds?

[LivingAlmostLarge]

I was thinking about emergency funds, and realized, that for DH and I, we invest our emergency funds in stocks. Wowsa, usually people suggest keeping 3-6 months of cash on hand.

But then I realized that part of the reason we do this is because we keep a lot of cash on hand in general. We have about $15k invested in a taxable account as our EF. We also have $15k cash on hand probably going to hit about $20k soon to pay DH's tuition bills which are $10k/semester = $30k/year.

So I always have a pretty large cash stash. Does this make sense? Do you keep your EF in cash? Is this a bad idea?

[maat55]

Cash is scary, I like your idea of having it in stocks or MF's. I wonder if having your EF in your Roth is wise.

[Taribor]

Everyone is different but I refuse to keep 10-15k sitting in a cash account. I keep my EF invested in single stocks with well established companies and I set a stop loss, so if one tanks, I get out in time. My "cash" account has earned me 8% this year by doing it this way.

If anything that catastrophic hit, I have 20k limit on my credit card, wich I would use during the three days it would take my stock accounts to be ready to liquidate/transfer.


I've also kept cash sitting in a money market and most would say this is a better idea, but I follow my stocks closely and have never been burned, mainly because I don't get greedy with it.


This obviously doesn't include the grand or so extra in our checking account for incidentals.

[Broken Arrow]

These are very interesting and provocative thoughts, and I wonder what others think because that's what I am contemplating as well. Currently, my checking is paying me 5%, which for cash, is enviable at this point in time. So, I'm not complaining.

[jIM_Ohio]

Originally Posted by LivingAlmostLarge

I was thinking about emergency funds, and realized, that for DH and I, we invest our emergency funds in stocks. Wowsa, usually people suggest keeping 3-6 months of cash on hand.

But then I realized that part of the reason we do this is because we keep a lot of cash on hand in general. We have about $15k invested in a taxable account as our EF. We also have $15k cash on hand probably going to hit about $20k soon to pay DH's tuition bills which are $10k/semester = $30k/year.

So I always have a pretty large cash stash. Does this make sense? Do you keep your EF in cash? Is this a bad idea?

We have 12k in Cds (CASH) right now, which is 3 months expenses.

We are in process of creating a "mortgage paydown fund" to increase the EF, but this additional money will be invested in a mutual fund (PRPFX) in an effort to beat the 5.75% rate we have on our first mortgage and 7.25% rate we have on our second.

The second part of this will need to reach 100k+, and I don't see the reason to keep that much in cash. In addition this fund could be used to pay bills if either spouse became unemployed for a significant period of time.

[PrincessPerky]

I see no reason to keep all EF in cash..unless you have a rather small EF (like me) suppose you need that money to cover 6 months of job loss...you do not need it on day one...so you have time to go get it (or wait for a CD to mature) or whatever...and having it hard to reach means most folk are more likely to find alternate methods to use less...least most folk who have an EF in the first place I think.

[Snave]

We usually only have a couple thousand in our checking, but the rest of our EF is invested in a few individual stocks and some mutual funds. I just don't see the point of having that much money in a money market, etc... I have yet to have such a huge emergency that we couldn't take care of it with the few thousand dollars we had on hand. Seriously, if we needed 20K for a new roof or something like that, we'd sell some stock or a mutual fund.

I find the concept of emergency funds really interesting. I agree that for people that are scraping by they are good thing - but they usually can't save enough to fund them. But, for people that have been saving and built up a cushion of, wouldn't you just be able to liquidate? An emergency for some people ($300 for tires on the car) is probably a nuisance for others.

[atomicrc11]

I keep a few thousand in CDs and in my MMA Savings for immediate emergencys. The rest of my EF is in FBALX, which is Fidelity's Balanced Fund. It is 60% stocks and 40% bonds. This fund has generally given quite good returns and it is less affected by large swings in the market by holding a good amount of bonds.

For example, my retirement portfolio has much more risk and a longer horizon, it is down about 8% this year. However, FBALX is down 4%. If I needed to I could take out the money, but hopefully the cash I have in CDs will cusion any unexpented expenses before I really need to dip into the mutual fund. Even if I did use my savings and cash out some CDs, most likely I will be able to build it back up without ever touching the money in the mutual fund.

[LivingAlmostLarge]

One thing is we have a lot of cash on hand in general because every 4 months we need to pay DH's tuition. Things will change in another 2 years when we stop paying his ridiculous tuition.

At that time maybe I'll still keep a cash cushion? I've always keep one month of expenses about $5k in cash in our checking account out of sheer laziness. That way if something goes wrong with our paychecks we can always pay our bills.

But I hate the idea of keeping so much cash on hand. Also with the Roth IRAs, I thought you couldn't withdraw your deposits without a penalty if it hadn't been in there 5 years?

[thekid]

Interesting perspectives.

I keep my EF (about 18K$ or 6 months) in CDs or MMA, whichever is higher at that time. I've always been of the mind that an EF had to be garanteed capital in case of, well, an emmergency.

I guess it's a question of balancing the risk of having to pull out of stocks in a down market for an emmergency vs risk of lower returns.

[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.

[jIM_Ohio]

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 think liquidity is of importance when talking about an EF.

On two other boards, there is a discussion of using HELOCs as the EF. Now with the credit crunch, getting a new HELOC is tougher and the existing HELOC limits are being reduced.

Cash is king when money is needed. Credit is bad, because if the debt is "called", then the credit really wasn't a huge help.

I do not advocate having more than 3 months expenses in cash. People with a 6 month EF would be wiser to put half their EF in something with around a 6% return (short term bond fund, or 40-60 balanced fund for example).

In addition the interest from the EF should get invested in something with that 6% return too.

[sweeps]

Very valid points, Jim.

Also I would say an emergency fund should include some physical cash in your house. $500, perhaps. This is for a situation where you cannot access your bank account for several days. For example in the case of a natural disaster, a regional telecommunications outage, or a bank failure.

[jIM_Ohio]

Originally Posted by sweeps

Very valid points, Jim.

Also I would say an emergency fund should include some physical cash in your house. $500, perhaps. This is for a situation where you cannot access your bank account for several days. For example in the case of a natural disaster, a regional telecommunications outage, or a bank failure.

Or have accounts at two banks. But a good point.

[maat55]

Where do you put a 15,000 EF? Would breaking it into 2 places be wise? I would like to put half into stock MF's. Need suggestions.

[jIM_Ohio]

Originally Posted by maat55

Where do you put a 15,000 EF? Would breaking it into 2 places be wise? I would like to put half into stock MF's. Need suggestions.

What is monthly expenses?

I would divide into 6ths.

1/6 in a 90 day CD
1/6 in a 90 day CD (maturing 30 days later)
1/6 in a 90 day CD (maturing 30 days later)

1/2 in another investment. A moderate allocation fund. I just opened PRPFX, which owns stocks, bonds, swiss francs, gold and silver. Quite moderate. a 40-60 fund like Vanguard Wellesley might also be prudent, or a 20-80 fund like T Rowe Spectrum Income would also make sense here.

If the 1/6 portion is NOT enough to cover 1 months expenses, then the 15k is not enough. Make sure each CD in the CD ladder has one months expenses in it.

In addition I would harvest the interest from the CDs each year and invest the interest into the moderate allocation fund.

The plan I showed above is very close to the plan I executed for myself. I am not at point where I have PRPFX balance equal to 3 months expenses yet.

[LivingAlmostLarge]

Is it a bad idea to use HELOCs for EF? And keep your EF invested and then see how things play out and pull as needed?

[maat55]

Adding this up, 2558.00 covers: Home & ins., auto ins. & gas, electric, gas, water, food, cells, landline & internet, cable and property taxes. Everything I think.

I have no payments and no credit card debt that isn't covered in the expenses. Wow, where's it all going.

[Ima saver]

I keep a lot of money in cash, mostly in cd's and money markets. We need that money to build a spec house when times get better.

[puck36]

I have my EF in an online savings account. It will take 3 business days to transfer the money so what I do is if I have a emergency that is $1000 or less then I use my bank credit card and than start the transfer. Once the transfer is complete then I transfer the money to pay off my credit card.