Are emergency funds overrated?

[MKKShah]

I was watching "The Suze Orman Show" the other day (and I watch it fairly regularly). In the "can I afford it" segment, Suze "denied" a few people, who I thought could perfectly afford what they wanted, just because they did not have an 8 month EF.

That brings me to a few questions:

- Is an emergency fund a necessity for all people?
- If so how much is actually necessary?
- and in what form? (checking/savings/money mkt)
- What are the emergencies that you are preparing / keeping this money for? (Job loss? Medical?)
- Have you thought through, or estimated the costs for some of these emergencies? and Is the EF the only mitigation plan for these emergencies?

I touched about this in a different thread, but here's my thought process:

- I have employer provided health insurance. Outside of a very small copay we are covered by this "Cadillac" plan. So when employed health emergencies are covered between health insurance, paid sick leave, short term disability and long term disability.

- In the event of a job loss I stand to get (2 months pay according to state law, backpay for vacation days accumulated, pending ESPP contributions, UI (max of $13k in my state) + anything bonus that the company may throw in as part of a severance package (in my industry 6 to 10 months is customary depending on experience.). All this could fetch me between 49K (guaranteed) and 71K on the upper end.

- I also have upto 80k in credit limit, with approximately 30K in 0% balance transfer offer at any given time (typically @ 3% fee for 12 months).

- My monthly expenses (reduced at job loss but including COBRA) will be $3500 per month. Based on the above calculation, receivables upon job loss should last me anywhere from 14 months to 20 months of my expenses without dipping into credit, and with upto 30k debt @ 0%, could even stretch this to 28 months of expenses. WAY more than what is required.

Between all this, and a potential new job in 5 or 6 months I should be ok without an EF. And this situation is not all that uncommon across corporate America. This is another reason why I am now keen on increasing my available credit, so even @ 10 - 15K use of CC (again @0% BT, with 3%), I should be well under 30% utilization, and have a year or so to actually pay that off.

Am I way off base thinking this way? Do any of you think along these lines? Are people's claims (like Suze's) on EF "alarmist"?

[jpg7n16]

In general, yes - everyone should have an EF. The standard recommendation is 3-6 months essential expenses set aside in a very liquid account (typically cash, money market, or CDs)

The point of the EF is to make sure you are financially ready to survive a short-mid term financial emergency. And not have to borrow to do so. A line of credit should not be included as borrowing is what you're trying to avoid. Given your situation, all things considered, you may only need about $10k total cash set aside. This would cover you during the period where you are awaiting receipt of your benefits.

An 8 month cash EF should be pretty rare, as in you're self employed, whose wife is a stay at home mom for your two kids.

Why You Need an Emergency Fund

Emergency Fund Definition | Investopedia


I also make a distinction between a set amount in cash as an EF, and the amount of investments you have access to outside of retirement accounts. If you want to be more conservative and have access to 2 years expenses, that's great, but I wouldn't recommend keeping it all in cash. Keep 6 months max in cash, and invest the remaining 18 months in a way that helps hedge against inflation.

[disneysteve]

I agree that everyone needs an EF. The amount needed varies by situation but a minimum of 3 months is a must IMO.

You mention short and long term disability. Keep in mind that disability payments never start on day one of your disability. There are generally forms and reports to be filed to apply for benefits and, depending on the coverage, a waiting period before they start paying you. My policies have a 60 or 90 day waiting period and then it takes a little time from the end of the waiting period to actually receive the first check, so closer to 90 and 120 days that I'd have to cover on my own.

Regarding medical, it sounds like you have great coverage, but there may still be costs that you pay out of pocket like OTC meds, wound dressing supplies, braces (for limbs, not teeth), etc. What if you are sick or injured and your spouse has to take time off work to care for you? You need to replace his/her lost income.

I totally agree with jpg that debt is NOT an emergency fund. The whole point of having an EF is so that you don't fall into debt if something happens. If you lost your job or got sick or injured or had some household catastrophe occur, would you really want to come out of that process with 80K in CC debt? I don't think so.

I also think the amount needed in a cash EF varies by your stage in life and personal wealth. Realistically, my wife and I don't really need to keep a big cash EF. We have a half-million dollar portfolio. If I need to sell some stock or cash out some mutual fund shares to cover something, I could do that. I still keep several months worth of expenses in fairly liquid places but I know that it is really more than I truly need. When you are just starting out, though, that EF is critically important as you don't have that investment portfolio to fall back on.

[bjl584]

Suze is talking to people on national tv in a 30 second sound byte. So, she has to make some generalizations and blanket statements. I'm sure that if she spend some actual time with some of these people that call in and looked through their finances, then some of the people that she denied would end up being approved. Denying someone does make for good tv however.

[kv968]

You mention short and long term disability. Keep in mind that disability payments never start on day one of your disability. There are generally forms and reports to be filed to apply for benefits and, depending on the coverage, a waiting period before they start paying you. My policies have a 60 or 90 day waiting period and then it takes a little time from the end of the waiting period to actually receive the first check, so closer to 90 and 120 days that I'd have to cover on my own.

Not necessarily. If your employer offers short-term disability, you may be able to get the benefits immediately.

Due to an ongoing injury, I've been on short-term leave a few times and I've never waited for my benefits. Although I work for a large company that is self-insured for short-term disablity and has its own medical department so I'm sure that factors into it. I do have to go to an outside doctor and fill out one form with them saying I need to be out but that's about it.

Long-term is a little different since then I'd be dealing directly with an insurance company. However if the short-term looks as if it's going to turn into long-term (i.e. >6 months) I can fill the paperwork out ahead of time and have everything approved and ready to go when the time comes. Luckily I haven't had to go that route though.

Again, working for a larger company which funds its own short-term insurance and has an in-house medical department I'm sure helps speed things along but the wait doesn't have to be 60-90 days for everyone.

[disneysteve]

That makes sense kv. So I guess my post just supports why some folks need a larger EF than other folks might.

Still, if my health benefits and disability benefits were all tied to my job, I'd be concerned about what could happen if I lost my job or the place went out of business. And if you think your job or your company is "too big to fail", go have a talk with employees of Enron or Lehman Bros. or some other infamous failures.

[kv968]

That makes sense kv. So I guess my post just supports why some folks need a larger EF than other folks might.

Still, if my health benefits and disability benefits were all tied to my job, I'd be concerned about what could happen if I lost my job or the place went out of business. And if you think your job or your company is "too big to fail", go have a talk with employees of Enron or Lehman Bros. or some other infamous failures.

Don't get the impression that my post was in any way against having a properly funded EF because it wasn't meant to be. I was just saying that not everyone's situation is the same and like you said, some need a larger EF than others.

I'm also not saying we're "too big to fail". I just meant that since we are a larger company and can self-insure, the situation may be different for me than for someone who works for a smaller company that may not have the resources. Although I don't think we'd really "fail" (big pharma) as much as we could definitely be bought and that could change everything. Either way, I could be out of a job and I do keep that in mind.

[Joan.of.the.Arch]

If you are married or have other family, you also need to think of emergencies that primarily involve them, not just you. If you have a spouse, are they covered in the same way you are? If you have children, can you cover their emergencies?

Say, for example your 14 year old son goes on a church club service trip to Mexico and their bus goes off a cliff. Your son survives but is hospitalized and you & your spouse rush to him. You need $$ for unexpected travel, will have to pay for food, residence, clothing, laundry as long as you are there. After a week he is stabilized and can be transported to a hospital at home. Will your insurance cover the ambulance plane and on the ground ambulances? Will you have already used up most of your paid vacation time? After another week or two he's released from the hospital to a recovery/nursing/therapy home for some weeks. Can you continue to leave work? He needs many comfort items, and being a kid he is depressed, angry, and bored. You do everything you can to bouy his spirits. Do you spend money to address that? After a time he is painfree enough to think about keeping up with his schoolwork. Do you hire a private tutor to go to the home?

I have no idea what emergencies really could occur and be costly in your life. Part of the point is that they are unexpected.

[GREENBACK]

I recently spent 14k on an unanticipated but vital home repair job (roof). Fortunately I had a large EF to handle this. That's but one reason I keep a big EF.

[MonkeyMama]

I think Joan points out a good scenario. & though it may sound rare, I mean, seriously, is there anyone we don't know who faced some huge hardship like that at some point in their life? I could go on and on and on when it comes to my own family. In the last few years my dad was on disability and fired when he tried to return to work. His COBRA expires this year and his health insurance is going from like $5k to $30k annually. Both our dads retired early due to the economy and lack of jobs. My dh has been long-term unemployed and we both had surgery in the past few years (very out of nowhere).

We've always been big on the emergency fund/cash savings. It just makes life infinitely easier to roll with the punches. There is also a large element of more freedom and choice. I know my job has an end date in the near future (employer will retire, and not sure I will stay if he sells the business). I think it is likely I can easily find a job. But how long will it take to find a job like the one I have? An employer with integrity, who pays well, and doesn't want to work us too much (like most the industry). I'd like the flexibility to find that employer, not just take whatever job I can find. Likewise, if our parents need care when they are older, do we want to say, "we have no time or money for that," or do we want to be able to take time off work to help? This is a very common scenario in this day and age.

If you like "cutting it close" and just racking up the credit cards instead, then no emergency fund necessary. I would think a bigger emergency fund would be more necessary the more people who rely on you financially, and if you have bigger expenses like home ownership, etc. Of course, everyone's situation is different. I have personally always had a large emergency fund and can go on and on how it has made life easier for us, and has always given us more options. There is a large element of doing what we *want* to do versus what we *have* to do, accordingly.

[LivingAlmostLarge]

Like you I am not a big believer in a large ef. I have I think 3-4 months cash and the rest is invested. But I consider all taxable accounts my EF if really necessary. For now we just keep a minimal amount in cash and work on paying off our debts and buying things like a new car on the horizon coming up. Everyone is different. Only you can judge if it's needed.

[AccountantSalary]

Job losses, sickness and other life emergencies tend to last far longer than you think they will. It's great that you have a severance package and credit. But what happens if you can't find a job for two years or five years? Those are also common situations in corporate America. The emergency fund can help.

If you're relying on credit, what if you have to take a job that pays far less than what you made previously? You may not be able to pay back what you owe.

It's my experience that the higher the salary and the greater my expenses, the bigger the emergency fund and the longer lasting it needs to be.

[MKKShah]

But what happens if you can't find a job for two years or five years?

Typical suggestions for EF is about 6-8 months with of funds. How can one plan on going for 5 years on that? or are you suggesting 5 years worth of expenses as an EF? (as things stand today, that would be 'retirement' for most people!)

When it comes to EFs, some folks are so sold on it that their reasons for EF almost amounts to irrational fear mongering. These folks propose having 8 months worth of expenses as EF, in preparation for catastrophic events that cost multiples of that amount in expenses. That just doesn't add up.

I think EFs are there to tide over simple difficulties like the unexpected travel expenses, medical events (like delay in disability payments etc), job loss etc.

I will keep 2 months worth of funds. Seems like there is no reason for anymore than that.

[kork13]

It just depends on your circumstances. Based on your perceived job security, your overall level of financial security, the risk of "something" happening, and alot of other factors. I don't see how fear mongering comes into the picture at all, though... I see it as preparation for the unknown. If I was hoarding guns, bullets, and canned beans, okay. Having an EF is simply about having funds available for whatever may come up. Cars break down, natural disasters happen (earthquakes, tornados, hurricanes, floods), people get sick, and so on. It's not that you expect these things to happen, but you're just financially preparing yourself for anything that might take place.

Personally, I only keep 2 months' expenses in ready cash. I keep another 3 months' worth in I-Bonds, and that's the extent of my actual "EF". As already stated, though, in an emergency, I've also got my investments to also fall back on. I see that 5 months as more than sufficient for myself at this point, especially having all of my investments behind it as well if required. Nothing is certain in life, but a little bit of preparation can alleviate some of the stress when "life happens".

[jpg7n16]

It's not easy to have emergency that needs money these days. Many people do not have cash that they can just use whenever they want. Actually, this can be a problem when that friend or family member you love calls with an emergency and needs you immediately. An instant cash advance can help. This way, you can get to your friend and take care of them. You can just pay the loan back later when your money comes.

Do what? Yes it is easy to have emergency money set aside. All you have to do is nothing Dont buy expensive cars, don't rent in too expensive a neighborhood, don't waste money on luxuries, don't go shopping virtually ever, don't eat out, don't save for retirement. Spend as little as possible and build up cash.

I'd be willing to wager that over 80% of Americans could be debt free (besides mortgage and SL debt) with at least 3 months expenses set aside in an EF - in less than 3 years if they applied themselves to it.

And when that friend/family member calls, often times they dont need YOU. If you cant help yourself, you cant help them either.

Giving rule #1: Do not give away what you do not have.

And no you cannot just pay the loan off when the money comes. You gave it away, but still need to pay your normal bills. And if you didn't have enough to help your family and pay your bills before the cash advance, you certainly don't have enough to help your family, pay your bills, and pay back the cash advance - just by taking a loan.