Emergency Funds?

[maat55]

You can do it either way, save outside the EF or use it and replenish. Scanners point was that if you use your EF to pay these type of expenses, you will need to have it bigger. I separate the EF from normal expenses.

[Scanner]

I don't plan to live in a McMansion when I am retired. . .that being said. . . I just worked on my c/c bill. . .I'll post it under Personal Finance although it's so pornographic. . .it may be appropriate under Frugal.

[PrincessPerky]

You can do it either way, save outside the EF or use it and replenish. Scanners point was that if you use your EF to pay these type of expenses, you will need to have it bigger. I separate the EF from normal expenses.

We have those types in the same savings account, but on paper there is 'escrow' and 'EF' so the same place different purpose...however we have auto instant transfer availible from checking to saving and vice versa....

[Snave]

An argument for having a cash EF is you don't want to cash out your stocks and mutual funds at an inopportune time. Usually you will lose your job during a recession -- the exact time your stock holdings may have dropped. Essentially you'd be taking a double hit to your net worth by liquidating your stocks when they are temporarily down.

I understand this logic, but how many times do you lose a job. Believe me, I know it can happen. It happened to me this past year. But, it was the first time in 10 years. Had I had that money in a money market account waiting for the day I lost my job, I would have lost out on a lot of money. Agreed that a recession and a job loss could (and most likely would) happen in the same year, but again, I have made so much more in the last 10 years in MF and individual stocks that a 10% downturn like this year. Here are the numbers: 15K at 4% for 10 years = 22K. 15K at 10% for 10 years = 40K - 10% loss during teh recession year (like now) = 36K. I just guess that I will take my chances.

Or, it could be that I just don't have as many "emergencies" as others do.

[myrdale]

My EF is my money market account. It's only about $10k but slowly growing. I do make mortgage payments from this account so as to get a little interest off the money before I give it to the bank.

I only keep $2k in checking but that is for food/bills/life.

I plan on starting some investment this year I want a CD and IRA but I wouldnt have considered either to be emergency fund. I did like the idea of 3 CD's on alternate 90 day cycles though.

[sweeps]

Snave: I hear ya. First, everyone seems to have a different definition for emergency fund. An emergency fund just for losing a job has to be handled differently than an emergency fund that is for anything unexpected that pops up.

Also, are you loaded, or are you scraping by. If you have hundreds of thousands of dollars in mutual funds, you have nothing to worry about. If every dime is expended every month, a rock-solid cash fund is going to be really important.

How stable is your job? Your industry? Is there a 2nd income in your household? Do children depend on you putting food on the table, or is it just you who could live on Ramen noodles for a while if things really get rough.

I think you see where I'm going with this...

[disneysteve]

Some of us don't consider taxes, household expenses and insurance emergency's. Those are things we prepare for outside the EF.

I think Scanner's point was that if there were to be an interruption in his income, all of those things would still need to be paid and he'd need to have a stash of money with which to pay them. That's what an emergency fund is for. I don't think he meant that he pays those things from his EF normally.

[disneysteve]

I understand this logic, but how many times do you lose a job.

The problem is that you may not have any warning that it is going to happen, so you always need to be prepared. The other issue is that job loss is not the only potential emergency. For example, my wife had very unexpected gallbladder surgery in Sept. 2006. Our responsibility after insurance was over $2,000. I know lots and lots of people who would have had no way to come up with that amount without resorting to debt. Less than a year later, she had hand surgery. That cost us another $800. Add in copays for doctor visits and therapy and we spent about $3,000 in 10 months that wasn't expected or budgeted for. It is those kinds of things that an EF is for also.

[scfr]

Beyond keeping some cash on hand in a high-yielding MMA for irregular expenses or "minor emergencies," I think that CDs are a great place to keep a big chunk of your EF.

In the event of a real emergency, you can cash out your CD early. You will probably lose a big chunk (if not all) of the interest you have earned, but you will probably won't lose your principal. [Of course, read the fine print before opening a CD to be sure.]

There is a psychological barrier to cashing in the CD early, because you don't want to lose all of that lovely interest you have earned. It forces you to distinguish between a real emergency (death of sole income-earning spouse, 　long-term unemployment, major medical emergency, etc) and a simple urge to access the money (great sale at Macy's).　

When I first started saving, I stuffed money away in CDs. I knew the money was there if I ever really, really needed it (which was a big help psychologically), but I knew it was a good idea to put it somewhere that was slightly hands-off. I still keep money in CDs. It's been over 20 years and I've yet to cash one in early.

[Snowgirl]

I think it really depends on how tight you are in your regular budget. For example, if we a had 2k$-3k$ roof emergency, we would take most of it from our cash flow, cutting back "wants" for 2-3 months and maybe raiding the vacation or TV fund. We wouldn't touch the emergency fund proper. Thus I don't consider the emergency fund a big priority for us, because we have a good cash flow, a big dual income, and spare room in the budget. We haven't always had one, and we'll probably use a big chunk on non-urgent home improvements in the spring (windows, living room remodel), instead of waiting another year. In the meanwhile, our real emergency fund will be our personal line of credit.

Medical emergencies are not a factor here because we have universal healthcare, personal insurance for "extras". We also have unemployment (small payout) & disability insurance, so a real emergency would only be a job loss. That's why we don't feel too bad not having much cash laying around.

[hellodeli1]

EF

I totally agree that an emergency fund should be kept in very liquid vehicles -- cash, CDs, and the like. Having an emergency fund in stocks or even funds is risky because by the very nature of the fund, it is something that you may need to tap into at any time -- and that time may not coincide with an opportune time in the market. Having standing stop loss orders may be a way to fight this, but it seems like a good way to have your money churn a bit.

Also, there were some questions as to why you would have a substantial sum, say $15,000 in an EF. Well, it all amounts to your personal expenses and tolerance for risk. If your expenses for 6 months total 15k, it would certainly be wise to have all of that available in your EF -- say, if you lost your job and had to cover your expenses for a duration of time.

Personally, I keep a decent amount in cash and more in staggered 1 year CDs, so every month, I have a CD that matures that I could tap into should I need it, if not, it just renews to another 1 year term. It also helps flatten spikes and dips in near term interest rates.

[maat55]

steve

scanner said he didn't understand how some of us can keep a smaller EF than 10k when he is using his to pay what I consider to be normal bills. I don't remember him stating that he had a loss in income to pay the bills he did with his EF. I can have a 5k EF and still have a tax fund and add up to his 10k. I don't consider paying 3500 in cc monthly bills an emergeny. He chooses to use his EF and thats his preference, but not everyone uses their EF for those purposes. Now if I have a loss of income, then I would use my EF to pay those bills if needed.

If I seem a little irratic, I've been painting all day in a closed inviroment.

[LivingAlmostLarge]

I'm the same, most expenses we can cash flow so we never touch the EF. It's gotta be more than $10k for us to start touching it.

hmm...I'll mull more.

[maat55]

Using your EF as a capitalized checking account that you reimburse or as a never touch it unless there's an emergency account, does not matter.

It reminds me of trying to loose weight. I've lost 12lbs since jan. 1. I vowed not to eat pastries, chips, cookies, drink beer at the golf course or any regular pop this year. In addition, I try to limit my food intake a little.

The point is, like with my EF, The don'ts, help me advoid calories in a lot of situations. Thus, 12lbs lighter.

Some people set a limit for what they will use their EF for and some just use it and replenish it. Both systems can work.

[buzz]

If I may jump off-topic for a moment, I went on a similar diet to maat55. No Pepsi, lay off the sweets, don't overeat. I've lost 11 lbs so far. I am shooting for 1 lb/wk all year. Wish me luck.

Back on topic...

I have been keeping a 6 month EF in savings, but I think I will reduce that to 3 months, max. I am starting to question whether the the likelihood of an extreme emergency that would require half a year's expenses justifies having that much tied up in cash.

I keep 0% CC transfer offers handy for major unexpected expenses. That would extend payments over 1 yr+. Together with unemployment and disability coverage, most minor dilemmas should be covered. In case of a true emergency, I would eventually have to cash in some stocks.

Like any investment decision, it is a balance of safety vs. risk. If the market continues to erode and I can pick up some good values at 30-40% or more off their 2007 prices, I think I will be raiding the EF.