Am I dumb for having a small emergency account?

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Am I dumb for having a small emergency account?

Postby Paul78 » Sat Jun 29, 2013 12:15 pm

Currently it is about 20k and I have a hard time adding any more to it.

I have it at 20k because I am planning on buying a car within the next 6 months or so and this is enough for me to buy a "cheap" new car (all cost) with 100% cash.

My reasoning for not expanding the ef
1. over time investments should earn more $$$
2. a savings account would literally lose money with the interest rates offered.
3. I always have my taxable accounts, roth accounts, and even a tsp loan for super emergencies.
4. Although I make a decent salary I live in a high COL area and I HATE to commute to work (live close enough to walk). Thus in my current situation I will NEVER be able to afford to buy anything and will always need to rent. Therefore I really do not need to have a large chunk of change for a down payment on a house. The only way this will change in the near future (5-10 years) is if I marry a women who makes noticeable (ie at least 40k a year more) more then me OR they have a large inheritance OR they make about the same and we move away from my current work place (ie 1hr+ commute each way).
5. I am young and do not have a family and do not own a house. The only major cost I truly have is my car (both fixing the old crappy one I currently have and buying the new one).
6. My job is very stable.

Yes after I buy the new car I will but up my emergency fund to at least 20k but I have a hard time convincing myself to make it much higher. How dumb am I?
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Re: Am I dumb for having a small emergency account?

Postby livesoft » Sat Jun 29, 2013 12:17 pm

I suppose it all depends on how much you have in your taxable accounts, Roth IRA, and what your expenses are.
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Re: Am I dumb for having a small emergency account?

Postby nisiprius » Sat Jun 29, 2013 12:23 pm

What are your financial resources if there is an emergency? By the way, awkward as it is, yes, friends and family count as potential financial resources. A young person whose parents live in a big house with a guest room can get by with a smaller emergency fund. After years of feeling "independent" it was still a shock when my parents died and I realized that for the first time in my life, I really was independent whether I liked it or not.
6. My job is very stable.
Don't kid yourself. Stability is relative. I had a very stable job, having worked 15 years at a company as a software engineer, where I got very good reviews. In late 2008 suddenly one day the company's sales dropped 70% month over month and they let some people go. A crunch is a crunch. And there is no job that is secure. Yes, tenured college professors get laid off. And during bad times, not anyone with skills, gumption, and willingness to work can find a job.

The usual "emergency" is job loss. And the missing piece of information is: have you researched the unemployment situation in your state, which varies hugely from state to state? I think most employers usually play fair about unemployment, but do you know if your employer has done so in the past? Do you have any idea how much you would get in unemployment compensation if you were let go? Notice, by the way, that this is a situation where renting may be worse than buying, because there's no way for a renter to cut expenditures.
Paul78 wrote:2. a savings account would literally lose money with the interest rates offered.
No, it wouldn't. It would lose purchasing power. At a very slow rate, since inflation is currently low. It would not "literally lose money."
Last edited by nisiprius on Sat Jun 29, 2013 12:34 pm, edited 4 times in total.
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Re: Am I dumb for having a small emergency account?

Postby stan1 » Sat Jun 29, 2013 12:25 pm

It's OK for a federal employee/military member (assuming this since you mentioned TSP) to have a smaller emergency fund because the likelihood of job loss is much lower than if you were an independent consultant or salaried employee in a corporation. Common sense specific to your situation always needs to be applied to a rule of thumb like having 6-12 months of expenses in an emergency fund (checking/savings account).
Last edited by stan1 on Sat Jun 29, 2013 12:36 pm, edited 1 time in total.
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Re: Am I dumb for having a small emergency account?

Postby MathWizard » Sat Jun 29, 2013 12:33 pm

You might want to read the following:

http://www.bogleheads.org/wiki/Roth_IRA ... gency_fund
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Re: Am I dumb for having a small emergency account?

Postby IlliniDave » Sat Jun 29, 2013 2:32 pm

Paul78 wrote:Currently it is about 20k and I have a hard time adding any more to it.

I have it at 20k because I am planning on buying a car within the next 6 months or so and this is enough for me to buy a "cheap" new car (all cost) with 100% cash.

My reasoning for not expanding the ef
1. over time investments should earn more $$$
2. a savings account would literally lose money with the interest rates offered.
3. I always have my taxable accounts, roth accounts, and even a tsp loan for super emergencies.
4. Although I make a decent salary I live in a high COL area and I HATE to commute to work (live close enough to walk). Thus in my current situation I will NEVER be able to afford to buy anything and will always need to rent. Therefore I really do not need to have a large chunk of change for a down payment on a house. The only way this will change in the near future (5-10 years) is if I marry a women who makes noticeable (ie at least 40k a year more) more then me OR they have a large inheritance OR they make about the same and we move away from my current work place (ie 1hr+ commute each way).
5. I am young and do not have a family and do not own a house. The only major cost I truly have is my car (both fixing the old crappy one I currently have and buying the new one).
6. My job is very stable.

Yes after I buy the new car I will but up my emergency fund to at least 20k but I have a hard time convincing myself to make it much higher. How dumb am I?


I guess the question is: how long could you keep paying your living expenses if you lost your income? If you could make that last 6 months or more then by most definitions it's fine, especially since you have other non-retirement assets you can draw on to back it up.
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Re: Am I dumb for having a small emergency account?

Postby bayview » Sat Jun 29, 2013 6:08 pm

Whatever you wind up doing, I'd recommend having separate (even if only mentally) savings for true emergencies and for planned future expenses, which by definition are not emergencies.

If you're a federal employee, as opposed to military, your job can be considered stable if you are considered a member of the bargaining unit at your place of employment, meaning that you're in a union or eligible to be in a union. If not, your job might be a lot less stable than you think it is. There's still plenty of chopping going on in federal employment, and with no plans to post the job opening for the future.

I agree that a TSP loan can be a decent partial substitute for an emergency. A Roth IRA can serve the same function.

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Re: Am I dumb for having a small emergency account?

Postby grabiner » Sat Jun 29, 2013 10:28 pm

Paul78 wrote:3. I always have my taxable accounts, roth accounts, and even a tsp loan for super emergencies.


Wiki article link: Placing Cash Needs in a Tax-Advantaged Account

With the TSP, you have an effective emergency fund in your G fund holdings. If you need $10,000, you can sell $10,000 without selling any stock by selling $10,000 of Total Stock Market Index in your taxable account and moving $10,000 from the G fund to the C ans S funds in the TSP. Therefore, you don't need a separate emergency fund in a money-market fund, and you can earn much more with no risk in the G fund.
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Re: Am I dumb for having a small emergency account?

Postby CABob » Sat Jun 29, 2013 10:37 pm

How dumb am I?

At this point, no, you are not dumb.
At some point you may be dumb if an emergency does come up and you have to sell, take a high interest loan, or access some accounts at an inopportune time.
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Re: Am I dumb for having a small emergency account?

Postby reisner » Sat Jun 29, 2013 10:40 pm

You could also consider putting your emergency money into Vanguard's Short Term Bond Fund. Even in these difficult times, it's pretty stable. In my present state I don't really need an emergency fund (retired, CalPers pension for 35 years of service, SS up and running since I turned 66, house paid off), but this is what I consider my go-to-the-wall fund. The Prime Money Market account is merely my sweep fund.
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Re: Am I dumb for having a small emergency account?

Postby NorCalDad » Sat Jun 29, 2013 10:45 pm

Not dumb. Assuming you're reasonably insured (meaning no potential for huge medical costs and access to disability income), I don't think you really need more than that since you have Roths that you can tap in a "super emergency." Plus, you can always reduce costs by renting some place cheaper, as opposed to having a mortgage that you're locked into. I personally don't think people need much more than 3-6 months expenses in cash if they have access to Roths and other savings in a truly calamitous situation.
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Re: Am I dumb for having a small emergency account?

Postby Watty » Sat Jun 29, 2013 11:01 pm

3. I always have my taxable accounts, roth accounts, and even a tsp loan for super emergencies.


I would not want to count on the loan since it might be restricted if there were a job loss.

The taxable accounts and Roth can act as your emergency fund as long as you have enough in them that you would still have access to the money in even a down market.

There isn't a magic right number but I would fee comfortable using a 5 to 1 ration on this My this I mean that if I have $5K in an accessible account then I would feel comfortable reducing my separate emergency fund by $1,000
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Re: Am I dumb for having a small emergency account?

Postby grabiner » Sat Jun 29, 2013 11:21 pm

Watty wrote:The taxable accounts and Roth can act as your emergency fund as long as you have enough in them that you would still have access to the money in even a down market.

There isn't a magic right number but I would fee comfortable using a 5 to 1 ration on this My this I mean that if I have $5K in an accessible account then I would feel comfortable reducing my separate emergency fund by $1,000


2 to 1 is probably safe; the stock market doesn't drop by 50% very often, and when it does, you will probably be selling most of your taxable stock anyway to harvest the losses. (Thus, if you are 2 to 1 and the market crashes, you may need to keep your taxable account in cash until it gets back up to the right size with savings.)
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Re: Am I dumb for having a small emergency account?

Postby statsguy » Sun Jun 30, 2013 5:58 am

I had a very secure job, Professor of Statistics with tenure, and we never had your typical emergency fund.

We did have emergencies and we always found the money by taking some cash from our taxable account. Since retiring three years ago, our emergency fund has actually grown to about three months expenses. I am working on putting three years expenses into cash so I won't have to worry about selling something at the wrong time.

Looking back on all the times we needed money quickly and did not have any cash, it is clear to me that our emergency fund has been our taxable account. On several occasions we sold some I-bonds and EE bonds that I usually do not consider as part of our portfolio.

From my perspective, I would not consider you dumb. But you should be aware of the risk. For example, in 2008 at the bottom of the market we needed cash and it was very difficult to have to sell some bonds. If we had had some cash it would have been easier. Of course, had we had some cash, I would have bought some equities since they were on sale.

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Re: Am I dumb for having a small emergency account?

Postby Paul78 » Sun Jun 30, 2013 11:18 am

bayview wrote:
If you're a federal employee, as opposed to military, your job can be considered stable if you are considered a member of the bargaining unit at your place of employment, meaning that you're in a union or eligible to be in a union. If not, your job might be a lot less stable than you think it is. There's still plenty of chopping going on in federal employment, and with no plans to post the job opening for the future.

I agree that a TSP loan can be a decent partial substitute for an emergency. A Roth IRA can serve the same function.

You're not my boss, are you?? :D


This is my case.

Yes I am young and yes no job is 100% safe BUT

They will always be rn jobs and I work at one of the biggest VA's in the nation (ie if they start shutting down VAs mine will not be on the list). Really unless I commit gross neglect AND it directly leads to the death of a patient my job is pretty safe.

YES there are a million things they would do other then firing me that could cause me to rethink my employment (ie a potential emergency).

-wages. At the moment the VA uses a special scale to pay/attract RN's. They look at the average salary of RN's in the area and offer a competitive wage. Since I live in one the better paying areas for RN's this is a good deal. Now if they decrease this scale (ie maybe just a standard national wage for RN's) I could be forced to leave (it would literally be to expensive to live anywhere close to work). I also realize the purchasing power of RNs should go down over time (lots of young people are picking nursing eventually the supply will exceed the demand and wages will stay flat or go down).

-work load. They (federal gov) could easily double the workload (ie cut the # of employees in half) if they really wanted to. At that point I would have to think about a higher paying private job.

- changing my assignment. There are parts of nursing I love and parts I hate. At the moment I am in a specialty I love IF they "detail" me to and area I hate I might leave.

ect
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Re: Am I dumb for having a small emergency account?

Postby Paul78 » Sun Jun 30, 2013 11:21 am

grabiner wrote:
Watty wrote:The taxable accounts and Roth can act as your emergency fund as long as you have enough in them that you would still have access to the money in even a down market.

There isn't a magic right number but I would fee comfortable using a 5 to 1 ration on this My this I mean that if I have $5K in an accessible account then I would feel comfortable reducing my separate emergency fund by $1,000


2 to 1 is probably safe; the stock market doesn't drop by 50% very often, and when it does, you will probably be selling most of your taxable stock anyway to harvest the losses. (Thus, if you are 2 to 1 and the market crashes, you may need to keep your taxable account in cash until it gets back up to the right size with savings.)



Yeah I guess the taxable account would be the only viable ef of the three. As you point out even if my taxable account falls by 50% it would still have some benefit (harvest the losses).

I would really prefer to save my roth for retirement to take advantage of the tax implications and a tsp loan could be out of the question (ie if I get fired).
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Re: Am I dumb for having a small emergency account?

Postby KyleAAA » Sun Jun 30, 2013 11:29 am

This question can't be answered without knowing what your monthly expenses are. If you are reasonably frugal, $20k may be far too high. If you have a $3,000 mortgage, it's probably too small.
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Re: Am I dumb for having a small emergency account?

Postby Paul78 » Sun Jun 30, 2013 11:38 am

KyleAAA wrote:This question can't be answered without knowing what your monthly expenses are. If you are reasonably frugal, $20k may be far too high. If you have a $3,000 mortgage, it's probably too small.


At the moment monthly expenses are $2k.

But really in the case of a true emergency I could easily cut it down to $1300 and possible even lower (spend a little less on food, cut cable, move to a less desirable location but save a few hundred a month on rent, ect).
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Re: Am I dumb for having a small emergency account?

Postby g$$ » Sun Jun 30, 2013 1:07 pm

If your monthly expenses are only $2,000 that means you have a 10 month emergency fund. Possibly more since you said you could get by on ~$1,300. I think that's plenty.

IMHO your emergency fund could be even smaller since your job is "very stable".

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Re: Am I dumb for having a small emergency account?

Postby bayview » Sun Jun 30, 2013 1:24 pm

Paul78 wrote:
bayview wrote:
If you're a federal employee, as opposed to military, your job can be considered stable if you are considered a member of the bargaining unit at your place of employment, meaning that you're in a union or eligible to be in a union. If not, your job might be a lot less stable than you think it is. There's still plenty of chopping going on in federal employment, and with no plans to post the job opening for the future.

I agree that a TSP loan can be a decent partial substitute for an emergency. A Roth IRA can serve the same function.

You're not my boss, are you?? :D


This is my case.

Yes I am young and yes no job is 100% safe BUT

They will always be rn jobs and I work at one of the biggest VA's in the nation (ie if they start shutting down VAs mine will not be on the list). Really unless I commit gross neglect AND it directly leads to the death of a patient my job is pretty safe.

YES there are a million things they would do other then firing me that could cause me to rethink my employment (ie a potential emergency).

-wages. At the moment the VA uses a special scale to pay/attract RN's. They look at the average salary of RN's in the area and offer a competitive wage. Since I live in one the better paying areas for RN's this is a good deal. Now if they decrease this scale (ie maybe just a standard national wage for RN's) I could be forced to leave (it would literally be to expensive to live anywhere close to work). I also realize the purchasing power of RNs should go down over time (lots of young people are picking nursing eventually the supply will exceed the demand and wages will stay flat or go down).

-work load. They (federal gov) could easily double the workload (ie cut the # of employees in half) if they really wanted to. At that point I would have to think about a higher paying private job.

- changing my assignment. There are parts of nursing I love and parts I hate. At the moment I am in a specialty I love IF they "detail" me to and area I hate I might leave.

ect

Not in nursing, but otherwise I'm in the identical situation. There are lots of Monday mornings where I have to argue myself into getting up and going in, especially when recruiters approach me with non-fed jobs paying 30% more, but I love what I do, and I love serving veterans, so out the door I go at 5:30 a.m.. :sharebeer
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Re: Am I dumb for having a small emergency account?

Postby Flobes » Sun Jun 30, 2013 1:38 pm

I have a strong and healthy friend who tripped over a tent stake while camping with his dog. His leg was shattered. So far, his out of pocket expenses are north of $27,000 of uncovered medical, rehab and care expenses. Plus, he has not been able to work for 6 weeks and counting.

This is why personal emergency funds are handy.

Life happens, not just job loss.
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Re: Am I dumb for having a small emergency account?

Postby Dulocracy » Mon Jul 01, 2013 1:25 pm

Flobes wrote:I have a strong and healthy friend who tripped over a tent stake while camping with his dog. His leg was shattered. So far, his out of pocket expenses are north of $27,000 of uncovered medical, rehab and care expenses. Plus, he has not been able to work for 6 weeks and counting.

This is why personal emergency funds are handy.

Life happens, not just job loss.


That is why you have health insurance. Even a high deductible policy is better than nothing.

OP: In your situation, I do not think $20k is unreasonable. I have a wife, a house, a car note, and the normal bills. To cover those bills, it would cost me $4,000 per month. Therefore, our 6 month emergency fund would be $24,000 (getting it back up after having to use it). What are your expenses? What costs would you have to cover if you lost your job? Multiply that number times 6. Is that number more than $20,000 for a single person without a house? I hope not. If so, build it more. If not, you should be fine. Of course, some advocate for a 12 month emergency fund if your job is in an unstable field or unstable company. That is worth considering as well.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
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Re: Am I dumb for having a small emergency account?

Postby englishgirl » Mon Jul 01, 2013 1:45 pm

$20k is small? :shock:

I bumped my emergency fund up to $20k a year or two ago (4-5 months of expenses). Before that it was about $12k (3 months of expenses). BUT I do also have separate savings accounts for things like a new car that I could tap if I need to. So, that's not all the cash at my disposal in an emergency. And I do intend to bump it up to 6 months of expenses at some point. It appears that I am on the low end of Bogleheads when it comes to emergency funds, but like you, I have a hard time just leaving money sitting there.
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Re: Am I dumb for having a small emergency account?

Postby barnaclebob » Mon Jul 01, 2013 4:46 pm

I don't think its necessary to have a dedicated emergency fund if you have enough in taxable investments. I just have my target allocation a little bit higher in bonds than if I had 6 months of cash sitting in a money market fund.
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