emergency fund?

[jimmyengland]

When people say have an emergency fund of at least six months which of the following do you mean?

a) six months of total income e.g. if i earn $1000 per month i should have 6000.

b) If i earn a 1000 a month but my Total bills are 500 then i should have 3000?

c) other? please explain

This is hypothetical example and not my income or total bills but just as an example. Please can you tell me which you have and why

Thanks

[jIM_Ohio]

b)

In addition, I do not think 6 months expenses in cash is prudent. I think 3 months in cash (at 2-4% interest) and 3 months in moderate investment (6-7% returns) makes more sense.

[sweeps]

A 6-month emergency fund covers 6 months of expenses, not income.

[noppenbd]

The idea is if you lost all sources of income for 3-6 months (a major emergency in anyone's book) you could cover your expenses without incurring debt. You would assume in such a situation that savings and "blow" money would cease during this period hence you would not need to replace all your income, just the necessities.

[GRITSinMS]

From Dave Ramsey "A fully funded emergency fund is 3-6 months of your personal expenses set aside in a savings or money market account...". After going through a few rough spots in my life, especially hurricane Katrina, I can see where that amount would be advisable. Due to my experience after the hurricane (no communication or electricity), I also strive to keep a small amount of cash available for emergencies.

[kilapapipa]

Sorry for the Hi-Jack but what if you are on a contract such as a teacher, Sept.-Aug? I might find out in May that I do not get my contract back but I will get paid through Aug. We have LTD as well. Plenty of time to get another position.

Point is, our EF need only be a couple grand if that since we are both teachers. Right now, it is 5K but I may not need that much. Any advice on this?

[anonymous_saver]

My personal goal is about 8 months of expenses for an emergency fund. This would include emergencies such as getting fired from a job, but also if (once I buy a house) if our stove quit working, and we need to buy a new stove. Or if one of my pets get sick and needs a surgery, etc.

Also, when I buy a home, if I buy it with a partner and pay 50/50 for the monthly bills I would still count my monthly expenses as the entire mortgage/expenses that we both share, just in case the relationship didn't work out.

Yeah, this may sound like it is going to far, but I just don't like to rely on someone else always being there with me. I want to be able to take care of things on my own.

My current emergency fund (of CURRENT expenses) is approx. 6 months worth. Although, if I was really in a bind I could use my money I have saved up for a down payment as well.

Originally Posted by kilapapipa

Sorry for the Hi-Jack but what if you are on a contract such as a teacher, Sept.-Aug? I might find out in May that I do not get my contract back but I will get paid through Aug. We have LTD as well. Plenty of time to get another position.

Point is, our EF need only be a couple grand if that since we are both teachers. Right now, it is 5K but I may not need that much. Any advice on this?

Just because you are both teachers doesn't mean you couldn't lose your job. It also doesn't mean you couldn't have trouble finding another job. I would definitely keep at least $5,000 around! What happens if there is another kind of emergency in your life, such as your heat doesn't work and you need to pay for your heating to get repaired in your house? This wasn't meant to be a mean comment, just something for you to think about!

[anonymous_saver]

Originally Posted by jIM_Ohio

b)

In addition, I do not think 6 months expenses in cash is prudent. I think 3 months in cash (at 2-4% interest) and 3 months in moderate investment (6-7% returns) makes more sense.

I'm assuming your recommending that the 3 months worth in moderate investments are in a taxable account at somewhere like Vanguard? What kind of asset allocation do you think would be good? Also, would you prefer a general mutual fund account or to pay a few fees and have a brokerage account. Just curious.

I had always planned that once I got to the point of having my 8 month of emergency fund (my personal goal), that I would just keep it at one of the online high interest accounts. I hadn't considered this option yet, it sounds like a good idea though.

[Merch]

I would say the 3-6 months depends on job stability, economic stability, and your ability to sleep at night.

I am a contractor so I will be striving for 6 months.

As for allocation, money market account with check writing. Not stock, not bond funds, not options, not enhanced cash funds investing ind SIV, CDO and the like.

The purpose of the emergency fund is to be there when needed. But happens if you had an emergency fund is S&P fund and needed that money. Would you take it or going into debt?

I look at an EF as an insurance policy. It's there when Murphy moves in my house, so I can pay to have to guys through him out.

[disneysteve]

Originally Posted by kilapapipa

Sorry for the Hi-Jack but what if you are on a contract such as a teacher, Sept.-Aug? I might find out in May that I do not get my contract back but I will get paid through Aug. We have LTD as well. Plenty of time to get another position.

Point is, our EF need only be a couple grand if that since we are both teachers. Right now, it is 5K but I may not need that much. Any advice on this?

1. You could have difficulty finding a job.

2. Job loss is not the only emergency that exists in life. You could have some medical problem that costs you thousands. You could have an accident or a car stolen or otherwise destroyed and have to replace it unexpectedly. Or a major repair on your home. There could be a family emergency requiring you to take an extended leave from your job without pay. All kinds of things can happen in life. Keep that EF fully funded.

[maat55]

Job loss is not the only emergency that can hit you. Blown engines, medical expenses, ID theft etc. can happen.

[jIM_Ohio]

Originally Posted by anonymous_saver

I'm assuming your recommending that the 3 months worth in moderate investments are in a taxable account at somewhere like Vanguard? What kind of asset allocation do you think would be good? Also, would you prefer a general mutual fund account or to pay a few fees and have a brokerage account. Just curious.

I had always planned that once I got to the point of having my 8 month of emergency fund (my personal goal), that I would just keep it at one of the online high interest accounts. I hadn't considered this option yet, it sounds like a good idea though.

3 months in cash. CDs, money markets or savings account. I prefer CDs, but others here use money markets for same thing.

3 months in an investment. Something which will rarely lose money (principal) based on past performance, which also will beat inflation.

My choice is PRPFX. The funds stated goal is to increase the purchasing power of dollars invested, and at minimum maintain purchasing power.

Could be an investment in I-bonds, could be a diversified balanced fund. My favorate balanced fund is RPSIX at T Rowe Price. Wellesley at Vangaurd is similar. RPSIX is a 20-80- allocation, Wellesley is a 40-60, I believe.

I would not consider this part of my overall allocation, it is there to grow. It's possible if I had to tap EF I would sell the investment to raise cash. I would not sell it if market tanked to buy more equities (on a dip).

[kilapapipa]

Thanks to Anonymous Saver and Disneysteve for your comments. Your right, we should not get to comfortable in our lifestyle, it could change in a heartbeat.

Thanks

[CreditExpert]

its great to have an EF fund that is capable to supply you with cash immediately if you have an emergency, so the other posters gave great advise on splitting it between short and long term! That way you get the best of both worlds

[Diolla]

I have alway hated the one size fits all 3-6 month of expenses.

I figured my EF on several factors-

1) I have a very secure job and could cover my basic needs on an $8 an hour retail job. (Lost job $2000 maximum needed, however if it is because of illness I would need 6 months plus health insurance until LTD kicked in $10,000)

2) I own a home so major breakdowns could happen (Sewer collapses $8000 needed)

3) I have a very old car (Car replacement needed $6000 for used vehicle)

Therefore worst case scenario I would need $10,000 (but not all of it immediately) so I have $6000 in a MM and $4000 in other investments (I could tap into over time) I have excellent credit so I could use that until the money was available.

Each situation is unique and should be looked at individually. It really is just the amount that lets you sleep at night.

[maat55]

It can depend alot on the emergency. If you were to have a serious medical problem causing your job loss, it could add up more costly than normal. Having disability ins. would come in handy in that case.

[jIM_Ohio]

Originally Posted by Diolla

I have alway hated the one size fits all 3-6 month of expenses.

I figured my EF on several factors-

1) I have a very secure job and could cover my basic needs on an $8 an hour retail job. (Lost job $2000 maximum needed, however if it is because of illness I would need 6 months plus health insurance until LTD kicked in $10,000)

2) I own a home so major breakdowns could happen (Sewer collapses $8000 needed)

3) I have a very old car (Car replacement needed $6000 for used vehicle)

Therefore worst case scenario I would need $10,000 (but not all of it immediately) so I have $6000 in a MM and $4000 in other investments (I could tap into over time) I have excellent credit so I could use that until the money was available.

Each situation is unique and should be looked at individually. It really is just the amount that lets you sleep at night.

Another way to tackle this is to budget for a new sewer or new car by looking at life of object, cost of object, and adding that to budget each month.

For example, new hot water heater every 10 years. Cost $2500. 10 years*12 months =120. $2500/120= $21

new car every 10 years. Cost $35,000 (includes maintainence and inflation on car). $35000/120=$292/month

new HVAC every 15 years cost $3500. 3500/180=$20/month

new roof every 20 years cost $5500. $5500/240=$23

add these up ($23+$20+292+21) and set this aside each month in EF or similar. $356 per month.

When working and in a new house, most people will only be dealing with car, but as you get closer to retirement it is important to account for all "random and semi annual costs" in a budget because a fixed income needs to account for these things. If HVAC and Roof go in same year, that would deplete EF considerably, so considering these things as money spent is an important retirement budgeting tool.

[tripods68]

Originally Posted by anonymous_saver

My personal goal is about 8 months of expenses for an emergency fund. This would include emergencies such as getting fired from a job, but also if (once I buy a house) if our stove quit working, and we need to buy a new stove. Or if one of my pets get sick and needs a surgery, etc.

So far we have managed to save 1.5 equal to our monthly expenses. Our goal is 6 months EF or 28K by next year. Anything above 6 months would be extra to use for car or home repairs, plane tickets, etc. Otherwise it will remain 6 months. We also have separate account that funds our vacation and property tax yearly. So far we haven't had to touch any of these accounts for anything other than its intended purpose.

[PrincessPerky]

Originally Posted by Diolla

Each situation is unique and should be looked at individually. It really is just the amount that lets you sleep at night.

Ditto that!

Though there aught to be some sort of minimum, there really is no hard and fast rule for all the world.

[Fizgig]

I feel most comfortable with 6 months of expenses in the bank. It makes sense to keep some of that in investments, but I feel better having it liquid so that I wouldn't have to sell off stocks. It's one of those things where the mathematically correct answer doesn't sync up with piece of mind, but that's okay. I keep it in a higher interest online bank.