Emergency Funds

[frugalgirl]

I have thought quite a lot about whether or not my family actually needs 3-6 months of living expenses in an emergency fund. We currently have 5 months expenses in ours. I am curious as to the forum members' thoughts on the subject.

Reasons for emergency funds:
1. To provide income in case of job loss.
The primary bread winner in our family has a job that he would have to do something illegal or immoral to get fired from so it is very, very secure.
2. To provide income in case of death or disability. We have very good life and disability insurance.
3. To cover unexpected expenses like deductibles, appliance repairs/purchases, etc. This is my only real worry for our family.

What I am forgetting?
I am a very conservative person when it comes to this emergency fund and get nervous when we take any money out of it. My spouse and I are living temporarily in Europe with the kids and have talked about using about 75% of one month's expenses from the fund to do some extra travelling. Would you all do it? We wouldn't be able to replenish the money until after 11/2012 when the mortgage is paid off.

[Slug]

Although I don't know anything about your current debt levels, I'd be inclined to do it. You have already offset a large portion of the cost of a European vacation by simply being in Europe (thus no airfare). It's one of those "opportunities of a lifetime" where you're spending on an experience rather than purchasing material goods. So, I'd go for it. Of course if you tell me you're carrying payday loans or credit card debt, the story changes markedly.

[disneysteve]

The EF topic is a subject of frequent discussion. 3-6 months is a general guideline. How much you personally need will vary based on various factors, some of which you've mentioned such as how secure your job is, what your financial risk is, the extent of unexpected expenses you might encounter, etc. For example, someone who owns a home could face more, and more costly, housing-related emergencies than someone who rents.

Another factor is what your overall financial situation looks like. If you are young and just starting out with not a whole lot in savings, that EF is very important. For someone like myself who is well-established and has a mid-6-figure investment portfolio, that pile of cash in a savings account isn't really as essential. In the event of some major expense, we have lots of resources to draw from. We still want to have money that is liquid and readily accessible but if I need to sell some shares of stock or a mutual fund or cash out a bond, I can do that.

Things to keep in mind: In the event of disability, make sure you know the terms of your policy. Mine have either a 60 or 90 day waiting period before benefits begin, so I need to cover costs for the first 2-3 months myself. In the event of death or disability, the other partner may need to take time off from work to help care for the sick partner or grieve over the death, so be prepared for that.

[couchrobt]

Some would think this is not the best decision to do especially at this time, when you weigh income versus expenses moreso to add travel expenses. No matter how you try to not spend, when you are on a vacation, you will spend. But then also, experience is just priceless.

[MonkeyMama]

No, I wouldn't.

I think most people seriously under-estimate #1. There are hundreds of reasons to lose a job. I personally fall in the "job extremely secure" area, but am realistic enough to know stuff happens. I wouldn't dip into my emergency fund because my job is "secure."

How would you pay for a sudden large medical bill? A major home repair? A totaled car? Most of us have insurance for these type things, but sometimes we need cash while we fight the insurance. Sometimes insurance doesn't cover everything.

I personally think of my emergency fund as a catastrophic savings fund. Job loss, major damage to home, etc. I don't think I have ever touched my emergency fund, but I know having a large emergency fund has given me a level of financial security most don't have. (Freedom to leave a bad job, no reason to go into debt, etc.). No "experience" is worth giving up that freedom, for me.

[elessar78]

agree with MM, plus the higher you are in the food chain the harder it is to find a job that pays as well.

Not many $80K jobs floating around out there, is there?

Also, in the event of job loss relocation may be necessary which is not cheap either.

[frugalgirl]

Thanks for the replies. I really appreciate all views on this.
More info. to help evaluate. Don't know if will change any opinions but here it is:

1. DH is a tenured professor at a well-established university hence the ultra-secure job.
2. We have no debt other than the mortgage.
3. DH is on a 7 month sabbatical so we are actually living in Europe not on vacation here.
4. We are meeting our retirement savings goals.
5. Mortgage will be paid in full in 19 months.
6. Not sure about the waiting period for the disability insurance but know there is one.
7. Dipping into the EF would put us at 4.25 months of expenses left in the EF.

[jpg7n16]

I have thought quite a lot about whether or not my family actually needs 3-6 months of living expenses in an emergency fund.

...My spouse and I are living temporarily in Europe with the kids and have talked about using about 75% of one month's expenses from the fund to do some extra travelling. Would you all do it?

These are actually two separate discussions. Which I think you'll like my answers (I hope).

The first discussion is, 'what level of EF does my family truly need?' and the second is 'should my family take a vacation with the money we have in addition to our EF?'

So to answer the first question - you've mitigated most of your risk through insurance, and you seem comfortable with job security. The range is 3-6 months and your factors all indicate a low amount of liquidity need, so I'd put you at a 3 months EF that must be held in cash.

The second question, of your family's vacation, boils down to that traveling is a discretionary expense, and not an emergency. (obv) Since you have 5 months cash on hand, but only truly need 3 months cash, that leaves 2 months of cash on hand that is not required to maintain your EF. So as long as your family can afford the trip, is still on pace to have enough retirement, and wants to travel (as discussed among your family) then as long as it doesn't cost more than 2 months expenses, you're okay.

You said it would cost 0.75 months, which is less than 2, so I'd say sure


Just make sure you're on pace for retirement savings from here on out. It would concern me if you were taking vacations and spending money on travel, but not saving anything for the future. (just saw your post you made while I was typing this up, and you're good on retirement, so don't see a problem at all. have a great trip! )

[creditcardfree]

If you can replenish that portion of the emergency fund quickly, yes take the vacation. If I was in your situation I would do it.

[GREENBACK]

I'm in the "very secure job" category as well but have about a year's worth of EF. I try to think of the worst case scenario because life happens.

The vacation thing is a personal decision but their is some small risk.

[happygirl]

Although I don't know anything about your current debt levels, I'd be inclined to do it. You have already offset a large portion of the cost of a European vacation by simply being in Europe (thus no airfare). It's one of those "opportunities of a lifetime" where you're spending on an experience rather than purchasing material goods. So, I'd go for it. Of course if you tell me you're carrying payday loans or credit card debt, the story changes markedly.

I agree. I've only been to a few parts of Europe and I can't wait to return. The world is so big and most people never get to see more than one small part of it. You have an amazing opportunity simply by virtue of where you're living right now and it sounds like you are fairly secure financially. I would definitely take the opportunity to explore.

[snafu]

DH and I purposely choose foreign contracts so that we can experience the challenges of following other cultures, language, day-to-day living and explore the entire country. Our income is only as secure as the next offer.

We carry no debt and have about a 3 month, instant access emergency fund. We fund our retirement portfolio without difficulty [it is nearly back to pre 9/08 valuation]. I see your query as a 'no brainer.' Foreign travel offers incredible, lifetime experiences particularly if you attempt to live 'like locals.' I promise you, if you don't take advantage of the opportunity at hand, you will forever regret that decision. Even if travels have difficult patches and don't meet your preconceived notions,the people you meet and resultant learning experiences will touch your lives for the next 10 years.

[Frugal]

I would do it. I have been to Europe, and any money you spend on traveling, you usually don't regret once you have a chance to do something once-in-a-lifetime. I wish I had spent more money traveling there, but I did not have that option. I don't know about you, but I regret NOT seeing more or traveling more while I was in Europe! There is a time to save money, and honestly, in Europe it is hard to do anyway for an American, with the exchange rates...

[Little House]

It looks like you are in a good position to travel. There's a point where you have to balance being frugal and living a little.