Another emergency fund thread

[elessar78]

As we go about rebuilding our emergency fund, I wanted to analyze how I construct it. Before, I just took our take home pay and multiplied it by six (months). Basically, to live as usual in the event that both of us lost our jobs.

But in the event that one needs to use the emergency fund, depending on circumstances, one probably has to go into more of a conservative approach to spending—a family probably shouldn't spend as much as they would normally.

So do I construct it like before? Or go with a more barebones approach?

[riverwed070707]

Barebones is great (more than what most of america has saved), but take home is better. Look at it this way, if you save up 6 months of take home and you both lose your jobs, you are going to buckle down and cut where you can meaning you actually can get by much longer than 6 months and that's a really great feeling of security.

[disneysteve]

I think riverwed nailed it. You'll never be sorry your EF was too large. The standard advice is to base it on your monthly expenses, not your monthly income, but more is better.

[bjl584]

A few things to consider.

If you lose your job you may qualify for unemployment. Also, you will no longer be contributing to a 401K. Finally, you may need to start paying more for healthcare. So, those are all things that you can factor into your EF calculations.

An easier approach would be to just put away 6 to 8 months worth of expenses based on your present financial picture. You may oversave a bit, but that usually isn't a bad thing.

[elessar78]

According to Dave Ramsey, we stop retirement contributions ("baby steps" 3 and 4) until we save up the appropriate amount in the EF. Is this wise?

[riverwed070707]

Originally Posted by elessar78

According to Dave Ramsey, we stop retirement contributions ("baby steps" 3 and 4) until we save up the appropriate amount in the EF. Is this wise?

No. Dave Ramsay, while wildly popular, is kind of an extremist when it comes to personal finance. If you are living comfortably and not struggling to make ends meet I would absolutely keep contributing to retirement while saving up your efund. He has some good advice, but I think those that use his book as a guideline rather than an instruction manual are much better off.

[bjl584]

Originally Posted by elessar78

According to Dave Ramsey, we stop retirement contributions ("baby steps" 3 and 4) until we save up the appropriate amount in the EF. Is this wise?

If you are stuggling to survive and keep your head above water then yes, stop contributing.

But if your debt is manageable by cutting expenses elsewhere then no, keep saving for retirement.

[Slug]

Originally Posted by elessar78

According to Dave Ramsey, we stop retirement contributions ("baby steps" 3 and 4) until we save up the appropriate amount in the EF. Is this wise?

I would not do this. My EF is not fully filled, but I max 2 Roth's and a 401k each year. Do I wish the EF building was going faster? Yes, but I prefer to prepare for retirement in 30 years.

[Joan.of.the.Arch]

I think in some emergencies one ends up needing to spend more than in normal times. For example, say your eight year old gets hit by a car (!) and is in hospital for a couple weeks. You need to be there with her, buy comfort items and larger clothes to fit over casts, braces, medical appliances. A physical therapist even tells you to buy a certain kind of sneakers for her. For yourself, you have to pay for parking, many meals out (though you try to bring sandwiches and fruit when you can get back home), many sample size toiletries you can bring to the hospital for yourself as you are basically living there for the next 2 weeks, a couple new sets of clothes from the Target near the hospital because you couldn't find the time to get home and do laundry. When she beginning to feel a bit better you buy her crayons, coloring books, and a new game for her DSI.

Your employer has been gracious and agreed to give you unpaid time off to be with your child. After two weeks in the hospital you have to ask the employer for more time off as our child is released to home, but needs someone there 24 hours and cannot go back to school yet. She has to be driven to physical therapy 4 days a week. You have to see surgeons and orthopedists for follow-ups, and need more co-pay money than you'd ever previously paid for the whole family in a year. Some of the appointments are in the afternoon and you cannot get back before your other child is due to be picked up from after school care, so you need to arrange a taxi service for him on those days. All your injured child's daily care now takes so long that you find you hardly have time to keep up with that laundry again--or cooking decent meals. You do stop at drive-throughs and have pizza delivered. You hire a high school kid to come help. You gather a huge load of laundry and drop it off at a service just to get caught up.

The extra expenses mount up and up. You know you need to get back to work, but your kid still needs you. You call your mother out of state and pay for her to fly out to come help...

I'm in favor of big emergency funds if at all possible, but then, you can see my imagination takes me to scary places.

[elessar78]

Thanks for the responses. Regarding Dave Ramsey, I just used him as a reference point on EF philosophy. I've read his books but don't subscribe to his approach wholesale.

I always wondered, since long-term investing takes advantage of compounding interest over time then you lose valuable years setting up the EF.

I'm leaning toward a more balanced approach. Fund the EF to an acceptable level, like 3 months, and reduce retirment contributions, say from 15% down to 12% until it's fully funded. <---I haven't thought about exact figures, just shooting from the hip at this point.

[bjl584]

Originally Posted by elessar78

Thanks for the responses. Regarding Dave Ramsey, I just used him as a reference point on EF philosophy. I've read his books but don't subscribe to his approach wholesale.

I always wondered, since long-term investing takes advantage of compounding interest over time then you lose valuable years setting up the EF.

Technically, yes. You are losing out on a potential investment opportunity by sitting on cash. But, the point of an emergency fund is to have cash for emergencies. That way you don't have to sell your positions in stocks or mutual funds, and you don't have to sell tangible assets, or worse, run up credit cards when you have an emergency. So, viewed that way, it makes perfect sense to have some cash as part of your overall portfolio.

[elessar78]

Originally Posted by Joan.of.the.Arch

I think in some emergencies one ends up needing to spend more than in normal times. For example, say your eight year old gets hit by a car (!) and is in hospital for a couple weeks. You need to be there with her, buy comfort items and larger clothes to fit over casts, braces, medical appliances. A physical therapist even tells you to buy a certain kind of sneakers for her. For yourself, you have to pay for parking, many meals out (though you try to bring sandwiches and fruit when you can get back home), many sample size toiletries you can bring to the hospital for yourself as you are basically living there for the next 2 weeks, a couple new sets of clothes from the Target near the hospital because you couldn't find the time to get home and do laundry. When she beginning to feel a bit better you buy her crayons, coloring books, and a new game for her DSI.

Your employer has been gracious and agreed to give you unpaid time off to be with your child. After two weeks in the hospital you have to ask the employer for more time off as our child is released to home, but needs someone there 24 hours and cannot go back to school yet. She has to be driven to physical therapy 4 days a week. You have to see surgeons and orthopedists for follow-ups, and need more co-pay money than you'd ever previously paid for the whole family in a year. Some of the appointments are in the afternoon and you cannot get back before your other child is due to be picked up from after school care, so you need to arrange a taxi service for him on those days. All your injured child's daily care now takes so long that you find you hardly have time to keep up with that laundry again--or cooking decent meals. You do stop at drive-throughs and have pizza delivered. You hire a high school kid to come help. You gather a huge load of laundry and drop it off at a service just to get caught up.

The extra expenses mount up and up. You know you need to get back to work, but your kid still needs you. You call your mother out of state and pay for her to fly out to come help...

I'm in favor of big emergency funds if at all possible, but then, you can see my imagination takes me to scary places.

Joan, yes, even our incident which turned out to be not so major in the grand scheme... if it was a "big" one, then I can imagine being SOL without a hefty EF.

[kork13]

Originally Posted by elessar78

I'm leaning toward a more balanced approach. Fund the EF to an acceptable level, like 3 months, and reduce retirment contributions, say from 15% down to 12% until it's fully funded. <---I haven't thought about exact figures, just shooting from the hip at this point.

That's an absolutely reasonable idea. Honestly, it's probably how most people do it, even if not intentionally. While saving for retirement, they build their EF. Once the EF is fully funded, they can increase the amount going to retirement (or other goals).