Can we get away with less emergency fund than average?

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Hyperion
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Can we get away with less emergency fund than average?

Post by Hyperion »

I am not debating the merit of a well-funded emergency fund, however, an emergency fund is usually needed primarily in case of loss of income, i.e. through loss of employment or illness.

I am wondering that the fact that I am a tenured professor in a top-tier private university changes any of this. In this case, loss of job is a VERY remote possibility (the college will have to burn down or something, even then the endowment is sufficiently large that they will rebuild). On the sickness front, the college has generous short-term and long-term disability policies that pays 90% of pay for 6 months and after that 60% until average retirement age (70).

So, do we really need to have 6 months of living expenses sitting in cash? What would you do in my shoes?

Many thanks.
stan1
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Re: Can we get away with less emergency fund than average?

Post by stan1 »

Here's what I do:

Set aside some money that you use for home repairs, replacement cars, vacations, and other planned/unplanned expenses that always come up. After that, invest in a taxable account in line with your overall asset allocation. You can sell securities at any time and have the money in your bank account within 3-5 days -- plenty of time to pay off a credit card bill or cash advance associated with a true emergency. In the unlikely event of an emergency you can rebalance your accounts back to your asset allocation. Yes you might have to pay capital gains tax -- but if the emergency is highly unlikely you are unlikely to need to sell.

I'm assuming you are already maxing out the retirement accounts you have available?
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sport
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Re: Can we get away with less emergency fund than average?

Post by sport »

There is no "right" amount for an EF. Anytime you see something that says 6 months, or 8 months, those are just rules of thumb. As with asset allocation, everyone is an individual with individual needs and situations. Yes, you should have an emergency fund. The size of it should be selected according to your needs, and what makes you comfortable.

Jeff
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Re: Can we get away with less emergency fund than average?

Post by Johm221122 »

Your EF does not need to be cash.I only keep $150 in checking account and one month salary in online bank. I bonds,index funds( http://www.bogleheads.org/wiki/Placing_ ... ed_Account )Roth Ira and credit cards make up the rest
Good luck
John
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Re: Can we get away with less emergency fund than average?

Post by Rainier »

Open a margin account and you can write a check today and pay a small amount of interest while the trade settles.
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Re: Can we get away with less emergency fund than average?

Post by livesoft »

Since you are tenured, you are very likely at least 30 years old. Thus you probably have a nice nest egg going. Under those circumstances, I see no reason to have an emergency fund per se. You can simply fold it into your retirement portfolio. Or in other words, your emergency fund can be invested in one or more bond funds held in your tax-advantaged accounts. You can have tax-efficient stock index funds in your taxable account. This is described in many places including the Wiki: http://www.bogleheads.org/wiki/Placing_ ... ed_Account

We are not retired and have essentially no cash assets except what flows through checking account monthly. In a pinch, we simply sell shares of a stock fund and spend the money. We don't care if the market has gone up or down when selling shares. I'll leave it as an exercise to figure out why we don't care. :)

Money is money. It doesn't matter to me whether I call it an "emergency fund" or a "short-term bond fund held in my IRA".
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Re: Can we get away with less emergency fund than average?

Post by sport »

Johm221122 wrote:Your EF does not need to be cash.I only keep $150 in checking account and one month salary in online bank. I bonds,index funds( http://www.bogleheads.org/wiki/Placing_ ... ed_Account )Roth Ira and credit cards make up the rest
Good luck
John
There are a number of ways to structure an EF. Personally, I don't like using a Roth, because once you withdraw anything, you cannot put it back. Roth space is too valuable IMO. A Roth should only be used if it would be IRA space that you would not otherwise fund. Credit cards may not be a good idea because they can be canceled by the bank, just when you need it. The interest rates are often excessive as well. A laddered approach can be a good idea, using cash, savings bonds, CD's, and short term bond funds.

Jeff
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Re: Can we get away with less emergency fund than average?

Post by Johm221122 »

jsl11 wrote:
Johm221122 wrote:Your EF does not need to be cash.I only keep $150 in checking account and one month salary in online bank. I bonds,index funds( http://www.bogleheads.org/wiki/Placing_ ... ed_Account )Roth Ira and credit cards make up the rest
Good luck
John
There are a number of ways to structure an EF. Personally, I don't like using a Roth, because once you withdraw anything, you cannot put it back. Roth space is too valuable IMO. A Roth should only be used if it would be IRA space that you would not otherwise fund. Credit cards may not be a good idea because they can be canceled by the bank, just when you need it. The interest rates are often excessive as well. A laddered approach can be a good idea, using cash, savings bonds, CD's, and short term bond funds.

Jeff
My ladder,I think mine is better(CDs and bond funds are not tax efficient)
Online bank account
Credit card
Savings bonds(EE)
Index funds
I bonds
Roth
Edit,I may use Roth before I bonds(there like gold with fixed rate)
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mickeyd
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Re: Can we get away with less emergency fund than average?

Post by mickeyd »

loss of job is a VERY remote possibility (the college will have to burn down or something,
do we really need to have 6 months of living expenses sitting in cash?
Are there no matches or lighting strikes in your area? Six months? Three months? One month? It's your call, but you get no do-overs.
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Re: Can we get away with less emergency fund than average?

Post by abuss368 »

Hyperion wrote:I am not debating the merit of a well-funded emergency fund, however, an emergency fund is usually needed primarily in case of loss of income, i.e. through loss of employment or illness.

I am wondering that the fact that I am a tenured professor in a top-tier private university changes any of this. In this case, loss of job is a VERY remote possibility (the college will have to burn down or something, even then the endowment is sufficiently large that they will rebuild). On the sickness front, the college has generous short-term and long-term disability policies that pays 90% of pay for 6 months and after that 60% until average retirement age (70).

So, do we really need to have 6 months of living expenses sitting in cash? What would you do in my shoes?

Many thanks.
Hi Hyperion,

I have often questioned the importance of a large cash holding. True, on a personal "balance sheet" it looks good in the event of loans, liquidity, etc.

However, with the state of today's rates, we are guaranteed to lose money after inflation.

On the flipside, the old saying of "cash is king" rings true.

At the end of the day, if you had an emergency, could you cover the short term loss/impact? That would be your answer to 1) if you need a separate emergency fund, and 2) how large or small should it be.

Best.
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archbish99
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Re: Can we get away with less emergency fund than average?

Post by archbish99 »

I do subtract my employer's severance policy from the 6-month guideline to arrive at our emergency fund target. However, there are other real emergencies that can crop up. They're all unlikely to occur, but the combined probability of one of them occurring in your lifetime is not so remote. Think of a couple, and plan accordingly:
  • You must simultaneously pay the deductible on your homeowner's and auto insurance (for each car, if multiple), because everything got smashed by a [insert local natural disaster type].
  • You suddenly discover your house needs a new roof / fully replaced insulation for reasons not covered by your insurance.
  • You must pay your health insurance plan's out-of-pocket maximum for a short-notice expensive procedure -- if you have no OOP max, think airlift to another hospital, followed by robotic surgery, followed by a week or two recovering in ICU, followed by outpatient follow-up appointments with a specialist.
  • A family crisis (the above happens to your spouse / sibling / parent) requires you to take an unpaid leave of absence for several months.
  • ... I'm sure you can think of more.
There's no magic number. The "magic" is that when the worst happens, you already know how it will be paid for, so you can spend your emotional energy on the situation and not on stressing over the financial fallout.
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Hyperion
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Re: Can we get away with less emergency fund than average?

Post by Hyperion »

Some more general info:
Yes we are maxing out our retirement accounts.
We have a good-sized nest egg for 30-something (I think), with at or close to 7 figures, depending on which day you look at it.
We made sure that our living expenses including mortgage can be paid out of 90% of my income alone (since with tenure, mine is the more secure income).

The reason I am asking now is that we have been having 6-months of living expenses as EF for a long time. However, I just got tenure last year and feel like I should be able to decrease that EF some.

Also I shouldn't have said cash. I meant any short-term asset that sacrifices return for liquidity. In our case (given the unlikeliness of emergencies), what is a reasonable amount that you would allocate as liquid asset, "just in case", above repairs, vacas, etc?

Again, I know each person has different tolerance levels, just wanted to hear different opinions.
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Re: Can we get away with less emergency fund than average?

Post by englishgirl »

I had a 3 month emergency fund for years. I'm now changing career so I am bumping it up to 6, but I think with a secure and/or in demand job or skill set there is less need to have a super high emergency fund.

Having said that, 3 months worth of expenses were not the only cash source at my disposal. I also have had separate new car funds that I could have tapped in an emergency, college savings, credit cards, and a HELOC (and, at times, taxable investments). So if a dire situation had arisen, I could have lived for 6 months off what I had, although it would have meant hanging on to my old car for much longer (for example).
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Hyperion
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Re: Can we get away with less emergency fund than average?

Post by Hyperion »

mickeyd wrote:
loss of job is a VERY remote possibility (the college will have to burn down or something,
do we really need to have 6 months of living expenses sitting in cash?
Are there no matches or lighting strikes in your area? Six months? Three months? One month? It's you call, but you get no do-overs.
While true, I doubt that everyone has an EF taking into account the possibility of his/her employer burning to the ground..
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Re: Can we get away with less emergency fund than average?

Post by livesoft »

Hyperion wrote:While true, I doubt that everyone has an EF taking into account the possibility of his/her employer burning to the ground..
While fire is a possibility, so are hurricanes, earthquakes and snipers:
http://www.youtube.com/watch?v=ct2AWh-nKSk
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Re: Can we get away with less emergency fund than average?

Post by downshiftme »

I think you are right to think what is the purpose of the Emergency Fund and then make sure that purpose is accomplished. In your situation with unusual job security I see why you think you need less ready cash Emergency Fund. You are in effect taking on slightly more risk by putting funds that might have been safe in your Emergency Fund to other use, but if you have investments then at most you are risking that an ill timed emergency of unanticipated nature would cause you to have to liquidate investments and your risk is that might be an inopportune time. Doesn't seem like unreasonable choice. Upside in your favor, downside very unlikely and manageable.

In periods of high job uncertainty, I have increased my readily accessible Emergency Fund. In periods of high job stability (and two independent and secure incomes) I have decreased my readily accessible Emergency Fund and invested more in a long term portfolio. Anecdotally, this has worked well for me.
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Re: Can we get away with less emergency fund than average?

Post by mhc »

Hyperion wrote:Some more general info:
Yes we are maxing out our retirement accounts.
We have a good-sized nest egg for 30-something (I think), with at or close to 7 figures, depending on which day you look at it.
We made sure that our living expenses including mortgage can be paid out of 90% of my income alone (since with tenure, mine is the more secure income).

The reason I am asking now is that we have been having 6-months of living expenses as EF for a long time. However, I just got tenure last year and feel like I should be able to decrease that EF some.

Also I shouldn't have said cash. I meant any short-term asset that sacrifices return for liquidity. In our case (given the unlikeliness of emergencies), what is a reasonable amount that you would allocate as liquid asset, "just in case", above repairs, vacas, etc?

Again, I know each person has different tolerance levels, just wanted to hear different opinions.

With that size nest egg and your job security, you do not need an emergency fund at all. Your whole nest egg is your emergency fund if needed. There is no need for you to set aside some cash and label it an emergency fund.

For me, I only keep cash on hand for smoothing out cash flow.
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Re: Can we get away with less emergency fund than average?

Post by sport »

Defining an EF in "months of expenses" implies dealing with a loss of job. However, there are also emergencies that are unrelated to how much you normally spend. For example, what if the roof and air conditioner fail at the same time, and then, to replace the AC, you also have to replace the furnace and hot water tank. The amount of this type of expense is a separate consideration. For someone with high expenses, it might be only one or two months. For someone who lives more simply, it might be 6 months. You should try to envision all the things you might need an EF for, and then select an amount that you are comfortable holding. Opportunity costs and tax efficiency are secondary concerns, and you might want to ignore them altogether.

Jeff
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Re: Can we get away with less emergency fund than average?

Post by retiredjg »

Hyperion wrote:So, do we really need to have 6 months of living expenses sitting in cash? What would you do in my shoes? Many thanks.
I'd say probably not since (as mentioned later) you are the larger breadwinner and your expenses would be pretty covered if your spouse has a job loss.

In your situation, there are plenty of places to get money for an emergency. Your IRA and/or 401k can be tapped without penalty for several types of issues. You probably have credit cards. You might get a line of credit on your house, etc. Your Roth IRA contributions (not earnings) are available without either tax or penalty.

If you have such an emergency that you have to look at these options, the difference in 2 or 3 months expenses in an emergency fund vs 6 months expenses is probably not going to matter much anyway. At 30 something and considering the size of your egg, I'm not sure you need a separate account for emergencies at all. You should like a good candidate for holding your cash needs in tax-advantaged accounts (the link that livesoft provided) if you have an adequate taxable account and if it suits you emotionally.
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Getting away without an emergency fund ?

Post by Taylor Larimore »

Hyperion:

The idea that everyone must have a separate emergency fund is a myth.

Of course, everyone should have a source of money for unexpected emergencies. However, many of us have sources other than maintaining a separate, low-yielding fund for emergencies that may never happen. I know that we can get money from an ETF, credit card, bank loan, or sell shares of funds in our taxable portfolio (Roth funds are readily available). You probably have more sources than I do.

I strongly suggest keeping investing simple with as few funds and accounts as possible.

Best wishes.
Taylor
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Re: Can we get away with less emergency fund than average?

Post by Dandy »

Probably not. But I would think that you would have access to 6 months or more somewhat liquid assets in any event. e.g. CDs, money market, I Bonds, short term bond funds etc. Having access to credit with cards or home equity is also a means to cover some unexpected expenses in the short term.
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Re: Can we get away with less emergency fund than average?

Post by Padlin »

Do you have a Roth or 2? if not start putting it there, it may take a few years but it'll be invested and still be available if you really need it.
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Re: Can we get away with less emergency fund than average?

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Re: Can we get away with less emergency fund than average?

Post by NYBoglehead »

Right now savings account are paying next to nothing. I think if you stop growing your emergency fund inflation will outpace the earnings on it and it'll be less than a 6 month emergency fund within 2-3 years.
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Re: Can we get away with less emergency fund than average?

Post by archbish99 »

Confused wrote:
archbish99 wrote:
  • You must simultaneously pay the deductible on your homeowner's and auto insurance (for each car, if multiple), because everything got smashed by a [insert local natural disaster type].
I'm sorry, but the mental image of everything getting smashed made me burst out laughing.
Funny mental image, isn't it? Like a monster smooshing everything. :shock:

A hurricane came through when I was 7, and Dad's car had a tree land on either side of it. We were amazingly lucky to have very little actual property damage -- just the labor of getting all the fallen trees off the driveway, plus losing power for a couple days. Not everyone was so lucky. Had trees angled differently, there would have been much higher expenses.

The reality can be... less funny. :|
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Re: Can we get away with less emergency fund than average?

Post by HomerJ »

livesoft wrote:Since you are tenured, you are very likely at least 30 years old. Thus you probably have a nice nest egg going. Under those circumstances, I see no reason to have an emergency fund per se. You can simply fold it into your retirement portfolio. Or in other words, your emergency fund can be invested in one or more bond funds held in your tax-advantaged accounts. You can have tax-efficient stock index funds in your taxable account. This is described in many places including the Wiki: http://www.bogleheads.org/wiki/Placing_ ... ed_Account

We are not retired and have essentially no cash assets except what flows through checking account monthly. In a pinch, we simply sell shares of a stock fund and spend the money. We don't care if the market has gone up or down when selling shares. I'll leave it as an exercise to figure out why we don't care. :)

Money is money. It doesn't matter to me whether I call it an "emergency fund" or a "short-term bond fund held in my IRA".
You can't sell a stock in your taxable account, and get the money TODAY... or even tomorrow.

I can think of one emergency where I don't want to have to wait a couple of days for the trade to settle... And that's bail money... :)
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Re: Can we get away with less emergency fund than average?

Post by HomerJ »

Hyperion wrote:We have a good-sized nest egg for 30-something (I think), with at or close to 7 figures, depending on which day you look at it.
1. You think?? For a college professor, you sure are clueless about how well you're doing... Do you have any idea what percentage of 30-somethings in the WORLD have close to 7 figures saved? You are extremely well-off.

2. When you have that much, an EF in cash isn't much of a drag on your portfolio returns... If you have $80k saved, having 40k in cash is a big drag on your returns. If you have $1 million saved, having $40k in cash isn't really hurting you that much.
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Re: Can we get away with less emergency fund than average?

Post by NYBoglehead »

HomerJ wrote:
Hyperion wrote:We have a good-sized nest egg for 30-something (I think), with at or close to 7 figures, depending on which day you look at it.
1. You think?? For a college professor, you sure are clueless about how well you're doing... Do you have any idea what percentage of 30-somethings in the WORLD have close to 7 figures saved? You are extremely well-off.

2. When you have that much, an EF in cash isn't much of a drag on your portfolio returns... If you have $80k saved, having 40k in cash is a big drag on your returns. If you have $1 million saved, having $40k in cash isn't really hurting you that much.

+1

I consider myself to be a very good saver and think that I am well ahead of my peers. That said, even rosy projections on returns don't push my portfolio into 7 figure territory until my early 40s. You're doing well prof!
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Re: Can we get away with less emergency fund than average?

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Re: Can we get away with less emergency fund than average?

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Re: Can we get away with less emergency fund than average?

Post by NoVa Lurker »

OP - I am in a somewhat similar situation to yours, and we keep only a very small emergency fund.

My wife and I keep a $1k buffer in our checking account (of course, not counting funds that are allocated for bills/transfers within the next few days). Then we try to keep only about $10k in a very liquid "almost-savings" account, which takes 2-3 business days to transfer into checking. The idea is that, if some part of our HVAC dies, or a tree falls on our house, these fairly liquid funds will tide us over.

So I guess you could say our target emergency fund is only about $11k. However, as others have mentioned, there are plenty of other places where we could pull cash if we really needed it (including borrowing through a home equity loan or HELOC). $11k is clearly insufficient if I were to lose my job, but in that case, I'd almost certainly get a severance, and I'd have the option to take a portion of my pension as a lump-sum, so we don't see a need to reserve a cash contingency for that.
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Re: Can we get away with less emergency fund than average?

Post by Skerrick »

I just chimed in to say that your estimation of 6 months of livings expenses as the average is a bit off... :wink:

I think LESS than the 'average' emergency fund would be very scary.

I am sure someone has researched what the "average" person has for emergencies and I would be shocked if it were more than two months of living expenses.
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Re: Can we get away with less emergency fund than average?

Post by Rainier »

If Warren Buffett is worth $44b and spends a modest $300k per year (he's pretty frugal) he has 146,000 years worth of expenses or 1.76m months as backup funding....that might throw the average off a little.
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Hyperion
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Re: Can we get away with less emergency fund than average?

Post by Hyperion »

HomerJ wrote:
Hyperion wrote:We have a good-sized nest egg for 30-something (I think), with at or close to 7 figures, depending on which day you look at it.
1. You think?? For a college professor, you sure are clueless about how well you're doing... Do you have any idea what percentage of 30-somethings in the WORLD have close to 7 figures saved? You are extremely well-off.
The size of the nest egg was recently enlarged to its current size because of an inheritance windfall (about 300K). I guess I haven't fully adjusted my thinking yet. Plus, on this forum it's generally foolish to assume that you are saving more than the other posters.

I agree the size of our nest egg does make the short-term positions less of a drag on the total returns. I wasn't thinking that way. I was just curious whether there is some common wisdom on the relationship between job/income security and EF size.
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Re: Can we get away with less emergency fund than average?

Post by AndroAsc »

While there is a job security for tenured professors, I'm sure that you can be dismissed for reasons. Shit happens, e.g.

You have whiny female undergraduate who keeps on pestering you for grades. You do what is right and not give into her demands. Unfortunately, she is a spoilt brat and comes from a rich family with power connections. Makes up this entire story that you molested her and threatened to fail her, etc... Unfortunately, there were not witnesses during that alleged incident and you have no alibi. The odds are stacked against you because you are in a position of power. How do you think that will end?

Next scenario...

You recently took in this outstanding graduate student as part of your research team. He does great and publishes 15 papers during his time with you. Couple of years later, word starts surfacing that those papers had results that were not reproducible. As it turns out, the student deceived you by faking and manipulating data. But as the Principal Investigator, you were responsible for the integrity of each published work, so may not be off the hook that easily. There is an official inquiry into this matter by the Office of Research Integrity. How do you think that will end?
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Hyperion
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Re: Can we get away with less emergency fund than average?

Post by Hyperion »

AndroAsc,

While the two senarios are possible, they are not very likely. Same as the other posters' senarios of natural disasters, unusual sequences of unfortunate events, etc. I don't believe my family stands an above average chance of those happening to us. Which means I should't over-prepare for them, either in the form of an emergency fund or else.

I mean do Bogleheads really all have EFs large enough to handle black-swan type events, on top of regular loss-of-income?
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FNK
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Re: Can we get away with less emergency fund than average?

Post by FNK »

Bogleheads should have enough emergency preparedness to cover multiple events coming up at the same time. If an "event" knocks out a half year of expenses, then you have one event's worth in the bank, another in unemployment coverage, and another in insurance, available credit or retirement savings. In your case, one of the possible events is less likely than usual. That doesn't preclude others.

So, yes, you can get away with less EF than recommended. Don't go with less than average though, the average is probably single dollars. ;-)

If you have car or home insurance, jack up deductibles as highly as you can. That will effectively make the EF earn you some money.
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Re: Can we get away with less emergency fund than average?

Post by Jacotus »

Hyperion wrote:I mean do Bogleheads really all have EFs large enough to handle black-swan type events, on top of regular loss-of-income?
I can't speak for everyone with authority, but I doubt it. Bogleheads simply like to play devil's advocate...
livesoft wrote:Since you are tenured, you are very likely at least 30 years old. Thus you probably have a nice nest egg going. Under those circumstances, I see no reason to have an emergency fund per se. You can simply fold it into your retirement portfolio. Or in other words, your emergency fund can be invested in one or more bond funds held in your tax-advantaged accounts. You can have tax-efficient stock index funds in your taxable account. This is described in many places including the Wiki: http://www.bogleheads.org/wiki/Placing_ ... ed_Account

We are not retired and have essentially no cash assets except what flows through checking account monthly. In a pinch, we simply sell shares of a stock fund and spend the money. We don't care if the market has gone up or down when selling shares. I'll leave it as an exercise to figure out why we don't care. :)

Money is money. It doesn't matter to me whether I call it an "emergency fund" or a "short-term bond fund held in my IRA".
This makes the most sense to me. You can always sell stocks in taxable, and if you want to rebalance or you are worried about "selling low", you sell bonds in your tax-advantaged account and buy the appropriate amount of stocks.
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archbish99
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Re: Can we get away with less emergency fund than average?

Post by archbish99 »

Hyperion wrote: I mean do Bogleheads really all have EFs large enough to handle black-swan type events, on top of regular loss-of-income?
Probably not "on top of." One reserve to cover many contingencies. The probability of them happening together is even lower than the probability of one happening.

My point, personally, is that the EF exists to cover any of several scenarios which may occur. You gave successfully reduced the probability of one of those. The doesn't affect the probability of the others. If, thinking about the full picture, you're comfortable reducing it, go for it.
I'm not a financial advisor, I just play one on the Internet.
KyleAAA
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Re: Can we get away with less emergency fund than average?

Post by KyleAAA »

You probably don't NEED to, but I think that's beside the point. What's the opportunity cost of keeping 6 months in an EF rather than just 2 or 3 months? It's very small. Probably not even noticeable in the long run. I would default to keeping a larger EF unless I had a VERY good reason not to. Better safe than sorry, especially since there's pretty much no advantage to being unsafe.
robocop
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Re: Can we get away with less emergency fund than average?

Post by robocop »

I just wanted to chime in and share a story. I have a very bright, hardworking friend, who was doing very well in the workforce. She is in her 20s and is very healthy- eats right, exercises regularly, etc.

This past year, she was just diagnosed with a disease that has completely changed her career outlook. Although she was smart with her money, fights between her worker's comp insurance and her health insurance wiped her out (and over a year later, they are still fighting everything). While they were fighting over which one should pay, and what was appropriate treatment (it is a rare disease), someone had to pay for the costs- otherwise her treatment would have been delayed, which would impact her overall outcome.

She is getting back on track, but her story is a good reminder why cash can really be helpful, even if you are doing everything right. She had all the right insurance, and it was only due to her decent EF and a supportive family that she is able to get the treatment she needs when she needs it.

Of course, a good investment portfolio can also be the EF. I just like to remember her story whenever I think that my job security makes me safer than most. While my specialty is high in demand right now, one accident or health issue could completely change my life, and although insurance will eventually help out, it is important to have something to fall back on.
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