What's the difference

[SnoopyCool]

You should have 3-6 months of expenses in savings. Do any of you pay 3-6 months ahead on things such as a mortgage or any other debts? What is the difference? The only thing I can think of is the need for that much money all at once, such as some sort of catastrophe. Just wondering.

PS - I'm not suggesting not to have the money on hand, just exploring the differences.

[FrugalIII]

I don't pay ahead on anything like that, but I do pay extra each month on my ELOC. Just to get it paid off ahead of time and save some interest. I do keep quite a bit of money on hand for liquidity in case something major happens such as a roof leak, car tears up, etc. I think that's what the EF is really for including a case where you may be out of work for a while or get ill and have no steady stream of income.

[jIM_Ohio]

3-6 months expenses in the bank is not the same as paying bills 3-6 months ahead.

Depending on the bill, this is like comparing ants to machine guns.

Take a house payment- if you just send in an extra payment, the bank **usually** assumes it is towards principal. This means the principal went down, you will shorten the repayment period by one month or more AT THE END of the loan (so instead of 360 payments, you make 359, and you gain the last month or so off the loan). You do save yourself money (in interest) based on this technique.

If you do the same with the phone bill or cable bill, you will get a credit for next month or next 3 months. You don't save any money on this technique because the cable company will gladly keep your money for free.

By keeping 3-6 months in cash, you earn interest on the money, and can also spend it- the money is liquid to some degree or another.

My own philosophy is I like 3 months expenses in a bank, and months 4-6 expenses need to be somewhere else. Months 1-3 are in CDs, each month in a 90 day CD, each CD maturing 30 days from the one before it or after it. Months 4-6 are in a moderate mutual fund which grows faster than the interest I pay on my mortgage.

This 6 month buffer is designed to
a) replace 6 months of expenses if either spouse loses a job
b) prevent minor problems from accumulating debt. Minor problems: new roof, new HVAC, new dishwasher, new driveway
c) accumulate faster than the money could be used to get debt free (from mortgage).

Most people do not use an emergency fund to exceed their mortgage balance. I am preferring to look at months 4-6 as a needed expenses (we will add to this account soon), as certain bills (like new roof, new HVAC, new hot water heater) are expenses which occur every 10 or 20 years, so I budget for 1/120 or 1/240 of the cost of each every month and set it aside in this 4-6 month emergency fund which might actually have 12-40 months expenses in it if we go a long time without a needed repair.

[MonkeyMama]

I don't pay anything ahead because my emergency fund is just for that - catastrophe. IT wouldn't make sense to put all that money to the mortgage or something like that, because catastrophe could come in the form of a large medical bill or something I haven't even thought of.

Just for me anyway.

[simpleyme]

I would not even consider prepaying bills for 3-6 months ahead

[SnoopyCool]

Clearly, I have much to learn. Thanks for the information.

[maat55]

Originally Posted by SnoopyCool

Clearly, I have much to learn. Thanks for the information.

The EF is to protect from going into debt for unexpected emergencies. If you were in a car wreck, you might loose months of income and have medical bills. That is worst case senario, hopefully. But also, you have money for big auto repairs etc.

Most people when they loose their job, pay their bills with CC's, not good. Thus, the EF.

[StanFatherof3]

We use our emergency fund for household emergencies, too. When our heater conked out last winter, it was really nice not to have to scramble for the money to replace it. It still stunk to write that big check, but at least we had it.