Emergency fund never feels large enough

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trademil
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Emergency fund never feels large enough

Post by trademil » Tue May 22, 2012 5:30 am

Hello,

I would like your advice on a problem I have:
I am single, 25, and have been working and saving for about 3 years now.
I am maxed-out on all my tax-advantage accounts, and my saving rate is high.

My plan was to accumulate 12 months of expenses as emergency fund, and then invest any further savings in 100% equity (VTI + VXUS) in a taxable account (in my tax-advantage accounts I have both equities and bonds).

I have already hit the 12 months of expenses threshold 9 months ago, but then I started thinking - maybe 12 month is not enough? and started to imagine all king of horrible things that might happen that will make me need more then I have in my fund, so I decided to wait until my fund will have 18 months of expenses...

Now, I have a fund of a little more then 18 months, and once again I think maybe I should wait until I have more, I expect to have almost 24 months saved by the end of 2012 (I add to the fund about 2 months of expenses for every 3 months I work, since I save 40% of my after-tax income, not including tax-advantage savings).

So, how do you know when you have enough? how did you choose the size of your emergency fund?

Note I am not trying to time the market or anything like that, I do not wait to buy cheaper, I wait because I'm not sure I will have enough liquidity on hand when it hits the fan.

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nisiprius
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Re: Emergency fund never feels large enough

Post by nisiprius » Tue May 22, 2012 4:56 pm

"How do you know when you have enough?" Alas, you do not. There's no good scientific answer to this question. So many things in life have probability distributions like this--this happens to be nursing home stays, but it doesn't matter, other needs for "emergency funds" are probably similar--
Image
More and more money will carry your farther and farther out on the curve, but there's no sharp fall-off, no well-defined "enough." And it's hard to find statistics on the things we'd like to have statistics for.

One approach is to sort of shrug and look around at your peers and friends and say, "I have no idea whether or not I have enough, but at least I can tell that I'm much better prepared than most people... if they can hack it, I can probably hack it."

But the problem isn't that you don't have enough, the problem is that your emergency fund "never feels large enough." That's a "feeling" question, so you will need to examine your feelings.
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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kenyan
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Re: Emergency fund never feels large enough

Post by kenyan » Tue May 22, 2012 5:56 pm

Do the horrible things you are imagining include insurable events (disability, litigation, etc.), or are they mostly related to job loss? Perhaps you should look at buying some (more?) disability or umbrella insurance.

Maybe easing in to your taxable investing would suit you better. It's not as if your non-cash investments will disappear; they're just riskier. Tax-free bonds, I bonds, etc. are worth consideration.

As noted by the ever-wise nisiprius, it's how you feel that is the issue. Investing methods that are not necessarily the most efficient but make you feel better/safer are perfectly valid.
Retirement investing is a marathon.

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ruralavalon
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Re: Emergency fund never feels large enough

Post by ruralavalon » Tue May 22, 2012 5:59 pm

Welcome to the forum :) .
trademil wrote:Hello,

I would like your advice on a problem I have:
I am single, 25, and have been working and saving for about 3 years now.
I am maxed-out on all my tax-advantage accounts, and my saving rate is high.

My plan was to accumulate 12 months of expenses as emergency fund, and then invest any further savings in 100% equity (VTI + VXUS) in a taxable account (in my tax-advantage accounts I have both equities and bonds).
. . . . .
Now, I have a fund of a little more then 18 months, and once again I think maybe I should wait until I have more, I expect to have almost 24 months saved by the end of 2012 (I add to the fund about 2 months of expenses for every 3 months I work, since I save 40% of my after-tax income, not including tax-advantage savings).
. . . .
Nice problem to have.

Nisi is right, you never know what may be needed, and this is a perception problem. Consider that your Emergency Fund includes these two additions.

First, you can look at your Roth IRA as a second or additional emergency fund. "In some situations, a Roth IRA can be used as emergency fund. Contributions (that is, the money that you put into your Roth) can come out at any time, free of taxes and penalties. This is not true of earnings on your contributions, which are subject to more complex rules . . ." Wiki article link: Emergency fund .

Second, go right ahead and start your taxable account using tax efficient mutual funds or ETFs, like VTI + VXUS. Wiki article link: Principles of Tax-Efficient Fund Placement . Do adjust your bond holdings in tax protected, so you do not increase your risk beyond what you are comfortable with. You can quickly and easily withdraw any amount from your taxable account without penalty, at any time a real need arises. By the time we developed a significant taxable account we stopped using a separate dedicated account as an emergency fund.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

john94549
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Re: Emergency fund never feels large enough

Post by john94549 » Tue May 22, 2012 6:26 pm

I might suggest you have those funds in a place where they earn at least a bit of interest. I have mine with Alliant (slightly less than 1%). It might not seem like much, but, depending on the amount involved, it's better than a punch in the nose.

For a rough-and-ready rule-of-thumb, take your age in months. A twenty-four-year old, 24 months in emergency funds. The older you are, the more time it might take to find alternate employment. A sixty-year old person might need five years or so until Medicare kicks in. An eighty-year old needs a nice set-aside for assisted living, in-home nursing, what have you.

Purists might disagree with my rule-of-thumb, but it has the beauty of simplicity.

Just my $.02.

PS: As you may have gathered, I disagree with the "one-size-fits-all" "X" amount of months in your emergency fund. I've always defined "emergency funds" as the amount it takes to supplement other available income while one is in the "emergency" to obtain the level of income prior to the "emergency".

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Re: Emergency fund never feels large enough

Post by ianferrel » Tue May 22, 2012 7:42 pm

This problem may sort of go away on its own. It did for me.

I'm 30. I could have written exactly the same post five years ago. I also felt like I couldn't have enough of an emergency fund. I built mine out to more than two years expenses at its biggest, and considered more. Now, five years later, it's down to a bit over 12 months expenses, and I feel much more comfortable with it than I felt even when it was twice as big. I've been slowly moving the excess emergency fund into taxable investments over the last two years.

What changed? I can think of a few things:

* My net worth increased. While it would really suck to have to liquidate stocks or retirement accounts, realistically, that money is there, and if I need more than a year's worth of expenses, we're likely talking major life changes. I accept that I may have to roll with the punches, and I realize I'm in a pretty good place for whatever may come, and that having another 6 or 12 months of expenses liquid isn't likely to be the determining factor in my future.
* I went through a major recession, stayed the course, and didn't lose my job or my savings. The world continued to turn.

If your professional skills and personal financial awareness are such that you're able to save this much at 25, a few years of building out the emergency fund instead of buying equities aren't likely to seriously derail your long-term plans. If it makes it easier for you to sleep at night, then go for it. You may find that you just grow out of it. If, in a few years time, you're up to 4 years of emergency fund and you still can't convince yourself to buy equities (and this bothers you), you may want to consider talking to a therapist. We all have different emotional reactions to money and savings and risk. You need to find something that makes you feel happy and secure, not worry about fitting a plan someone else has come up with.

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Toons
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Re: Emergency fund never feels large enough

Post by Toons » Tue May 22, 2012 7:46 pm

Given the way in which you save your money I would say 24 months is ample enough for short term savings(maybe overkill)but stay with the 24 months
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

trademil
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Re: Emergency fund never feels large enough

Post by trademil » Thu May 24, 2012 5:09 am

Thank you all,
This is a very good forum and I am happy to see I turned to the right place for advice.
nisiprius wrote: One approach is to sort of shrug and look around at your peers and friends and say, "I have no idea whether or not I have enough, but at least I can tell that I'm much better prepared than most people... if they can hack it, I can probably hack it."

But the problem isn't that you don't have enough, the problem is that your emergency fund "never feels large enough." That's a "feeling" question, so you will need to examine your feelings.
I always try to tell myself that if I'm much better prepared then everyone I personally knows (which is most definitely the case) I should not be worry, but somehow I can't convince myself with that argument. Almost no one among my friends, colleagues and family is financially aware at a level I think is reasonable. For example, it took me a very long time to convince my mother to have 3 months emergency fund, and she still asks me once in a while if she shouldn't "invest" it in Apple/Facebook/some other trend, because its a "waste" that the money "just sits there".

I am aware that this is more of an emotional issue then financial issue, but I think it still helps to hear how other people deals with it.
kenyan wrote:Do the horrible things you are imagining include insurable events (disability, litigation, etc.), or are they mostly related to job loss? Perhaps you should look at buying some (more?) disability or umbrella insurance.
All answers are correct.
I can easily picture a scenario of losing my (well-payed but highly volatile) job exactly at the worst moment when the stock market collapses and the employment market is tough, only to get very sick while I'm unemployed and then having to take my health and disability insurance companies (which I do not trust at all) to court and pay a lot for litigation before I see a penny from them.
ruralavalon wrote:Welcome to the forum :) .
Thanks, and thanks for the input in your post.
Maybe when my total assets will be more significant the size of the e-fund will actually be less significant, that is a valid point, I will keep it in mind.
john94549 wrote: For a rough-and-ready rule-of-thumb, take your age in months. A twenty-four-year old, 24 months in emergency funds.
I think I might follow your suggestion, it sounds reasonable to me and it puts a well-defined limit on the size of the e-fund.
ianferrel wrote:I'm 30. I could have written exactly the same post five years ago.
Thank you, your post was very inspiring for me, I guess it makes me feel better to hear I'm not the only one to have/had this issue in mind (since I really don't know anyone else who do).

Nukeboilermaker
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Re: Emergency fund never feels large enough

Post by Nukeboilermaker » Thu May 24, 2012 5:49 am

Trademil,

It agree the previous posts all have a great deal of good info. As a fellow 25 year old I can partially relate. However, I also realized that emergency funds are very personal. They are personal in the sense that everyone has their own risk tolerance, job risk, debt risk, etc. Might I also suggest that you build confidence in your self and your personal finance muscles? Take a look at what your monthly expenses are, do you carry any debt? Debt will reduce cash flow and increase risk and stress in a tough time. When making a list (or your detailed budget) you will see all the expenses you could cut the day things go south, depending on your expenses you could likely double (though my bets are you are fairly frugal like many of us) your efund "value". It sounds to me that you are basing your efund off of current expenses not the "uh oh" budget. You may also realize that you can cover a majority of your expenses delivering pizzas in a real pinch (I could because my monthly expenses are currently $2500). You should also keep track of your net worth and see that you are making significant growth and have a good financial foundation. Also evaluate your job and how volatile it is, if you feel it is more volatile then you absolutely should have a larger emergency fund.

On a side note, what about other future plans? Ex. Home ownership, new car purchase, vacations, expensive hobbie etc... Where do these big ticket items fit in?

soccerdad12
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Re: Emergency fund never feels large enough

Post by soccerdad12 » Thu May 24, 2012 8:08 am

I know where you are coming from. I used to feel the exact same way. I had about 7 years of living expenses sitting in money market accounts just because I was nervous. I hate debt and am always nervous that something will go wrong and I won't be able to pay my bills. Just like you, I save a very large amount of my pay and lived a much lower standard than I could have. What really helped me is that I began paying off my house at a very fast pace. I still have 9 years to go, but every month I feel more secure, b/c when the house is paid I could live on 1/8th my current income (and I have a wife and kids).

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Re: Emergency fund never feels large enough

Post by Grt2bOutdoors » Thu May 24, 2012 8:25 am

trademil wrote: So, how do you know when you have enough? how did you choose the size of your emergency fund?

Note I am not trying to time the market or anything like that, I do not wait to buy cheaper, I wait because I'm not sure I will have enough liquidity on hand when it hits the fan.
Around your age, I was thinking about purchasing a home, I figured since I was single at the time, I would need a sufficient fund to carry my living expenses for about a year. Living expenses defined as twelve months of principal, interest, insurance, taxes, food, utilities. Those funds are invested in I bonds. Today, the value of that fund has grown to about 2 years expenses, a nice buffer to have.

What are your goals? If you have in mind to purchase a home down the road, you might start to think about setting up such a fund. Think of it as a down payment fund - say the targeted purchase price is $250K, aim to save 25% - 20% serves as the downpayment, 5% is the partial buffer should you need extra funds.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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camper
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Re: Emergency fund never feels large enough

Post by camper » Thu May 24, 2012 8:42 am

An emergency fund is a very personal thing. I think the most important factor is ones emergency fund is job security. I have a secure gov't job and DW is a nurse. The chances of either one of us losing our job is very small. Second factor for us is home/car emergency expenses. Last year it was the A/C compressor for the house. Yesterday it was the fan motor on the A/C for the house. By the way I don't like Goodman A/C systems. We strive for 12 months expenses for an emergency fund.
You do an excellent job saving. Congrats!

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Re: Emergency fund never feels large enough

Post by Johm221122 » Thu May 24, 2012 8:43 am

I also feel my emergency fund is never enough,my eye is on having enough(total portfolio) to live on for the rest of my life(the very basics) then I feel more relaxed(and will take less risk with whole portfolio)

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Re: Emergency fund never feels large enough

Post by Grt2bOutdoors » Thu May 24, 2012 8:47 am

camper wrote:An emergency fund is a very personal thing. I think the most important factor is ones emergency fund is job security. I have a secure gov't job and DW is a nurse. The chances of either one of us losing our job is very small. Second factor for us is home/car emergency expenses. Last year it was the A/C compressor for the house. Yesterday it was the fan motor on the A/C for the house. By the way I don't like Goodman A/C systems. We strive for 12 months expenses for an emergency fund.
You do an excellent job saving. Congrats!
At least you found out now, versus in July when the temps are 100's in the shade. :shock:
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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touchdowntodd
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Re: Emergency fund never feels large enough

Post by touchdowntodd » Thu May 24, 2012 10:50 am

its your emergency, so your the only one that knows what you will need then, or what makes you feel prepared ...

for me, 12 months is fine ... others may disagree .. and im sure onceI have a child mine will go to 18-24 months
tryin to do this right... thanks guys

Snowjob
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Re: Emergency fund never feels large enough

Post by Snowjob » Thu May 24, 2012 11:31 am

Ok I'm a bad example, I do a lot of non boglehead investing practices but just think about the issue this way.

1.) Your 25, single, and have 18 months of savings already which to me, on the surface, means you probably dont have a lot of external responsibilities to worry about in case of a job loss.
2.) Your rate of savings is, well, extreeme... at that rate of total savings taxable + tax deferred, your likely saving more than 50% of your gross paycheck. This means that if you did lose your job for some reason, you only need to get one that pays a shade under half of what you were formerly making to stay afloat and not even dip into your savings at all ! Heck, you dropped to a quarter of your former income, you would have in excess of 3 years before your savings would run out and you would need to tap investments.

Honestly, I would do the following.

Cut your emergency fund savings rate in half (add 1 month for every 3, you'll still feel good about adding to it) and use the balance of what you would have saved to go out and have fun. Your 25 your physically in the prime of your life, go live a litte, take the extra vacation time see the world enjoy your friends, you never know where life may end up taking you. Excessive savings can have 1 adverse affect: that you dont live life enough while your able too. For a while I got bogged down in my mid twenties with over saving / investing but I've learned to loosen the purse strings over time but I do wish I wasnt so paranoid about saving when I entered the workforce 7 years ago.

Hope this helps.

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Re: Emergency fund never feels large enough

Post by investor1 » Thu May 24, 2012 11:40 am

Keep in mind that your EF is money which is not giving you a good return. It is money which is not working for you. The greater your EF, the lower your rate of return.

Don't get me wrong, I'm not saying "don't have an EF". I'm just providing an argument which might motivate you to say enough is enough and put your money to work for you.

ShowMeTheER
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Re: Emergency fund never feels large enough

Post by ShowMeTheER » Thu May 24, 2012 12:00 pm

I'm a bit the same as you, but in this interest rate environment it doesn't seem like that big of a deal. I have found though that getting a least a bit of my bloated EF to Ibonds or the like makes it easier to deal with mentally. I don't feel like I'm missing out on all that much in safe returns by having an extra 6-12 months in my EF.

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BigD53
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Re: Emergency fund never feels large enough

Post by BigD53 » Thu May 24, 2012 12:32 pm

For a young person, In this crazy economy? I'd say 24 months is a good minimum to have. :moneybag

(And when I get elderly, I'll never blow my life savings in a Nursing Home! If I ever reach that point, I'd rather just go take a long walk off a short pier.... and allow my heirs to inherit my millions. :D )

Random Poster
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Re: Emergency fund never feels large enough

Post by Random Poster » Thu May 24, 2012 1:25 pm

soccerdad12 wrote:I know where you are coming from. I used to feel the exact same way. I had about 7 years of living expenses sitting in money market accounts just because I was nervous. I hate debt and am always nervous that something will go wrong and I won't be able to pay my bills. Just like you, I save a very large amount of my pay and lived a much lower standard than I could have.
Agreed.

At some point, your emergency fund can become your (pay for a) house (in cash) (and furnish it) and still have enough left over for an emergency fund. Mine has.

yosef
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Re: Emergency fund never feels large enough

Post by yosef » Thu May 24, 2012 2:24 pm

I have the same problem, though to a lesser degree. I'm coming up on over a years worth of expenses, and yet I'm still loathe to start investing in taxable for some reason. One thing you don't mention is where you're keeping your EF. I know one of the things that is motivating me personally to get over this is the potential gains I am missing out on by insisting on keeping more cash than I need in bank accounts and CDs. Considering the paltry rates that even online banks are paying nowadays, you have to face the possibility that you may well be getting a negative real return on your EF.

epilnk
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Re: Emergency fund never feels large enough

Post by epilnk » Thu May 24, 2012 4:10 pm

At some level, it's all emergency fund. If you urgently and genuinely need money, and you have money, you will spend the money.

You seem to be risk averse, but don't neglect the long term risk of watching inflation erode the value of the money you've saved. If it helps with the mental accounting you might want to think of all of your savings and investments as one giant tiered e-fund:
* Tier 1: 12 months of expenses safe and liquid - the real e-fund.
* Tier 2: taxable portfolio - the backup plan, only to be drawn from if you blow through tier 1.
* Tier 3: Roth IRA - the backup backup plan, only to be drawn from after you've used up the taxable portfolio. And in a complete financial crisis you'd dip into the 401k or IRA and eat the penalty. But don't avoid funding these on the off chance that such a crisis might some day arise.

By thinking of it this way you can remain reasonably safe without watching all of your money sit earning bupkis in a money market account. You are unlikely to get past tier 1, even in an emergency. But if you begin tapping your e-fund you'll probably begin reallocating the taxable portfolio into safer investments, so the risk of leaving money invested is relatively low. There are never guarantees, but the odds definitely favor coming out ahead if you keep more of your savings invested. And eventually, as your total assets become large enough (as they should in the absence of an actual emergency), you may decide that you no longer need a separate e-fund at all.
Last edited by epilnk on Fri May 25, 2012 1:43 pm, edited 1 time in total.

iceman
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Re: Emergency fund never feels large enough

Post by iceman » Thu May 24, 2012 4:40 pm

I am quite risk-averse in the same way. One thing that helped me was thinking through exactly what would happen if a worst-case scenario played out. Hopefully you have already considered the obvious like, if you lose your job and are unemployed for an extended period of time, you will likely eat out far less than you do now, will not be commuting, you will not need to be buying new clothing on a regular basis. But consider beyond 12 months - are you renting right now? Do you have parents or other family in the area that you could live with? If you were out of a job for 12+ months and have a support network you would likely not renew your lease and could cut that (include utilities, cable here). If you own and have enough equity, you could sell your house/condo, even if you had to take a loss on it. When my wife and I thought through it we realized that 18 months was the max we really needed - if something dire happened, at some point during that period we would take steps to dramatically cut our expenses.

Once you get beyond that, what you likely are really desiring is just general financial independence. And once you realize that, and realize that is a goal for the future, it will help you be okay with investing the money in the market and not be as concerned about liquidity for today.

3Wood85
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Re: Emergency fund never feels large enough

Post by 3Wood85 » Thu May 24, 2012 6:04 pm

GRT2BOUTDOORS wrote:
trademil wrote: So, how do you know when you have enough? how did you choose the size of your emergency fund?

Note I am not trying to time the market or anything like that, I do not wait to buy cheaper, I wait because I'm not sure I will have enough liquidity on hand when it hits the fan.
Around your age, I was thinking about purchasing a home, I figured since I was single at the time, I would need a sufficient fund to carry my living expenses for about a year. Living expenses defined as twelve months of principal, interest, insurance, taxes, food, utilities. Those funds are invested in I bonds. Today, the value of that fund has grown to about 2 years expenses, a nice buffer to have.

What are your goals? If you have in mind to purchase a home down the road, you might start to think about setting up such a fund. Think of it as a down payment fund - say the targeted purchase price is $250K, aim to save 25% - 20% serves as the downpayment, 5% is the partial buffer should you need extra funds.

GRT2BOUTDOORS,

This is great information and I would like to learn more if you don't mind. I am thinking of buying a home in 8 months or so and would like to learn more about I bonds and how it worked for you. Could I email you?

Johm221122
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Re: Emergency fund never feels large enough

Post by Johm221122 » Thu May 24, 2012 8:55 pm

Just Google treasury direct all I bond info is there(just in case people other than poster want to know)

trademil
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Re: Emergency fund never feels large enough

Post by trademil » Mon May 28, 2012 11:01 am

Again, thank you all so much, it really makes me feels much better to read your thoughts on this issue.
soccerdad12 wrote:when the house is paid I could live on 1/8th my current income (and I have a wife and kids).
Wow, that is amazing, I never met anyone who could live on 1/8th his income, you must have a very high income and very low expenses at the same time.
GRT2BOUTDOORS wrote: What are your goals? If you have in mind to purchase a home down the road...
I don't see myself buying a house in the foreseeable future, since I hate being in debt, I like being mobile and I don't see the value of owing (vs ranting). So I don't have any specific big-ticket goal, I just want my money to last and accumulate for whatever I might need/want it in the future, I value financial (and general) independence very much.
camper wrote:You do an excellent job saving. Congrats!
Thanks, I hope I can keep it up in the future.
Johm221122 wrote:I also feel my emergency fund is never enough,my eye is on having enough(total portfolio) to live on for the rest of my life(the very basics) then I feel more relaxed(and will take less risk with whole portfolio)
That is also exactly my thinking, but I think I'm many many years away from having enough passive income to live on.
Nukeboilermaker wrote:You may also realize that you can cover a majority of your expenses delivering pizzas
And
Snowjob wrote:This means that if you did lose your job for some reason, you only need to get one that pays a shade under half of what you were formerly making to stay afloat and not even dip into your savings at all ! Heck, you dropped to a quarter of your former income, you would have in excess of 3 years before your savings would run out and you would need to tap investments.
That is a nice back-of-envelope calculation, but it is far from being a reasonable case for me, since in my line of work there are not many opportunities with much lower pay - it either I stay with about my current paycheck (or somewhere in the range of 80%-110% of it) or I take a job that is completely out of my career path, which, in my view, will have a very negative long-term impact on my career (it will be harder to get back to my filed after doing something else for a period longer then I can hide in a job interview), so my only vital options if I lose my job is to find another job in the same field, or to go to grad school.
Snowjob wrote:...go live a litte, take the extra vacation time see the world enjoy your friends, you never know where life may end up taking you. Excessive savings can have 1 adverse affect: that you dont live life enough while your able too.
I don't see many ways of spending more of my money on "fun" things (and I am actively looking for such ways), I actually have the other problem - since I make way more money then my friend, I can't really go out to very expensive places (unless I want to go alone, or pay for all my friends, which seems a little excessive), so for example when we go to a pub, each of my friend order a drink or two, and I order 4, and maybe one round of chasers for everyone on me, but that's about it, how much I "live" is not bound by my spending, but buy my alcohol Capacity :)

I don't have a taste for expansive clothing, gadgets, cars (I drive a 10 years old car and she is great) etc, I don't like hoarding stuff.

The only thing I want more of is free time (I just don't have enough time to spend my money on "fun" stuff fast enough!) and out of town vacations, if I could work 80% of the time and earn 80% of the pay I would be happy, but all the employers in my field I talked with (including my current) says in response that they want me to work 110% of the time and willing to give me 110% of the pay...no one wanted to hear about a part-time job, they all had a "take it or leave it" attitude about the hours, even though they were very flexible about the salary, so I have concluded it is a universal quality of my field. :|
iceman wrote:But consider beyond 12 months - are you renting right now? Do you have parents or other family in the area that you could live with?
Yes, I am renting, I could theoretically go back to live with my mother(she lives a few driving hours away), but for me it will be a bitter failure, I have worked very hard for not having to relay on anyone (and I didn't took a nickle form my mother, or from anyone else other then my employers, since I was 18) , and since my mother is making less money then me, have almost no liquid assets (tough her net worth is still higher then mine since she have a home which is worth more then my portfolio and she have finished paying her mortgage many years ago), and have my younger siblings to take care for all by herself, I conclude that in a crisis there is a greater chance I will need to help her then a chance that she will be able to help me.

I guess in the end it all comes back to the fact I was raised in a poor home, and I don't want to ever go back being poor, I had enough :!:

larmewar
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Tiered Funds

Post by larmewar » Mon May 28, 2012 6:22 pm

I had a little different solution to the same problem. Instead of keeping an oversized emergency fund, I maintain "buckets" of more or less liquid funds that still figured into my investment mix ( in addition to emergency fund). One bucket is I-bonds which I count as equivalent to TIPS in portfolio. Others include muni bond and balanced funds in taxable and part of cash value of a universal life policy.

These "buckets" probably aren't right for you and I've accepted some tax inefficiency. Also, this approach isn't terribly useful if desired asset allocation is 100% equities.

Lar

robocop
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Re: Emergency fund never feels large enough

Post by robocop » Tue May 29, 2012 11:59 am

If your real concern lies with not trusting your insurance companies, that may be something to think about. For example, if you are young and healthy, you could get a HDHP as backup coverage so you know your liability would be limited to X amount of dollars if that did happen. There are many well-regarded HDHP companies out there that quoted my SO at under $100 a month (he is 31 and healthy).

blinx77
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Re: Emergency fund never feels large enough

Post by blinx77 » Tue May 29, 2012 12:08 pm

trademil wrote: I can easily picture a scenario of losing my (well-payed but highly volatile) job exactly at the worst moment when the stock market collapses and the employment market is tough, only to get very sick while I'm unemployed and then having to take my health and disability insurance companies (which I do not trust at all) to court and pay a lot for litigation before I see a penny from them.
I think about these things sometimes, but then I think, "well, I coud also get hit by a bus right when I walk outside." For some reason, recognizing I can never eliminate uncertainty makes me more comfortable living with it.

Snowjob
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Re: Emergency fund never feels large enough

Post by Snowjob » Tue May 29, 2012 12:46 pm

trademil wrote:
Nukeboilermaker wrote:You may also realize that you can cover a majority of your expenses delivering pizzas
And
Snowjob wrote:This means that if you did lose your job for some reason, you only need to get one that pays a shade under half of what you were formerly making to stay afloat and not even dip into your savings at all ! Heck, you dropped to a quarter of your former income, you would have in excess of 3 years before your savings would run out and you would need to tap investments.
That is a nice back-of-envelope calculation, but it is far from being a reasonable case for me, since in my line of work there are not many opportunities with much lower pay - it either I stay with about my current paycheck (or somewhere in the range of 80%-110% of it) or I take a job that is completely out of my career path, which, in my view, will have a very negative long-term impact on my career (it will be harder to get back to my filed after doing something else for a period longer then I can hide in a job interview), so my only vital options if I lose my job is to find another job in the same field, or to go to grad school.
Snowjob wrote:...go live a litte, take the extra vacation time see the world enjoy your friends, you never know where life may end up taking you. Excessive savings can have 1 adverse affect: that you dont live life enough while your able too.
I don't see many ways of spending more of my money on "fun" things (and I am actively looking for such ways), I actually have the other problem - since I make way more money then my friend, I can't really go out to very expensive places (unless I want to go alone, or pay for all my friends, which seems a little excessive), so for example when we go to a pub, each of my friend order a drink or two, and I order 4, and maybe one round of chasers for everyone on me, but that's about it, how much I "live" is not bound by my spending, but buy my alcohol Capacity :)

I don't have a taste for expansive clothing, gadgets, cars (I drive a 10 years old car and she is great) etc, I don't like hoarding stuff.

The only thing I want more of is free time (I just don't have enough time to spend my money on "fun" stuff fast enough!) and out of town vacations, if I could work 80% of the time and earn 80% of the pay I would be happy, but all the employers in my field I talked with (including my current) says in response that they want me to work 110% of the time and willing to give me 110% of the pay...no one wanted to hear about a part-time job, they all had a "take it or leave it" attitude about the hours, even though they were very flexible about the salary, so I have concluded it is a universal quality of my field. :|
I guess my idea of an emergency doesn't include taking a high paying job at 80% of my current salary. I think the emergency fund is for when you cant find anything and you do need to end up deliverying pizzas or bussing tables. Sure doing those things might be damaging for you proffessional career if you spend several years there, but I think thats a separate issue entirely, the point is, you have the money to survive the bad times if things do go south.

Also with regards to not having anything to spend the money on cause you dont need anything and that your spending is constrained by the fact you cant get time off. I guess thats just one of the things you need to feel comfortable giving up to stay in that job, everyone is willing to give up something for money.

scrabbler1
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Re: Tiered Funds

Post by scrabbler1 » Tue May 29, 2012 1:56 pm

larmewar wrote:I had a little different solution to the same problem. Instead of keeping an oversized emergency fund, I maintain "buckets" of more or less liquid funds that still figured into my investment mix ( in addition to emergency fund). One bucket is I-bonds which I count as equivalent to TIPS in portfolio. Others include muni bond and balanced funds in taxable and part of cash value of a universal life policy.

These "buckets" probably aren't right for you and I've accepted some tax inefficiency. Also, this approach isn't terribly useful if desired asset allocation is 100% equities.

Lar
This is how I handle things, too. DIfferent buckets, or layers/tiers, but the same princple applies.

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Clearly_Irrational
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Re: Emergency fund never feels large enough

Post by Clearly_Irrational » Tue May 29, 2012 3:23 pm

I don't think there is an objective "right" answer. For me, I want three months to figure out something is wrong then a full year to fix it. I also assume that during that time I'll lose my job, my tenants will stop paying, my businesses will stop earning money and the financial markets will lose half their value. So for me, the magic number is 30 months worth. I'm not there yet, but I'm working on it.

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NORDO
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Re: Emergency fund never feels large enough

Post by NORDO » Wed May 30, 2012 10:41 am

Very insightful discussion here. As another person of similar age (27, recently married) it's interesting to see where everyone lies on this issue.

My wife and I currently have 4-6 months of expenses in our e-fund (online savings, $12K at 0.90% or so) and I just opened a Roth IRA in her name to add a second tier. Putting another $3K in there in VFIIX (Vanguard GNMA) and that will bring us up to 6-8 months total, depending on how you look at it. Better return in the GNMA fund than the savings (and I know there's been lots of discussion for and against GNMAs on here...) but I feel it's a reasonable risk for us at this point in time.

In addition, we have $13K in a different online savings account anyway that, while we don't consider it an e-fund, we would end up tapping into before we ever touched the true e-funds. So, in reality, we have closer to 12 solid months of cash available if things really hit the fan.

We own a house, so that certainly leaves us more in need of a decent e-fund than a renter - in my opinion. Still, we've been pretty comfortable with things where they are right now. I think we'll ultimately settle into a multi-tiered approach in the 10-12 month range. Probably following a distribution along the lines of 4-6 in online savings, 2-3 in I-Bonds, and 2-3 in the Roth/GNMA. Beyond that, we'll continue targeted savings toward other goals.

So, ultimately, while I definitely understand the desire to keep adding to the e-fund I think that it might be best to consider some of it (>18-24 months) savings towards other goals like a down payment on a house, cash for a new car, etc.

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abuss368
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Re: Emergency fund never feels large enough

Post by abuss368 » Wed May 30, 2012 11:47 am

Ah, the old saying of "Cash is king".

In today's world, I understand the need for an emergency fund consisting of cold hard cash (even if the yield is small). It just makes most folks sleep better at night and is good for your personal balance sheet in front of the banks or other institutions!

I never bought into the 6 months of expenses. Maybe I am a little more conservative, but I always leaned towards at least a year. Probably the max I would go for would be two years.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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