Why do we need an emergency fund?

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infotrader
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Why do we need an emergency fund?

Post by infotrader » Sun Jun 18, 2017 9:45 am

We have been told again and again that we need to have an emergency fund worth at least 3 months of income or expenses for rainy days.

I have never had an emergency fund, and all I have is money invested and money to be invested. I did not have college fund for my kids too, but sent both of them to private colleges. Don't get me wrong. I just make an average salary, and have not inherited any money.

I have a really "un-bogleheading" and stupid question: why we need an emergency fund? Or, in which case an emergency fund is used?

Why not just allocate your assets appropriately, but not designate an emergency fund? I also wonder how this "rainy day" is defined? I just cannot think of anything other than market pullback.

It reminds me of my friend who saves specifically for buying a computer, and different pots of money for different purposes. I just cannot think myself doing that.

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kelway
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Re: Why do we need an emergency fund?

Post by kelway » Sun Jun 18, 2017 9:49 am

I suppose for the exact same reason you might not retire 100% invested in stocks.

infotrader
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Re: Why do we need an emergency fund?

Post by infotrader » Sun Jun 18, 2017 9:54 am

kelway wrote:I suppose for the exact same reason you might not retire 100% invested in stocks.


So, can we retire the idea of emergency fund as long as appropriate AA is in place?

Mike Scott
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Re: Why do we need an emergency fund?

Post by Mike Scott » Sun Jun 18, 2017 10:02 am

Bogleheadism is a concept not a cult. Do what you think best. We keep an emergency fund because we don't have a big pile of $$ to draw on. I can see not keeping a separate emergency fund at some point in the future.

ljford7
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Re: Why do we need an emergency fund?

Post by ljford7 » Sun Jun 18, 2017 10:05 am

Not everyone "needs" an emergency fund. If you have access to sizable credit accounts and/or easily accessible taxable accounts, the need to keep a bunch of cash on hand is minimized.

Like most personal finance topics, it depends on your situation, comfort level and net worth.

aristotelian
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Re: Why do we need an emergency fund?

Post by aristotelian » Sun Jun 18, 2017 10:08 am

Whatever works for you. I have a tiered approach that gets the best of both worlds. I have a few months liquid, risk free cash, while keeping everything else fully invested. Above the first tier I have a few funds that do double duty as I think it is important to have at least a few months expenses for a few reasons:

1. If I got into a horrific car crash tomorrow, my wife would need some time to get up to speed to manage the portfolio. A few months cash would give her some cushion to worry about more important things.

2. I just like the convenience of liquid risk free cash to accommodate expenses that naturally fluctuate from month to month. I don't want to have to cash in stocks just to pay off the last vacation, I would rather dip into cash and then save a bit more for the next couple of months.

Some may want a larger emergency fund if they are freelancers with intermittent employment, or prone to large health care expenses that aren't fully covered by insurance.

If none of those reasons apply to you, and you can sleep at night with just a checking account, then that is a perfectly defensible choice. Of course, if you are already financially independent, it probably doesn't matter what you do -- the concept of "emergency" no longer applies.

infotrader
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Re: Why do we need an emergency fund?

Post by infotrader » Sun Jun 18, 2017 10:11 am

aristotelian wrote:Whatever works for you. I have a tiered approach that gets the best of both worlds. I have a few months liquid, risk free cash, while keeping everything else fully invested. Above the first tier I have a few funds that do double duty as I think it is important to have at least a few months expenses for a few reasons:

1. If I got into a horrific car crash tomorrow, my wife would need some time to get up to speed to manage the portfolio. A few months cash would give her some cushion to worry about more important things.

2. I just like the convenience of liquid risk free cash to accommodate expenses that naturally fluctuate from month to month. I don't want to have to cash in stocks just to pay off the last vacation, I would rather dip into cash and then save a bit more for the next couple of months.

Some may want a larger emergency fund if they are freelancers with intermittent employment, or prone to large health care expenses that aren't fully covered by insurance.

If none of those reasons apply to you, and you can sleep at night with just a checking account, then that is a perfectly defensible choice. Of course, if you are already financially independent, it probably doesn't matter what you do -- the concept of "emergency" no longer applies.


Thanks. These are pretty convincing reasons for me.

livesoft
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Re: Why do we need an emergency fund?

Post by livesoft » Sun Jun 18, 2017 10:19 am

Some people have a psychological need for "peace of mind", so you are giving them a piece of your mind. Nothing wrong with that.

Some people tend to have lots of emergencies that you would not consider emergencies, too.

Some people have funds that they could use in an emergency that are not cash, so they don't call their funds an emergency fund. So what?

Some people are afraid to sell funds at a loss to get money to pay for expenses.

Have you read at least three books on Behavioral Finance? I think you would enjoy them.
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stan1
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Re: Why do we need an emergency fund?

Post by stan1 » Sun Jun 18, 2017 10:20 am

You need liquidity and access to cash not an emergency fund. If you can get liquidity another way, great.

How will you pay cash for a new car?
How will you pay cash for a new roof?
How will you pay for living expenses if you need to care for a close family member for 6 months in another city?
What if you unexpectedly need a new roof, new HVAC, new car, extra living expenses all in the same year?

If you have answers to those questions then you are good. Emergency funds are an alternative to high cost credit card debt. If you have a better approach than either of those that's great.

aristotelian
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Re: Why do we need an emergency fund?

Post by aristotelian » Sun Jun 18, 2017 10:25 am

infotrader wrote:
aristotelian wrote:1. If I got into a horrific car crash tomorrow, my wife would need some time to get up to speed to manage the portfolio. A few months cash would give her some cushion to worry about more important things.

2. I just like the convenience of liquid risk free cash to accommodate expenses that naturally fluctuate from month to month. I don't want to have to cash in stocks just to pay off the last vacation, I would rather dip into cash and then save a bit more for the next couple of months.


Don't get me wrong. I am addicted to investing and it pains me to keep any money in a savings account earning negative real return. That said, I have found it useful to have a cash cushion and it helps me sleep at night without too much opportunity cost.

infotrader
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Re: Why do we need an emergency fund?

Post by infotrader » Sun Jun 18, 2017 10:26 am

stan1 wrote:Emergency funds are an alternative to high cost credit card debt. If you have a better approach than either of those that's great.


This is the best summary.

KlangFool
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Re: Why do we need an emergency fund?

Post by KlangFool » Sun Jun 18, 2017 10:26 am

OP,

I have kids and old parent to take care off. My mother was very sick and she needs money. All her children sent a few thousand each.

KlangFool

2pedals
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Re: Why do we need an emergency fund?

Post by 2pedals » Sun Jun 18, 2017 10:30 am

Many times during a recession or even a greater recession your stocks will drop significantly along with a job loss, or other expensive malady. You may not be able to provide for yourself and your family in the short term and/or might be force to selling your stock in an inopportune time frame. A significant emergency will be give you piece of mind and confidence so that your execute your long term investment plan.
Last edited by 2pedals on Sun Jun 18, 2017 1:48 pm, edited 1 time in total.

infotrader
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Re: Why do we need an emergency fund?

Post by infotrader » Sun Jun 18, 2017 10:31 am

aristotelian wrote: I am addicted to investing and it pains me to keep any money in a savings account earning negative real return. That said, I have found it useful to have a cash cushion and it helps me sleep at night without too much opportunity cost.


I feel exactly the same way.

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TD2626
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Re: Why do we need an emergency fund?

Post by TD2626 » Sun Jun 18, 2017 10:32 am

A rainy day is defined as when the roof caves in (literally, with bits of ceiling raining down upon you). Or basically any similar, massive "I need to buy a new house or car or pay this medical bill/legal judgment now" type expense.

One can't sell at a market bottom without locking in enormous losses. If your rainy day happens in March 2009, your stocks shouldn't be sold at such lows. Besides, if we have another Great Depression and stocks decline 90%, your stocks wouldn't be worth enough to fix the roof.

Assume you've also lost your job in these scenarios. (Loosing a job can be a rainy day in and of itself or it can exacerbate other rainy days).

One should have a good chunk in safer things. Tier 1 may be cash and bank accounts/money markets. Tier 2 may be short-term bonds.

The size of safer holdings should pass three tests:
1. It should be at least 6 to 18 months of expenses
2. It should be large enough to pay for reasonably forseeable large expenses (if you have a 20 year old car you should have enough to cover a sudden car purchse need)
3. It should be a small but significant chunk of a portfolio size in order to moderate the risks of 100% higher risk things like stocks and long-term bonds. 5% cash (in money markets or high yeild savings accounts) and at least 5-10% shorter term bonds seems like a reasonable baseline.

If it passes all three tests, whether you choose to monitor and allocate based on months of expenses (emergency fund) or based on a 5% cash allocation is largely irrelevant and a matter of personal preference. I feel that since MPT says one should look at the whole portfolio instead of individual parts the latter option is best. (I.e. peg a set cash allocation in the portfolio that also passes the other two tests). Just some ideas and thoughts.

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bengal22
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Re: Why do we need an emergency fund?

Post by bengal22 » Sun Jun 18, 2017 10:37 am

Not everyone needs an emergency fund. IMO my assets are my emergency fund. IMO why have zero earning money sitting in a cash account just in case. I have a credit card that can be used for short term urgent needs. I have mutual funds that can be sold and turned into cash within 2 days. I prefer to look at my asset's total return and not park some for "oh-no's." But this is just my opinion.

Dandy
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Re: Why do we need an emergency fund?

Post by Dandy » Sun Jun 18, 2017 10:46 am

I never had a pot of money specifically designated as an emergency fund. I did always have a decent amount of liquid or easily liquidated assets to meet sudden, unexpected expenses. Sudden needs some clarification -rarely is the emergency something that is needed in a manner of hours -- usually you can use credit to buy some time to satisfy the expense. For those just starting out that don't have a decent nest egg a modest expense bump can cause them lots of issues. Once you have established a nice sized asset pot then the need becomes less unless you are very aggressive. You would prefer not to have to liquidate stocks when they are way down to cover a modest emergency expense.

In a real emergency like a loss of job and/or major medical illness/expense your whole asset base becomes you emergency fund. It isn't as if you are going to keep fully invested and not eat when your dedicated emergency fund runs out.

goingup
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Re: Why do we need an emergency fund?

Post by goingup » Sun Jun 18, 2017 10:50 am

infotrader wrote:Why not just allocate your assets appropriately, but not designate an emergency fund? .

Yes, great idea!

stan1
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Re: Why do we need an emergency fund?

Post by stan1 » Sun Jun 18, 2017 10:54 am

Here are some steps we have taken in the past if we needed cash:
- Sell shares of a municipal bond fund
- Cash out a CD
- Sell shares in equity funds in a taxable account (also helpful for rebalancing or purging investments in a taxable account that you no longer want to own)
- Sell I bonds
- Take Traditional IRA/401K RMD (if you are 70.5+)

Yes, sometimes capital gains tax is owed but you'll have to pay that eventually anyways unless you are leaving entire taxable account to heirs untouched.

I consider all of these to be liquid investments and can have cash in my checking account within seconds to a few days.

NorCalDad
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Re: Why do we need an emergency fund?

Post by NorCalDad » Sun Jun 18, 2017 11:07 am

ljford7 wrote:Not everyone "needs" an emergency fund. If you have access to sizable credit accounts and/or easily accessible taxable accounts, the need to keep a bunch of cash on hand is minimized.

Like most personal finance topics, it depends on your situation, comfort level and net worth.

Agreed. The ones who most need an emergency fund are not on Bogleheads. People here generally have high net worth, ready access to credit and investments they can liquidate if need be.

The ones who would benefit most by an EF have low/negative net worth and few assets to draw upon in an emergency. It was a building block for me years ago and it remains a building block for most people getting their house in order. Bogleheads with high net worth have the freedom to make EF an academic argument. Those who are one car accident away from missing the rent/house payment do not.

infotrader
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Re: Why do we need an emergency fund?

Post by infotrader » Sun Jun 18, 2017 12:40 pm

Well said, Norcaldad.

EF is a building block. However, once the house is built, it becomes part of the building, so you don't need another building block lying around.

The idea of EF should be promoted more to the audience of suze orman show. If you follow BH and execute its ideas well, EF is hidden in your portfolio, and you probably don't need to designate one in most cases.

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Re: Why do we need an emergency fund?

Post by avalpert » Sun Jun 18, 2017 1:00 pm

infotrader wrote:Well said, Norcaldad.

EF is a building block. However, once the house is built, it becomes part of the building, so you don't need another building block lying around.

The idea of EF should be promoted more to the audience of suze orman show. If you follow BH and execute its ideas well, EF is hidden in your portfolio, and you probably don't need to designate one in most cases.

With the number of 100% stock threads (when stocks are up) I don't think I agree that bogleheads may not need a segregated emergency fund to prevent them from taken more risk in their asset allocation than they should be.

The idea of 6-12 months of safety is insurance against both liquidity emergencies and behavioral pressures (like extended unemployment) that lead people to make rash decision if they don't have the feeling of comfort. Over the course of ones investing lifetime where they are targeting 25x+ years of safety, the cost of <1 year in cash does not impact outcomes materially, the cost of not having it in those instances where you need it can. It is prudent, even for bogleheads.

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Re: Why do we need an emergency fund?

Post by delamer » Sun Jun 18, 2017 1:08 pm

To me, an emergency fund is for the purpose of replacing income in the event that we can't earn money for a period of time. For instance -- job loss or extended recovery from an injury or illness.

And you don't want to have to sell stocks in that situation.

So the point is to have a way to cover your bills with no income.

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Re: Why do we need an emergency fund?

Post by Marylander1 » Sun Jun 18, 2017 1:32 pm

infotrader wrote:I have a really "un-bogleheading" and stupid question: why we need an emergency fund? Or, in which case an emergency fund is used?

Here's a scenario: you get the flu around Thanksgiving, and somehow it doesn't go away through the New Year. It turns into a sinus infection, and threatens to become pneumonia. As January progresses, you're sleeping 12 hours a day grows to 16. When you're awake, you're still exhausted; working is impossible. In February, the doctors give you a diagnosis and start chemotherapy.

By the way, this is February 2009; the market is crashing. It'll be 3 years before you can work again, after $450,000 in medical care.

This scenario wasn't hypothetical for someone I know. It turned out the seeds had been sown a decade earlier, with a root canal from a dentist who didn't quite finish the job.

If you have an emergency, it'll probably be different. But available reserves (whether in your accounts, or loved ones willing to lend while hoping for your recovery) make a huge difference when trouble strikes.

-Marylander1

aristotelian
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Re: Why do we need an emergency fund?

Post by aristotelian » Sun Jun 18, 2017 1:36 pm

delamer wrote:To me, an emergency fund is for the purpose of replacing income in the event that we can't earn money for a period of time. For instance -- job loss or extended recovery from an injury or illness.

And you don't want to have to sell stocks in that situation.

So the point is to have a way to cover your bills with no income.


Actually if that market is up, a period of unemployment is an ideal time to harvest capital gains without paying any taxes.

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nedsaid
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Re: Why do we need an emergency fund?

Post by nedsaid » Sun Jun 18, 2017 1:46 pm

infotrader wrote:We have been told again and again that we need to have an emergency fund worth at least 3 months of income or expenses for rainy days.

I have never had an emergency fund, and all I have is money invested and money to be invested. I did not have college fund for my kids too, but sent both of them to private colleges. Don't get me wrong. I just make an average salary, and have not inherited any money.

I have a really "un-bogleheading" and stupid question: why we need an emergency fund? Or, in which case an emergency fund is used?

Why not just allocate your assets appropriately, but not designate an emergency fund? I also wonder how this "rainy day" is defined? I just cannot think of anything other than market pullback.

It reminds me of my friend who saves specifically for buying a computer, and different pots of money for different purposes. I just cannot think myself doing that.


As the great T-Shirt philosopher once said, "Stuff Happens." I actually substituted "Stuff" for a barnyard term, but you get the idea. Stocks are meant as a long term investment, you don't want a double whammy of a down market and a financial emergency. The emergency fund is a way of keeping long term investments long term. There are all kinds of things that can go wrong in life and it is always good to have a buffer.
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Re: Why do we need an emergency fund?

Post by 3CT_Paddler » Sun Jun 18, 2017 1:52 pm

It's a prudent first step for people who don't have much in the way of investments or savings... Which is most people, especially in their 20s.

If you have a good cushion in either taxable or retirement accounts then an emergency fund is not a significant need, especially if you have enough in safe bonds that you could sell in a pinch to cover an emergency.

Roth IRA is a great emergency fund option, because your contributions can be withdrawn without penalty.

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Re: Why do we need an emergency fund?

Post by ACM4297 » Sun Jun 18, 2017 2:24 pm

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BuyAndHoldOn
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Re: Why do we need an emergency fund?

Post by BuyAndHoldOn » Sun Jun 18, 2017 2:44 pm

As has been pointed out on this and other threads: Once your accessible investments become sizable enough, that *is* your emergency fund. Within that framework, having sufficient cash/low risk investments on hand would be nice when funds are needed -->Timing the market is tough in equities for both buying and selling.

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Re: Why do we need an emergency fund?

Post by arsenalfan » Sun Jun 18, 2017 2:47 pm

Do what works for you.
E Fund is like 101 for those just starting - it enforces discipline.
I like to think of myself as a 200-level student. We have $250k in muni bonds as part of our portfolio in aftertax.
This represents one year of expenses, and will be in case all 3 cars blow up, etc etc.
Do what works for you!

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Lemonaid56
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Re: Why do we need an emergency fund?

Post by Lemonaid56 » Sun Jun 18, 2017 2:59 pm

The way I envision the emergency fund is kind of a Boggleheads "Preppers" scenario. The survivalist mentality.
A portion of our fund is in cash and what I would call barterable goods should something hit the fan. Now the "fan" could be a job loss or emergency house repair or even grabbing all our valuable documents and dehydrated food and that "emergency fund" and heading for the hills!
I see the emergency fund as not only some numbers you have tied up in some financial institution in a server farm somewhere but hard cash and transactables (a word?) you can grab quickly in a real emergency and go and not have to worry whether the credit card machine is going be down or some place that doesn't deal in credit at all.
I'm sure this sounds maybe on "edge of society" type of thinking.To me emergency fund means just that, and there can be many types of emergencies and I try to prepare for as many as I can envision.
You carry a jack in your car and a spare? You stick a hundred (or more practical some twenties) folded up in the side pocket of your wallet? You get travel insurance and homeowners? All different types of emergencies you try to prep for.

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Re: Why do we need an emergency fund?

Post by stoptothink » Sun Jun 18, 2017 3:50 pm

Marylander1 wrote:
infotrader wrote:I have a really "un-bogleheading" and stupid question: why we need an emergency fund? Or, in which case an emergency fund is used?

Here's a scenario: you get the flu around Thanksgiving, and somehow it doesn't go away through the New Year. It turns into a sinus infection, and threatens to become pneumonia. As January progresses, you're sleeping 12 hours a day grows to 16. When you're awake, you're still exhausted; working is impossible. In February, the doctors give you a diagnosis and start chemotherapy.

By the way, this is February 2009; the market is crashing. It'll be 3 years before you can work again, after $450,000 in medical care.

This scenario wasn't hypothetical for someone I know. It turned out the seeds had been sown a decade earlier, with a root canal from a dentist who didn't quite finish the job.

If you have an emergency, it'll probably be different. But available reserves (whether in your accounts, or loved ones willing to lend while hoping for your recovery) make a huge difference when trouble strikes.

-Marylander1


Very sad story, not so sure how it is relevant. Does anybody keep an emergency fund of $450k? That isn't really possible for the overwhelming majority of the workforce. You can't plan for things like that.

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Re: Why do we need an emergency fund?

Post by patrick » Sun Jun 18, 2017 3:52 pm

Marylander1 wrote:
infotrader wrote:I have a really "un-bogleheading" and stupid question: why we need an emergency fund? Or, in which case an emergency fund is used?

Here's a scenario: you get the flu around Thanksgiving, and somehow it doesn't go away through the New Year. It turns into a sinus infection, and threatens to become pneumonia. As January progresses, you're sleeping 12 hours a day grows to 16. When you're awake, you're still exhausted; working is impossible. In February, the doctors give you a diagnosis and start chemotherapy.

By the way, this is February 2009; the market is crashing. It'll be 3 years before you can work again, after $450,000 in medical care.

This scenario wasn't hypothetical for someone I know. It turned out the seeds had been sown a decade earlier, with a root canal from a dentist who didn't quite finish the job.

If you have an emergency, it'll probably be different. But available reserves (whether in your accounts, or loved ones willing to lend while hoping for your recovery) make a huge difference when trouble strikes.


Recommendations for emergency funds do seem to be increasing -- the old recommendation was 3 to 6 months, but now I've seen some of a year or more. Nonetheless, how many are going to save $450,000 in emergency cash?

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Re: Why do we need an emergency fund?

Post by patrick » Sun Jun 18, 2017 3:55 pm

nedsaid wrote:As the great T-Shirt philosopher once said, "Stuff Happens." I actually substituted "Stuff" for a barnyard term, but you get the idea. Stocks are meant as a long term investment, you don't want a double whammy of a down market and a financial emergency. The emergency fund is a way of keeping long term investments long term. There are all kinds of things that can go wrong in life and it is always good to have a buffer.


If you put your money in emergency funds instead of long term investments, then you aren't keeping long term investments long term because you don't have long term investments at all -- or at least you will have less long term investments, and they won't be so for so long a term either if you waited until filling up a large emergency fund before you started making the long term investments.

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Re: Why do we need an emergency fund?

Post by patrick » Sun Jun 18, 2017 3:58 pm

NorCalDad wrote:
ljford7 wrote:Not everyone "needs" an emergency fund. If you have access to sizable credit accounts and/or easily accessible taxable accounts, the need to keep a bunch of cash on hand is minimized.

Like most personal finance topics, it depends on your situation, comfort level and net worth.

Agreed. The ones who most need an emergency fund are not on Bogleheads. People here generally have high net worth, ready access to credit and investments they can liquidate if need be.

The ones who would benefit most by an EF have low/negative net worth and few assets to draw upon in an emergency. It was a building block for me years ago and it remains a building block for most people getting their house in order. Bogleheads with high net worth have the freedom to make EF an academic argument. Those who are one car accident away from missing the rent/house payment do not.


Which seems to be saying that the people who really need emergency funds are those who don't have them and will likely find it difficult to establish them. I think that's probably correct, although rather gloomy.

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StevieG72
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Re: Why do we need an emergency fund?

Post by StevieG72 » Sun Jun 18, 2017 4:04 pm

I don't have one, but I do have access to an open ended credit account that would easily cover 6 months of my living expenses. Some may argue that if I lose my job I could lose that line of credit which is true, however I could just pull money from taxable investments if that happened.

I think the emergency fund is a step in the process for those climbing out of debt. Folks that are living paycheck to paycheck, most of us have been there at some point.
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123
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Re: Why do we need an emergency fund?

Post by 123 » Sun Jun 18, 2017 4:09 pm

Things happen. If you are a one-car household and your car gets stolen you may need cash to get a replacement ASAP. Sure you may have car insurance but between police reports and insurance paperwork it could be a number of weeks to get a claim settled. Major appliance could fail and repair may not be a realistic option based on the item's age. Sure if you've got an adequate credit line, credit cards etc, you may be able to use that as an emergency fund. But even though many unexpected expenses, like funeral expenses, may be temporarily deferred for something like 30 days, you still have to raise cash within a month to start paying them. Even though your life is organized and planned you may have an emergency strike a family member where it becomes necessary for you to assist. Your income could stop, either from unemployment or a screw-up by a government agency like social security. The purpose of an emergency fund is to meet those kind of needs.
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Re: Why do we need an emergency fund?

Post by Sandtrap » Sun Jun 18, 2017 4:13 pm

Health catastrophe.
Life catastrophe.

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Re: Why do we need an emergency fund?

Post by delamer » Sun Jun 18, 2017 4:16 pm

stoptothink wrote:
Marylander1 wrote:
infotrader wrote:I have a really "un-bogleheading" and stupid question: why we need an emergency fund? Or, in which case an emergency fund is used?

Here's a scenario: you get the flu around Thanksgiving, and somehow it doesn't go away through the New Year. It turns into a sinus infection, and threatens to become pneumonia. As January progresses, you're sleeping 12 hours a day grows to 16. When you're awake, you're still exhausted; working is impossible. In February, the doctors give you a diagnosis and start chemotherapy.

By the way, this is February 2009; the market is crashing. It'll be 3 years before you can work again, after $450,000 in medical care.

This scenario wasn't hypothetical for someone I know. It turned out the seeds had been sown a decade earlier, with a root canal from a dentist who didn't quite finish the job.

If you have an emergency, it'll probably be different. But available reserves (whether in your accounts, or loved ones willing to lend while hoping for your recovery) make a huge difference when trouble strikes.

-Marylander1


Very sad story, not so sure how it is relevant. Does anybody keep an emergency fund of $450k? That isn't really possible for the overwhelming majority of the workforce. You can't plan for things like that.


It isn't paying for the medical care, but paying your basic bills like rent and food when you can't work. Most people aren't going to have three years of expenses in an emergency fund (nor should they), but six months would give you some breathing room to figure out how to deal with your new reality.

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Re: Why do we need an emergency fund?

Post by Marylander1 » Sun Jun 18, 2017 4:38 pm

delamer wrote:
stoptothink wrote:Very sad story, not so sure how it is relevant. Does anybody keep an emergency fund of $450k? That isn't really possible for the overwhelming majority of the workforce. You can't plan for things like that.

It isn't paying for the medical care, but paying your basic bills like rent and food when you can't work. Most people aren't going to have three years of expenses in an emergency fund (nor should they), but six months would give you some breathing room to figure out how to deal with your new reality.

Precisely. Medical insurance covered much of the medical expenses--but doesn't pay for housing, food, and the rest of life even when expenses are super-critically minimized. That's where the emergency fund was essential.

-Marylander1

OnTrack2020
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Re: Why do we need an emergency fund?

Post by OnTrack2020 » Sun Jun 18, 2017 4:48 pm

Depending on your living situation, here's why:

1. We have had three major rain/wind storms over a 12-month period. Straight-line winds do major damage. We had several trees uproot during the storm; one fell on our roof. We needed to get it off quickly. The company who came to get the tree off our roof doesn't accept credit cards, and we needed to pay him within the day. We also had to replace the roof at some point; that we were able to take care of with savings and selling some taxable investments. The roofing contractor doesn't take credit cards.

2. Yesterday our son's 16-year-old pick-up truck started spewing smoke inside the cab. Had it towed. Hope it can be fixed fairly inexpensively, or we'll be helping him purchase another truck. We are heavily reliant on vehicles and there isn't public transportation here. This can be taken care of with a loan if need be, but due to work schedules, etc., he needs to have a vehicle of some sort. Another reason to have money you can get to quickly.

3. Dental expenses (or other medical expenses for that matter.) Was having severe pain in a tooth earlier this year on a weekend, went to urgent care, needed antibiotics, went to the dentist the next day, and then had to set up an appointment with an endodontist a few hours away. I wasn't feeling well enough during this time frame to sit down and sell funds to pay for dental treatment. $1,000 for root canal. Doctor wanted paid upfront. I put it on a credit card, but still has to be paid somehow, either through FSA or emergency savings.

There are all kinds of things that come up--trust me. Better to have some put back. It just makes life a little easier.
Last edited by OnTrack2020 on Sun Jun 18, 2017 4:53 pm, edited 2 times in total.

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Re: Why do we need an emergency fund?

Post by stoptothink » Sun Jun 18, 2017 4:51 pm

Marylander1 wrote:
delamer wrote:
stoptothink wrote:Very sad story, not so sure how it is relevant. Does anybody keep an emergency fund of $450k? That isn't really possible for the overwhelming majority of the workforce. You can't plan for things like that.

It isn't paying for the medical care, but paying your basic bills like rent and food when you can't work. Most people aren't going to have three years of expenses in an emergency fund (nor should they), but six months would give you some breathing room to figure out how to deal with your new reality.

Precisely. Medical insurance covered much of the medical expenses--but doesn't pay for housing, food, and the rest of life even when expenses are super-critically minimized. That's where the emergency fund was essential.

-Marylander1


I understand, but that doesn't really change it that much. Your anecdote was 3yrs; how many people have 3yrs of expenses in a dedicated emergency fund? Some things you really can't plan for. We keep a few thousand in a high yield online savings account, otherwise nada. With a two-income household, either of which easily could cover our living expenses, not to mention 6-figures in Roth IRAs, nearly 6-figures in credit, and several other sources of quickly liquid funds, what would be the point? I guess there is an (infinitesimally small) chance that both us could lose our very stable jobs and not be able to find other employment for a long time (even less likely) or have medical emergencies at the same time.

Depending on your specific situation, you absolutely should keep some cash quickly available because as adults things just come up, but in situations like ours (which is the norm on this board), for that to be 6+ months of expenses rarely makes much sense.
Last edited by stoptothink on Sun Jun 18, 2017 4:54 pm, edited 1 time in total.

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Re: Why do we need an emergency fund?

Post by stoptothink » Sun Jun 18, 2017 4:53 pm

patrick wrote:
NorCalDad wrote:
ljford7 wrote:Not everyone "needs" an emergency fund. If you have access to sizable credit accounts and/or easily accessible taxable accounts, the need to keep a bunch of cash on hand is minimized.

Like most personal finance topics, it depends on your situation, comfort level and net worth.

Agreed. The ones who most need an emergency fund are not on Bogleheads. People here generally have high net worth, ready access to credit and investments they can liquidate if need be.

The ones who would benefit most by an EF have low/negative net worth and few assets to draw upon in an emergency. It was a building block for me years ago and it remains a building block for most people getting their house in order. Bogleheads with high net worth have the freedom to make EF an academic argument. Those who are one car accident away from missing the rent/house payment do not.


Which seems to be saying that the people who really need emergency funds are those who don't have them and will likely find it difficult to establish them. I think that's probably correct, although rather gloomy.


Exactly.

delamer
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Re: Why do we need an emergency fund?

Post by delamer » Sun Jun 18, 2017 6:07 pm

stoptothink wrote:
Marylander1 wrote:
delamer wrote:
stoptothink wrote:Very sad story, not so sure how it is relevant. Does anybody keep an emergency fund of $450k? That isn't really possible for the overwhelming majority of the workforce. You can't plan for things like that.

It isn't paying for the medical care, but paying your basic bills like rent and food when you can't work. Most people aren't going to have three years of expenses in an emergency fund (nor should they), but six months would give you some breathing room to figure out how to deal with your new reality.

Precisely. Medical insurance covered much of the medical expenses--but doesn't pay for housing, food, and the rest of life even when expenses are super-critically minimized. That's where the emergency fund was essential.

-Marylander1


I understand, but that doesn't really change it that much. Your anecdote was 3yrs; how many people have 3yrs of expenses in a dedicated emergency fund? Some things you really can't plan for. We keep a few thousand in a high yield online savings account, otherwise nada. With a two-income household, either of which easily could cover our living expenses, not to mention 6-figures in Roth IRAs, nearly 6-figures in credit, and several other sources of quickly liquid funds, what would be the point? I guess there is an (infinitesimally small) chance that both us could lose our very stable jobs and not be able to find other employment for a long time (even less likely) or have medical emergencies at the same time.

Depending on your specific situation, you absolutely should keep some cash quickly available because as adults things just come up, but in situations like ours (which is the norm on this board), for that to be 6+ months of expenses rarely makes much sense.


Your family has multiple sources of funds to carry you through an income energency. Most families -- although probably not most Bogleheads -- don't have even one. At any rate, the original question was "why do we need an emergency fund?" And it is to be able to cover expenses in the case of a loss of income and so it needs to be quite liquid.

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nedsaid
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Re: Why do we need an emergency fund?

Post by nedsaid » Sun Jun 18, 2017 6:30 pm

patrick wrote:
Marylander1 wrote:
infotrader wrote:I have a really "un-bogleheading" and stupid question: why we need an emergency fund? Or, in which case an emergency fund is used?

Here's a scenario: you get the flu around Thanksgiving, and somehow it doesn't go away through the New Year. It turns into a sinus infection, and threatens to become pneumonia. As January progresses, you're sleeping 12 hours a day grows to 16. When you're awake, you're still exhausted; working is impossible. In February, the doctors give you a diagnosis and start chemotherapy.

By the way, this is February 2009; the market is crashing. It'll be 3 years before you can work again, after $450,000 in medical care.

This scenario wasn't hypothetical for someone I know. It turned out the seeds had been sown a decade earlier, with a root canal from a dentist who didn't quite finish the job.

If you have an emergency, it'll probably be different. But available reserves (whether in your accounts, or loved ones willing to lend while hoping for your recovery) make a huge difference when trouble strikes.


Recommendations for emergency funds do seem to be increasing -- the old recommendation was 3 to 6 months, but now I've seen some of a year or more. Nonetheless, how many are going to save $450,000 in emergency cash?


The $450,000 or most of that should be covered by health insurance. What is recommended is 6 months of normal living expenses. I recommend that be upped to a year by the time you get to age 50. Unfortunately, when you get past age 50, you become a juicy target for lay-offs.
A fool and his money are good for business.

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Re: Why do we need an emergency fund?

Post by 22twain » Sun Jun 18, 2017 6:37 pm

infotrader wrote:I have never had an emergency fund, and all I have is money invested and money to be invested. I did not have college fund for my kids too, but sent both of them to private colleges. Don't get me wrong. I just make an average salary, and have not inherited any money.


What fraction of your investments is in taxable versus tax-deferred accounts?

Until I inherited some money in my mid-50s, all my "investments" were in my tax-deferred 403(b) plan at work, and therefore pretty much "locked up" until I reached age 60. I never had a specifically designated "emergency fund" either, but I always kept several months' worth of salary in my checking account as a cushion for large expenses, which served the same purpose.

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Re: Why do we need an emergency fund?

Post by Dottie57 » Sun Jun 18, 2017 6:37 pm

An emergency fund is for emergencies when you need cash NOW. Like when you are told your dad is dying, mom is glassy eyed and he is being transferred to a physical hospice. Hospice want money NOW on Friday evening. I had money in checking and savings , so wrote a check which was cashed on Monday morning by Hospice. I needed to pay on friday night. Mom wasn't capable. Glad I had the money. No credit cards allowed.

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nedsaid
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Re: Why do we need an emergency fund?

Post by nedsaid » Sun Jun 18, 2017 6:54 pm

patrick wrote:
nedsaid wrote:As the great T-Shirt philosopher once said, "Stuff Happens." I actually substituted "Stuff" for a barnyard term, but you get the idea. Stocks are meant as a long term investment, you don't want a double whammy of a down market and a financial emergency. The emergency fund is a way of keeping long term investments long term. There are all kinds of things that can go wrong in life and it is always good to have a buffer.


If you put your money in emergency funds instead of long term investments, then you aren't keeping long term investments long term because you don't have long term investments at all -- or at least you will have less long term investments, and they won't be so for so long a term either if you waited until filling up a large emergency fund before you started making the long term investments.


What I would recommend is to build the emergency funds over time. No one is saying that you have to live on beans and weenies until you have 6 months of expenses in cash at the bank. I started out with nothing and what I did was put money in the bank and start on my retirement at the same time. It isn't an either, or proposition.

There are a couple reasons for lack of emergency funds. First, the cost of housing is dramatically higher than it was 34 years ago when I started my career. Certain areas of the country are very expensive to live. Second, jobs are harder to get for even college graduates. It does seem to be tougher now for a young person to get started.

But a lot of people who claim they can't save seem to have all the cool toys that I don't have. They don't seem to make good financial decisions. A lot of little things add up to big money over time. I did a lot of things like taking my lunch to work, taking mass transit, and going easy on such places as Starbucks. My cellphone is a pre-paid cell phone.
A fool and his money are good for business.

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Re: Why do we need an emergency fund?

Post by Mr.BB » Sun Jun 18, 2017 7:24 pm

An emergency fund has much more value when one is working versus in retirement collecting a pension and/or social security.
Some people will look at having a large money market acct to tap in retirement as a cash bucket, after all you don't want to withdrawal money on your savings if the market is down 40%.

But if your working, even with a proper AA not having to touch your savings during a down time is what an emergency fund is all about.
"We are what we repeatedly do. Excellence, then, is not an act, but a habit."

adam1712
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Re: Why do we need an emergency fund?

Post by adam1712 » Sun Jun 18, 2017 7:28 pm

I'm the same as OP. I keep about $3,000 cash in a checking account, but everything else is allocated to my 75/25 AA. I buy and sell as needed and in lines with my AA.

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