Capping Emergency Fund

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nasrullah
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Capping Emergency Fund

Post by nasrullah » Fri Jul 06, 2018 12:28 pm

In general the advice/target for an emergency fund is 6 months of expenses. I'm curious at what point in total assets this rule doesn't make sense.

- For example, if someone had 20, 30, 40x their monthly expenses in bonds would it make sense to decrease the emergency fund in a high yield savings?

- Or another example, if 6 months of emergency fund was > $50k, $100k, $150k does it really make sense to keep that much money on the beach?

I understand that you could deploy CD ladders and money market funds as a way to increase returns, but for the initial question just assume the simplest portfolio with three funds and a savings account.
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Jags4186
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Re: Capping Emergency Fund

Post by Jags4186 » Fri Jul 06, 2018 12:42 pm

nasrullah wrote:
Fri Jul 06, 2018 12:28 pm
In general the advice/target for an emergency fund is 6 months of expenses. I'm curious at what point in total assets this rule doesn't make sense.

- For example, if someone had 20, 30, 40x their monthly expenses in bonds would it make sense to decrease the emergency fund in a high yield savings?

- Or another example, if 6 months of emergency fund was > $50k, $100k, $150k does it really make sense to keep that much money on the beach?

I understand that you could deploy CD ladders and money market funds as a way to increase returns, but for the initial question just assume the simplest portfolio with three funds and a savings account.
I think people make this way too complicated. Back in the day asset allocations were cash/bonds/equities. It seems the cash part has disappeared these days.

My emergency fund is 8 months of our expenses. I consider it part of my asset allocation which means my 20% bonds is really 10% cash, 10% bonds right now. I’m able to eek out around 3% on the cash which is much better than my bonds are performing.

I also realize that the emergency fund is large enough to withstand almost anything that hits our family. There are very few things which would cause me to use a large chunk of money all at once—our OOP max on health insurance is $6,000 per individual and $12,000 for family. Our car insurance deductibles are $500 and home owners deductible is $1000. In the case of unemployment I could carry our family on my income plus my wifes unemployment. If I lost my job my wifes income plus my unemployment plus about $500/mo from our EF would allow us to continue living as we do today. Of course if one of us lost our jobs we would cut back immediately. That means in an unemployment situation we wouldn’t even have to use EF money until month 7. If both of us lost our jobs we’d need about $1500/mo from the EF—which means that for the first 6 months we’d use $9000 and then still have 7 months of expenses or so in savings.

So, the reality is, the EF is large because it makes a good return vs alternatives and it makes me feel good. If bonds all of a sudden come around and are doing much better I might shift some cash to bonds.

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cheese_breath
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Re: Capping Emergency Fund

Post by cheese_breath » Fri Jul 06, 2018 12:46 pm

nasrullah wrote:
Fri Jul 06, 2018 12:28 pm
In general the advice/target for an emergency fund is 6 months of expenses. I'm curious at what point in total assets this rule doesn't make sense.
When you don't need it anymore. Think of the emergency fund as insurance. At some point you reach a point where it makes more sense to self-insure rather than have that much money on the sideline. For example, I don't have insurance to cover DW's and my funeral expenses. I self insure rather than paying the premiums.
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radiowave
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Re: Capping Emergency Fund

Post by radiowave » Fri Jul 06, 2018 12:50 pm

I think of EF in terms of liquidity:
Tier 1 - credit card, checking/high yield savings
Tier 2 - CDs and short term treasury bonds in taxable accounts (might incur EWP for CDs)
Tier 3 - stock mutual funds (will incur capital gains tax to access)
Tier 4 - IRA accounts (tax deferred so will incur income tax to withdraw)

I might also consider home equity loan if something went real bad but if the house goes up in smoke, well . . .

Thinking about the overall porfolio, espeically on the short term end, cash does not grow but actually loses value due to inflation. T-Bills and CD may break even but don't grow over time. Stock funds in taxable accounts will grow over the long term but subject to market risk (e.g. 2008-2009).
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nisiprius
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Re: Capping Emergency Fund

Post by nisiprius » Fri Jul 06, 2018 12:54 pm

I don't think it's ever been any quantitatively determined number. And I actually think it goes back to a fairly specific set of circumstances. It sounds like an answer that might have been given to a young person in 1960, with $1,000 in the bank and the itch to buy $1,000 worth of Globulonics stock. st is a vague rule of thumb about when it might be suitable to begin investing in stocks.

It is noticeable that discussions of emergency funds always suggest that "job loss" is the canonical emergency... and yet rarely discuss how to find out what your personal situation is with regard to unemployment insurance.

Anyway, my idea is that "6 months' income" is a good rule of thumb, and sound advice if you don't want to think about it... and that if you have any actual plan, with numbers in it, that answers the question "what will I do if I need money in an emergency," that's good enough.

Of course, I would add that "debt is not cash," and that plans that assume you will always be able to get a home equity line of credit, or always be able to use your credit cards up to their current limit, are bad plans.
Last edited by nisiprius on Fri Jul 06, 2018 12:57 pm, edited 1 time in total.
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KlangFool
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Re: Capping Emergency Fund

Post by KlangFool » Fri Jul 06, 2018 12:56 pm

nasrullah wrote:
Fri Jul 06, 2018 12:28 pm
In general the advice/target for an emergency fund is 6 months of expenses. I'm curious at what point in total assets this rule doesn't make sense.

- For example, if someone had 20, 30, 40x their monthly expenses in bonds would it make sense to decrease the emergency fund in a high yield savings?

- Or another example, if 6 months of emergency fund was > $50k, $100k, $150k does it really make sense to keep that much money on the beach?

I understand that you could deploy CD ladders and money market funds as a way to increase returns, but for the initial question just assume the simplest portfolio with three funds and a savings account.
nasrullah,

<<- Or another example, if 6 months of emergency fund was > $50k, $100k, $150k does it really make sense to keep that much money on the beach?>>

Or, if your portfolio excluding the EF is more than 1 million, the EF is such a small number as compared to the overall portfolio that you won't mind. I keep 90K as my emergency fund.

Most of the EF is earning between 1% to 2% now in my money market fund.

KlangFool

P.S.: 90K = 60K -> 1 year of expense
30K -> half of the year college expense for my 2 kids.

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Re: Capping Emergency Fund

Post by sport » Fri Jul 06, 2018 2:10 pm

When I was working, I kept my EF in a CD ladder at a local bank. In normal times, it was part of my "fixed income" allocation. When unemployment occurred, I had 3 "tiers" for the EF.
1. All accumulated interest was available for withdrawal without penalty.
2. I could change the CDs from reinvest to receive cash payout of interest.
3. When a CD matured, I had that money available.
Of course, in those days, CD yields were much higher than now.

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Re: Capping Emergency Fund

Post by mega317 » Fri Jul 06, 2018 2:29 pm

I love money on the beach as a metaphor. I know it was a typo but it works for me.

My own take is that as long as I am confident that I'll have enough money to cover an emergency, it doesn't matter how it's held. Many people will have no emergency fund and hold 100% stock in taxable once the taxable account is ~ double whatever they want for emergencies. I.e. when stocks tank you'll still have enough available, however you defined enough.

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dratkinson
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Re: Capping Emergency Fund

Post by dratkinson » Fri Jul 06, 2018 2:46 pm

I believe 6-12mos of liquid savings is about right for a 1st-tier EF (checking, savings, mmkt, CDs,...). Why?
--I worry about liquidity if I have only 6mos.
--I worry about lost return if I have more than 12mos.

Keeping 6-12mos in 1st-tier EFs seems to be the sweet spot to avoid day-to-day worry (liquidity vs return), and the hassle of reporting capital gains should I be forced to sell some of my 2nd-tier EF* if I had less. (* 3yrs of safer bonds in taxable for extended-tier EF, home projects, new car, dry powder, or retirement.)



On the other hand, some retirees report keeping 5yrs liquid*. Why? To avoid the sequence of return risk (SoRR) should they experience a market correction during retirement. Assuming corrections recover within 4yrs, then keeping 5yrs liquid means they should never need to sell stocks during a correction. (* Cash equivalents, safe bond fund, stable value fund, annuity.... Search forum for SoRR for other solutions.)
Last edited by dratkinson on Sat Jul 07, 2018 4:47 pm, edited 2 times in total.
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delamer
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Re: Capping Emergency Fund

Post by delamer » Fri Jul 06, 2018 3:23 pm

The sole purpose of our emergency fund was to cover expenses in the event of a loss of income.

We both had jobs and in unrelated industries, so the odds of our both being unable to work at the same time were small.

So our emergency fund was for only 3 months of expenses.

Once we were financially independent, we got rid of the emergency fund.

However, that did not mean that we did not maintain some cash equivalents in our retirement accounts.

MnD
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Re: Capping Emergency Fund

Post by MnD » Fri Jul 06, 2018 4:05 pm

We capped it by never having one in cash and instead, saved up $70K in a 100% stock taxable account between 1986 and 1990 which were the "two early-career incomes and no kids yet" years. That was probably 2 years of expenses back then and after we had that built up, we never saw any need for a cash fund and never added another dime to that account. We have spent plenty from that account - not for huge emergencies fortunately but lots of big ticket items both planned and unplanned. Whenever we've made significant withdrawals from the account we buy stocks with bond funds in retirement accounts so it makes no change in our AA by utilizing it. Short-term cash flow imbalances we managed with credit card float, cutting back expenses temporarily and (gasp) even a little very short-term borrowing on a checking linked credit line.

Approaching retirement in 5 months we have built up a cash account over the past 18 months or so and it feels weird after never having one for 30+ years. I keep tinkering with it (t-bills, CD's, MM funds). It's like having a new pet! :mrgreen:

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Re: Capping Emergency Fund

Post by willthrill81 » Fri Jul 06, 2018 4:11 pm

Even though we're a single-earner household, my career is a very stable one, and I always work under multi-year contracts through my state. Consequently, I have no fear at all of sudden unemployment, which seems to be the biggest bugaboo that emergency funds are held for. We have a recurring expenses fund that covers auto and home maintenance, insurance deductibles, etc., so a three month supply is ample for us. We actually keep some of that in my Roth IRA invested in Vanguard's Wellesley Income fund.

If I didn't have such a stable career, as a single-earner household, I'd shoot for at least six months of expenses and preferably closer to a year's worth.
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nasrullah
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Re: Capping Emergency Fund

Post by nasrullah » Fri Jul 06, 2018 8:03 pm

I'll add real world numbers to my question. My holdings are about to look like this:

Traditional IRA $48k
Taxable Brokerage $1.4M
529 #1 $6k
Emergency Fund $50k

My AA is 75/25 so roughly $1.088M in Equities and $363K in Bonds (as an aside, one of the biggest surprises I've had from this forum is the understanding of my potential loss in a downturn, obviously the number is large but piece of mind I've developed knowing the number vs fear of unknown has been incredible).

I would generally classify my income as stable, but I own my own business and understand how fragile that actually makes things. I'm fortunate in the sense that emergency spending (medical not impacting myself, property loss, etc...) can reasonably be absorbed by my monthly cash flow with insurance deductibles.

After I found this forum and started conversion to the Boglehead way I stopped investing money to establish an emergency fund. This wasn't a target in terms of months of expenses, but more a "$50k seems reasonable" at the time. After reading Taylor Larimore's new book (thank you for everything you've done!) I remembered I needed to revisit this and actually craft a reason and a plan for it. Increasing my emergency fund to > $100K feels anti-boglehead in some ways (don't time the market, stay fully invested, stay the course, etc...). Which brings me back here looking for guidance and knowledge from the community.
"We have a lot to do, and very little time, so we must work slowly." Liviu Ciulei | | Thanks vineviz (https://www.bogleheads.org/forum/memberlist.php?mode=viewprofile&u=134698) for the quote.

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Re: Capping Emergency Fund

Post by mortfree » Fri Jul 06, 2018 8:11 pm

nasrullah wrote:
Fri Jul 06, 2018 8:03 pm
I'll add real world numbers to my question. My holdings are about to look like this:

Traditional IRA $48k
Taxable Brokerage $1.4M
529 #1 $6k
Emergency Fund $50k

Change Emergency Fund to Cash Savings.

Bogle-on

Nothing to worry about here.

Nate79
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Re: Capping Emergency Fund

Post by Nate79 » Fri Jul 06, 2018 8:50 pm

I believe in an emergency plan, not just an emergency fund. The plan is stress tested against various emergency scenarios. For example job loss, roof replacement, 2 years of total out of pocket medical expenses, major market downturn -85% stock loss, major car repair, evacuation, etc. Stress test includes 2 bad events at same time.

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Re: Capping Emergency Fund

Post by willthrill81 » Fri Jul 06, 2018 8:53 pm

Nate79 wrote:
Fri Jul 06, 2018 8:50 pm
I believe in an emergency plan, not just an emergency fund. The plan is stress tested against various emergency scenarios. For example job loss, roof replacement, 2 years of total out of pocket medical expenses, major market downturn -85% stock loss, major car repair, evacuation, etc. Stress test includes 2 bad events at same time.
Out of curiosity, what's your plan for dealing with a job loss and an 85% stock loss? Surely bonds would be in some danger in such a situation as well.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Nate79
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Re: Capping Emergency Fund

Post by Nate79 » Fri Jul 06, 2018 9:02 pm

willthrill81 wrote:
Fri Jul 06, 2018 8:53 pm
Nate79 wrote:
Fri Jul 06, 2018 8:50 pm
I believe in an emergency plan, not just an emergency fund. The plan is stress tested against various emergency scenarios. For example job loss, roof replacement, 2 years of total out of pocket medical expenses, major market downturn -85% stock loss, major car repair, evacuation, etc. Stress test includes 2 bad events at same time.
Out of curiosity, what's your plan for dealing with a job loss and an 85% stock loss? Surely bonds would be in some danger in such a situation as well.
Basically I look at how many months I can last until we are eating cat food and living on the street (more likely moving in with family). How long will my cash/ibonds/eebonds/treasuries + bond funds + taxable stocks (discounted to 15% of value) last. Usually I don't include 401k (but could as backup backup plan) but do include Roth IRA as secondary accounts (contributions only). I include unemployment payments as well.

We would probably sell house/move to family before cashing out the 401k.

The main point of the 85% discount on stocks (a Great Depression like event) is I value stock funds very little for emergencies. People seem to thing 50% stock decline is worst case but that is not true from history.

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willthrill81
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Re: Capping Emergency Fund

Post by willthrill81 » Fri Jul 06, 2018 9:27 pm

Nate79 wrote:
Fri Jul 06, 2018 9:02 pm
willthrill81 wrote:
Fri Jul 06, 2018 8:53 pm
Nate79 wrote:
Fri Jul 06, 2018 8:50 pm
I believe in an emergency plan, not just an emergency fund. The plan is stress tested against various emergency scenarios. For example job loss, roof replacement, 2 years of total out of pocket medical expenses, major market downturn -85% stock loss, major car repair, evacuation, etc. Stress test includes 2 bad events at same time.
Out of curiosity, what's your plan for dealing with a job loss and an 85% stock loss? Surely bonds would be in some danger in such a situation as well.
Basically I look at how many months I can last until we are eating cat food and living on the street (more likely moving in with family). How long will my cash/ibonds/eebonds/treasuries + bond funds + taxable stocks (discounted to 15% of value) last. Usually I don't include 401k (but could as backup backup plan) but do include Roth IRA as secondary accounts (contributions only). I include unemployment payments as well.

We would probably sell house/move to family before cashing out the 401k.

The main point of the 85% discount on stocks (a Great Depression like event) is I value stock funds very little for emergencies. People seem to thing 50% stock decline is worst case but that is not true from history.
Thanks.

While we don't have a written plan for such things, I've actually thought about this quite a bit. Once our house is paid off in a couple of years, a period of time over which I am contractually employed, even if we had to sell our home for 50% of its current value, we could live in a motor home, makeshift or otherwise, and live very sparsely for several years on the proceeds plus emergency funds and no income before we would need to start raiding retirement accounts. Like you, raiding retirement accounts is very low on my list of backup options, though everything is on the table if the need is great enough.

Rob Berger of the Dough Roller podcast recommended similar thought exercises in the show's most recent episode. He explained that examining extremes, especially with constraints in place, can be useful for helping us to understand what is truly possible, not just what we would like to be. This can be helpful for planning purposes but also to help us realize the limitations we so often place on our thinking. For instance, I doubt that many here have considered selling their home and living with their family in a van for a significant period of time, but there can be huge advantages to doing so. Simply knowing that we could do so and actually live well is a reassuring thing to us now, even if we are never forced to do it, kind of like an insurance policy.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

mega317
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Re: Capping Emergency Fund

Post by mega317 » Fri Jul 06, 2018 9:33 pm

OP you're talking about like 5% of your taxable assets. It couldn't matter less what you do here. I'd say revisiting your arbitrary decided emergency fund is not market timing and having such a fund does not violate the spirit of staying invested.

Nate79
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Re: Capping Emergency Fund

Post by Nate79 » Fri Jul 06, 2018 9:54 pm

willthrill81 wrote:
Fri Jul 06, 2018 9:27 pm
Nate79 wrote:
Fri Jul 06, 2018 9:02 pm
willthrill81 wrote:
Fri Jul 06, 2018 8:53 pm
Nate79 wrote:
Fri Jul 06, 2018 8:50 pm
I believe in an emergency plan, not just an emergency fund. The plan is stress tested against various emergency scenarios. For example job loss, roof replacement, 2 years of total out of pocket medical expenses, major market downturn -85% stock loss, major car repair, evacuation, etc. Stress test includes 2 bad events at same time.
Out of curiosity, what's your plan for dealing with a job loss and an 85% stock loss? Surely bonds would be in some danger in such a situation as well.
Basically I look at how many months I can last until we are eating cat food and living on the street (more likely moving in with family). How long will my cash/ibonds/eebonds/treasuries + bond funds + taxable stocks (discounted to 15% of value) last. Usually I don't include 401k (but could as backup backup plan) but do include Roth IRA as secondary accounts (contributions only). I include unemployment payments as well.

We would probably sell house/move to family before cashing out the 401k.

The main point of the 85% discount on stocks (a Great Depression like event) is I value stock funds very little for emergencies. People seem to thing 50% stock decline is worst case but that is not true from history.
Thanks.

While we don't have a written plan for such things, I've actually thought about this quite a bit. Once our house is paid off in a couple of years, a period of time over which I am contractually employed, even if we had to sell our home for 50% of its current value, we could live in a motor home, makeshift or otherwise, and live very sparsely for several years on the proceeds plus emergency funds and no income before we would need to start raiding retirement accounts. Like you, raiding retirement accounts is very low on my list of backup options, though everything is on the table if the need is great enough.

Rob Berger of the Dough Roller podcast recommended similar thought exercises in the show's most recent episode. He explained that examining extremes, especially with constraints in place, can be useful for helping us to understand what is truly possible, not just what we would like to be. This can be helpful for planning purposes but also to help us realize the limitations we so often place on our thinking. For instance, I doubt that many here have considered selling their home and living with their family in a van for a significant period of time, but there can be huge advantages to doing so. Simply knowing that we could do so and actually live well is a reassuring thing to us now, even if we are never forced to do it, kind of like an insurance policy.
That we even have a plan puts us ahead of 95% of the population that when it hits the fan are sitting on their roof waving a white flag or end up homeless when they find out their credit card emergency fund gets shut down.

bayview
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Re: Capping Emergency Fund

Post by bayview » Sat Jul 07, 2018 7:38 am

nasrullah wrote:
Fri Jul 06, 2018 12:28 pm
In general the advice/target for an emergency fund is 6 months of expenses. I'm curious at what point in total assets this rule doesn't make sense.

- For example, if someone had 20, 30, 40x their monthly expenses in bonds would it make sense to decrease the emergency fund in a high yield savings?

- Or another example, if 6 months of emergency fund was > $50k, $100k, $150k does it really make sense to keep that much money on the beach?

I understand that you could deploy CD ladders and money market funds as a way to increase returns, but for the initial question just assume the simplest portfolio with three funds and a savings account.
If the rule of thumb is truly 6 months' worth of expenses, rather than 6 months' worth of income, I would think that if one had $25k/month in expenses, one should have $150k of easily accessible savings. (And consider lowering monthly expenses...)

When the discussion shifts to 6 months' worth of income, the picture changes.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

KlangFool
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Re: Capping Emergency Fund

Post by KlangFool » Sat Jul 07, 2018 9:44 am

OP,

There is a fundamental money philosophy question that you need to answer.

Are you

A) One of those people that use the money to simplify your life

Or

B) You like to squeeze every penny of profit out of your money.

I keep 90K as my emergency fund. Hence, I do not need to save for a new car, house downpayment, and vacation. I use my emergency fund to pay for that. Then, I use the interest and dividend from my taxable account plus my annual saving to refill my emergency fund.

Some folks say that it is cheating. Those are scheduled expense. They use separate buckets/saving account to handle those expenses. It is not an emergency.

I say that money is fungible. If my emergency fund is big enough, I do not need to count that closely. Fuzzy math is good enough.

Out of that 90K, 70K to 80K is in a money market fund earning 1% to 2%. It is a small price to pay. My portfolio excluding the emergency fund is around 1.2 million. I can afford this.

KlangFool

Nate79
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Re: Capping Emergency Fund

Post by Nate79 » Sat Jul 07, 2018 9:57 am

KlangFool wrote:
Sat Jul 07, 2018 9:44 am
OP,

There is a fundamental money philosophy question that you need to answer.

Are you

A) One of those people that use the money to simplify your life

Or

B) You like to squeeze every penny of profit out of your money.

I keep 90K as my emergency fund. Hence, I do not need to save for a new car, house downpayment, and vacation. I use my emergency fund to pay for that. Then, I use the interest and dividend from my taxable account plus my annual saving to refill my emergency fund.

Some folks say that it is cheating. Those are scheduled expense. They use separate buckets/saving account to handle those expenses. It is not an emergency.

I say that money is fungible. If my emergency fund is big enough, I do not need to count that closely. Fuzzy math is good enough.

Out of that 90K, 70K to 80K is in a money market fund earning 1% to 2%. It is a small price to pay. My portfolio excluding the emergency fund is around 1.2 million. I can afford this.

KlangFool
How low would you allow your $90k to get before saying something is not an emergency enough to use the money? I understand having a big pile of money means you don't need a separate pile just for emergencies but you must be doing mental accounting to keep the pile above a certain number in case a real emergency comes along.

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JPH
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Re: Capping Emergency Fund

Post by JPH » Sat Jul 07, 2018 10:08 am

I have a checking account, a savings account, a MM account, and quite a bit in short-term bonds. I would go through those in that order if I needed emergency cash. I don't really know what my "Emergency Fund" balance is at any given time. For most of my emergencies in the past, I have used a credit card. If I'm ever arrested and go to jail, I figure I might need access to cash to post bail. I don't spend a lot of time worrying about that.
While the moments do summersaults into eternity | Cling to their coattails and beg them to stay - Townes Van Zandt

GAAP
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Re: Capping Emergency Fund

Post by GAAP » Sat Jul 07, 2018 10:22 am

I would agree that life stages can affect this. I could retire today, if I had to -- just not at my ideal income. An emergency fund for me is really about short-term cash flow, not longer term expenses. For a younger person, I would tie it to the amount of time required to find an equivalent job. The old rule of thumb was 1 month per $10k of annual income -- I haven't seen anything newer.

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Re: Capping Emergency Fund

Post by KlangFool » Sat Jul 07, 2018 11:03 am

Nate79 wrote:
Sat Jul 07, 2018 9:57 am
KlangFool wrote:
Sat Jul 07, 2018 9:44 am
OP,

There is a fundamental money philosophy question that you need to answer.

Are you

A) One of those people that use the money to simplify your life

Or

B) You like to squeeze every penny of profit out of your money.

I keep 90K as my emergency fund. Hence, I do not need to save for a new car, house downpayment, and vacation. I use my emergency fund to pay for that. Then, I use the interest and dividend from my taxable account plus my annual saving to refill my emergency fund.

Some folks say that it is cheating. Those are scheduled expense. They use separate buckets/saving account to handle those expenses. It is not an emergency.

I say that money is fungible. If my emergency fund is big enough, I do not need to count that closely. Fuzzy math is good enough.

Out of that 90K, 70K to 80K is in a money market fund earning 1% to 2%. It is a small price to pay. My portfolio excluding the emergency fund is around 1.2 million. I can afford this.

KlangFool
How low would you allow your $90k to get before saying something is not an emergency enough to use the money? I understand having a big pile of money means you don't need a separate pile just for emergencies but you must be doing mental accounting to keep the pile above a certain number in case a real emergency comes along.
Nate79,

I am comfortable to spend up to 20K out of that 90K. Beyond that, I prefill my emergency fund before I spend the money.

KlangFool

nasrullah
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Re: Capping Emergency Fund

Post by nasrullah » Sat Jul 07, 2018 11:08 pm

Thank you all for some great advice, details and opinions on this thread. Discussion around an emergency plan vs. an emergency fund has actually been interesting food for thought. Reading past threads on the forum related to emergency funds there are wide ranging approaches on high yield savings, no penalty CDs, CD ladders, money market funds, even short term bonds and TIPS.

If using any of these methods there will be varying delay in time before being able to access and use the cash. Depending on the actual banking situation, online savings or money market funds would be the shortest, but still a few days for transfers. So immediate access to cash is not the primary goal of the emergency fund.

What is then?

Is it simply to have assets completely isolated from your portfolio and the market?

One of the big Boglehead lessons it took me a while to completely understand was looking at all of my assets as part of my portfolio and ultimate asset allocation. So why treat an emergency fund as a special/separate thing? Other than potential loss in value with a downturn, what really would be the negative of being fully invested according to your AA and in an emergency selling holdings to maintain the desired AA?
"We have a lot to do, and very little time, so we must work slowly." Liviu Ciulei | | Thanks vineviz (https://www.bogleheads.org/forum/memberlist.php?mode=viewprofile&u=134698) for the quote.

Dandy
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Re: Capping Emergency Fund

Post by Dandy » Sun Jul 08, 2018 9:13 am

Let's be honest in a real emergency your whole assets are liable to be in play. Cash and cash-like products are earning close to inflation, if CDs are included maybe a bit more. Intermediate bonds are slightly negative this year so far with rising rates in the near term likely - but they aren't on the "beach" but Prime yielding 2% is?

All bonds are a "drag" on your portfolio since equities are expected to outpace fixed income over time. But, people seem fine with some intermediate bonds, which are a "drag" but abhor other fixed income. Maybe a several decades long interest rate decline which created a nice bond fund total returns has clouded the view. That, and historically low yields on cash type products.

If the purpose of your fixed income is stability so you can take the major risk on the equity side then bonds and cash have a role. Cash and cash-like fixed income to a limited extent add additional safety and diversification. Having a modest allocation to those vehicles is often prudent. In the past, as was noted, allocations were described in stocks/bonds/cash. Maybe since brokers didn't make any/much money on cash they dropped it. Having 6 to 12 months of expenses in cash doesn't seem unwise.

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willthrill81
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Re: Capping Emergency Fund

Post by willthrill81 » Sun Jul 08, 2018 9:52 am

Dandy wrote:
Sun Jul 08, 2018 9:13 am
If the purpose of your fixed income is stability so you can take the major risk on the equity side then bonds and cash have a role. Cash and cash-like fixed income to a limited extent add additional safety and diversification. Having a modest allocation to those vehicles is often prudent. In the past, as was noted, allocations were described in stocks/bonds/cash. Maybe since brokers didn't make any/much money on cash they dropped it. Having 6 to 12 months of expenses in cash doesn't seem unwise.
I agree. It seems to me that a mix of cash and low duration fixed income instruments like T-bills, very short-term bonds, and CDs could be a worthwhile addition to one's fixed income allocation.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Engineer250
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Re: Capping Emergency Fund

Post by Engineer250 » Sun Jul 08, 2018 12:22 pm

nasrullah wrote:
Sat Jul 07, 2018 11:08 pm
Thank you all for some great advice, details and opinions on this thread. Discussion around an emergency plan vs. an emergency fund has actually been interesting food for thought. Reading past threads on the forum related to emergency funds there are wide ranging approaches on high yield savings, no penalty CDs, CD ladders, money market funds, even short term bonds and TIPS.

If using any of these methods there will be varying delay in time before being able to access and use the cash. Depending on the actual banking situation, online savings or money market funds would be the shortest, but still a few days for transfers. So immediate access to cash is not the primary goal of the emergency fund.

What is then?

Is it simply to have assets completely isolated from your portfolio and the market?

One of the big Boglehead lessons it took me a while to completely understand was looking at all of my assets as part of my portfolio and ultimate asset allocation. So why treat an emergency fund as a special/separate thing? Other than potential loss in value with a downturn, what really would be the negative of being fully invested according to your AA and in an emergency selling holdings to maintain the desired AA?
If I am understanding your post correctly, yes many BH don't have an emergency fund per se, and consider it part of their AA. I would say the key there is you need to have sizeable enough assets in a taxable account that your EF could be considered to be living inside that taxable account. For me personally, my taxable account that is my EF is less than 3% of my total account balance with that 97% being "trapped" in various retirement accounts that have penalties for taking money out. However yes if one's taxable is large enough you could just hold some portion in your desired non-equity (bonds, TIPS, CDs, MM) and consider yourself good.
Where the tides of fortune take us, no man can know.

KlangFool
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Re: Capping Emergency Fund

Post by KlangFool » Sun Jul 08, 2018 5:48 pm

nasrullah wrote:
Sat Jul 07, 2018 11:08 pm

What is then?

Is it simply to have assets completely isolated from your portfolio and the market?
nasrullah,

1) There is a point of view that the emergency fund is cash or cash equivalent. Aka, the principal value will not drop below $1. And, when one's portfolio is big enough, one may just hold a percentage of the portfolio in that.

2) Ditto, someone may hold a percentage of the portfolio in physical gold too. Just to be protected from the volatility of the currency.

KlangFool

bling
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Re: Capping Emergency Fund

Post by bling » Sun Jul 08, 2018 7:55 pm

emergency funds stop making sense the moment it doesn't affect your feelings about it. mathematically, the best thing to do is to invest every penny you have, and if/when an emergency happens, sell and rebalance. if you can't sleep well at night doing that, then by all means, carry some cash around so that you can.

IlliniDave
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Re: Capping Emergency Fund

Post by IlliniDave » Mon Jul 09, 2018 3:45 am

In the spirit of a primary purpose of an emergency fund being to see one through a period characterized by no income from work, to me it's all a giant emergency fund and so never deliberately capped. Retirement is essentially a (hopefully) decades-long period without employment. I keep about year's worth of spending in cash (I don't spend much so we're talking about maybe 3% of invested assets) and several years worth in muni bonds in a taxable account which is sort of tier 1 and tier 2, respectively, should I need to raise a whole bunch of cash quickly. If I lost employment now I would most likely just retire. Being maybe 1.5-2.5 years from retirement, any distinction between emergency fund and retirement funds is rapidly disappearing. For someone earlier in accumulation I would suggest sizing an emergency fund based on comfort level rather than math. I'd be more inclined to argue for a minimum than a cap. For folks with some bravado and a decent nest egg started holding a substantial amount of cash isn't necessary, but at the same time I don't think anyone has landed in the poor house over having what would be considered an oversized emergency fund on top of their longer-term investments.
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Engineer250
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Re: Capping Emergency Fund

Post by Engineer250 » Mon Jul 09, 2018 12:22 pm

bling wrote:
Sun Jul 08, 2018 7:55 pm
emergency funds stop making sense the moment it doesn't affect your feelings about it. mathematically, the best thing to do is to invest every penny you have, and if/when an emergency happens, sell and rebalance. if you can't sleep well at night doing that, then by all means, carry some cash around so that you can.
This comes back to needing to have a sizeable amount in taxable accounts though. If your taxable balance is one year or more of living expenses, sure you don't need an EF and can probably invest it however you like.
Where the tides of fortune take us, no man can know.

KlangFool
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Re: Capping Emergency Fund

Post by KlangFool » Mon Jul 09, 2018 12:51 pm

Engineer250 wrote:
Mon Jul 09, 2018 12:22 pm
bling wrote:
Sun Jul 08, 2018 7:55 pm
emergency funds stop making sense the moment it doesn't affect your feelings about it. mathematically, the best thing to do is to invest every penny you have, and if/when an emergency happens, sell and rebalance. if you can't sleep well at night doing that, then by all means, carry some cash around so that you can.
This comes back to needing to have a sizeable amount in taxable accounts though. If your taxable balance is one year or more of living expenses, sure you don't need an EF and can probably invest it however you like.
Engineer250,

In regards to sizable taxable account, there is 2 interesting point associated with this:

A) The distribution/interest/dividend of the taxable investment could be substantial. In OP's case, the taxable investment is 1.4 million. Assuming 2% distribution, there is at least 28K cash flow from the investment.

B) I had been there many times. I have about 500K in my taxable account. But, in a full recession/market downturn/unemployment, it is painful to sell your taxable investment in order to finance your daily expenses. And, do you do this every month? Every 3 months? Please note that at the same time, you are trying to find a job and/or saving your business. You do not need the additional stress and pain.

I can afford this. So, I keep 1 year of expense (60K plus 50% college expense) as the emergency fund. I do not need the stress.

In a full-scale recession, I will be in shock. And, most likely, I will freeze and do nothing. Hence, I need a system to protect myself from my emotion.

KlangFool

garlandwhizzer
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Re: Capping Emergency Fund

Post by garlandwhizzer » Mon Jul 09, 2018 12:59 pm

My emergency fund, Vanguard's Prime MMF, covers between 2 and 3 years of my full living expenses, longer than most because I have an equity dominated portfolio (66/34) even though I'm retired. This came in very handy during the market crash of 2007-9, which I survived without selling a single share of equity. Also in a rising rate/rising inflation scenario like now, MMF total returns often outperform longer duration bonds which suffer principal loss. Hence at present there is no economic cost for having a large amount of instant liquidity in MMF which can be withdrawn as much or as little as needed in case of emergencies, bear markets, or those rare gift horse opportunities to buy risk assets at a huge discount.

Garland Whizzer

Engineer250
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Re: Capping Emergency Fund

Post by Engineer250 » Mon Jul 09, 2018 1:47 pm

KlangFool wrote:
Mon Jul 09, 2018 12:51 pm
Engineer250 wrote:
Mon Jul 09, 2018 12:22 pm
bling wrote:
Sun Jul 08, 2018 7:55 pm
emergency funds stop making sense the moment it doesn't affect your feelings about it. mathematically, the best thing to do is to invest every penny you have, and if/when an emergency happens, sell and rebalance. if you can't sleep well at night doing that, then by all means, carry some cash around so that you can.
This comes back to needing to have a sizeable amount in taxable accounts though. If your taxable balance is one year or more of living expenses, sure you don't need an EF and can probably invest it however you like.
Engineer250,

In regards to sizable taxable account, there is 2 interesting point associated with this:

A) The distribution/interest/dividend of the taxable investment could be substantial. In OP's case, the taxable investment is 1.4 million. Assuming 2% distribution, there is at least 28K cash flow from the investment.

B) I had been there many times. I have about 500K in my taxable account. But, in a full recession/market downturn/unemployment, it is painful to sell your taxable investment in order to finance your daily expenses. And, do you do this every month? Every 3 months? Please note that at the same time, you are trying to find a job and/or saving your business. You do not need the additional stress and pain.

I can afford this. So, I keep 1 year of expense (60K plus 50% college expense) as the emergency fund. I do not need the stress.

In a full-scale recession, I will be in shock. And, most likely, I will freeze and do nothing. Hence, I need a system to protect myself from my emotion.

KlangFool
KF,

I agree with you. My EF makes up 100% of my taxable savings so there's no way I'm investing any of it in equity. Maybe some day I will be lucky enough to have a larger balance. Then I might be okay with anything beyond 6 months or 1 year being invested. Or I might also decide I'm okay with a lower ceiling on returns in exchange for safety in my taxable, and have 100% of it on MMF or treasuries.
Where the tides of fortune take us, no man can know.

delamer
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Re: Capping Emergency Fund

Post by delamer » Mon Jul 09, 2018 3:42 pm

garlandwhizzer wrote:
Mon Jul 09, 2018 12:59 pm
My emergency fund, Vanguard's Prime MMF, covers between 2 and 3 years of my full living expenses, longer than most because I have an equity dominated portfolio (66/34) even though I'm retired. This came in very handy during the market crash of 2007-9, which I survived without selling a single share of equity. Also in a rising rate/rising inflation scenario like now, MMF total returns often outperform longer duration bonds which suffer principal loss. Hence at present there is no economic cost for having a large amount of instant liquidity in MMF which can be withdrawn as much or as little as needed in case of emergencies, bear markets, or those rare gift horse opportunities to buy risk assets at a huge discount.

Garland Whizzer
I guess this is semantics to some extent, but I don’t see your cash allocation as being an emergency fund.

To me, people only need an emergency fund if they have earned income that they depend on that might be interrupted.

Retirees aren’t dependent on earned income. So they just have a cash allocation in their assets, not an emergency fund.

mega317
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Re: Capping Emergency Fund

Post by mega317 » Wed Jul 11, 2018 7:01 am

I think some people consider a stock crash an emergency and plan to use their energy fund in an attempt to avoid selling stocks under any circumstances until they recover, which I assume people define as a return to pre-crash prices but I don't really know.

KlangFool
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Re: Capping Emergency Fund

Post by KlangFool » Wed Jul 11, 2018 7:05 am

mega317 wrote:
Wed Jul 11, 2018 7:01 am
I think some people consider a stock crash and unemployment as an emergency and plan to use their energy emergency fund in an attempt to avoid selling stocks under any circumstances until they recover, which I assume people define as a return to pre-crash prices but I don't really know.
mega317,

A minor correction.

KlangFool

Luke Duke
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Re: Capping Emergency Fund

Post by Luke Duke » Wed Jul 11, 2018 8:52 am

Jags4186 wrote:
Fri Jul 06, 2018 12:42 pm
Our car insurance deductibles are $500 and home owners deductible is $1000.
Based on your stated financial situation and the deductibles listed above, it would appear that you are paying too much for insurance.

Luke Duke
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Re: Capping Emergency Fund

Post by Luke Duke » Wed Jul 11, 2018 8:56 am

Engineer250 wrote:
Mon Jul 09, 2018 1:47 pm
My EF makes up 100% of my taxable savings so there's no way I'm investing any of it in equity.
I'm in a similar situation, but my EF is in a 20/80 portfolio in an attempt to keep up with inflation with a fairly minimal downside risk.

Jags4186
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Re: Capping Emergency Fund

Post by Jags4186 » Wed Jul 11, 2018 9:19 am

Luke Duke wrote:
Wed Jul 11, 2018 8:52 am
Jags4186 wrote:
Fri Jul 06, 2018 12:42 pm
Our car insurance deductibles are $500 and home owners deductible is $1000.
Based on your stated financial situation and the deductibles listed above, it would appear that you are paying too much for insurance.
You would think so, however the break even on these policies to raise the deductible made little sense.

For example, I only saved $50/yr in premiums going from $500 to $1000 deductibles on the car insurance and based on our history we average more than one incident every 10 years.

Similarly, as new home owners I am unsure of frequency of claims, however going from $1000 to 1% of value—the next step up—saved us less than $35/yr on premiums. If we do have a claim that would give us $3000 of headroom and While I hope to never have a claim, in the event I have one in the next 100 years or so I will win.

digit8
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Re: Capping Emergency Fund

Post by digit8 » Wed Jul 11, 2018 9:51 am

nasrullah wrote:
Fri Jul 06, 2018 12:28 pm
In general the advice/target for an emergency fund is 6 months of expenses. I'm curious at what point in total assets this rule doesn't make sense.
For me, never. I put less in then I did when I was starting out, but I continue to contribute regularly.

With that said, my EF holdings are mainly a money market and taxable equity fund. Over the long term I have decent odds of those returns giving me enough of a cushion that things like retiring a few years early are an option. For those with more conservative holdings, a cap makes sense. Putting away more than what you need to sleep comfortably at night in a savings account or cd ladder doesn't add much and takes a toll in opportunity cost.
Last edited by digit8 on Wed Jul 11, 2018 9:52 am, edited 1 time in total.
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Luke Duke
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Re: Capping Emergency Fund

Post by Luke Duke » Wed Jul 11, 2018 9:52 am

That is a surprisingly low difference in premiums. I would have made the same choices that you did.

mega317
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Re: Capping Emergency Fund

Post by mega317 » Wed Jul 11, 2018 2:30 pm

KlangFool wrote:
Wed Jul 11, 2018 7:05 am
mega317 wrote:
Wed Jul 11, 2018 7:01 am
I think some people consider a stock crash and unemployment as an emergency and plan to use their energy emergency fund in an attempt to avoid selling stocks under any circumstances until they recover, which I assume people define as a return to pre-crash prices but I don't really know.
mega317,

A minor correction.

KlangFool
The point I was trying to make was that for some people, unemployment isn't necessary to define an emergency and/or use their nominal EF. Some people don't want to sell stocks when they're "down" regardless of anything else.

Engineer250
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Re: Capping Emergency Fund

Post by Engineer250 » Wed Jul 11, 2018 4:40 pm

mega317 wrote:
Wed Jul 11, 2018 2:30 pm
KlangFool wrote:
Wed Jul 11, 2018 7:05 am
mega317 wrote:
Wed Jul 11, 2018 7:01 am
I think some people consider a stock crash and unemployment as an emergency and plan to use their energy emergency fund in an attempt to avoid selling stocks under any circumstances until they recover, which I assume people define as a return to pre-crash prices but I don't really know.
mega317,

A minor correction.

KlangFool
The point I was trying to make was that for some people, unemployment isn't necessary to define an emergency and/or use their nominal EF. Some people don't want to sell stocks when they're "down" regardless of anything else.
I agree with part of what you are saying. My EF is also a "contingency fund". I used it to replace my roof several years ago. The alternative would be financing. Some people may have a fund that serves as an EF and a "next car" fund.

The point being, all this needs to be in taxable if you are too young to withdraw from retirement accounts without penalty. Though plenty of people are cashing out IRAs and 401ks to cover unexpected events because they didn't have enough saved otherwise. I can't be too critical of this because while I am a good saver, my taxable is probably 5% or less of my total savings.
Where the tides of fortune take us, no man can know.

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willthrill81
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Re: Capping Emergency Fund

Post by willthrill81 » Wed Jul 11, 2018 4:47 pm

Engineer250 wrote:
Wed Jul 11, 2018 4:40 pm
My EF is also a "contingency fund". I used it to replace my roof several years ago. The alternative would be financing. Some people may have a fund that serves as an EF and a "next car" fund.
Five years ago we created a 'non-monthly expense' fund that covers nearly all such things, including home maintenance, auto maintenance/taxes, gifts, etc. We place a very consistent amount into it monthly and withdraw from it when one of the expenses is incurred. This has greatly smoothed out our monthly expenses. Aside from something like a multi-year medical issue that would eventually drain our HSA, helping a family member or friend financially, or unemployment, I honestly can't think of what we would use our three month's of expenses in our EF for.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

KlangFool
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Re: Capping Emergency Fund

Post by KlangFool » Wed Jul 11, 2018 4:56 pm

Engineer250 wrote:
Wed Jul 11, 2018 4:40 pm
mega317 wrote:
Wed Jul 11, 2018 2:30 pm
KlangFool wrote:
Wed Jul 11, 2018 7:05 am
mega317 wrote:
Wed Jul 11, 2018 7:01 am
I think some people consider a stock crash and unemployment as an emergency and plan to use their energy emergency fund in an attempt to avoid selling stocks under any circumstances until they recover, which I assume people define as a return to pre-crash prices but I don't really know.
mega317,

A minor correction.

KlangFool
The point I was trying to make was that for some people, unemployment isn't necessary to define an emergency and/or use their nominal EF. Some people don't want to sell stocks when they're "down" regardless of anything else.
I agree with part of what you are saying. My EF is also a "contingency fund". I used it to replace my roof several years ago. The alternative would be financing. Some people may have a fund that serves as an EF and a "next car" fund.

The point being, all this needs to be in taxable if you are too young to withdraw from retirement accounts without penalty. Though plenty of people are cashing out IRAs and 401ks to cover unexpected events because they didn't have enough saved otherwise. I can't be too critical of this because while I am a good saver, my taxable is probably 5% or less of my total savings.
Engineer250,

Not necessary true. You can withdraw the Roth IRA contribution penalty free before 59 1/2 years old too.

KlangFool

KlangFool
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Re: Capping Emergency Fund

Post by KlangFool » Wed Jul 11, 2018 5:00 pm

willthrill81 wrote:
Wed Jul 11, 2018 4:47 pm
Engineer250 wrote:
Wed Jul 11, 2018 4:40 pm
My EF is also a "contingency fund". I used it to replace my roof several years ago. The alternative would be financing. Some people may have a fund that serves as an EF and a "next car" fund.
Five years ago we created a 'non-monthly expense' fund that covers nearly all such things, including home maintenance, auto maintenance/taxes, gifts, etc. We place a very consistent amount into it monthly and withdraw from it when one of the expenses is incurred. This has greatly smoothed out our monthly expenses. Aside from something like a multi-year medical issue that would eventually drain our HSA, helping a family member or friend financially, or unemployment, I honestly can't think of what we would use our three month's of expenses in our EF for.
willthrill81,

1) How big is that fund in term of months of expenses?

2) You could do it that way in addition to your 3 months of EF. Or, you could do it my way and keep 12 months of expense as EF to cover all possible contingency.

I am more of the one portfolio and one emergency fund/bucket kind of person. Keep it simple.

KlangFool

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