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How to fund an EF?

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  • How to fund an EF?

    Reading the Suze Orman book, I see that she is recommending an 8-month EF. DH's job is pretty secure, but it seems foolish to count on anything these days, so I am looking towards building the EF.

    I guess that I've technically never had a real EF. We have $20k in CDs that were earmarked towards a house downpayment, and another $10k that I like to just keep as security. I guess the $10k would count as an EF, though I've not really considered it as such. But if we are to have an 8-month EF, that would be over the 10k (more like 12-15k). Do I build up the EF more, or just figure that if things get that bad, we won't be buying a house anyway, so we can just use the $20k house-fund to cover living expenses?

    More info:
    No cc debt
    Car loan due to paid-off in 4 months (1%interest)
    We already put 10% pre-tax into DH's TSP, and $4400/yr into my Roth/trad. IRAs
    We have a college fund for kids
    We have a "Freedom Account" where I stash $ for everything from car repairs/insurance to vacations & Christmas

  • #2
    It sounds to me like you've got the EF pretty well covered. You have the 10K plus whatever is in the Freedom account. And, until you actually buy a house, you've got the 20K in CDs.

    Once you do buy a house, you'll need to take another look at the numbers because your expenses will change so the amount needed in your EF may change.
    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.

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    • #3
      Thanks, I just didn't want to be too confident and find out down the road that there was something I should have been doing at this point in time.

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      • #4
        I agree, you've got plenty of cash available if an "emergency" comes up. So I think there are other places you can put that money that may get a greater yield at the price of liquidity.

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        • #5
          The CDs average 4% interest, so at least that $ isn't completely dormant.

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          • #6
            I would not look for a good return on the EF. Liquidity (quick access to money) will be more valuable than the return you have on the money. Just guessing, but 4% on a CD implies to me that the duration of the CD is long (maybe 3-4 years?) and the penalty for access to the money might be higher than you want for an EF.

            My EF is in CDs. I use 3 91 day CDs (each CD matures 31 days apart). So at any point in time I have a CD maturing or a 10 day look back period where I have access to the money. My return is usually around 1% on the CDs.

            I use CDs so the money is not accessible thru atm cards, online transactions or similar. The short term of the CDs keeps the penalty low (3 months interest at 1% is a low penalty).

            In your case I would move 3 months expenses to short term Cds, then keep the rest in a longer term CD. After you buy the house expenses change, so make sure the EF still represents 3 months expenses after you move. Some might even say that a house carries more risk and you want 6 months expenses in the bank, not 3.

            If your EF is anything higher than 6 months expenses, I would question why. There are good reasons (about to retire, self employed, variable income), but anything higher than 6 months should be discussed (IMO).

            What I do is keep 3 months in CDs and then I have a taxable investment account which I invest in a moderate risk mutual fund (PRPFX). Others might use a municipal bond fund or tax efficient balanced fund. The goal is stability of principal with some risk to give more growth.

            I slowly add to my taxable accounts. Goal at retirement is 1 years expenses in CDs, 1 years expenses in PRPFX and 1 years expenses in muni bonds, plus 3 more years expenses in TIPs.

            We allocate 5% of our gross pay each month to the EF, so this will build slowly over time (this same 5% also funds vacations or other short term financial needs, so some years 1% might get added to EF and other years it might be more).

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            • #7
              This is oversimplifying things, perhaps, but I just have one giant "slush" fund to cover most scenarios. If interest rates would vary(increase) a little more on some of the short term stuff I'd consider doing things differently. I like the idea that I can get to all my cash in a couple of days if need be just in case the fit hits the shan.
              "Those who can't remember the past are condemmed to repeat it".- George Santayana.

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