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    Another emergency fund question

    I know that it is recommended to save 6-8 of your monthly expenses in a liquid account for a rainy day.

    When I hear the term “rainy day”, for me it means either one of the following:
    A. you lost your job
    B. unexpected medical expenses
    C. natural disaster like flood, earthquake, etc.
    D. any unexpected event that you must spend money
    eg. someone in your family passed away and you need to go out of state/town, car repair, home repair, etc.

    A “liquid” for me is cash or any account you can easily withdraw money. With that definition, I only consider cash, checking or savings account. Stocks might take few days to liquidate, you will need the money right away with emergency like (B, C, or D).

    My question is why 6 months? why not 3, or 5? Why not a fixed number depending on your situation?

    Let’s use my situation for example. My monthly expenses is $2600. 6 months fund is $15,600.

    If (A) happened to me right now, I am assuming that I will get the max unemployement insurance for $450/week. That is equal to $1800/month and can cover almost 70% of my expenses, with that, all I need is to save $800x6 for my emergency fund. Plus, with my line of work and my situation, I am confident that I can get a job within 1-2 months. The only down side here is I will not have a medical insurance while out of work.

    I think saving $15k for (B) is a lot especially if you have your own medical insurance. $15k is a lot for (D). We don’t experience a lot of (C) here in CA.

    In my case, should I just make it a fix number, say $5000 in savings account and instead of putting all $15k in a savings account, put the other 10k in an investment account or something useful?

    #2
    You're right that not everyone's situation is the same. Some people have secure jobs while others are questionable. You can think of your emergency fund as an insurance policy. Everything should be considered. While one may have a secure job, he may also have health issues.

    The 6-8 months is just a better insurance policy than the basic 3 month EF. If you are comfortable with 3 months, then have 3 months, but realize you may be under insured for some occurrences.

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      #3
      To add, I guard my EF diligently. I will deplete my auto fund before my EF. While I have an EF, I also maintain business capital and an auto fund. These give me an extra layer of protection. If you do not have other savings funds, you might consider having the larger EF.

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        #4
        I have my $1000 mini fund until my cc and loan debt is paid off, then my 3-6 mo EF will go into a moneymarket fund for the inevitable rainy day fund. I was told it was 3 months if your job was "secure" or at least as secure as any in this day and age, or 6 mo if it was more risky. Obviously it should be at whatever your means and comfort level will allow. I have noticed I have a hard time paying interest on loans with money sitting in a bank account so we will see how well I manage as time passes too. :-)

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          #5
          jIM & tomhole had an interesting discussion you may find enlightening
          http://www.savingadvice.com/forums/i...ous-funds.html

          We all have different circumstances and different risk profiles. I've never yet needed a significant sum in one pop. I keep a $ 1K 'float' in my chequing account for the benefits of free banking services which are a significant savings over the course of a year. I keep $ 700. in cash, in our home safe because we were in a forced evacuation scenario several years ago when I train derailment sent toxic fumes into the atmosphere. ATMs quickly ran out of cash, credit cards were useless because for safety sake they turned off electricity. Cash was the only useable currency that day. We have a saving account linked to chequing where I sweep leftover sums to accumulate, I know I can use a CC for nearly all of life's challenges that I consider 'emergency.' We can access an investment liquidation in two business days and I'm not risk adverse.

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            #6
            I'm another who believes in the concept of "layered" Emergency Funds.

            Right now my husband and I are in rebuilding mode after using $15k from our Emergency fund last summer. Right now I have a little over $23000 in a savings account that is our basic Emergency Fund. It earns approximately 1% in interest, so in other words it struggles to even keep up with inflation. I also have about $2000 in cash tucked away in our house.

            I haven't quite decided when I'll stop depositing to the Savings Account, but it will likely be after it totals somewhere in the $25k to $30k range. At that point I'll start looking at other investments that balance the need for higher returns along with the need for liquidity.

            For these types of things I mostly look at

            Certificates of Deposit (Although right now it is really hard to find ones that offer significantly better rates than my 1% Savings Account

            And then I have investments that throw off monthly income while hopefully appreciating the balance. For this type of thing I prefer high quality Dividend Stocks (google the Dividend Aristocrats list), Bonds, and even my Peer to Peer Lending Investment accounts. That last one isn't exactly liquid, but as the balance grow it does start to return more in terms of monthly income that could be utilized if our wages were compromised or stopped for some reason.

            I'll add that we also have about $100k in Credit Card availability. That's not something I'd ever want to use but if I had a desperate need, it is there.

            Comment


              #7
              If I could be nosy? what peer to peer site do you use? If you dont feel like answering I understand.

              Comment


                #8
                Originally posted by JulieAlbright View Post
                Certificates of Deposit (Although right now it is really hard to find ones that offer significantly better rates than my 1% Savings Account
                Was just reading an article suggesting that you consider a long-term CD with an early withdrawal option. Some are paying over 2% and even if you cash out early, your net earnings will still be more than what money market account is paying.
                Steve

                * Despite the high cost of living, it remains very popular.
                * Why should I pay for my daughter's education when she already knows everything?
                * There are no shortcuts to anywhere worth going.

                Comment


                  #9
                  Originally posted by Green43 View Post
                  If I could be nosy? what peer to peer site do you use? If you dont feel like answering I understand.
                  No that's fine. I have accounts at both Prosper and LendingClub.

                  Comment


                    #10
                    It is situation dependent. I am holding more cash than needed and have been for 2 years. But our situation is different in we know we are moving and need cash on hand. We just haven't pinned down when
                    LivingAlmostLarge Blog

                    Comment


                      #11
                      We have a couple layers of EF.

                      The first is highly liquid, and used for immediate expenses. We've dipped into it occasionally to cover unplanned expenses such as appliance repairs and other out of pocket expenses. When we hit it, we both say that "we need to pay back the EF" as if it is a lender. It gets money added through direct deposit without exception, so it constantly grows.

                      The second is in bonds. This is for more long-term, such as a car purchase. But it also is a second line of funding in case the stars align and we get hit with so many expenses that our EF is depleted. This gets occasional deposits, and grows pretty well on its own.

                      I'd never assume that unemployment will kick in at the levels I need or be available when I need it. Rather than fall back on credit cards or a HELOC, I'd much rather have a generous amount of cash on hand.

                      Comment


                        #12
                        Unemployment benefits: having served as Chairman of Unemployment Benefits Appeal Board, I'm appalled at how little eligible employees know about how this 'insurance' works and the rules of entitlement. There are hundreds of reasons benefits can be delayed or even denied. Anyone susceptible to lay-offs needs to learn the requirements to access benefits and how many 'deductions' delay access.

                        Comment


                          #13
                          Originally posted by snafu View Post
                          Unemployment benefits: having served as Chairman of Unemployment Benefits Appeal Board, I'm appalled at how little eligible employees know about how this 'insurance' works and the rules of entitlement. There are hundreds of reasons benefits can be delayed or even denied. Anyone susceptible to lay-offs needs to learn the requirements to access benefits and how many 'deductions' delay access.
                          So where can one go to find the definitive list of these rules, and the hundreds of reasons that could account for delay or denial? I'd like to know sooner rather than later, to at least be prepared. Thanks.

                          Comment


                            #14
                            i used to keep an emergency fund but now that im retired i really dont understand it at all. i lump everything into 1. savings and retirement funds, they are all net worth, my emergency fund was part of my net worth, when i save a few hundred on car insurance or $1 on a loaf of bread it goes straight to my bottom line

                            my savings is liquid so essentially it is there for emergency use, i think it is way overblown
                            retired in 2009 at the age of 39 with less than 300K total net worth

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