Thoughts on emergency account amount.

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raptor001
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Joined: Wed Mar 01, 2017 3:56 pm

Thoughts on emergency account amount.

Post by raptor001 »

I was wondering how you guys come up with how much you need for your emergency account. Not looking to see how many months or years you keep in reserve. Looking more to see how you came up with the number. Me and my wife are working towards holding 1 year of funds. But that is 1 year of expenses with out our life changing one bit ( aside from not being able to save ). Am I looking at this wrong. Should I just be calculating bare essentials ( mortgage - insurance - food - etc ) and invest the rest ? How do you guys look at this ?
OatmealAddict
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Re: Thoughts on emergency account amount.

Post by OatmealAddict »

I figured 6 months worth of expenses we'd need in order to still live somewhat comfortably. This includes the mortgage, daycare, insurance, food, gas, most bills, and another few hundred (per month) for incidentals.
Silence Dogood
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Re: Thoughts on emergency account amount.

Post by Silence Dogood »

There is no right or wrong way to do this. I prefer 6 months of expenses in an "emergency fund" savings account. In reality, 6 months could be stretched out much longer with a reduction in spending. For example, if my wife and I both lost our jobs we certainly wouldn't be going out to eat and we'd look for other ways to reduce expenses while looking for jobs.

Every once in a great while I will do a rough calculation of how much we've spent in the past 6 months and I'll make sure we have at least that much in the "emergency fund" account.
Last edited by Silence Dogood on Sat Jun 03, 2017 8:03 am, edited 1 time in total.
SimplicityNow
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Re: Thoughts on emergency account amount.

Post by SimplicityNow »

I think a lot of the variability is an individual decision based on factors that apply only to you.

How secure are your job(s), how much do you have in fixed income accounts other then your savings, do you have equity in your home. access to low rate loans, how much could you reduce your expenses?

Most of the the people i have seen on this forum list amounts from 3 months to a year. Some will argue the need for an emergency fund at all if you have access to other sources of funds like a HELOC (Home Equity Line of Credit).

Some of it has to do with how close you are to retirement.

I would say the average seems to be about 6 months of ordinary expenses.

My personal situation, for what it is worth, is that we have 18 months of ordinary expenses in our emergency fund. We have very secure jobs and I am planning to retire later this year. I also consider us on the conservative side of the spectrum.

YMMV.
FedGuy
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Re: Thoughts on emergency account amount.

Post by FedGuy »

I decided to go with 12 months of expenses, to be somewhat on the safe side. I tracked my spending for a while, figured out my typical/average monthly spend, rounded it up a bit both to be a bit more conservative and to have a round number to work with, and set that as my target.

I actually did lose my job late in the Recession and was unemployed for 15 months. I cut back on expenses (without having taken into account my ability to do so in setting my emergency fund; again, trying to be a bit on the conservative side) and got a little unemployment, so I hadn't fully depleted my emergency fund before going back to work. I probably had about two months left before I would have had to start liquidating assets. I'm glad I was as conservative as I was; otherwise, I would have incurred losses selling assets to keep putting food on the table.
ragabnh
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Re: Thoughts on emergency account amount.

Post by ragabnh »

I am in early retirement so my cash fund is 2 years of expenses to ride stock market downs, but that is specific to my case, when I was working I had one year worth of expenses stashed in saving account.
runner540
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Re: Thoughts on emergency account amount.

Post by runner540 »

It is personal: what number lets you sleep well?

Keep in mind that if you lose your job, some expenses may actually go up, most notably health insurance for Cobra. Also, utilities if you are home more.
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bligh
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Re: Thoughts on emergency account amount.

Post by bligh »

To me the size of my cash reserves is a function of so many little things. It is extremely personal..

[*]The stability of your job (freelance graphic designer VS Physician)
[*]Your ability to decrease expenses (mortgage and car loans VS renting and able to move in with mom and dad)
[*]Whether you are a dual income family or not. (Single income freelance graphic designer VS dual federal employees with full benefits)
[*]Whether you have dependents (Kids/dependent parents VS just you)
[*]Average unemployment duration for your job (Physician VS "VP of Highly Specialized field")
[*]Size of your taxable investments (high six figure portfolio with a good helping of bonds VS no portfolio in taxable)

The examples I gave don't need to be accurate, they are just representations of what I perceive to be on the extreme end of safe vs risky.

In my case I don't hold an emergency fund. Instead I hold cash reserves. These cash reserves vary to cover known future cash flows and provide me with liquidity in an emergency. Measured as monthly expenditure, the amount usually bounces around between 4 and 16 months for us. I try to keep my cash reserves at around 6-9 months of expenses. But this makes sense to me, for my risk tolerance, in my situation.

In the end, in an actual emergency, one's entire net worth becomes ones emergency fund. No one is going to let their kids starve while they have 7 figures in a 401K plan. They will pay the penalty and they will pull out the money. That is why I prefer using the term "cash reserves" or "liquidity fund" not emergency fund.
mortfree
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Re: Thoughts on emergency account amount.

Post by mortfree »

I do right around 30k... it's a feel good number for me.

this amount is also there for other buckets so it is not purely a 100% EF... my taxable investing account is my 2nd level EF and is double the other amount, for now until the market crashes :wink:


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rattlenap
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Re: Thoughts on emergency account amount.

Post by rattlenap »

I am single with no children. Still young, in my early 40's and in excellent health. Also, I live in near and area that has an abundance of jobs and actually did well during the crash of 2008. So I keep six months worth of saving. Once I hit 50 I will gradually up it so that once I retire at around 62-65 I will have 3 years saved up.
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PhysicianOnFIRE
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Re: Thoughts on emergency account amount.

Post by PhysicianOnFIRE »

I keep significantly less in ready cash. The opportunity cost of a year's worth of cash is high. It might protect you from selling in a market downturn, but that benefit is outweighed by the drag of low and perhaps negative real returns in the years where the market is up.

WCI shared his thoughts on the topic the other day, asking [Are Emergency Funds for the Weak Minded?](https://www.whitecoatinvestor.com/are-e ... ak-minded/) The post gives a good framework for how to think about your needs in an emergency fund.

:beer
-PoF
jnet2000
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Re: Thoughts on emergency account amount.

Post by jnet2000 »

We keep enough for my wife to feel safe and sleep well at night. We didn't use an exact formula but it ends up being 2 years of expenses.
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mister37
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Re: Thoughts on emergency account amount.

Post by mister37 »

The DW said she would be comfortable with $10k each, so we have a total of $20k in our EF. Happy Wife, Happy Life.... :wink:
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saladdin
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Re: Thoughts on emergency account amount.

Post by saladdin »

2 years at current spend but probably 2.5 years since I would cut down on some stuff.

I like to sleep well and not have to worry about taking the first job offered.

People with 6 month funds give ME ulcers. But in my area a job over $10 hour is hard to find. I would be looking for a while.
simmias
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Re: Thoughts on emergency account amount.

Post by simmias »

I calculate mine using my current spend rate, which is probably shockingly low by Bogleheads standards and shockingly high by MMM standards.

I keep two years because I'm weak-minded, but that could stretch to two-and-a-half in a jam. Once my house is paid off in a couple of years I'll readjust.
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englishgirl
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Re: Thoughts on emergency account amount.

Post by englishgirl »

My minimum is three months of normal expenses, which probably equates to six months of "if I lost my job and was economizing" bare bones expenses. In practice, I have quite a lot more than that, and can probably go at least a year of bare bones expenses.
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FelixTheCat
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Re: Thoughts on emergency account amount.

Post by FelixTheCat »

What do you consider an emergency? Job loss? Medical not covered by insurance? New car? I would write down exactly what categories are in the fund. Figure the cost and fund it.

The standard answer is three-to-six months of expenses.
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downshiftme
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Re: Thoughts on emergency account amount.

Post by downshiftme »

My emergency account has drifted up and down, depending on circumstances. In days when I believed that I could easily find a new job should I unexpectedly lose my current job, I figured 3 months of expenses would be enough, and I could stretch it a bit by belt tightening if needed. In days when the economy soured and my industry looked overrun by job seekers, I raised that to 6 months (and briefly to 8 months) expenses as I was a lot less confident of finding a new job quickly.

As I approach retirement, job loss is no longer as much of a concern. Now, I size my emergency account based on the largest cash emergency I might encounter (big house expense or big medical expense beyond insurance coverage) and it no longer makes sense to count "months of expenses" so I just use a dollar amount for the largest expense I might encounter unexpectedly.
Texanbybirth
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Re: Thoughts on emergency account amount.

Post by Texanbybirth »

6 months bare expenses: no retirement contributions, car payments to ourselves, eating out, presents for others, tithing, etc. We could easily stretch this to 9 months. (We are quite used to eating beans and rice, as we do it for religious reasons frequently, though I can't imagine it'd be fun for 9 months!)

The emergency fund is only for job loss (I'm the sole breadwinner, wife is SAHM); we have other savings for other "emergencies" that don't really seem like emergencies to us: house repairs, car repairs, new car, etc. We also have one year's worth of out of pocket family max saved in a separate account for what would seem like a catastrophic medical emergency.

I think it's whatever helps you sleep at night!
“The strong cannot be brave. Only the weak can be brave; and yet again, in practice, only those who can be brave can be trusted, in time of doubt, to be strong.“ - GK Chesterton
Atgard
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Re: Thoughts on emergency account amount.

Post by Atgard »

This is a tough one for me. I guess I'm very conservative, as I have 3–4 years of expenses in savings accounts (mostly at least earning about 1% though, so it kinda blurs the line into my bond allocation, since many CDs don't pay much more). But I have almost all of the "risky" factors bligh mentioned above: mortgage, single earner, kids, self-employed with ups & downs of income and no guarantees, and it may take a while to find another comparable job in my field in this area.

So by most estimates my cash allocation is high and I'm losing money to inflation / investing opportunity costs. On the other hand, I feel that being self-employed I need a larger-than-average buffer, and that some of that cash is kinda-sorta part of my bond allocation. Really, where's the line there? I have a 5-year CD at 2.3%, that's a bond, right? But I could break it with a 3-month interest penalty. So it can definitely easily be used for an emergency. How about my 1-year CD at 1.3%? Cash? Emergency fund? Bond fund? Or just a very liquid investment? (Then there are also I-bonds, etc.)

That's part of why I just look at savings accounts, CDs, I-bonds, and other bonds all together as "fixed income," so part of my "bond" allocation. And it's important to keep a certain amount of that liquid, meaning easily accessible without market timing risks or large early redemption penalties.
SJR
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Re: Thoughts on emergency account amount.

Post by SJR »

Atgard wrote:This is a tough one for me. I guess I'm very conservative, as I have 3–4 years of expenses in savings accounts (mostly at least earning about 1% though, so it kinda blurs the line into my bond allocation, since many CDs don't pay much more). But I have almost all of the "risky" factors bligh mentioned above: mortgage, single earner, kids, self-employed with ups & downs of income and no guarantees, and it may take a while to find another comparable job in my field in this area.

So by most estimates my cash allocation is high and I'm losing money to inflation / investing opportunity costs. On the other hand, I feel that being self-employed I need a larger-than-average buffer, and that some of that cash is kinda-sorta part of my bond allocation. Really, where's the line there? I have a 5-year CD at 2.3%, that's a bond, right? But I could break it with a 3-month interest penalty. So it can definitely easily be used for an emergency. How about my 1-year CD at 1.3%? Cash? Emergency fund? Bond fund? Or just a very liquid investment? (Then there are also I-bonds, etc.)

That's part of why I just look at savings accounts, CDs, I-bonds, and other bonds all together as "fixed income," so part of my "bond" allocation. And it's important to keep a certain amount of that liquid, meaning easily accessible without market timing risks or large early redemption penalties.
Some here choose to blur the line between their emergency fund and bond/fixed income (and mix them together). Those that blur it, will often view their entire investment portfolio as an emergency fund (and essentially it is, push comes to shove).

Personally, I have 1 year of emergency funds. It's split among a few checking accounts earning 2-2.27%. Part of it is in a batch of 5 year CD's that are maturing next year and are earning 1.76-1.84% with a 3 month EWP (I will likely reinvest them into new CDs at maturity. Hopefully rates will be considerably higher). I choose to keep my bond funds separate and part of my investment portfolio but some would actually choose to view my emergency fund as having a larger bond portfolio similar to what you were saying.
Last edited by SJR on Wed Jun 07, 2017 7:35 pm, edited 2 times in total.
TallBoy29er
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Re: Thoughts on emergency account amount.

Post by TallBoy29er »

PhysicianOnFIRE wrote:I keep significantly less in ready cash. The opportunity cost of a year's worth of cash is high. It might protect you from selling in a market downturn, but that benefit is outweighed by the drag of low and perhaps negative real returns in the years where the market is up.

WCI shared his thoughts on the topic the other day, asking [Are Emergency Funds for the Weak Minded?](https://www.whitecoatinvestor.com/are-e ... ak-minded/) The post gives a good framework for how to think about your needs in an emergency fund.

:beer
-PoF
Good article by WCI. ERN has an interesting perspective on this as well, as they keep $0 set aside, and use other options (credit cards, heloc, taxable acct) (https://earlyretirementnow.com/2016/05/ ... ency-fund/).

For us, 12+ months. I sleep better knowing it is there.
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Boris
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Re: Thoughts on emergency account amount.

Post by Boris »

So many variables and differs by individual. Bligh brought up some good points to consider.

I'm a believer in the $0 emergency fund for many people. If you have money to set aside for emergencies, then you have money to max out your Roth IRA first. Make that a priority. If an emergency comes up, you can always raid the Roth IRA, but you can't travel back in time and invest into a Roth IRA. Real emergencies are rare. Structure your life in a way that emergencies aren't emergencies. The more leveraged you are, the more of an emergency an emergency becomes. Reduce debt.

Consider safety-nets already in place (i.e. unemployment insurance, social security insurance) or other type of insurance if applicable. Some workplaces provide some sort of disability insurance, life insurance, etc. Figure out the delta and only worry about that portion. You can usually cut out a LOT of fat out of life in a real emergency, so no need to save for what it costs to live on TODAY. I eat out almost daily... pretty sure I can live on Ramen Noodles for a while if I had to. There are so many other factors to consider.
Short term moves in the market are like "a tale Told by an idiot, full of sound and fury, Signifying nothing." | - John C. Bogle quoting Shakespeare
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