How crazy is this EF idea?

[disneysteve]

Mitigating circumstances...
- I'm in the military, so my job/income are pretty secure. Medical expenses are covered for me.
- I don't own a home, so any maintenance required on my house is not my expense.
- I own (outright) a 3y/o, reliable car (Honda Civic), and it's fully insured.

I must be thick! Given your the personal outline that opened this discussion, I can't imagine why you strive for a 15K EF.

snafu makes a really good point. Your income is secure. You have no debt, no medical expenses. You have no housing expenses. You have a new car so you've got some maintenance costs there. What could possibly happen that would cost you 15K and that you would need that money quickly?

[kork13]

I must be thick! Given your the personal outline that opened this discussion, I can't imagine why you strive for a 15K EF. Has anything in your past experience given you cause to anticipate a $15K Emergency? The flex you have in your day-to-day banking would cover nearly any problem. If pressed, put what is needed on a CC and pay the bill when due using their 21 day float.

A valid point, and a question that I have put to the fire many times. As you bring up, I do put everything on my CC, and normally pay it off before the statement even posts online, so I would have that float as a backstop if necessary. However, I'm just not comfortable having ZERO in a readily-accessible account, because I have had months in the past where I've spent more than expected, and had to dip into my liquid savings a bit. Also, it's just a matter of prudence. Yes, I probably COULD be okay with just keeping $3k-$4k in a savings account and have that be it, but I strongly believe in the "just in case" mentality. I often hear a 3mo EF recommended for people in the military, but again, "just in case".

As for my expected emergencies.... Within the next 3-4 months, I'll be moving overseas to Japan, where nearly everything is more expensive, and I'm planning for my expenses to increase by $1k-$2k, though I'll also receive $3k more in monthly gross pay, between COLA pay and an upcoming promotion in June. My biggest anticipated cost would be either some major breakdown with my car (I'm not allowed to bring my current car with me, so I'll have to get a different one out there), or needing to take emergency leave for family illness/death (I unfortunately do have some family history with this...), both of which could cost $2k-$3k in a single fell swoop (airline tickets can easily be as high as $1500).

All of that said, I am open to criticism -- Given my situation, am I really being over-cautious? I'm aiming for a $15k EF (6mo), but would my current $10k (4mo) be more realistic? Or should it be even less than that?

You have no debt

To be completely accurate, I do actually have ~$20k in a "career-starter" loan I got in college, but it's at only 1% interest, and I count those debt payments ($520/mo) as a part of my monthly expenses.

[disneysteve]

Personally, I'm of the opinion that most of our financial assets are available for emergencies if necessary. The only things that I don't count are IRA/Roths, 401k and 529 money. I consider all of that untouchable. Everything else - checking, money market, stocks, bonds, mutual funds, etc. are all available if something bad were to happen. Some money needs to be liquid but it doesn't all need to be liquid.

In your case, I'd see nothing wrong with keeping perhaps 5K liquid, another 5K semi-liquid and invest the rest.

[jIM_Ohio]

All of that said, I am open to criticism -- Given my situation, am I really being over-cautious? I'm aiming for a $15k EF (6mo), but would my current $10k (4mo) be more realistic? Or should it be even less than that?

Only you can decide what is "too cautious". Don't let us tell you how much risk to take... what I try to do is suggest if this, then this. if this, then this. You know your situation better than any of us ever will and you care more than we do- its your money.

Look at a layered EF approach

layer 1, high liquidity. Short term CDs or savings accounts or money markets. Focus on liquidity here, not return. Think 3 month CD ladder.

layer 2. medium liquidity, better return. Medium liquidity might mean a fee to access money or a delay in 2-3 days to access money.

layer 3 stability of principal focus, with return which beats inflation being important. Access to money would be measured in months or years (wait for right time to sell).

If layer 1 is a 3 month CD ladder, layer 2 could be a longer ladder (2-3 year CDs).
If layer 1 is a 6 month CD ladder, layer 2 could be a moderate risk mutual fund which invests in bonds or stocks (30% stocks is as high as I would go, but have read about people using Wellesley for this which is 40% stocks).
If layer 1 is a 3 or 6 month CD ladder, its possible the government bonds are an option, but as other posts have pointed out, this takes "time" to set up because bond maturities have less granularity, you might need to wait for an auction, and there are sales restrictions depending on the type of bond.

Some common planning examples I look for:

1) self employed person- want 6 months layer 1, 18 more months in layers 2 and 3. Logic- if person becomes disabled short term, money is needed. My cousin works for his father in law as a plumber. He broke is leg in November, and just returned to work in January. Only way he gets paid is if he works.

2) sales person or variable income- put 3 months in layer 1, with 9 months layer 2, and another 12 months in layer 3. Logic- The person might need money because of a bad year, so keeping access to 12 months in cash is important, however most of the time people in fields like this make more money than the rest of us, so directing as much excess to layer 3 when times are good is important.

3) stable employment, conservative finances
3 months layer 1- keep it in cash
enough in layer 2 to justify risk taken for layer 3 (this greatly depends on person's risk tolerance.
For example I can justify to myself that I need 3 months in layer 1, 0 months in layer 2 and as much in layer 3 as we can afford to send there. My logic is that if an emergency happens, I can stop layer 3 contributions and the monthly contribution might cover the emergency.

I have layers 1 and 3 right now... but do not contribute to layer 3 anymore, so when I need money, I turn off IRAs for a month or two, and leave the EF untouched.

[kork13]

hmmm... Alot to think about. I initially asked this question just to see if I was nuts to even consider it. But in the meantime, I think I've learned alot about what I actually do and don't want/need to do... For one, I realized that I kinda applied a broad-stroke approach without really considering my personal situation. So thanks everybody.

I think I've figured out what I'll be doing with my EF from here out, at least for the foreseeable future... I like the idea of 'layers' with varying levels of liquidity that Jim and DS bring up, and I think I'll move toward something of that form. Thanks again.

[disneysteve]

I kinda applied a broad-stroke approach without really considering my personal situation.

This is a very common planning flaw, and it shows up here in our discussions frequently. We are quick to spout rules of thumb, but those rules are just starting points. You need to take that rule of thumb and adjust it to your own situation.

Jim's examples point to how this works with the EF. Personally, I have a stable job with a very marketable profession. If my job suddenly ceased unexpectedly, I could easily find work within weeks if not days. In fact, there are numerous firms that do nothing but place physicians in short-term (and long-term) positions. Not a week goes by that I don't get e-mail and snail mail from these firms wanting me to contact them if I'm looking for work.

I also have top-notch disability insurance. If I get sick or injured and I'm unable to work for some extended period of time, I'm well covered.

Finally, my wife currently works only part-time, about 10-12 hours per week. If something happened to me, she could easily switch to a full-time position to bring in more money. It wouldn't come close to replacing my income but it would certainly help stretch our resources and ease the burden.

All of those factors reduce the potential demands on our EF. Also, our personal investments are substantial at this point in our lives, much more than they were 10 or 15 years ago. We have a much bigger cushion to fall back on if needed, so age and personal wealth plays into this also.

[Beppington]

If inflation rises, as it has to since it is sitting at zero right now ...

Don't forget about poor ol' deflation.

[feh]

In your case, I'd see nothing wrong with keeping perhaps 5K liquid, another 5K semi-liquid and invest the rest.

This is what we do. Our "official" EF (money kept in a checking/savings account) is quite a bit less than 6 months of living expenses. But, we have other monies in taxable investing accounts that we could access if necessary.

[disneysteve]

This is what we do. Our "official" EF (money kept in a checking/savings account) is quite a bit less than 6 months of living expenses. But, we have other monies in taxable investing accounts that we could access if necessary.

Same here. We do not maintain 6-months worth of expenses in liquid investments but we do have more than that when you add up checking, money markets, bonds, CDs, etc. We can get to some of it quickly but the rest would take a little time and some of it would incur a penalty if cashed in early.

[kork13]

Resurrecting this thread to ask a question about accrued interest for I-Bonds.....

So I'm buying savings bonds for both my house fund and my EF. The oldest one is from Dec '09. Isn't the monthly interest supposed to be added to the balance of the bond each month? When I look online, it shows the current value of the bonds as only the initial principle that I've put into them. Or am I mistaken?

The I-Bond FAQ reads:

I Bonds increase in value on the first day of each month, and interest is compounded semiannually based on each I Bond's issue date. An I Bond's issue date is the month and year in which an I Bond issuing agent receives the full issue price.

So am I missing something, or reading that the wrong way? Why doesn't the website show the accrued interest in the current bond value?

Or is this actually an issue and something I should contact the treasurydirect guys about?

[jIM_Ohio]

interest is compounded semiannually

you missed that
means you get interest 2X per year