How do you determine the emergency fund size?

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How do you determine the emergency fund size?

Postby SpecialK22 » Thu Feb 11, 2010 6:26 am

So, I've been looking at the composition of my total portfolio, and I've realized that from a percentage standpoint, I am heavier in cash than I would like. The majority of this cash is in my emergency fund, although I do have some cash that is meant for short term goals. I'm wondering if I am giving myself too much of a cushion? How do you other bogleheads determine the appropriate size of your emergency fund? The 3-12 months living expenses is fairly vague, and I'm sure people have different definitions of what constitutes and emergency. Further, several emergency situations are usually covered by some sort of insurance or benefit which lessens the blow or need to live off savings.

Unemployment: Benefits currently last as long as two years (I know this is temporary), and I would have a small severance package. Medical and life insurance are through the Air National Guard, so I wouldn't have to worry about these if laid off. Being terminated for cause is extremely unlikely as I would have to do something extremely stupid. While receiving unemployment benefits, I would likely only need about 20% of my gross income to maintain a similar lifestyle for a year.

Disability: Have both short and long term disability through civilian job. If I am injured in the line of duty with the Guard, benefits are even better. For example, all medical treatment would be free.

Medical: Annual catastrophic limit is extremely low, IMHO. Maybe just maintain three years worth of the catastrophic limit?

These are just some examples of the more common emergencies, and I realize there are black swans out there or that more than one emergency might occur at similar times. Overall, I estimate that I need at most 25% of my gross annual income to maintain my current quality of life for a year in most emergencies; less if I want to take on a more spartan existence, which I probably would.
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Postby TxAg » Thu Feb 11, 2010 10:06 am

I'm probably over simplifying it, but I just add up my take-home pay for the month and multiply by 6. That gives me at least a 6 month cushion living my life exactly as I live it now. If times were really tough, I could cut out a lot of expenses and get at least 9 months. I'm a single guy with no kids and no mortgage so, again, it's over simplified in my example.
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Re: How do you determine the emergency fund size?

Postby jbk » Thu Feb 11, 2010 5:56 pm

SpecialK22 wrote:How do you other bogleheads determine the appropriate size of your emergency fund? The 3-12 months living expenses is fairly vague, and I'm sure people have different definitions of what constitutes and emergency.


We currently have six months of expenses as the emergency fund, though that may go down soon to about three months as a baby is on the way. Our taxable investments are such that we feel comfortable having a smaller than "standard" emergency fund.
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Postby SpecialK22 » Fri Feb 12, 2010 7:13 am

Thanks for the replies. I guess my question was more along the lines of how do bogleheads factor in insurance or benefits for potential emergency situations? For example, if I was laid off and it wasn't for cause, I would receive a minimum of two months severance as well as be eligible for unemployment benefits. Therefore, I would not need to live exclusively off of savings or investments. Likewise, my health insurance has a maximum annual out of pocket expense. Of course, there are also black swans, but I feel that it may be too conservative to actually keep 6-12 months of total living expenses in cash. By keeping roughly 12 months of expenses in cash, my overall portfolio of cash, stocks and bonds has a cash portion of 27.63%. From an overall portfolio standpoint, I feel I am too conservative for a 28 year old. On top of that I do have a mortgage at 5%, so in effect I'm leveraged with a good portion of my portfolio in savings accounts/CDs which currently would not beat the interest being paid to the mortgage loan. I know that liquidity is necessary even if it comes at a premium, but at what point are you being too conservative? The answer is going to almost certainly be based on personal opinion and risk tolerance, as well as individual circumstances. How did you determine that you needed sufficient cash to cover living expenses for x amount of months? Did insurance, unemployment benefits, etc. come into play in your decision of how much to set aside reserves for an emergency?
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Postby TheEternalVortex » Fri Feb 12, 2010 8:35 am

There are other emergencies besides losing your job. I think that 12 months is probably excessive except in some cases (e.g. you have a more than usually unstable situation), but 6 months is a good idea.

If this is a large portion of your portfolio, then your exact AA doesn't matter too much since your current savings rate is more significant in determining your long-term portfolio value.
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Postby neverknow » Fri Feb 12, 2010 8:43 am

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Last edited by neverknow on Mon Jan 17, 2011 10:28 am, edited 1 time in total.
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Postby avalpert » Fri Feb 12, 2010 9:25 am

The most honest answer (despite all the elegant, arbitrary equations and touching stories you might read here) is finger in the wind. You should use whatever makes you comfortable at night.

Personally, I have a higher 'emergency fund' (equals about 15 months of current expenses) because I occasionally take off for months to wander the world. It is probably a drag on my total returns but I also am very comfortable with my investment portfolio level given my targets for retirement so I don't sweat it.
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Postby SpecialK22 » Fri Feb 12, 2010 9:56 am

Thanks for the insight, neverknow. I was never advocating not having liquid assets in reserve for an emergency, but instead was wondering how individuals determine the size. It seems the "rule of thumb" advice ranges anywhere from 3 to 12 months living expenses. Why? Unemployment benefits, health insurance, severance packages, short and long term disability insurance etc. can help smooth over certain emergencies, at least for a short while. These all lessen the amount of money needed in reserves in order to maintain a lifestyle in a number of emergency situations. Obviously, there are black swans, but many emergency type situations wouldn't leave you with only your emergency fund to pay for them or to maintain a reasonable quality of life.

I guess my question is this: When does the premium on liquidity become too much? All my cash is in accounts earning much less than 5.00%, which is what my fixed mortgage rate is at. In essence, I am losing money by not paying down the debt and instead keeping cash or cash equivalents on hand. It is absolutely necessary to have some liquidity, but I think this can go too far. How do you all factor in different insurances, government benefits, severance packages, etc. in determining the size of a liquid emergency fund? I know these questions are very specific to individual situations, but I'm still interested in others' opinions. For someone who wants six months of living expenses in cash, why? That is not to say there is anything wrong with it, just wondering how they arrived at that number. More pointedly, why do you feel you need that much in cash reserves rather than paying down debt or more aggressively investing? What's the point of insurance if you have enough assets on hand to cover the precise situation you are insuring?

Sorry for the fairly long post, I'm just wondering why and how other bogleheads arrived at the decision to keep X months of living expenses in cash, particularly if they have debt. Maybe it's just a feel good number? Maybe others would rather keep a pile of cash on hand to cover emergencies rather than have insurance, or maybe keep insurance premiums cheaper by having a higher deductible or catastrophic limit? How does the cash on hand play into the overall game plan for emergencies that you could see happening? When does it become too costly to keep debt outstanding in the name of liquidity? Why do I overanalyze things? :wink:
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Postby englishgirl » Fri Feb 12, 2010 10:11 am

I think it's definitely a "feel-good" number. It's whatever makes you feel secure, given your personal circumstances. I definitely think job security and easy access to benefits in your situation could warrant a smaller emergency reserve. If you can expect to receive a severance package, all the better, although do bear in mind that an emergency fund is not just about losing your job - what if your house burnt down? [Yes, you'd get insurance, but it'd take a while to come through and in the meantime you need possibly hotel accommodation and new clothes/computer/stuff to get back on your feet.] Or you were in a car crash and ended up unable to work?

Personally, I have a 3-month emergency fund, because I have a stable job with fairly unusual sought-after skills. And the ability to live and work anywhere in the US or Europe should I need to move to find a new job. But I also have other cash savings set aside for other things - for a new car, property tax, school, etc, that I could tap in a real emergency (after all, you can always delay buying a new car). Additionally I have a HELOC with credit available, credit cards and I-bonds. So in reality I could last longer than 3 months if I lost my job. I am going to school to change careers, though, and I am starting to build up my emergency fund to a higher level in view of this.

I think this is one of those "do what you feel comfortable with" things.
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Postby sscritic » Fri Feb 12, 2010 10:18 am

I think the answer depends on the size of your investment accounts. If you have $5,000,000 of which $1,000,000 is in taxable, you have the money you need to cover living expenses. It doesn't matter if you say it is six months or twelve, and it doesn't matter if you say your emergency fund is the $500,000 you have in Emerging Markets or the $500,000 you have in long term tax exempt bonds. Several posters here suggest keeping your emergency fund in your tax deferred account. That works, not because you intend to take out any of the "emergency fund" when you have an emergency, but because you have other money that can be used as you shift money around within taxable and within tax-advantaged accounts to adjust your asset allocation.

It's not really about having an emergency fund, it's about having readily available money. How long will it take Vanguard to transfer the proceeds of the sale of your Large Cap Index Fund in your taxable account to your checking account? If you use your Vanguard MM fund to write checks, the answer is overnight. As a retired person with adequate savings and a steady income from social security and pensions, my emergency fund is zero. That's not to say that I don't have CDs and a money fund, but that I don't segregate this money as having one purpose from that money as having another purpose in my mind. All my money is to support me during my life and to go to my children after I die. I don't have a car fund, a vacation fund, and an emergency fund, all segregated and invested separately using different investment strategies. It's all just money to me.
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Postby mike_slc » Fri Feb 12, 2010 11:05 am

SpecialK22 wrote:Thanks for the insight, neverknow. I was never advocating not having liquid assets in reserve for an emergency, but instead was wondering how individuals determine the size. It seems the "rule of thumb" advice ranges anywhere from 3 to 12 months living expenses. Why? Unemployment benefits, health insurance, severance packages, short and long term disability insurance etc. can help smooth over certain emergencies, at least for a short while. These all lessen the amount of money needed in reserves in order to maintain a lifestyle in a number of emergency situations. Obviously, there are black swans, but many emergency type situations wouldn't leave you with only your emergency fund to pay for them or to maintain a reasonable quality of life.

I guess my question is this: When does the premium on liquidity become too much? All my cash is in accounts earning much less than 5.00%, which is what my fixed mortgage rate is at. In essence, I am losing money by not paying down the debt and instead keeping cash or cash equivalents on hand. It is absolutely necessary to have some liquidity, but I think this can go too far. How do you all factor in different insurances, government benefits, severance packages, etc. in determining the size of a liquid emergency fund? I know these questions are very specific to individual situations, but I'm still interested in others' opinions. For someone who wants six months of living expenses in cash, why? That is not to say there is anything wrong with it, just wondering how they arrived at that number. More pointedly, why do you feel you need that much in cash reserves rather than paying down debt or more aggressively investing? What's the point of insurance if you have enough assets on hand to cover the precise situation you are insuring?

Sorry for the fairly long post, I'm just wondering why and how other bogleheads arrived at the decision to keep X months of living expenses in cash, particularly if they have debt. Maybe it's just a feel good number? Maybe others would rather keep a pile of cash on hand to cover emergencies rather than have insurance, or maybe keep insurance premiums cheaper by having a higher deductible or catastrophic limit? How does the cash on hand play into the overall game plan for emergencies that you could see happening? When does it become too costly to keep debt outstanding in the name of liquidity? Why do I overanalyze things? :wink:


You don't have to use cash for liquidity - what about Limited or Intermediate Term Tax-Exempt Bond funds? For me, IT tax exempt yields more than the after-tax cost of my mortgage, so there is no "liquidity insurance premium" for using that to hold funds that could otherwise go to my mortgage. In fact I earn more using IT than I would save in interest if I paid off my mortgage. If I were to step it down to Limited Term to get less NAV volatility, then it would cost me about $1850 per year (the after tax difference between the bond distribution and mortgage interest cost), which to me is a fair price for a liquidity insurance premium.

Mortgage = ~200k
Mortgage interest carrying cost after tax = ~6300
200k invested in Ltd TE yields ~ 4450 after tax
200k invested in IT TE yields ~ 7050 after tax

To me liquidity is more important than some "emotional" value of having no leverage in my capital structure. Net worth is all that matters to me. And I can't eat my house.

Side note: I do keep about 25k lying around in cash. But above that, I save using TE bond funds, and this savings is distinct from my investment portfolio.
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Postby SpecialK22 » Fri Feb 12, 2010 3:43 pm

sscritic wrote: I don't have a car fund, a vacation fund, and an emergency fund, all segregated and invested separately using different investment strategies. It's all just money to me.


For me, it's easier to seperate money for particular future uses. I certainly do allow for flexibility, but, for example, my Roth IRA and Roth 401(k) are alloted for retirement savings. If a sufficient enough emergency were to hit, I would certainly look to those as a source of funds if necessary. However, the investment strategy is for the long run, so I do not have any cash kept within these accounts. I feel that the mix of equities and bonds will expand these accounts over several decades, thus allowing me even more tax advantaged space in the future. I do see your reasoning for keeping all money as one big pool, I just feel more organized and in control by earmarking funds for future known expenses.
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Postby SpecialK22 » Fri Feb 12, 2010 3:56 pm

mike_slc wrote:
You don't have to use cash for liquidity - what about Limited or Intermediate Term Tax-Exempt Bond funds? For me, IT tax exempt yields more than the after-tax cost of my mortgage, so there is no "liquidity insurance premium" for using that to hold funds that could otherwise go to my mortgage. In fact I earn more using IT than I would save in interest if I paid off my mortgage. If I were to step it down to Limited Term to get less NAV volatility, then it would cost me about $1850 per year (the after tax difference between the bond distribution and mortgage interest cost), which to me is a fair price for a liquidity insurance premium.

Mortgage = ~200k
Mortgage interest carrying cost after tax = ~6300
200k invested in Ltd TE yields ~ 4450 after tax
200k invested in IT TE yields ~ 7050 after tax

To me liquidity is more important than some "emotional" value of having no leverage in my capital structure. Net worth is all that matters to me. And I can't eat my house.

Side note: I do keep about 25k lying around in cash. But above that, I save using TE bond funds, and this savings is distinct from my investment portfolio.


Aren't you unable to deduct mortgage interest if you hold sufficient funds within TE bonds which could pay off the mortgage? Aside from that, TE bonds aren't a bad idea as a portion of an emergency fund. They do still carry more risk than cash, which is why I prefer my emergency fund to be cash. I suppose I could set up some sort of tier system.

And yes, I realize I cannot eat my house; however, a paid off mortgage would significantly reduce my cash outflow obligations which would be extremely useful if cash inflows were drastically reduced. I do see the risk of putting extra towards the mortgage and not having it paid off fully by the time a major emergency hits. In that situation, I would still be required to make the normal monthly payment, although more of the payment would be going to reduce the prinicpal. "Emotional" aspects do come into play, but I also feel that it is smart, albeit conservative, financial move to pay down the mortgage, at least in the current interest rate enviornment. For the time being, interest on CDs and savings accounts won't beat it. Also, limited term or intermediate term muni's may beat it, but they also assume a greater risk.
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Postby CMMCC » Fri Feb 12, 2010 4:46 pm

SpecialK22 wrote:
mike_slc wrote:


Aren't you unable to deduct mortgage interest if you hold sufficient funds within TE bonds which could pay off the mortgage? Aside from that, TE bonds aren't a bad idea as a portion of an emergency fund. They do still carry more risk than cash, which is why I prefer my emergency fund to be cash. I suppose I could set up some sort of tier system.

And yes, I realize I cannot eat my house; however, a paid off mortgage would significantly reduce my cash outflow obligations which would be extremely useful if cash inflows were drastically reduced. I do see the risk of putting extra towards the mortgage and not having it paid off fully by the time a major emergency hits. In that situation, I would still be required to make the normal monthly payment, although more of the payment would be going to reduce the prinicpal. "Emotional" aspects do come into play, but I also feel that it is smart, albeit conservative, financial move to pay down the mortgage, at least in the current interest rate enviornment. For the time being, interest on CDs and savings accounts won't beat it. Also, limited term or intermediate term muni's may beat it, but they also assume a greater risk.


1. There is no rule limiting tax deduction of a mortgage based on how much you have in TE bonds.
2. You have way more liquidity (200k more) by having 200k in TE bonds and a 200k mortgage VS no mortgage and no TE bonds. Your cash flow is better with no mortgage, but you can go a long time with 200k in liquidity.
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Postby Dan Moroboshi » Fri Feb 12, 2010 5:23 pm

Here's a somewhat related thread on the topic of maintaining an emergency fund here:

viewtopic.php?t=47468

I keep three months of living expenses in FDIC/NCUA insured bank savings (Split between a bank and a credit union - unlikely that both will go under simultaneously.) Low interest rate, but accessible immediately from an ATM whenever needed. This also serves as a cushion for if the water heater blows up, the basement floods, etc. If tapped, the reserve is replenished as soon as possible.

I have disability insurance that would kick in if I were unable to work for longer than three months, hence the three month reserve.

I keep six months of living expenses in a money market mutual fund at Vanguard - slightly higher yield than the bank accounts, at the cost of not having same-day access, and no FDIC insurance. I don't use short-term bond funds for this purpose, because I value stability of principal over yield for the emergency fund. I would use this reserve for a situation in which I would have no income for a protracted period, which would not be covered by my disability insurance. (I deem this the "my office was destroyed by a fire/tornado/earthquake/meteorite" fund, or the "f**k you, I quit" fund.)

By the way, "X month's expenses" = the amount required to maintain my current standard of living. In a pinch, I could scale back spending and stretch out the funds to last well over a year.

I concede that the size of my fund (9+ months of living expenses) is probably excessive. However, I'm pessimistic, and prefer to prepare for the worst.

Of course, there are scenarios in which the fund would probably not suffice - for example, if my wife or one of the kids got cancer or some other dire condition, and I decided to quit working while racking up medical expenses as we travelled to specialty centers in a desperate attempt to find an experimental treatment...

But in that case, I'd liquidate long-term holdings in my taxable portfolio as needed.
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Postby SpecialK22 » Fri Feb 12, 2010 6:32 pm

CMMCC wrote:
1. There is no rule limiting tax deduction of a mortgage based on how much you have in TE bonds.


You're right. I was thinking the interest disallowance rule would apply to a mortage, but it would seem it typically does not.

CMMCC wrote:2. You have way more liquidity (200k more) by having 200k in TE bonds and a 200k mortgage VS no mortgage and no TE bonds. Your cash flow is better with no mortgage, but you can go a long time with 200k in liquidity.


No argument from me there. It certainly wouldn't be advisable to have zero money in liquid or near liquid assets in order to have a paid off mortgage. This is not the situation I was hoping to imply, however. I was referring to the decision to pay down the mortgage vs invest in TE bonds with excess cash; cash left over after other savings such as for retirement, emergency funds, etc.
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Postby SpecialK22 » Fri Feb 12, 2010 6:42 pm

Dan Moroboshi wrote:Here's a somewhat related thread on the topic of maintaining an emergency fund here:

viewtopic.php?t=47468

I keep three months of living expenses in FDIC/NCUA insured bank savings (Split between a bank and a credit union - unlikely that both will go under simultaneously.) Low interest rate, but accessible immediately from an ATM whenever needed. This also serves as a cushion for if the water heater blows up, the basement floods, etc. If tapped, the reserve is replenished as soon as possible.

I have disability insurance that would kick in if I were unable to work for longer than three months, hence the three month reserve.

I keep six months of living expenses in a money market mutual fund at Vanguard - slightly higher yield than the bank accounts, at the cost of not having same-day access, and no FDIC insurance. I don't use short-term bond funds for this purpose, because I value stability of principal over yield for the emergency fund. I would use this reserve for a situation in which I would have no income for a protracted period, which would not be covered by my disability insurance. (I deem this the "my office was destroyed by a fire/tornado/earthquake/meteorite" fund, or the "f**k you, I quit" fund.)

By the way, "X month's expenses" = the amount required to maintain my current standard of living. In a pinch, I could scale back spending and stretch out the funds to last well over a year.

I concede that the size of my fund (9+ months of living expenses) is probably excessive. However, I'm pessimistic, and prefer to prepare for the worst.

Of course, there are scenarios in which the fund would probably not suffice - for example, if my wife or one of the kids got cancer or some other dire condition, and I decided to quit working while racking up medical expenses as we travelled to specialty centers in a desperate attempt to find an experimental treatment...

But in that case, I'd liquidate long-term holdings in my taxable portfolio as needed.


Thanks for the breakdown, Dan. It's a similar concept to how I am trying to structure my emergency fund. It seems like there is insurance or some sort of benefits that help to smooth out most of the typical emergency situations I might face. Lately I've been thinking I have too much in cash at the expense of investing in more aggressive asset classes or paying down the mortgage quicker. I also agree that there are certain emergencies, many unseen, which I might never be prepared for.

Looking at the link you provided, I now remember seeing that a short time ago. I still feel an emergency fund/cash reserves are necessary, I just feel that I may be overdoing it relative to "likely" emergencies. Maybe the best advice is what some of you have already said: "have enough so you can sleep comfortably at night."
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Postby Dan Moroboshi » Fri Feb 12, 2010 7:32 pm

SpecialK22 wrote:Thanks for the breakdown, Dan. It's a similar concept to how I am trying to structure my emergency fund. It seems like there is insurance or some sort of benefits that help to smooth out most of the typical emergency situations I might face. Lately I've been thinking I have too much in cash at the expense of investing in more aggressive asset classes or paying down the mortgage quicker. I also agree that there are certain emergencies, many unseen, which I might never be prepared for.

Looking at the link you provided, I now remember seeing that a short time ago. I still feel an emergency fund/cash reserves are necessary, I just feel that I may be overdoing it relative to "likely" emergencies. Maybe the best advice is what some of you have already said: "have enough so you can sleep comfortably at night."


I forgot to mention that I keep some cash squirrelled away in the house - a large enough sum that we could live for a couple weeks without having to use any electronic means of exchange. This is what I call the "hackers break the Internet" fund, aka the "massive solar flare that fries all unshielded electronics" fund (link goes to solar storm scaremongering), aka the "emergency of epic proportions that forces us to get out of town RIGHT THE HELL NOW" fund. (Take your pick - pandemic, earthquake, Yellowstone supervolcano eruption, zombies clawing out of the earth to feast on the brains of the living, etc.)

I figure that if something bad enough happens that the electronic financial system is out of commission for more than two weeks, I'll have bigger problems to deal with than accessing my accounts at the bank or Vanguard.

"Press on, regardless." - John C Bogle.
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Postby MWCA » Fri Feb 12, 2010 7:33 pm

We figured 16 months. Then one day it dawned on us we have disability insurance that would cover us for over a year and pay the bills. Right now for various reasons its quite a bit over that.
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Postby Triple digit golfer » Fri Feb 12, 2010 7:40 pm

TxAg wrote:I'm probably over simplifying it, but I just add up my take-home pay for the month and multiply by 6. That gives me at least a 6 month cushion living my life exactly as I live it now. If times were really tough, I could cut out a lot of expenses and get at least 9 months. I'm a single guy with no kids and no mortgage so, again, it's over simplified in my example.


That's exactly what I do.

Except if I lose my job, I'd have to pay Cobra, so better make it six months plus Cobra :)
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Postby caluchko » Fri Feb 12, 2010 9:17 pm

Hey Dan,

If there is an "emergency of epic proportions", what makes you think people will accept cash? Better to buy ammo and canned food. Better yet, better to buy a place in the country will an off-grid electricity supply and some land to farm.

But seriously, do a lot of you guys really leave like thousands of dollars in cash around the house in case of an epic emergency? Could this be a case of perceived risk being greater than actual risk? Then again, my wife's parents are form the former Soviet Union and will not put a dime in the bank because they lost their entire savings in 1991 when the USSR collapsed. I fel differently if that happened to me.
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Postby Dan Moroboshi » Fri Feb 12, 2010 9:56 pm

caluchko wrote:Hey Dan,

If there is an "emergency of epic proportions", what makes you think people will accept cash? Better to buy ammo and canned food. Better yet, better to buy a place in the country will an off-grid electricity supply and some land to farm.

But seriously, do a lot of you guys really leave like thousands of dollars in cash around the house in case of an epic emergency? Could this be a case of perceived risk being greater than actual risk? Then again, my wife's parents are form the former Soviet Union and will not put a dime in the bank because they lost their entire savings in 1991 when the USSR collapsed. I fel differently if that happened to me.


The "Yellowstone supervolcano" and "zombie apocalypse" comments are tongue in cheek.

The cash stash is for something along the lines of a major disruption to computer networks, whether caused by human mischief or a solar storm, or a natural disaster that might temporarily disrupt the normal financial system and/or supply chain.

I do have a plan for a protracted adverse situation, but the rural hideaway is more of a money pit/hunting cabin than a shelter to hunker down for the zombie apocalypse.

But like I said, I'm sort of paranoid. I got it from my parents, who also lost everything in the throes of a 20th century war.
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Postby caluchko » Fri Feb 12, 2010 10:06 pm

Good, I'll bunk with you in the event of a zombie apocalypse. Hope you've got lots of twinkles! I'll bring my paper I-bonds. They are widely know to repel the undead :)
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Postby Dan Moroboshi » Fri Feb 12, 2010 10:24 pm

Good. The paper I-bonds might be useful as kindling, or toilet paper.

The Treasury Direct ones, not so much.

If you're seriously interested in disaster preparedness, try reading this:

http://books.google.com/books?id=ElyjhF ... q=&f=false

It's practical, yet funny.

While I do have a paranoid streak, I'm optimistic. Otherwise, why bother investing in stocks and bonds at all? And I'm not some tinfoil hat wearing, snake-eating survivalist. It's just that black swans can happen, and the thin veneer of civilization is more delicate than most people think. As an example, I am on the disaster preparedness committee of a level 1 trauma center hospital in Ohio. Our area got hit by some rough weather patterns generated by Hurricane Ike that widely disrupted electrical power for a few days. You would *think* that a major local hospital would have enough diesel on hand to run their generators nonstop for more than 72 hours - but it didn't. The supplier who they assumed would top up the tanks within 24 hours couldn't deliver, as they did not maintain enough stock to provide for all of their emergency supply contracts in the area simultaneously. The hospital actually had to make an emergency purchase from an out of state supplier, at great expense, to keep the hospital running. Other hospitals in the area fared worse - ours was the only civilian hospital that could still run CT scanners, because of the power outage. (The hospital on the large military base in the area had plenty of diesel reserves, but was not available to the general public.)

Anyway, the cash drag of the emergency fund and the cost of the bug-out cabin are a form of insurance - an unpalatable expense that I hope will be unnecessary, but invaluable in the event that they're needed.
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Postby joe8d » Fri Feb 12, 2010 10:48 pm

As a retired person with adequate savings and a steady income from social security and pensions, my emergency fund is zero. That's not to say that I don't have CDs and a money fund, but that I don't segregate this money as having one purpose from that money as having another purpose in my mind. All my money is to support me during my life and to go to my children after I die. I don't have a car fund, a vacation fund, and an emergency fund, all segregated and invested separately using different investment strategies. It's all just money to me.


Same here.I've always had "Savings" not just an "Emergency Fund".The savings covered my current expenses, anticipated future expenses and unanticipated expenses (Emergencies).Now that I'm retired,The savings has been combined with FI portion of my retirement accounts to form my Income Bucket.
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Postby EmergDoc » Fri Feb 12, 2010 11:00 pm

3 months expenses. Which happens to magically coincide with my disability insurance waiting period. Amazing how that works. :) I do increase my short term savings a bit when I foresee big expenses coming soon (car, house downpayment, move, big vacation etc) but that isn't my emergency fund. The emergency fund is what i live on instead of charging up the credit cards if something expensive happens.
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Postby Snowjob » Sat Feb 13, 2010 12:44 am

Emergency savings is the taxable account.

After its big enough, I dont see the point in having a bunch of cash lying around.
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Postby Landlording » Sat Feb 13, 2010 1:00 am

I would agree with 3 month's expenses.
Even that will seriously bite into your investing money, and as long as you have no credit card debt, but ample credit card limits available, you won't starve even if you lose your job.
Best of luck,

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Postby traineeinvestor » Sat Feb 13, 2010 1:55 am

I don't have an emergency fund at all. In the right circumstances, I consider them wasteful - you earn very little on the money set aside for the purpose.

The "right circumstances" for us were:

(i) two good incomes (combined savings rate got close to 50% at one point)
(ii) lengthy notice periods for being laid off
(iii) a reasonable level of liquid investments (equities, bonds) which could be sold
(iv) adequate medical insurance
(v) positive cash flow on our investment properties
(vi) credit cards which are paid off in full each month
(vi) there is enough slack in our budget to cut expenses without feeling too deprived should the need arise

Even though my wife is now a SAHM and we are down to one income, I have not changed my position on this. If I have cash in the bank, it's there because I have not invested it yet or as an accrual for my tax obligations.

Once I retire, this will change and I will keep some money in cash/cds/short term deposits to cover emergencies and near term living expenses. I have not decided how much yet (retirement is still a few years away) but am looking at 12-18 months of living expenses representing 12 months of expenses and a 6 month emergency fund. The main purpose of having that amount of cash is to avoid being forced to sell investments at unfavourable times.
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Postby tetractys » Sat Feb 13, 2010 3:18 am

It's an individual choice. If your comfortable with what your already doing stick with it, if not adjust it. My emergency fund is making sure I have the next months rent at the beginning of each month, cash for all the scheduled online bill payments, etc. -- Tet
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Postby spam » Sat Feb 13, 2010 7:20 am

I have a large emergency fund. I live in an at-risk state, and my career sector is at risk. I also have a mortgage on a rental. It should give me about 5 years to sell the rental and change things around without taking a bath on anything.

My Emergency fund looks like this:

CD Ladder (12 one year CD's and one matures each month)
5 year CD used as collateral for emergency loans
State-Specific Municipal Bond fund
I-Bonds at Treasury Direct

If I held them in equal amounts then it would look like this:

50% tax advantaged status in taxable accounts
50% Directly related to interest rates (CD's)
50% inversely related to interest rates (Bonds)
25% Directly related to inflation (I-Bonds)

I use FMHTX for my state specific municipal bond fund.
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emergency fund

Postby epictetus » Sat Feb 13, 2010 7:34 am

It sounds like you are really wanting to use some of your emergency cash to pay down your mortgage.

I would suggest figuring out how many months/years of cash you would like to have access to so that you know if something happened and you had zero income, you could make it for x months/years. ONce you have that set aside then you could use extra cash to start paying down your mortgage if that is what you want to do.

In our 403s and Roths we do our x/y stock/bond investing. outside of those accounts i save but don't invest. we put away a lot (for us) in the 403/Roth. so outside of that we have the money in CDs, I Bonds.

we paid off our mortgage some years ago by devoting our after-investing money to that goal. i have not regretted paying it off for one second. your monthly cash flow increases a lot with no mortgage. and the amount you need to pay your bills each month goes down a lot with no mortgage.

you can see from this board there are many ways to invest. there are also many ways to think about the savings/emergency fund issue. I think most important is find something you are comfortable with re: savings/emergency fund (whether that is 3 months or 5 years) and then if you want to pay your mortgage down with the rest you can do so knowing you have that cash cushion sitting there if you need it.

a lot of issues dealing with money are more emotional that mathematical. so if you can find some plan that fits you emotionally you'll be more likely to stick with it that if you do something that makes mathematical sense but doesn't fit you emotionally.

hope this is somewhat helpful.
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Postby CyberBob » Sat Feb 13, 2010 11:33 am

I read an article yesterday that had a unique view on how much of an emergency fund you need. The article suggested basing it on the unemployment rate. That is, at a 5% unemployment rate, have 5 months of expenses in your emergency fund. At 10% unemployment, have 10 months. The rationale being that during periods of high unemployment you may lose your job and be out of work longer, and so a bigger cushion is prudent.

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Postby southerndoc » Sat Feb 13, 2010 1:28 pm

During periods of high unemployment, you also may lose your job. It's hard to build an emergency fund without a job. So during periods of 3% unemployment, you should have 10 months of emergency expenses if you want to follow the model suggested. By the time unemployment gets to 10%, you may have already lost your job.

Personally I think 6 months is enough for most professions. I think you should judge it by how hard it is to get a job in your line of work. As a physician, my job is normally pretty stable and there is always demand. It does, however, take up to 6 months to get credentialed for a hospital. So 9 months of emergency funds is ideal for me. For someone who works at McDonald's, perhaps 3 months is all they need. For a sales executive, 6-9 months may be needed.
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Postby Gekko » Sat Feb 13, 2010 1:31 pm

i like to keep a minimum of $200K cash in my slush fund.
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Postby KlangFool » Sat Feb 13, 2010 9:01 pm

Hi,

My emergency fund = 3 years.

Why??

1) I am above 40 years old. In this industry, age discrimination is common.

2) My industry laid off 1 1/2 millions people over the last few years. And, as your phone call get cheaper, there will be more laid off.

3) So, if I lose my job now, there is a good chance that I will be forced into early retirement or permanently under-employed.

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Postby jon-nyc » Sat Feb 13, 2010 9:28 pm

Base it on the size of your emergencies, of course. 8)

Seriously, while I don't have an emergency fund per se, I do have a cash allocation in my AA model so it would serve the purpose if the need arose. Depending on my career situation (personal marketability, job market where I lived, etc.) I would feel uncomfortable if I couldn't go 6 months without selling assets if I were to lose my income.
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Postby digit8 » Sat Feb 13, 2010 10:07 pm

I started with the rule of thumb six months split between the bank and a money market. But I keep shoveling in more every month, the overage going to taxable index funds. The goal is early retirement or at least getting enough in there that even lengthy unemployment is not a panic worthy situation. Of course, it's not the only disaster scenario, but it's one of the relatively few partially manageable ones(you can't stave off lung cancer by sending out more resumes) so it's what I focus on. No sense worrying about every possible problem, there's just too many of them.
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Postby Boris » Sat Feb 13, 2010 10:22 pm

Different perspective...

I'm not a big believer in emergency funds, especially large ones. I think they should be an exception rather than the rule. The idea is not to live paycheck to paycheck. If you're comfortable an emergency fund isn't mandatory.

Here's an article to ponder The $0 Emergency Fund.

Now having said this, I do always have "cash" stashed away in various accounts, but not as an emergency fund, but for known future expenditures which can be used in case of an emergency. For example, I have my $5,000 Roth IRA investment saved up way before investing it on January 1st, so technically until I'm able to invest it, some may argue it's considered an emergency fund. I constantly have cash sitting around that I've saved for various projects which can be considered emergency money until spent on the projects. For example, I have some money which I've saved up to buy granite for our new kitchen, new hardwood floors, a dog, etc. So in case of emergency, I will forgo on the aforementioned and use the money. However, the idea is that as long as you save for what you buy, instead of get in debt paying for things, then your need for an emergency fund is close to nil. I can always tap my 401k, Roth, home equity, assets, credit cards, friends, parents, etc in case of real emergencies.

Obviously everyone's situation is different, but I do think that people on this forum are a bit too conservative when it comes to emergency funds. I would rather fund a Roth account before I'd fund an emergency fund. In case of an emergency you can get at that money.

Again, just another perspective... to each his own. Whatever helps you sleep better at night. If I count the amount of "cash" I'm sitting on now for future expenditures it would add up to about 6-months worth of expenses, however I do have plans to deplete most of it in the coming months. After which point I'll save again for something else. I just don't like to "partition" money and have an extra $20k (or whatever) sitting in an account doing absolutely nothing... "just in case." I'd rather use that money to get rid of debt so when "just in case" happens I won't need all that money. I admit it does take some time to get to that kind of position, but I believe most of the people on this forum are in that kind of position and still choose to keep the emergency fund blanket.

Hope this helps...
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Postby Gekko » Sat Feb 13, 2010 10:22 pm

IMO - here's the rule of thumb i use -

time horizon ----------------------- asset class
0-5 years-----------------------------cash
5-10 years----------------------------bonds
10+ years-----------------------------stocks

also -

cash+bonds % = age

so cash is not just for emergencies. cash is also the shock absorber for your portfolio when the **** hits the fan.
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Postby SpecialK22 » Sat Feb 13, 2010 11:14 pm

Boris wrote:
Here's an article to ponder The $0 Emergency Fund.



Thanks very much for the article. It definitely dealt with the issues I was thinking about. Lots of good points brought up in the article as to why you may not need such a big cash reserve on hand for an emergency. Thanks for all the replies to everyone else as well. Lots of different camps on how to plan for emergencies.
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Postby spam » Sun Feb 14, 2010 9:26 am

KlangFool wrote:

Hi,

My emergency fund = 3 years.

Why??

1) I am above 40 years old. In this industry, age discrimination is common.

2) My industry laid off 1 1/2 millions people over the last few years. And, as your phone call get cheaper, there will be more laid off.

3) So, if I lose my job now, there is a good chance that I will be forced into early retirement or permanently under-employed.

KlangFool


You are right on the money KlangFool,

I am 55 so being forced into early retirement is a major hazard. Age descrimination is extremely common. I have two close friends who were fired in their late 50's in 2008, and neither (although highly skilled) have been able to get so much as an interview.

I have looked at refinancing, and paying down the rental mortgage, but it just does not make sense. The best positon might be to pay down the principal by about 6k to 8k, and I might do that. In any event, it still would not an earth-shattering change. My plan is basically on track.

All my large emergency fund position really means is that I am more conservative with my taxable savings than what a majority of Bogleheads appear to be. I do think that the market will continue to go sideways for at least another 5 years. Good luck with a plan of capital appreciation without dividends when you cannot sell equities in taxable accounts to harvest any gains.

On this basis, my emergency fund is not only prudent, but it is also a reasonable way to use taxable savings. The only real changes I forsee in its structure down the road will be longer term CD's, STRIPS, and TIPS after we se how the feds tightening policy begins to work in the market.
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Postby spam » Sun Feb 14, 2010 9:47 am

boris wrote:

Here's an article to ponder The $0 Emergency Fund.


In my opinion, liz weston is a fool. She advocates living paycheck to paycheck while taking equity risk which is financed by reducing credit card debt.

Next she says ... well if you need money for an emergency, then use your credit card. A woman like that would quickly bankrupt any well-to-do husband. She would see the "inappropriately large savings account" and ..... SPEND IT. Wow, what a relief.

I have easily done what she claims is impossible to do. My credit card balance is less than $800 and paid off every month, I have no personal loans, I have a large emergency fund, I have a large retirement account with no home mortgage. With a wife like her, I would have nothing.

Oh .... poor lizzzy wails, you will not be able to establish your emergency fund instantly or even over the weekend .... (sob sob sob)

good grief. talk about financial porn. The point, deer lizzzy, is that it does take time. It also takes a plan and some discipline.
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Postby Boris » Sun Feb 14, 2010 10:35 am

spam wrote:boris wrote:

Here's an article to ponder The $0 Emergency Fund.


In my opinion, liz weston is a fool. She advocates living paycheck to paycheck while taking equity risk which is financed by reducing credit card debt.

Next she says ... well if you need money for an emergency, then use your credit card. A woman like that would quickly bankrupt any well-to-do husband. She would see the "inappropriately large savings account" and ..... SPEND IT. Wow, what a relief.


You may consider her a fool, but I think she makes great points. In the example you described, she may advocate paying off your credit card debt prior to getting an emergency fund. Why? Because by the time you accumulate for an emergency fund your CC bills will kill you. Just pay off the CC instead and in case of an emergency you can always use your CC again. It makes perfect sense.

I don't see her saying that if you have too much savings then spend it. She's advocating getting rid of debt, which isn't quite the same thing.

spam wrote:I have easily done what she claims is impossible to do. My credit card balance is less than $800 and paid off every month, I have no personal loans, I have a large emergency fund, I have a large retirement account with no home mortgage. With a wife like her, I would have nothing.


Again, her advice isn't meant for someone like you. It's meant for someone who's starting out and/or may not have a lot in terms of cash flow and has debt. A "typical" American scenario.

Which lines in her article did you dislike, specifically?

spam wrote:Oh .... poor lizzzy wails, you will not be able to establish your emergency fund instantly or even over the weekend .... (sob sob sob)

good grief. talk about financial porn. The point, deer lizzzy, is that it does take time. It also takes a plan and some discipline.


I believe that's her point as well. Establishing an emergency fund must be done by forgoing something else. If that something else means not paying fully your credit cards then you better pay the credit cards first. That way you're not leveraging your emergency fund.

An emergency fund is just for that: emergencies. Emergencies don't happen often, so why dedicate money to them if you can always tap something in case they happen?

Boris
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Postby KlangFool » Sun Feb 14, 2010 11:23 am

Boris wrote:
spam wrote:boris wrote:



You may consider her a fool, but I think she makes great points. In the example you described, she may advocate paying off your credit card debt prior to getting an emergency fund. Why? Because by the time you accumulate for an emergency fund your CC bills will kill you. Just pay off the CC instead and in case of an emergency you can always use your CC again. It makes perfect sense.


An emergency fund is just for that: emergencies. Emergencies don't happen often, so why dedicate money to them if you can always tap something in case they happen?

Boris


Boris,

1) You do know that CC limit can be lowered at any time. So, DO NOT ASSUME that a person can always use their CC in an emergency.

Be safe...

2) During EMERGENCY, you REALLY need the money. So, do you want to take the RISK of not having the money when you NEED it??

3) Do you wear your seat belt while driving?? Or, car accident so rarely happen that you do not need seat belt??

4) Risks are assessed in two dimensions. Occurrence and severity.

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Postby SpecialK22 » Sun Feb 14, 2010 11:43 am

I also didn't get the impression from the article that she was advocating spending the emergency fund. It makes sense to me that if someone is already carrying consumer debt, that person should probably dedicate most capital towards paying down the debt. A certain degree of liquidity is necessary ( a small emergency fund), but it would probably be best to focus on paying down high interest debt before saving a large or even “standard” emergency fund. Personally, I think she brought up some excellent points. Everyone's psychological makeup, employment outlook, ability to adjust quickly, etc. is different. I think her ideas that a large cash reserve as an emergency fund might be excessive are valid, particularly for many bogleheads who are far above the norm in understanding how to manage personal finances. Still, some people may prefer the comfort of a large emergency fund or be in a situation where a great deal of liquidity is necessary. It would be dangerous for everyone to follow the advice she presented; however, it does seem to be a concept that can work for some people.

I think planning for emergencies is mostly about knowing your own psychology. If you are responsible with credit, it can be a useful tool. If you are an over spender and easily max out cards, it will only exacerbate an already bad situation.

I was just questioning the rule of thumb concerning x months of living expenses in reserves. I was wondering how people factored in unemployment benefits, insurance, disability, credit, home equity, severance, etc. in planning for emergencies. I'll agree that it is very difficult to plan for emergencies and that dealing with emergencies is mostly how well you quickly adapt to drastic change. No plan, no matter how well thought out, survives first contact.
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Postby Gekko » Sun Feb 14, 2010 12:35 pm

i think a better question is - how much cash to have on hand? not all cash is for emergencies.
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Postby Goldfinger » Sun Feb 14, 2010 12:55 pm

Dan Moroboshi,

I gave a cursory scan of the disaster preparedness book you linked...although it's communicated (for the most part) in a serious vein, a few quotes absolutely commanded my attention.

"The Week after" Rat-A-Touille (pg 341):

1 tablespoon olive oil
1-4 rats (skinned and boned)
2 medium-size zucchini, unpeeled and thinly sliced
other misc ingredients

Add tomatoes, basil, garlic, parsley, and pepper. Stir and continue cooking about 10-15 minutes, or until rat is cooked and tender. Serve over rice.

Here's another morsel on pg 357 under the section "Constipation":

"I have had more than one student become constipated on a stressful field course and not have a bowel movement for 3 days or more. A change in diet, dehydration, and the low-level stress of being at the mercy at the freaky guy in the woods takes it toll on their colon and they "lock up", so to speak. If the problem doesn't take care of itself in the field when they eventually get used to the routine and settle down, once back in the comfort of their own homes, they gleefully give birth to the mother lode."

How on earth did you stumble upon this book?

Classic.

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Postby spam » Sun Feb 14, 2010 3:23 pm

Boris wrote:

Again, her advice isn't meant for someone like you. It's meant for someone who's starting out and/or may not have a lot in terms of cash flow and has debt. A "typical" American scenario.

Which lines in her article did you dislike, specifically?


Hi Boris,

Let’s see then. The title of the article is the 0-dollar emergency fund. I have and believe in emergency funds.

Her positions:

1) It is hard to save 6 months pay.
2) It takes a long time to accumulate an emergency fund
3) Emergency funds are an unacceptably high opportunity cost.
4) Don’t let cash sit idle
5) A big pile of cash “may not be enough”

Lizzy’s solution: Just borrow for every emergency. Heck, even if you don’t have a job, just borrow money. In fact, if you both loose your jobs, then just take out a loan on your house. What could go wrong with that?

Any wife with those beliefs would nag and scold a life savings away from any man over time.

So, finance the “emergency savings” by reducing credit card debt, invest the money in stocks, and if an emergency shows up ….. well, just use the card. I might be wrong, but that sounds circular.

Oops, there is a direct relationship between stock prices, unemployment rates, bankruptcies, and foreclosures. She is still chirping the house as a piggy bank sermon even after the disaster of the past 3 years.

I even think it is bad advice for young people. They will never learn any financial discipline with her recipe and die in poverty.

I do agree with reducing the debt part, but thats about it. Oh well, to each their own
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Postby jh » Sun Feb 14, 2010 7:14 pm

...
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