Sell me on the benefits of an emergency fund

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Salmonid
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Sell me on the benefits of an emergency fund

Post by Salmonid » Sun Feb 18, 2018 1:29 am

I'm struggling to see why I should bother with a cash equivalent emergency fund. What risks would I be hedging against?

I have a year plus of living expenses in after tax investments that I could access if the need was truly dire. What are the advantages of taking part of that out of the market?

It seems like the single most likely "emergency" would be unexpected job loss. In that event, the payout of my PTO balance would cover several months of living expenses, and then in the unlikely event I didn't find another job unemployment or (worst case) long term disability would kick in.

I have a substantial savings rate, so I could cover an unexpected expense pretty well by charging it and cutting savings for a month to pay the balance.

I realize not maintaining a dedicated emergency fund is contrary to conventional wisdom, so I'm concerned that I'm missing something here.

sambb
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Re: Sell me on the benefits of an emergency fund

Post by sambb » Sun Feb 18, 2018 1:37 am

Im sure people here will talk about all the emergencies that could happen, but in reality, having the fund was a terrible decision for me, and i got rid of it. I have significant taxable holdings, and a few credit cards. YMMV

mega317
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Re: Sell me on the benefits of an emergency fund

Post by mega317 » Sun Feb 18, 2018 1:44 am

I don't think you're necessary missing anything, lots of people don't have a cash emergency fund. Just make sure you can withstand a common bad scenario which is you lose your job at the same time the market crashes. Will you still have enough to cover living expenses for a while?

mrpotatoheadsays
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Re: Sell me on the benefits of an emergency fund

Post by mrpotatoheadsays » Sun Feb 18, 2018 2:14 am

A major earthquake hits. Power is knocked-out, businesses are closed. The only thing being accepted is cash. I go to my safe and pull out my emergence fund - a stack on fresh bills to trade for food and water.

Replace "earthquake" with "Chinese cyberattack" or "fire" or "flood" or ...

AlohaJoe
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Re: Sell me on the benefits of an emergency fund

Post by AlohaJoe » Sun Feb 18, 2018 2:40 am

You're not missing anything.

You don't need an emergency fund.

Many people feel better if they have one. If you're not one of those people, then there's no need to have it, provided you have some vaguely plausible plan to handle whatever emergencies you consider reasonable. After all, even holding a 12 month emergency fund all in physical cash and gold bullion doesn't protect one against every possible emergency, so it is all about making trade-offs and one's own estimation of future probabilities.

The varying definitions of "emergency" and "emergency funds" make it nearly impossible to have a comprehensive or coherent discussion. Some people think an emergency fund is for Chinese cyberattacks; some think it is for unexpected unemployment; some think it is to avoid selling equities when your car engine blows up in the middle of a bear market; some think it has to held in physical cash; some think a savings account; some think i-bonds are okay; some think a Roth is okay.

I don't have an emergency fund.

HRPennypacker
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Re: Sell me on the benefits of an emergency fund

Post by HRPennypacker » Sun Feb 18, 2018 3:02 am

Helps me sleep better at night, so I have one. That's probably the main reason.

gotester2000
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Re: Sell me on the benefits of an emergency fund

Post by gotester2000 » Sun Feb 18, 2018 3:05 am

I think the idea of emergency fund is of a fixed rate return , highly liquid instrument - you dont need physical cash(maybe $1k if you worry too much.)
I would not put anything that you require in less than a year(I prefer 5) in the market. Your risk taking ability changes with age and experience.
Last edited by gotester2000 on Sun Feb 18, 2018 3:46 am, edited 1 time in total.

ssquared87
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Re: Sell me on the benefits of an emergency fund

Post by ssquared87 » Sun Feb 18, 2018 3:26 am

You don't need a dedicated emergency fund.

If you are confident that you will have liquidity to support 6 or 12 months of living expenses or however many you feel comfortable with, then having a savings account with that amount isn't necessary. When your portfolio is large enough that a 50% hit would still leave you with enough $ to cover your living expenses, you're probably in good enough shape

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camillus
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Re: Sell me on the benefits of an emergency fund

Post by camillus » Sun Feb 18, 2018 4:37 am

Salmonid wrote:
Sun Feb 18, 2018 1:29 am
I have a year plus of living expenses in after tax investments
You don't need an emergency fund if you'd feel okay withdrawing money in a downturn.

chevca
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Re: Sell me on the benefits of an emergency fund

Post by chevca » Sun Feb 18, 2018 7:41 am

OP, you don't need an EF.

I feel an EF is good for those starting out, or when all one's investments are in tax advantaged and not easy to get at. If one has enough in taxable or enough assets in some form, I don't think they need a designated EF. It would be a comfort thing at that point to have one or not.

angelescrest
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Re: Sell me on the benefits of an emergency fund

Post by angelescrest » Sun Feb 18, 2018 7:45 am

camillus wrote:
Sun Feb 18, 2018 4:37 am
Salmonid wrote:
Sun Feb 18, 2018 1:29 am
I have a year plus of living expenses in after tax investments
You don't need an emergency fund if you'd feel okay withdrawing money in a downturn.
I think this is the key, assuming you have money to withdraw—which you do. The market drops 50%, and you also lose your job. Time to withdraw that money!

UpperNwGuy
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Re: Sell me on the benefits of an emergency fund

Post by UpperNwGuy » Sun Feb 18, 2018 8:10 am

I don’t have a separate emergency fund. I assessed the likely risks going forward and determined that that they were mostly covered by insurance, or they could be addressed through management of my existing financial resources. I never keep more than $300 of cash on hand.

blevine
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Re: Sell me on the benefits of an emergency fund

Post by blevine » Sun Feb 18, 2018 8:13 am

mrpotatoheadsays wrote:
Sun Feb 18, 2018 2:14 am
A major earthquake hits. Power is knocked-out, businesses are closed. The only thing being accepted is cash. I go to my safe and pull out my emergence fund - a stack on fresh bills to trade for food and water.

Replace "earthquake" with "Chinese cyberattack" or "fire" or "flood" or ...
US ccy is no longer accepted....why not gold ;-)

Dottie57
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Re: Sell me on the benefits of an emergency fund

Post by Dottie57 » Sun Feb 18, 2018 8:14 am

mrpotatoheadsays wrote:
Sun Feb 18, 2018 2:14 am
A major earthquake hits. Power is knocked-out, businesses are closed. The only thing being accepted is cash. I go to my safe and pull out my emergence fund - a stack on fresh bills to trade for food and water.

Replace "earthquake" with "Chinese cyberattack" or "fire" or "flood" or ...
+1

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welderwannabe
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Re: Sell me on the benefits of an emergency fund

Post by welderwannabe » Sun Feb 18, 2018 8:15 am

I keep about about 9 months of expenses in Vanguards Municipal Money Market. Go back in time and imagine it is 2008 after a 50% downturn in the market and you got laid off because you worked for Lehman or something. Do you really want to be liquidating stocks then to cover living expenses? This is why I keep a e-fund.

I would prefer the $40K I have in my efund to be in the market appreciating, but having it helps me sleep at night.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

Jags4186
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Re: Sell me on the benefits of an emergency fund

Post by Jags4186 » Sun Feb 18, 2018 8:35 am

Not everyone has years worth of expenses in a taxable account. IMO count your emergency fund as part of your bond allocation. You don't need it to be 100% liquid, throw it in laddered CDs. Biggest emergency most people face is sudden loss of employment. That doesn't involve an immediate large expense, but a slow trickle of expenses.

RetireSoon90
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Re: Sell me on the benefits of an emergency fund

Post by RetireSoon90 » Sun Feb 18, 2018 8:38 am

I always wonder if I keep my emergency fund in the best place, I have it in a Discover Card Savings account at 1.35 APY. What is the benefit of keeping your emergency fund in a Vanguard Municipal Money Market? Hoping to learn :) Thanks!

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welderwannabe
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Re: Sell me on the benefits of an emergency fund

Post by welderwannabe » Sun Feb 18, 2018 8:49 am

RetireSoon90 wrote:
Sun Feb 18, 2018 8:38 am
I always wonder if I keep my emergency fund in the best place, I have it in a Discover Card Savings account at 1.35 APY. What is the benefit of keeping your emergency fund in a Vanguard Municipal Money Market? Hoping to learn :) Thanks!
Nothing wrong with what you are doing there. I am in the 37% federal bracket this year, plus the net investment tax, so after taxes I am better off in the municipal money market since it is largely tax free income for us.

I keep my e-fund in a totally separate brokerage account. It is separate from all investing etc. I like having it hidden away in its own account.

Many people move their efund around to chase bank deposit bonuses. Thats fine too. Whatever works and keep someone from touching it. I have to save myself from myself, and keeping it in a separate brokerage account keeps me from spending the money on things it shouldn't get spent on...burning a hole in my pocket so to speak.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

DC3509
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Re: Sell me on the benefits of an emergency fund

Post by DC3509 » Sun Feb 18, 2018 9:17 am

chevca wrote:
Sun Feb 18, 2018 7:41 am
OP, you don't need an EF.

I feel an EF is good for those starting out, or when all one's investments are in tax advantaged and not easy to get at. If one has enough in taxable or enough assets in some form, I don't think they need a designated EF. It would be a comfort thing at that point to have one or not.
So what would be "enough" in a taxable account?

jmetsrule
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Re: Sell me on the benefits of an emergency fund

Post by jmetsrule » Sun Feb 18, 2018 9:34 am

DC3509 wrote:
Sun Feb 18, 2018 9:17 am
chevca wrote:
Sun Feb 18, 2018 7:41 am
OP, you don't need an EF.

I feel an EF is good for those starting out, or when all one's investments are in tax advantaged and not easy to get at. If one has enough in taxable or enough assets in some form, I don't think they need a designated EF. It would be a comfort thing at that point to have one or not.
So what would be "enough" in a taxable account?
I agree with chevca. I'd say, keep an EF of 6 months to 1 year (depending on your psychological comfort level) until you can build a 1.5 x expenses taxable account. Then, move the EF into the taxable. Or, merge the two when they both equal out to 1.5 x expenses.

Why you would need an EF is dependent on a lot of factors that really only you would know. How secure is your job? Are you maxing out your tax-advantaged accounts? Do you have important family liabilities? Can you already see a potential problem on the horizon in the next 3-5 years: change in company leadership, potentially catastrophic expenses that will take a large chunk out of savings, medical issues?

No on one this forum should make this decision for you. You need to reflect on your personal circumstances and decide if you need an EF.

Admiral
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Re: Sell me on the benefits of an emergency fund

Post by Admiral » Sun Feb 18, 2018 9:36 am

DC3509 wrote:
Sun Feb 18, 2018 9:17 am
chevca wrote:
Sun Feb 18, 2018 7:41 am
OP, you don't need an EF.

I feel an EF is good for those starting out, or when all one's investments are in tax advantaged and not easy to get at. If one has enough in taxable or enough assets in some form, I don't think they need a designated EF. It would be a comfort thing at that point to have one or not.
So what would be "enough" in a taxable account?
6-12 mos basic living expenses (home, utils, food, etc). I would not include "assets" like a home when defining/funding an emergency fund. It should be liquid assets. I would also think carefully about having your EF all in equities subject to steep market loss and how you'd feel selling them at that time, if needed. Many of us strive to NOT sell in a downturn. Many also have credit cards that can be used for at least a few months...provided you have money to pay the bills when they arrive.

3funder
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Re: Sell me on the benefits of an emergency fund

Post by 3funder » Sun Feb 18, 2018 9:37 am

Simple solution: just build a small emergency fund.

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Pajamas
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Re: Sell me on the benefits of an emergency fund

Post by Pajamas » Sun Feb 18, 2018 9:40 am

Emergency funds are a great idea for people living on the edge. More than a third or a half of Americans would have to go into debt to cover a $500 or $1,000 unexpected expense, depending on which survey you look at. For people with sufficient financial assets it is just necessary to be able to access them when needed.

My emergency fund is a few $20 bills stashed in a book just in case I want to order a pizza and my wallet is empty because I haven't made it to the ATM and the pizza place can't process credit cards. I have never needed to access it.

Admiral
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Re: Sell me on the benefits of an emergency fund

Post by Admiral » Sun Feb 18, 2018 9:43 am

Pajamas wrote:
Sun Feb 18, 2018 9:40 am
Emergency funds are a great idea for people living on the edge. More than a third or a half of Americans would have to go into debt to cover a $500 or $1,000 unexpected expense, depending on which survey you look at. For people with sufficient financial assets it is just necessary to be able to access them when needed.

My emergency fund is a few $20 bills stashed in a book just in case I want to order a pizza and my wallet is empty because I haven't made it to the ATM and the pizza place can't process credit cards. I have never needed to access it.
Hope you don't live in Puerto Rico! :?

chevca
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Re: Sell me on the benefits of an emergency fund

Post by chevca » Sun Feb 18, 2018 9:45 am

DC3509 wrote:
Sun Feb 18, 2018 9:17 am
chevca wrote:
Sun Feb 18, 2018 7:41 am
OP, you don't need an EF.

I feel an EF is good for those starting out, or when all one's investments are in tax advantaged and not easy to get at. If one has enough in taxable or enough assets in some form, I don't think they need a designated EF. It would be a comfort thing at that point to have one or not.
So what would be "enough" in a taxable account?
That's up to the individual. There is no one answer. Typically though, one with a taxable account has a high income, high savings rate, or both. They can probably figure out what enough is easy enough.

Personally, I prefer having an EF and likely always will. At least a little one, not a year of expenses. Keeping $10-15k out of the market isn't likely to make or break me and it makes me more comfortable. Others, it might make their skin crawl to have even that amount making savings account rates. To each their own.

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Pajamas
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Re: Sell me on the benefits of an emergency fund

Post by Pajamas » Sun Feb 18, 2018 9:48 am

Admiral wrote:
Sun Feb 18, 2018 9:43 am
Hope you don't live in Puerto Rico! :?

I keep several weeks' worth of food (at least) and other supplies on hand for situations like hurricanes and earthquakes and have had to use at least some of it on more than one occasion, although there would have been alternatives had I been unprepared. Different issue than an emergency fund.

H-Town
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Re: Sell me on the benefits of an emergency fund

Post by H-Town » Sun Feb 18, 2018 9:52 am

Salmonid wrote:
Sun Feb 18, 2018 1:29 am
I'm struggling to see why I should bother with a cash equivalent emergency fund. What risks would I be hedging against?

I have a year plus of living expenses in after tax investments that I could access if the need was truly dire. What are the advantages of taking part of that out of the market?

It seems like the single most likely "emergency" would be unexpected job loss. In that event, the payout of my PTO balance would cover several months of living expenses, and then in the unlikely event I didn't find another job unemployment or (worst case) long term disability would kick in.

I have a substantial savings rate, so I could cover an unexpected expense pretty well by charging it and cutting savings for a month to pay the balance.

I realize not maintaining a dedicated emergency fund is contrary to conventional wisdom, so I'm concerned that I'm missing something here.
Life happens.

- One morning you go to work, your car broke down. You need a replacement car.
- One night you come back from work, your wife tells you she wants a divorce.
- Just as you come back home from a vacation, a fire destroy your house and all your belongings.
- One day you wake up, your wife got sick and diagnosed with cancer. She goes to long-term treatment and your family loses one source of income. All your savings get wiped out in a matter of months.
- One weekend, you have a fun class reunion party and have one glass too much to drink. You cause an accident and kill another person. His/her family sues you to your bones.
- The global economy goes to the next Great Depression. Everyone's stock portfolio loses up to 80% value.

Shall I go on?

Put it as whatever you want, but stock market always has two components, two faces of the same coin: risk and rewards. As far as risk management goes, when you expose all of elements of your life to risk, you'll get caught with your pants down, eventually.

chevca
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Re: Sell me on the benefits of an emergency fund

Post by chevca » Sun Feb 18, 2018 10:03 am

thangngo wrote:
Sun Feb 18, 2018 9:52 am
Salmonid wrote:
Sun Feb 18, 2018 1:29 am
I'm struggling to see why I should bother with a cash equivalent emergency fund. What risks would I be hedging against?

I have a year plus of living expenses in after tax investments that I could access if the need was truly dire. What are the advantages of taking part of that out of the market?

It seems like the single most likely "emergency" would be unexpected job loss. In that event, the payout of my PTO balance would cover several months of living expenses, and then in the unlikely event I didn't find another job unemployment or (worst case) long term disability would kick in.

I have a substantial savings rate, so I could cover an unexpected expense pretty well by charging it and cutting savings for a month to pay the balance.

I realize not maintaining a dedicated emergency fund is contrary to conventional wisdom, so I'm concerned that I'm missing something here.
Life happens.

- One morning you go to work, your car broke down. You need a replacement car.
- One night you come back from work, your wife tells you she wants a divorce.
- Just as you come back home from a vacation, a fire destroy your house and all your belongings.
- One day you wake up, your wife got sick and diagnosed with cancer. She goes to long-term treatment and your family loses one source of income. All your savings get wiped out in a matter of months.
- One weekend, you have a fun class reunion party and have one glass too much to drink. You cause an accident and kill another person. His/her family sues you to your bones.
- The global economy goes to the next Great Depression. Everyone's stock portfolio loses up to 80% value.

Shall I go on?

Put it as whatever you want, but stock market always has two components, two faces of the same coin: risk and rewards. As far as risk management goes, when you expose all of elements of your life to risk, you'll get caught with your pants down, eventually.
How does an EF help with most of the examples you gave?? No need to take it to extremes here.

Most of those would be why we have insurance, not an EF. Why does a car breaking down mean it needs to be replaced? A divorce... or being in jail... yea, an EF is the least of your worries there.

Why do some think withdrawing from investments would only be done from stocks? Does someone with no EF automatically make them a 100/0 investor?

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Sandtrap
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Re: Sell me on the benefits of an emergency fund

Post by Sandtrap » Sun Feb 18, 2018 10:11 am

You don't need an emergency fund if you are willing to withdraw from invested funds (in a down market) in times of "need".
But, if you are concerned with protection of principal, of said emergency fund, then there's a need for CD's, etc.
WIKI: Emergency Fund
[urlhttps://www.bogleheads.org/wiki/Emergency_fund[/url]
j :D

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goingup
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Re: Sell me on the benefits of an emergency fund

Post by goingup » Sun Feb 18, 2018 10:22 am

The idea is to be able to keep yourself afloat if something unexpected happens, without going into debt.

We don't have a separate EF; it's part of our 60/40 portfolio. I guess the whole portfolio, especially taxable account, would become an EF in case of a prolonged crisis.

The decision to have a dedicated EF is very personal to your level of assets and expenses.

runner540
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Re: Sell me on the benefits of an emergency fund

Post by runner540 » Sun Feb 18, 2018 10:30 am

Haven't seen this mentioned yet as a reason:
A good-sized cash or cash equivalent emergency fund helped me pour more money each week into the markets in 2008 and 2009 and buy low. People got laid off every week, the markets fell every week, huge companies were going bankrupt... If I had not already had the dedicated emergency fund, I probably would have lost my nerve and started hoarding cash instead of investing it at record lows.

The opportunity cost is of not investing my EF is what I view as an insurance premium.
Last edited by runner540 on Sun Feb 18, 2018 10:45 am, edited 1 time in total.

chevca
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Re: Sell me on the benefits of an emergency fund

Post by chevca » Sun Feb 18, 2018 10:33 am

Then it wasn't really your EF if you were investing it. :wink:

SCV_Lawyer
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Re: Sell me on the benefits of an emergency fund

Post by SCV_Lawyer » Sun Feb 18, 2018 10:41 am

You just need access to capital, and it doesn't need to be cash or bonds either. As livesoft has explained several times, even if your taxable account is 100% equities that are down at the time, that is OK as long as there are bonds in your qualified plans. Sell the equities in your taxable, and at the same time, sell bonds and buy equities in your qualified plans in the same amount (just be careful for a wash sale rule if you sold equities for a taxable loss).

We also have a $250K no-fee HELOC which we leave fully undrawn. In a matter of minutes, I can pull funds from the HELOC into my checking account at the same bank, and then wire those funds to my primary bank checking account. I know that HELOCs can be frozen, but that doesn't happen immediately upon a bad thing happening (like a job loss). Interest rate is Prime minus 0.25%, so not horrible

And as a last resort, we also have over $100K in credit card availability. But with taxable plus HELOC (which covers several years of expeses), I don't think that would ever be necessary.

KlangFool
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Re: Sell me on the benefits of an emergency fund

Post by KlangFool » Sun Feb 18, 2018 10:43 am

blevine wrote:
Sun Feb 18, 2018 8:13 am
mrpotatoheadsays wrote:
Sun Feb 18, 2018 2:14 am
A major earthquake hits. Power is knocked-out, businesses are closed. The only thing being accepted is cash. I go to my safe and pull out my emergence fund - a stack on fresh bills to trade for food and water.

Replace "earthquake" with "Chinese cyberattack" or "fire" or "flood" or ...
US ccy is no longer accepted....why not gold ;-)
blevine,

I do all 4.

1) Emergency Fund

2) Cash at home.

3) Gold.

4) Enough food and water in the pantry to last at least one week.

KlangFool

runner540
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Re: Sell me on the benefits of an emergency fund

Post by runner540 » Sun Feb 18, 2018 10:47 am

chevca wrote:
Sun Feb 18, 2018 10:33 am
Then it wasn't really your EF if you were investing it. :wink:
chevca, not sure if you intended that comment as a response to mine but I'll clarify: My EF stayed in cash, where it was. It was not and has never been for investing. But since I already had that stashed, I was much more comfortable continuing to invest out of each paycheck throughout the recession. Many other people reacted in the recession by hoarding whatever cash they could get, and not investing.

Agggm
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Re: Sell me on the benefits of an emergency fund

Post by Agggm » Sun Feb 18, 2018 10:51 am

Salmonid wrote:
Sun Feb 18, 2018 1:29 am
I'm struggling to see why I should bother with a cash equivalent emergency fund. What risks would I be hedging against?

I have a year plus of living expenses in after tax investments that I could access if the need was truly dire. What are the advantages of taking part of that out of the market?

It seems like the single most likely "emergency" would be unexpected job loss. In that event, the payout of my PTO balance would cover several months of living expenses, and then in the unlikely event I didn't find another job unemployment or (worst case) long term disability would kick in.

I have a substantial savings rate, so I could cover an unexpected expense pretty well by charging it and cutting savings for a month to pay the balance.

I realize not maintaining a dedicated emergency fund is contrary to conventional wisdom, so I'm concerned that I'm missing something here.
You don't need an emergency fund.

KlangFool
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Re: Sell me on the benefits of an emergency fund

Post by KlangFool » Sun Feb 18, 2018 10:53 am

OP,

1) Have you ever been unemployed?

2) Have you ever been unemployed in a recession?

3) Have you ever been unemployed in a recession and selling your investment at a huge loss in order to feed your family?

There is a huge psychological benefit of having 1 year of the emergency fund when you are faced with the potential of (1) to (3). You can negotiate and hold out for a better job offer. You do not have to take whatever job that is out there.

I had been unemployed for more than 1 year a few times. Thanks to my 1-year emergency fund, I can "Sleep Well At Night" (SWAN) and get a better job offer.

KlangFool

tesuzuki2002
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Re: Sell me on the benefits of an emergency fund

Post by tesuzuki2002 » Sun Feb 18, 2018 10:55 am

Salmonid wrote:
Sun Feb 18, 2018 1:29 am
I'm struggling to see why I should bother with a cash equivalent emergency fund. What risks would I be hedging against?

I have a year plus of living expenses in after tax investments that I could access if the need was truly dire. What are the advantages of taking part of that out of the market?

It seems like the single most likely "emergency" would be unexpected job loss. In that event, the payout of my PTO balance would cover several months of living expenses, and then in the unlikely event I didn't find another job unemployment or (worst case) long term disability would kick in.

I have a substantial savings rate, so I could cover an unexpected expense pretty well by charging it and cutting savings for a month to pay the balance.

I realize not maintaining a dedicated emergency fund is contrary to conventional wisdom, so I'm concerned that I'm missing something here.

What are you missing by having an emergency fund??

KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Sell me on the benefits of an emergency fund

Post by KlangFool » Sun Feb 18, 2018 11:01 am

SCV_Lawyer wrote:
Sun Feb 18, 2018 10:41 am
You just need access to capital, and it doesn't need to be cash or bonds either. As livesoft has explained several times, even if your taxable account is 100% equities that are down at the time, that is OK as long as there are bonds in your qualified plans. Sell the equities in your taxable, and at the same time, sell bonds and buy equities in your qualified plans in the same amount (just be careful for a wash sale rule if you sold equities for a taxable loss).
SCV_Lawyer,

This is assuming the person is not in shock and froze. In a recession and job loss situation, the last thing that a person could do is to act rationally and sell stock or bond in an appropriate fashion. It is not possible for most normal human beings. We will make mistake if we are forced to do something. With one year of the emergency fund, the person does not have to do anything. It is a lot safer.

We need to protect ourselves from any possible bad decision at that stressful situation.

KlangFool

hightower
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Re: Sell me on the benefits of an emergency fund

Post by hightower » Sun Feb 18, 2018 11:05 am

For me keeping an efund depends on how secure I feel in my job. I'm well insured against disability so i'm not worried about losing my job for that reason. But, if I were concerned about my line of work drying up at any time, I'd be more inclined to keep at least 3-6 months cash on hand to cover me if I suddenly stopped receiving paychecks. That's essentially what's happening with me now actually. The hospital where I work is going through some changes and could mean that my group's services are no longer needed in the coming months. It's unpredictable at this point. I'm sure they would give us at least a few months notice, so it's really not an issue, but I am working on getting privileges elsewhere now. Once I have those, I'm not concerned any longer because I can just start working at a new hospital as soon as this one close. But, between now and then (could take several months for credentialing) I am going to be saving everything I make and holding on to it as cash. Just in case there's any chance that I may be without a paycheck for any period of time, though it's highly unlikely this would happen. Once, I feel secure again, I'll re-deploy my funds for their original purpose which is currently student loan debt pay off.
Outside of that, I consider my Roth funds as part of the emergency fund. If sh** really hit the fan, I'd be able to withdraw my original contributions for additional back up. Eventually I'd like to have a large taxable account which will serve as my primary emergency fund moving forward. But, I'm not there yet because I want to get rid of student loans first.

Jon H
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Re: Sell me on the benefits of an emergency fund

Post by Jon H » Sun Feb 18, 2018 11:10 am

thangngo wrote:
Sun Feb 18, 2018 9:52 am
Salmonid wrote:
Sun Feb 18, 2018 1:29 am
I'm struggling to see why I should bother with a cash equivalent emergency fund. What risks would I be hedging against?

I have a year plus of living expenses in after tax investments that I could access if the need was truly dire. What are the advantages of taking part of that out of the market?

It seems like the single most likely "emergency" would be unexpected job loss. In that event, the payout of my PTO balance would cover several months of living expenses, and then in the unlikely event I didn't find another job unemployment or (worst case) long term disability would kick in.

I have a substantial savings rate, so I could cover an unexpected expense pretty well by charging it and cutting savings for a month to pay the balance.

I realize not maintaining a dedicated emergency fund is contrary to conventional wisdom, so I'm concerned that I'm missing something here.
Life happens.

- One morning you go to work, your car broke down. You need a replacement car.
- One night you come back from work, your wife tells you she wants a divorce.
- Just as you come back home from a vacation, a fire destroy your house and all your belongings.
- One day you wake up, your wife got sick and diagnosed with cancer. She goes to long-term treatment and your family loses one source of income. All your savings get wiped out in a matter of months.
- One weekend, you have a fun class reunion party and have one glass too much to drink. You cause an accident and kill another person. His/her family sues you to your bones.
- The global economy goes to the next Great Depression. Everyone's stock portfolio loses up to 80% value.

Shall I go on?

Put it as whatever you want, but stock market always has two components, two faces of the same coin: risk and rewards. As far as risk management goes, when you expose all of elements of your life to risk, you'll get caught with your pants down, eventually.
This.

Nobody ever sees it coming.
Consider gain and loss, but never be greedy and everything will be alright (fortune cookie)

KlangFool
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Re: Sell me on the benefits of an emergency fund

Post by KlangFool » Sun Feb 18, 2018 11:24 am

Salmonid wrote:
Sun Feb 18, 2018 1:29 am

In that event, the payout of my PTO balance would cover several months of living expenses, and then in the unlikely event I didn't find another job unemployment or (worst case) long term disability would kick in.

I have a substantial savings rate, so I could cover an unexpected expense pretty well by charging it and cutting savings for a month to pay the balance.

I realize not maintaining a dedicated emergency fund is contrary to conventional wisdom, so I'm concerned that I'm missing something here.
Salmonid,

<< In that event, the payout of my PTO balance would cover several months of living expenses, >>

Not if the employer filed for bankruptcy. Thousands of ex-Nortel employees did not get their severance payment in 2009/2010.

http://www.newsobserver.com/news/busine ... 65612.html

<< in the unlikely event I didn't find another job unemployment or (worst case) long term disability would kick in.>>

Not finding a job is not the same as long-term disability. In a recession, there are plenty of able-bodied people that cannot find a job.

KlangFool

PlayingLife
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Re: Sell me on the benefits of an emergency fund

Post by PlayingLife » Sun Feb 18, 2018 11:43 am

Pajamas wrote:
Sun Feb 18, 2018 9:40 am
Emergency funds are a great idea for people living on the edge. More than a third or a half of Americans would have to go into debt to cover a $500 or $1,000 unexpected expense, depending on which survey you look at. For people with sufficient financial assets it is just necessary to be able to access them when needed.

My emergency fund is a few $20 bills stashed in a book just in case I want to order a pizza and my wallet is empty because I haven't made it to the ATM and the pizza place can't process credit cards. I have never needed to access it.
I like this quote and definitely agree with the first paragraph. For us, we like having around 20-25K around. The reason is that we like not having to think about money at all should we wish to book a big vacation or have to pay a major unexpected expense like a new furnace, for example. We can just dip in without looking at our day to day account, and then we just replenish over a couple of months. I also like having at least 2-3 months of our mortgage covered just incase...but we are in fairly stable situations so I'm not overly concerned about this. To each his own I think....unless you are in line with the first quote above.

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Re: Sell me on the benefits of an emergency fund

Post by Lafder » Sun Feb 18, 2018 11:55 am

To me, my emergency fund is the money that I have in my checking accounts available to spend. If I feel I have "extra" I might pay extra to my car loan or send more to investments.

I have not actually calculated how many months expenses I have in there. Maybe I do not want to know :)

I need enough "extra" in there that if there is an unexpected expense, or my property tax is due, or car insurance (2 teen drivers :0) is due, or what ever other larger periodic expenses come due............I have it.

This is the account that all income comes into, and all expenses go out of.

I know this month I have an extra $8000 in expected but only annual or semiannual costs, and the money is there to pay for it. My emergency fund is just my checking account with enough "extra" that I almost never have to pull from my taxable savings to cover expenses. The balance hovers around 100k (this number has crept up over the years, it used to be about 10k). Less after estimated tax payments or property tax payments. Then it builds up enough to pay the next time they are due. Yes my plan falls apart if the income stream stops. And that is what my taxable investments are for............emergency loss of work or ?? But if we need that......we have bigger problems than needing to pull from taxable since not working would be due to some kind of personal emergency.

I know my "emergency" fund might be a little different than some peoples' actual calculated month's expenses they keep available. It is months of expenses if our income stream stopped.

What I like about an "emergency fund" is that I keep it separate from my investments where I have a chosen asset allocation.

lafder

chevca
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Re: Sell me on the benefits of an emergency fund

Post by chevca » Sun Feb 18, 2018 12:08 pm

runner540 wrote:
Sun Feb 18, 2018 10:47 am
chevca wrote:
Sun Feb 18, 2018 10:33 am
Then it wasn't really your EF if you were investing it. :wink:
chevca, not sure if you intended that comment as a response to mine but I'll clarify: My EF stayed in cash, where it was. It was not and has never been for investing. But since I already had that stashed, I was much more comfortable continuing to invest out of each paycheck throughout the recession. Many other people reacted in the recession by hoarding whatever cash they could get, and not investing.
Yes, it was in response to yours. My apologies, I thought you meant you took from the EF to buy on the cheap. Thanks for clarifying.

chevca
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Re: Sell me on the benefits of an emergency fund

Post by chevca » Sun Feb 18, 2018 12:16 pm

Lafder wrote:
Sun Feb 18, 2018 11:55 am
To me, my emergency fund is the money that I have in my checking accounts available to spend. If I feel I have "extra" I might pay extra to my car loan or send more to investments.

I have not actually calculated how many months expenses I have in there. Maybe I do not want to know :)

.......

I know my "emergency" fund might be a little different than some peoples' actual calculated month's expenses they keep available. It is months of expenses if our income stream stopped.
This is how I run mine as well. Pretty much call it savings. But, saying I have an EF seems more PC in finance world. :happy

In some of the more extreme examples others have brought up in this one though, pretty much everything one has could be used in an extreme emergency. Not sure why some feel the need to show their way is right by going to extremes??

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nisiprius
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Re: Sell me on the benefits of an emergency fund

Post by nisiprius » Sun Feb 18, 2018 12:31 pm

I don't like postings that make challenges like "sell me..." I'm not interested in seeing whether my irresistible sales force is stronger than your immovable sales resistance.

"Emergency fund" advice is, in reality, all over the map, and I have yet to see any data-based statistical data of what emergencies really happen, what they cost, and what forms of assets will actually work in terms of providing quick enough payment in a form acceptable to the person who needs to be paid.

I think the traditional advice is best understood if you think in terms of "investing" as it was during 1960s, and in a story about my son when he was in college. He called one day because a friend of his was saying that he could earn a lot more money by putting his $5,000 savings into a money market mutual fund instead of a bank. I honestly don't remember what I said--probably that it was fine but that if he did the math he would decide it wasn't worth the effort.

Now, go back to the 1960s, when "investing" typically meant "buying individual stocks and paying a $100+ brokerage commission on every transaction." A twenty-year-old comes to you and says "I have $2,000 in the bank, what stock should I buy?" What would you say to him? You would say "don't put all your savings into stocks; in fact, wait until you have enough so that you can keep a cash reserve for emergencies." It's not crazy; in fact, it's good advice.

OK, fast-forward to your situation. I would say these things.

1) If you have a coherent plan for where you would get the money to meet an emergency, and you are happy with the possibility that the emergency will hit when the stock market is -50% down, and you've thought through the time it takes to turn a number in your brokerage into payment acceptable for the hypothetical emergency, then you don't need anything else.

2) Too insistent an urge to keep every single dollar out of the bank and into something with as much or more risk as a target-date retirement fund sounds to me like greed.

3) I have an emergency fund because that makes me happy. It's a luxury. It's what I choose to do with my money. Some people get a sense of well-being from being really well dressed. Some from owning show-quality pedigreed dogs. I do from having an emergency fund... in the bank.

4) There have been two occasions in the last ten years, neither emergencies, when I was glad I had a chunk of money in the bank. One was when I was buying a new car. I didn't want to finance it. I really wanted a specific car. The dealer said they needed to have a teller's check. I chose to believe them. I was glad I had enough cash in a place that could cut me a teller's check for the right amount, before the day I was committing to take delivery, based on what was already in the account. Another time involved a medical expense of tens of thousands of dollars where I was only 90% sure it would really be covered by insurance, and it gave me considerable peace of mind knowing that if I did get a "surprise" bill I at least knew where I could find the money.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Pajamas
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Re: Sell me on the benefits of an emergency fund

Post by Pajamas » Sun Feb 18, 2018 1:00 pm

PlayingLife wrote:
Sun Feb 18, 2018 11:43 am

I like this quote and definitely agree with the first paragraph. For us, we like having around 20-25K around. The reason is that we like not having to think about money at all should we wish to book a big vacation or have to pay a major unexpected expense like a new furnace, for example. We can just dip in without looking at our day to day account, and then we just replenish over a couple of months. I also like having at least 2-3 months of our mortgage covered just incase...but we are in fairly stable situations so I'm not overly concerned about this. To each his own I think....unless you are in line with the first quote above.
That's more for cash flow management than an emergency fund. You're not worried about how to pay for a $500 car repair or else commuting two hours each way by bus and then losing your job for being late when you miss a connection.

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bligh
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Re: Sell me on the benefits of an emergency fund

Post by bligh » Sun Feb 18, 2018 1:04 pm

I have made several posts on this forum pointing out that I think "Emergency fund" is a poor label given to "Cash Reserves". In a true emergency, your entire net worth becomes your "emergency fund". I am not going to have my family live under a bridge while I have seven figures sitting in an IRA, because I didn't set aside an emergency fund, or burnt through it.

Understand the purpose of cash reserves. Most corporations and businesses keep cash reserves on hand. They don't refer to them as emergency funds. Instead they realize their ongoing and unexpected expenses occur. The cash reserves provide the liquidity needed to be able to tide over most situations where current cash flows are unable to meet current expenses. This could be due loss of income, or due to unexpected spike in expenses. The cash reserves provide immediate liquidity without the need to sell assets, potentially at a loss or inopportune moment.

I have significant (for me) assets in taxable brokerage accounts that I could also tap in an emergency. However, I still maintain cash reserves. The cash reserves fluctuate over time but I keep them in a defined range as much as possible.

I think if we all started referring to it as cash reserves, its function would be much clearer.

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whodidntante
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Re: Sell me on the benefits of an emergency fund

Post by whodidntante » Sun Feb 18, 2018 1:14 pm

sambb wrote:
Sun Feb 18, 2018 1:37 am
Im sure people here will talk about all the emergencies that could happen, but in reality, having the fund was a terrible decision for me, and i got rid of it. I have significant taxable holdings, and a few credit cards. YMMV
Same here. People with sufficient liquidity don't need a big pile of cash. I think for people of means who hold onto big cash positions an "emergency fund" is a way of backdooring a much more conservative portfolio, while still feeling like they are 80/20 or whatever. Which is fine, but call it what it is: a more conservative portfolio.

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