Emergency Fund Revisited
-
- Posts: 2519
- Joined: Tue Oct 06, 2009 7:05 pm
Emergency Fund Revisited
Searching here on the words "emergency" and "funds" brings up a long list of various threads and I did not see anything directly related to this question.
I've long read of the rule of thumb for 6 months living expenses as an adequate emergency fund, but like many things in life, maybe there are situations when this should be customized? - does anyone here adjust this number upward or downward depending on personal circumstances? If you do, I would be interested in reading your rationale for doing so.
Thank you, BFG
I've long read of the rule of thumb for 6 months living expenses as an adequate emergency fund, but like many things in life, maybe there are situations when this should be customized? - does anyone here adjust this number upward or downward depending on personal circumstances? If you do, I would be interested in reading your rationale for doing so.
Thank you, BFG
How many retired people does it take to screw in a lightbulb? Only one, but he takes all day.
-
- Posts: 2985
- Joined: Tue Apr 01, 2014 11:41 am
Re: Emergency Fund Revisited
A family with one working parent and one at home parent probably needs the six months of expenses for an emergency fund. With two working parents this can probably be cut to three or four months. A single parent probably needs a year of expenses in the bank to be safe. People without children can cut living expenses more drastically if needed, and so can keep less in reserve.
Ralph
Ralph
Re: Emergency Fund Revisited
One counter argument is that since on average stocks and bonds do better than cash in the bank, you could just keep all of your money in stock and bond mutual funds and then sell in an emergency. There is a chance that you would have to sell when the market is low but a higher probability that you will sell at more of a profit than if the emergency fund had been in a bank account.
I am retired and keep about 1 years living expenses in bank accounts. In theory I am more likely to do better investing it all.
I am retired and keep about 1 years living expenses in bank accounts. In theory I am more likely to do better investing it all.
. |
The most important thing you should know about me is that I am not an expert.
Re: Emergency Fund Revisited
If a person has a job that is shaky, 1 year's worth of emergency fund may be a good idea- and conceivably if a person has strong job security the fund could be smaller.
Another option- for a person who has a large amount of money invested (they've reached 'their number'), they could forgo an emergency fund entirely and just draw upon their sizable portfolio when needed.
I think a 6-month emergency fund is a good rule of thumb, but it can be modified due to circumstances.
Another option- for a person who has a large amount of money invested (they've reached 'their number'), they could forgo an emergency fund entirely and just draw upon their sizable portfolio when needed.
I think a 6-month emergency fund is a good rule of thumb, but it can be modified due to circumstances.
"Optimum est pati quod emendare non possis." |
-Seneca
Re: Emergency Fund Revisited
Are you sleeping well at night? If not, add more.
Note that an emergency fund doesn't have to be an isolated bank account. It can be all or partly short-term bonds in a Roth IRA and/or municipal bonds in an investment account.
Note that an emergency fund doesn't have to be an isolated bank account. It can be all or partly short-term bonds in a Roth IRA and/or municipal bonds in an investment account.
-
- Posts: 2519
- Joined: Tue Oct 06, 2009 7:05 pm
Re: Emergency Fund Revisited
Thanks all for the feedback. In my own situation, I think I have too much set aside. I've had an emergency fund for 25 years and never used it, I suppose I've been very fortunate...I am trying to talk myself into reallocating part of the fund and old habits die hard.
BFG
BFG
How many retired people does it take to screw in a lightbulb? Only one, but he takes all day.
-
- Posts: 2388
- Joined: Fri May 17, 2013 7:09 am
Re: Emergency Fund Revisited
I adjusted upward because of my age (50sih) and being single--those in my age cohort tend to have more difficulty picking up equivalent jobs in rough times after being laid off, and being a single income household means a job loss = no income at all. However, I have no debt and live a modest lifestyle, so I'm not tying up a ton of money (and part of it is held in bonds and so not completely idle).
Don't do something. Just stand there!
Re: Emergency Fund Revisited
The definition of "emergency" and "fund" is different for many of us. I've always been a believer that money should be as deployed as possible, meaning invested for at least "some" return. Personally, I couldn't stomach the thought of 6 months worth of expenses sitting in Vanguard's Prime Money Market fund (as an example) earning 0.10%. I can tap my Roth IRA or taxable account (which I'm starting to more aggressively fund) if needed, as well as a HELOC, plus credit cards if I knew I could simply charge the emergency and pay it off when the bill comes due from current income.
-
- Posts: 6560
- Joined: Tue Jul 26, 2011 1:35 pm
Re: Emergency Fund Revisited
All that is needed in an "emergency" is enough funds to cover the cash flow needed. It does not have to be
money in the bank.
The reasoning for the EF to be in the bank is for the single case of a huge economic downturn like the
Great Depression or the recent Great Recession. In these cases, there was large unemployment, so there
was a greater chance of unemployment, and at the same time, large sustained drops in the stock and bond markets.
In those cases, the broad stock market may have dropped 50 to 75% from its peak and the bond market likely also
dropped (by a smaller percentage) due to a "flight to safety". So if you plan to draw from these funds, you will be
selling low.
The one problem with the "dropped 50 or 75%" is that this was from highly inflated bubble stock prices.
Take 2002 for example. DJIA dropped by 25% between Apr and Sept. but even AFTER the drop, the average
was nearly 3 times what it was only 10 years before.
Had you sold at the "bottom" in Sept 2002, you'd have still been way ahead of sticking the money in the bank.
That is why I keep a first tier EF in the bank, and the 2nd tier is invested within a ROTH.
money in the bank.
The reasoning for the EF to be in the bank is for the single case of a huge economic downturn like the
Great Depression or the recent Great Recession. In these cases, there was large unemployment, so there
was a greater chance of unemployment, and at the same time, large sustained drops in the stock and bond markets.
In those cases, the broad stock market may have dropped 50 to 75% from its peak and the bond market likely also
dropped (by a smaller percentage) due to a "flight to safety". So if you plan to draw from these funds, you will be
selling low.
The one problem with the "dropped 50 or 75%" is that this was from highly inflated bubble stock prices.
Take 2002 for example. DJIA dropped by 25% between Apr and Sept. but even AFTER the drop, the average
was nearly 3 times what it was only 10 years before.
Had you sold at the "bottom" in Sept 2002, you'd have still been way ahead of sticking the money in the bank.
That is why I keep a first tier EF in the bank, and the 2nd tier is invested within a ROTH.
- abuss368
- Posts: 27850
- Joined: Mon Aug 03, 2009 2:33 pm
- Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
- Contact:
Re: Emergency Fund Revisited
Taylor once gave me excellent advice: If you can raise funds in an emergency, one has no need for an "emergency fund".
John C. Bogle: “Simplicity is the master key to financial success."
- abuss368
- Posts: 27850
- Joined: Mon Aug 03, 2009 2:33 pm
- Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
- Contact:
Re: Emergency Fund Revisited
For us the old saying of "cash is king" still means something. Granted cash makes next to nothing in interest with current rates. In some respects it is almost like a form of insurance anymore. Cash provides flexibility and is available when it is needed. I have often found that the need for cash appears when one least expects it.
John C. Bogle: “Simplicity is the master key to financial success."
Re: Emergency Fund Revisited
I keep more than 6 months because we are a single income home. Bad market for my field. Do not want to move. So cash and equivalents is about 18-24 months. Have other taxable investments to tap. A job loss may mean a sustained period of no/low income. Moving 1000 miles for a job at this point in my life seems much less desirable than living on the bear minimum.
Re: Emergency Fund Revisited
I like to keep some cash around for unexpected occurances. Could be a condo special assessment, could be an unexpected opportunity..... could be let's go to Rome next week. I keep about 2 to 3% of port that was in an Ally MM. If it gets to large via cash flow excess back to munis it goes.
Re: Emergency Fund Revisited
BFG,
I think the concept of an emergency fund is overrated. It is a Suzy Orman type thing. It is amazing. People put their $ into 3 categories. Retirement, investments, liquid. Person A could have 10 million retirement, 10 million investments and zero liquid and get denied for a pair of shoes. I won't bother you with other examples. People always say that they will get their money from liquid. But really, the reason you haven't had to use your EF is because you have sufficient cash flow or that you don't have emergency expenses that would throw you over the edge past the cash you have. As long as you can sell something if in need then I don't think you need to worry. On the other hand, maybe you aren't in the mood to increase your stocks or bonds in which case 0.00% yielding cash is good to have.
I think the concept of an emergency fund is overrated. It is a Suzy Orman type thing. It is amazing. People put their $ into 3 categories. Retirement, investments, liquid. Person A could have 10 million retirement, 10 million investments and zero liquid and get denied for a pair of shoes. I won't bother you with other examples. People always say that they will get their money from liquid. But really, the reason you haven't had to use your EF is because you have sufficient cash flow or that you don't have emergency expenses that would throw you over the edge past the cash you have. As long as you can sell something if in need then I don't think you need to worry. On the other hand, maybe you aren't in the mood to increase your stocks or bonds in which case 0.00% yielding cash is good to have.
Re: Emergency Fund Revisited
I have 1 yr expenses in my emergency fund.Barefootgirl wrote:Searching here on the words "emergency" and "funds" brings up a long list of various threads and I did not see anything directly related to this question.
I've long read of the rule of thumb for 6 months living expenses as an adequate emergency fund, but like many things in life, maybe there are situations when this should be customized? - does anyone here adjust this number upward or downward depending on personal circumstances? If you do, I would be interested in reading your rationale for doing so.
Thank you, BFG
I am the type of person who will (and have) walked away from a job w/o another one lined up because I got tired of the BS.
It's a great feeling not being job scared!
"Always be thankful for what you have no matter how much or how little" -EternalOptimist
Re: Emergency Fund Revisited
I've never thought in terms of emergency fund. All of my financial assets are part of my portfolio, so this eliminates the concept of an EF as something separate that's not earning a return.
What I do think about is liquidity, especially having been retired for seven years. So I like to keep enough of my portfolio in safe, liquid assets that I won't have to sell at a loss to fund expected and unexpected expenses. I can still earn anywhere from 0.87% to 3% on the safe, liquid assets, which is better than short-term treasuries, and the high end is even better than something like total bond market. So why would I think of these assets as something inferior to other fixed income in my portfolio?
If I have some really high unexpected expenses, maybe I have to sell some of my stock or bond funds, or do an early withdrawal from a CD (earning as much as or more than a bond fund), depending on current AA compared to target AA. Of course you'll want to keep enough in taxable accounts to cover expenses to avoid paying any penalties on early withdrawals from retirement accounts (if applicable to you).
Kevin
What I do think about is liquidity, especially having been retired for seven years. So I like to keep enough of my portfolio in safe, liquid assets that I won't have to sell at a loss to fund expected and unexpected expenses. I can still earn anywhere from 0.87% to 3% on the safe, liquid assets, which is better than short-term treasuries, and the high end is even better than something like total bond market. So why would I think of these assets as something inferior to other fixed income in my portfolio?
If I have some really high unexpected expenses, maybe I have to sell some of my stock or bond funds, or do an early withdrawal from a CD (earning as much as or more than a bond fund), depending on current AA compared to target AA. Of course you'll want to keep enough in taxable accounts to cover expenses to avoid paying any penalties on early withdrawals from retirement accounts (if applicable to you).
Kevin
If I make a calculation error, #Cruncher probably will let me know.
-
- Posts: 67
- Joined: Mon Oct 28, 2013 9:40 pm
- Location: Austin, TX
Re: Emergency Fund Revisited
We don't have an emergency fund so much as a 'cash' fund. We have $5,000 in a local bank and $10,000 in an online bank. This is mainly for 'need cash now' events where we don't want to have to sell stock but don't have time to wait for a few paychecks to come in (such as a funeral, yes it came in handy). If one of us lost our jobs, we could pay most of the bills with the other's paycheck. After that we have Roth accounts, and after that it's all up for grabs. However, $15,000 was a number that allowed us to sleep well at night and divert everything else to retirement and the mortgage.
Re: Emergency Fund Revisited
as retirees we need to wait out a downturn without locking in losses in our 50/50 portfolio. so I figure our I Bonds (counted as part of our 50% fixed holdings) can get us through 2-3 years before selling off assets that we need to grow again during the recovery.
Don't it always seem to go * That you don't know what you've got * Till it's gone
Re: Emergency Fund Revisited
I don't base it on any notion of "normal expenses" because I don't think emergencies take into account your normal expenses.
One way that I think of my emergency fund is money that is available in a crisis that would not put my long term financial stability at risk.
For example, if a close family member needed money to get out of an abusive relationship - how much money could I give without risking my own finances?
Or if I came down with a serious long-term illness, but one I could expect to recover from, can I opt for expensive options to increase my comfort without jeopardizing my ability to retire in the future?
If our property suffered some kind of loss not covered by insurance, how much could we spend repairing / replacing?
Emergencies tend to be very emotional situations so knowing where you stand beforehand can be extremely beneficial. It would take very weighty deliberation for me to go beyond my EF - deliberation that would take time, possibly months. But my EF is available without the need for self-doubt.
Obviously this idea of an EF doesn't dictate where the funds should be or how they should be invested, but it does require a good understanding of your entire financial position.
One way that I think of my emergency fund is money that is available in a crisis that would not put my long term financial stability at risk.
For example, if a close family member needed money to get out of an abusive relationship - how much money could I give without risking my own finances?
Or if I came down with a serious long-term illness, but one I could expect to recover from, can I opt for expensive options to increase my comfort without jeopardizing my ability to retire in the future?
If our property suffered some kind of loss not covered by insurance, how much could we spend repairing / replacing?
Emergencies tend to be very emotional situations so knowing where you stand beforehand can be extremely beneficial. It would take very weighty deliberation for me to go beyond my EF - deliberation that would take time, possibly months. But my EF is available without the need for self-doubt.
Obviously this idea of an EF doesn't dictate where the funds should be or how they should be invested, but it does require a good understanding of your entire financial position.
Re: Emergency Fund Revisited
Like some others, we have about $15k in a bank account (that pays about .5-1%), for short-term spikes in spending (such as planned or unplanned home improvement), plus money in i-bonds. There are more ibonds than needed for an emergency fund, so I used to mentally segregate the ibonds into emergency fund vs retirement investment (e.g., for asset allocation) but I don't bother to do that anymore.
When I was younger and money was tighter (for me, but looser for banks) we had a home equity line of credit that served some of the purpose of an e-fund.
When I was younger and money was tighter (for me, but looser for banks) we had a home equity line of credit that served some of the purpose of an e-fund.
Re: Emergency Fund Revisited
Are emergency funds like a useless middle man? Does a credit card eliminate some of the need for a liquid emergency fund?
If an emergency happens and we have to deplete half of our emergency fund, don't most people use investments to replenish the emergency fund anyway? Either by directly withdrawing from investments or diverting our usual monthly investments into our emergency fund for a few months? I'm usually a proponent of 6 month emergency funds but I'm quickly rethinking myself. Also, what's the need for a perfectly liquid emergency fund? If you have a credit card with a nice limit, and it takes a week to collect your assets, who cares?
If an emergency happens and we have to deplete half of our emergency fund, don't most people use investments to replenish the emergency fund anyway? Either by directly withdrawing from investments or diverting our usual monthly investments into our emergency fund for a few months? I'm usually a proponent of 6 month emergency funds but I'm quickly rethinking myself. Also, what's the need for a perfectly liquid emergency fund? If you have a credit card with a nice limit, and it takes a week to collect your assets, who cares?
Re: Emergency Fund Revisited
I needed two different things:
An emergency fund.
place to park extra investment money after sheltered portfolios were filled.
Using Vanguard ETF, VOO The S&P 500 and started gradually investing. That was several years ago.
Works for both. I'll sell shares if needed.
Marty
An emergency fund.
place to park extra investment money after sheltered portfolios were filled.
Using Vanguard ETF, VOO The S&P 500 and started gradually investing. That was several years ago.
Works for both. I'll sell shares if needed.
Marty
Re: Emergency Fund Revisited
It also depends on what you call an emergency. New furnace, roof? job loss? severe health issues. How re employable are you? How much debt? etc.
I never had a specific pot called an emergency fund. I always had safe/liquid money as part of my allocation. Due mostly to luck I never had to panic sell or go into debt. Lost 2 jobs after 50, had a family member with a serious illness, put 2 kids through college, retired at the worst possible time - mid 2008. The part not due to luck was living below my means, avoiding debt, etc
Some scary times but I slept a lot better having a safe/liquid allocation than I would have with an all in strategy. Even in retirement I made sure to have a decent safe/liquid allocation of about 5-10%.
I never had a specific pot called an emergency fund. I always had safe/liquid money as part of my allocation. Due mostly to luck I never had to panic sell or go into debt. Lost 2 jobs after 50, had a family member with a serious illness, put 2 kids through college, retired at the worst possible time - mid 2008. The part not due to luck was living below my means, avoiding debt, etc
Some scary times but I slept a lot better having a safe/liquid allocation than I would have with an all in strategy. Even in retirement I made sure to have a decent safe/liquid allocation of about 5-10%.
Re: Emergency Fund Revisited
I think the concept of an Emergency Fund is very different depending on where a person is at in life.
As an example, a family with children and only one income is going to want to have more safe/liquid funds set aside than a single 20-something. But the idea of 6 months of mandatory expenses is a pretty good rule of thumb in most cases. (A family with children is going to have more mandatory expenses than a single 20-something, so 6 months of expenses will be more for the family, in absolute dollars).
I suspect that as people retire, the idea of an EF goes away entirely. In retirement, there is simply a portfolio allocation, and generally a fairly stable amount of fixed income. One of the main reasons to have an EF is to protect in the event of a temporary job loss. This reason obviously no longer applies to retirees.
When to tap the EF? What is an "emergency?" I define it as unexpected circumstances that require funds above and beyond what are available from monthly cash flow. The key word here is "unexpected". For me (and I suspect most on this forum), it generally takes something pretty dramatic to rise to the level of "unexpected". We plan for home maintenance expenses (e.g. furnace goes out). We plan for car maintenance costs, and probably have some "wiggle room" in our checking accounts. But for the general population, a $1000 car repair bill could be a real disaster and rise to the level of an "unexpected emergency". Personally I've never tapped my EF. I would in the event of (1) job loss, (2) major health issues, (3) true life or death situations.
As for replenishing the EF, I think most will do it from excess cash flow (from their income). Not from investments. But again this will highly depend on one's stage in life.
As an example, a family with children and only one income is going to want to have more safe/liquid funds set aside than a single 20-something. But the idea of 6 months of mandatory expenses is a pretty good rule of thumb in most cases. (A family with children is going to have more mandatory expenses than a single 20-something, so 6 months of expenses will be more for the family, in absolute dollars).
I suspect that as people retire, the idea of an EF goes away entirely. In retirement, there is simply a portfolio allocation, and generally a fairly stable amount of fixed income. One of the main reasons to have an EF is to protect in the event of a temporary job loss. This reason obviously no longer applies to retirees.
When to tap the EF? What is an "emergency?" I define it as unexpected circumstances that require funds above and beyond what are available from monthly cash flow. The key word here is "unexpected". For me (and I suspect most on this forum), it generally takes something pretty dramatic to rise to the level of "unexpected". We plan for home maintenance expenses (e.g. furnace goes out). We plan for car maintenance costs, and probably have some "wiggle room" in our checking accounts. But for the general population, a $1000 car repair bill could be a real disaster and rise to the level of an "unexpected emergency". Personally I've never tapped my EF. I would in the event of (1) job loss, (2) major health issues, (3) true life or death situations.
As for replenishing the EF, I think most will do it from excess cash flow (from their income). Not from investments. But again this will highly depend on one's stage in life.
-
- Posts: 1814
- Joined: Mon Aug 01, 2011 8:15 pm
Re: Emergency Fund Revisited
This is my thought, too.abuss368 wrote:Taylor once gave me excellent advice: If you can raise funds in an emergency, one has no need for an "emergency fund".
I keep enough of an ER fund to buy me enough time to liquidate low/semi-liquidity assets (house, cars, stocks, some inherited jewelry) and down-size living by moving to a less expensive area (high COL area required for job).
All in all, I'm comfortable with 3 months of expenses. After 3 months, I (or the wife) should be able to raise funds by selling assets and/or decrease our on-going rent costs.