An emergency fund cautionary tale

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fortyofforty
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An emergency fund cautionary tale

Post by fortyofforty » Mon Jan 28, 2019 9:58 pm

From recent experience, I observed many people with stable, solid, steady jobs suddenly lose their paychecks. Working for the Federal government, many workers assumed their paychecks were as reliable as the sunrise. Surprise. They stopped.

Many were able to withstand one missing check, but by the second, there was widespread discomfort. People had no way to pay mortgages or utility bills. People had no means to pay college tuitions or credit card bills. People were cutting back on food, and cutting out all unnecessary purchases.

People obviously had almost no ability to withstand a couple of missing paychecks. Had the shutdown lasted longer, I am not sure what would have happened. For those of us with a six-month emergency fund (or more), the shutdown required shifting funds around between accounts, but no real hardship.

Listen to the experts. Save. An emergency fund is priority number one in your financial plan. Everything else--IRA, 401(k), new car, college fund, lattes--must be subordinate to that emergency fund. No source of income, no matter how stable it appears, is guaranteed. Frankly, I don't think three months is enough. Six months would be a minimum, in my opinion. I would not have felt secure if a third of my emergency fund had been depleted after only two missing paychecks.
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celia
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Re: An emergency fund cautionary tale

Post by celia » Mon Jan 28, 2019 10:08 pm

A study showed that about 50% of Americans wouldn't be able to cover a $400 emergency:
https://www.washingtonpost.com/news/won ... 0-expense/

That's a far cry from several months of living expenses!

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fortfun
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Re: An emergency fund cautionary tale

Post by fortfun » Mon Jan 28, 2019 10:09 pm

A good friend of mine just had her house foreclosed. They are a couple that both have good jobs. Sadly, this was a good reminder for me. With a family of 4, I really don't want to drop below 75k liquid assets.

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Re: An emergency fund cautionary tale

Post by dekecarver » Mon Jan 28, 2019 10:15 pm

celia wrote:
Mon Jan 28, 2019 10:08 pm
A study showed that about 50% of Americans wouldn't be able to cover a $400 emergency:
https://www.washingtonpost.com/news/won ... 0-expense/

That's a far cry from several months of living expenses!
I'd be interested in reading that study and knowing what metrics were used. The way news is reported today and I'm not referring to "fake news", the veracity is often questionable depending who is writing the article much less actually doing the research to support the reporting.

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Re: An emergency fund cautionary tale

Post by Grt2bOutdoors » Mon Jan 28, 2019 10:21 pm

dekecarver wrote:
Mon Jan 28, 2019 10:15 pm
celia wrote:
Mon Jan 28, 2019 10:08 pm
A study showed that about 50% of Americans wouldn't be able to cover a $400 emergency:
https://www.washingtonpost.com/news/won ... 0-expense/

That's a far cry from several months of living expenses!
I'd be interested in reading that study and knowing what metrics were used. The way news is reported today and I'm not referring to "fake news", the veracity is often questionable depending who is writing the article much less actually doing the research to support the reporting.
I recall seeing the study coming from the Liberty Street Economics blog of The Federal Reserve Bank of New York. What usually happens is the blurb is picked up by various news outlets and disseminated through a small paragraph highlighting that x% say they can’t come up with enough cash to pay for a $400 emergency. I believe it too. Usually those who have access to credit will use a card, it’s what happens when the bill arrives that confirms they can’t handle it - they make monthly payments thereby perpetuating the debt spiral.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: An emergency fund cautionary tale

Post by knpstr » Mon Jan 28, 2019 10:23 pm

+1
I think this notification is worthwhile even for those not affected by the recent events.
I also think it is easy to get "lazy" and at ease with having underfunded reserves during good times.

That is one thing Buffett has always stated as well, he never wants to be in a position where Berkshire is at the mercy of others for cash and it is why he says they will always have at least $20,000,000,000 in treasuries/cash. He has an emergency fund.
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Re: An emergency fund cautionary tale

Post by Tom0026 » Mon Jan 28, 2019 10:37 pm

The article has a link to the study

https://www.federalreserve.gov/2015-rep ... 201605.pdf

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Re: An emergency fund cautionary tale

Post by LadyGeek » Mon Jan 28, 2019 10:54 pm

The wiki has some background info: Emergency fund

To keep this actionable, please focus on your own situation.
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Re: An emergency fund cautionary tale

Post by willthrill81 » Mon Jan 28, 2019 11:29 pm

fortyofforty wrote:
Mon Jan 28, 2019 9:58 pm
An emergency fund is priority number one in your financial plan.
I completely agree with the spirit of your post, but I would make one change here. It's not that an emergency fund is your number one priority but rather liquidity. This liquidity need not come from a 'designated fund for emergency purposes'. It could even come from an 'overfunded' position of stocks (e.g. if you need $10k of liquidity, then put $20k in VTSAX). Yes, selling stocks in a downturn is not ideal, but (1) it's actually fairly unlikely that stocks will be down 50% at the precise moment that you need that money, and (2) the opportunity cost of holding cash reserves is not to be underestimated. I'm not saying that anyone should hold their 'EF' in stocks, only that they could in a sensible way. But certainly the person who has a balanced portfolio for other reasons can certainly draw from their fixed income holdings with a lesser likelihood of them being in a significant drawdown than stocks.

And a Roth IRA can actually be a great place for someone to 'store' their liquid funds. That's where 2/3 of ours is.
“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

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Re: An emergency fund cautionary tale

Post by AlohaJoe » Mon Jan 28, 2019 11:42 pm

willthrill81 wrote:
Mon Jan 28, 2019 11:29 pm
fortyofforty wrote:
Mon Jan 28, 2019 9:58 pm
An emergency fund is priority number one in your financial plan.
I completely agree with the spirit of your post, but I would make one change here.
I'd actually go a step further and say an emergency fund isn't priority one. I think that YNAB's "age of money" is a better priority one, since it breaks the "living paycheck to paycheck" cycle but isn't an (explicit) emergency fund. Having read the YNAB forums for a few years I've seen a lot more stories about the improvement age of money makes for most people than having an emergency fund does.

https://www.youneedabudget.com/method/rule-four/

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Re: An emergency fund cautionary tale

Post by Independent George » Mon Jan 28, 2019 11:53 pm

willthrill81 wrote:
Mon Jan 28, 2019 11:29 pm
Yes, selling stocks in a downturn is not ideal, but (1) it's actually fairly unlikely that stocks will be down 50% at the precise moment that you need that money, and (2) the opportunity cost of holding cash reserves is not to be underestimated. I'm not saying that anyone should hold their 'EF' in stocks, only that they could in a sensible way.
I agree on the second point, but disagree on the first. A sudden stock drawdown of 50% is precisely the most likely time someone will get laid off, and therefore need to sell to pay bills. If you own a business, that is the most likely time your sales will decline, or your renters will be unable to pay.

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Re: An emergency fund cautionary tale

Post by strongboy2005 » Tue Jan 29, 2019 12:15 am

Could you keep a 12 month emergency fund of stocks (e.g., VTI or VTSAX) as your 6 month emergency fund? Then, in a situation where there is a simultaneous emergency (such as job loss) and a 50% decline in the stock market, you still have 6 months of liquidity.

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Re: An emergency fund cautionary tale

Post by willthrill81 » Tue Jan 29, 2019 12:27 am

Independent George wrote:
Mon Jan 28, 2019 11:53 pm
willthrill81 wrote:
Mon Jan 28, 2019 11:29 pm
Yes, selling stocks in a downturn is not ideal, but (1) it's actually fairly unlikely that stocks will be down 50% at the precise moment that you need that money, and (2) the opportunity cost of holding cash reserves is not to be underestimated. I'm not saying that anyone should hold their 'EF' in stocks, only that they could in a sensible way.
I agree on the second point, but disagree on the first. A sudden stock drawdown of 50% is precisely the most likely time someone will get laid off, and therefore need to sell to pay bills. If you own a business, that is the most likely time your sales will decline, or your renters will be unable to pay.
Certainly the stock market and the unemployment rate are positively correlated. But many people have lost their jobs for whatever reason since the end of the last recession, and most people, especially those with a college degree, who are also the most likely to be reading this forum, retained their employment throughout that same recession, the worst in decades.
Only 17% of unemployment claims occur during recession periods, 83% during expansions since the government started measuring those in 1967 (Weekly Unemployment Claims). 17% is higher than the recession probability since 1967 (13%), hence the positive correlation, but you are still five times more likely to claim unemployment benefits during an expansion than during a recession.
https://earlyretirementnow.com/2016/09/ ... nds-part1/

Again, I'm not saying that you should hold your 'EF' in stocks, only that you could in a sensible way by 'overfunding' your 'EF'.
Last edited by willthrill81 on Tue Jan 29, 2019 12:48 am, edited 1 time in total.
“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

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willthrill81
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Re: An emergency fund cautionary tale

Post by willthrill81 » Tue Jan 29, 2019 12:31 am

AlohaJoe wrote:
Mon Jan 28, 2019 11:42 pm
willthrill81 wrote:
Mon Jan 28, 2019 11:29 pm
fortyofforty wrote:
Mon Jan 28, 2019 9:58 pm
An emergency fund is priority number one in your financial plan.
I completely agree with the spirit of your post, but I would make one change here.
I'd actually go a step further and say an emergency fund isn't priority one. I think that YNAB's "age of money" is a better priority one, since it breaks the "living paycheck to paycheck" cycle but isn't an (explicit) emergency fund. Having read the YNAB forums for a few years I've seen a lot more stories about the improvement age of money makes for most people than having an emergency fund does.

https://www.youneedabudget.com/method/rule-four/
That makes a lot of sense.

I hope that recent events have shown people that being too dependent on your next paycheck is a dangerous way to live.
“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

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Re: An emergency fund cautionary tale

Post by mariezzz » Tue Jan 29, 2019 12:40 am

knpstr wrote:
Mon Jan 28, 2019 10:23 pm
That is one thing Buffett has always stated as well, he never wants to be in a position where Berkshire is at the mercy of others for cash and it is why he says they will always have at least $20,000,000,000 in treasuries/cash. He has an emergency fund.
+1, always good to have $20,000,000,000 in treasuries/cash :moneybag

(just having a bit of (friendly) fun)

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Re: An emergency fund cautionary tale

Post by sandramjet » Tue Jan 29, 2019 12:43 am

Tom0026 wrote:
Mon Jan 28, 2019 10:37 pm
The article has a link to the study

https://www.federalreserve.gov/2015-rep ... 201605.pdf
And I found it interesting in reading the report they found
68 percent of all respondents report that they would be prepared for a three-month financial disruption.

which was actually higher than I expected (although 3 months doesn't really seem like enough) but as pointed out, what gets reported most was the other question about
To determine individuals’ preparedness for a smaller scale
financial disruption, respondents are asked how
they would pay for a hypothetical emergency expense
that would cost $400. Just over half (54 percent)
report that they could fairly easily handle such an
expense, paying for it entirely using cash, money currently
in their checking/savings account, or on a
credit card that they would pay in full at their next
statement (collectively referred to here as “cash or its
functional equivalent”). The remaining 46 percent
indicate that such an expense would be more challenging
to handle and that they either could not pay
the expense or would borrow or sell something to
do so.
So somehow, almost 70 % could handle 3 months without a paycheck, but only 54% can handle a $400 expense??

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Re: An emergency fund cautionary tale

Post by MnD » Tue Jan 29, 2019 12:44 am

35 years as a fed with DW 35 years in the private sector, me just retired and her retiring in a few weeks.
Spenders and savers are found in all sectors of employment. Spenders go from one mostly self-made emergency to another while savers deal with inevitable financial setbacks and surprises with a practical and reasoned approach. Unless you owe money to the mafia and/or are prone to kidnapping/ransom situations, most "emergencies" do not require a big cash balance earning nothing down the street at local bank or stuffed in the mattress.

If you are a saver and have a variety of accounts and a blend of equity and fixed income I wouldn't worry too much about bucketing some big emergency fund off to the side. I could tell a hair-raising emergency story about liabilities we had that cropped up in 2008-10 that had nothing to do with the financial crisis directly. But it is a boring story because costs were spread out over time without penalties and using a variety of income/asset sources.
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Re: An emergency fund cautionary tale

Post by AlohaJoe » Tue Jan 29, 2019 12:49 am

Independent George wrote:
Mon Jan 28, 2019 11:53 pm
willthrill81 wrote:
Mon Jan 28, 2019 11:29 pm
Yes, selling stocks in a downturn is not ideal, but (1) it's actually fairly unlikely that stocks will be down 50% at the precise moment that you need that money, and (2) the opportunity cost of holding cash reserves is not to be underestimated. I'm not saying that anyone should hold their 'EF' in stocks, only that they could in a sensible way.
I agree on the second point, but disagree on the first. A sudden stock drawdown of 50% is precisely the most likely time someone will get laid off, and therefore need to sell to pay bills.
For what it is worth, this isn't actually true. Let's look at the actual data for 2008. The trough for stocks was March 2009 but the peak for unemployment was October 2009, two years into the bear market (so not exactly sudden) and half a year after stocks had started rebounding (though no one at the time knew with certainty the bottom had been reached). By October the market (well, VTSAX) had already gone up from 13.64 to 22.50, a 65% increase.

Unemployment always trails the stock market. The time you are most likely to be unemployed is during the stock market recovery, not when it is 50% down.

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Re: An emergency fund cautionary tale

Post by willthrill81 » Tue Jan 29, 2019 12:56 am

MnD wrote:
Tue Jan 29, 2019 12:44 am
35 years as a fed with DW 35 years in the private sector, me just retired and her retiring in a few weeks.
Spenders and savers are found in all sectors of employment. Spenders go from one mostly self-made emergency to another while savers deal with inevitable financial setbacks and surprises with a practical and reasoned approach. Unless you owe money to the mafia and/or are prone to kidnapping/ransom situations, most "emergencies" do not require a big cash balance earning nothing down the street at local bank or stuffed in the mattress.

If you are a saver and have a variety of accounts and a blend of equity and fixed income I wouldn't worry too much about bucketing some big emergency fund off to the side. I could tell a hair-raising emergency story about liabilities we had that cropped up in 2008-10 that had nothing to do with the financial crisis directly. But it is a boring story because costs were spread out over time without penalties and using a variety of income/asset sources.
+1

It's still my opinion that it's prudent to have some liquidity. But there's a huge difference between that and having a 5 year EF, as one poster was recently asking about.

Most here are not 100% stock in their portfolio. So if they encounter a true emergency, they can sell off enough fixed income to cover the cost if they don't want to sell their stocks for whatever reason. If you had to pay a 10% penalty for doing so due to the funds being held in a tax-advantaged account, that's very likely still a better situation than not contributing to the account in the first place (i.e. opportunity cost).
“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

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Re: An emergency fund cautionary tale

Post by HIinvestor » Tue Jan 29, 2019 3:17 am

I know we sleep better at night knowing we have liquidity even if our funds aren’t earning the max possible, they’re handy for whatever unexpected emergency may arise.

Living paycheck to paycheck is very uncomfortable. I’ve always lived below my means to secure an emergency fund equal to a few months worth of expenses because I like having a cushion. Our kids also do the same.

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Re: An emergency fund cautionary tale

Post by Tamarind » Tue Jan 29, 2019 3:40 am

We keep a liquid 12 month emergency fund scaled from our bare bones budget. In practice it'd probably last 9 months because we wouldn't immediately drop to a rice and beans diet but would make increasing cuts as an income interruption continued.

It's important for two reasons:
1) So we have the ability to take risks on jobs to advance both our careers.
2) Because we don't yet have a taxable investment account. If we go off the end of our EF runway, the next tier is Roth contributions and we really want to avoid that.

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Re: An emergency fund cautionary tale

Post by Ari » Tue Jan 29, 2019 4:09 am

willthrill81 wrote:
Mon Jan 28, 2019 11:29 pm
I completely agree with the spirit of your post, but I would make one change here. It's not that an emergency fund is your number one priority but rather liquidity. This liquidity need not come from a 'designated fund for emergency purposes'. It could even come from an 'overfunded' position of stocks (e.g. if you need $10k of liquidity, then put $20k in VTSAX).
Yes, I agree. The important thing is to have liquidity. The money doesn't necessarily have to be in a dedicated "emergency fund". Whenever I need money, I sell stocks, even if they're down. Chances are they're still up from the moment I bought them.

Also, is unemployment insurance not a thing in the US? For most Swedes, that would be the first line of defense against job loss.
All in, all the time.

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Re: An emergency fund cautionary tale

Post by Valuethinker » Tue Jan 29, 2019 4:16 am

Ari wrote:
Tue Jan 29, 2019 4:09 am
willthrill81 wrote:
Mon Jan 28, 2019 11:29 pm
I completely agree with the spirit of your post, but I would make one change here. It's not that an emergency fund is your number one priority but rather liquidity. This liquidity need not come from a 'designated fund for emergency purposes'. It could even come from an 'overfunded' position of stocks (e.g. if you need $10k of liquidity, then put $20k in VTSAX).
Yes, I agree. The important thing is to have liquidity. The money doesn't necessarily have to be in a dedicated "emergency fund". Whenever I need money, I sell stocks, even if they're down. Chances are they're still up from the moment I bought them.

Also, is unemployment insurance not a thing in the US? For most Swedes, that would be the first line of defense against job loss.
As I understand it in the US case, the eligibility rules are quite restrictive. The qualification period is long and the term of benefits is not long, and the amounts are strictly limited.

UK is somewhat similar. There are quite strict rules about taking any job that comes up, even if unsuited, etc. Payment levels are small compared to a middle class income. There are asset limits - owning a house might disqualify you, etc.

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Re: An emergency fund cautionary tale

Post by Valuethinker » Tue Jan 29, 2019 4:17 am

fortyofforty wrote:
Mon Jan 28, 2019 9:58 pm
From recent experience, I observed many people with stable, solid, steady jobs suddenly lose their paychecks. Working for the Federal government, many workers assumed their paychecks were as reliable as the sunrise. Surprise. They stopped.

Many were able to withstand one missing check, but by the second, there was widespread discomfort. People had no way to pay mortgages or utility bills. People had no means to pay college tuitions or credit card bills. People were cutting back on food, and cutting out all unnecessary purchases.

People obviously had almost no ability to withstand a couple of missing paychecks. Had the shutdown lasted longer, I am not sure what would have happened. For those of us with a six-month emergency fund (or more), the shutdown required shifting funds around between accounts, but no real hardship.

Listen to the experts. Save. An emergency fund is priority number one in your financial plan. Everything else--IRA, 401(k), new car, college fund, lattes--must be subordinate to that emergency fund. No source of income, no matter how stable it appears, is guaranteed. Frankly, I don't think three months is enough. Six months would be a minimum, in my opinion. I would not have felt secure if a third of my emergency fund had been depleted after only two missing paychecks.
During the recession after the Financial Crisis, it took people 1, 2 even 3 years to find jobs. We had posts about it here - retirement plans were devastated.

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Re: An emergency fund cautionary tale

Post by Ari » Tue Jan 29, 2019 5:14 am

Valuethinker wrote:
Tue Jan 29, 2019 4:16 am
As I understand it in the US case, the eligibility rules are quite restrictive. The qualification period is long and the term of benefits is not long, and the amounts are strictly limited.

UK is somewhat similar. There are quite strict rules about taking any job that comes up, even if unsuited, etc. Payment levels are small compared to a middle class income. There are asset limits - owning a house might disqualify you, etc.
Ah. In Sweden, there's the governmental one, which doesn't replace that much income (though more than my expenses). Then you can additionally sign up for an "income insurance", which will cover more, though it will cost you an insurance premium. Most Swedes with a high-paying job have an income insurance in addition to the governmental unemployment insurance.
All in, all the time.

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Re: An emergency fund cautionary tale

Post by Eric76 » Tue Jan 29, 2019 6:06 am

I maintain an over funded position in BSV as a percentage of my portfolio to cover unexpected emergencies. Will it drag my long term returns? Absolutely. I guess sleeping at night is my priority.

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Re: An emergency fund cautionary tale

Post by RickBoglehead » Tue Jan 29, 2019 6:21 am

Over my career, I had multiple periods of extended unemployment. New England banking collapse of 1991. Leaving a horrible job. Being laid off.

I keep at least 6 months in money markets, then ROTH. But I focus on growing my portfolio.

Too many Americans live check to check and no strategy gets them out of that hole. And they don't save for retirement. Very sad.
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Re: An emergency fund cautionary tale

Post by AlohaJoe » Tue Jan 29, 2019 6:37 am

Ari wrote:
Tue Jan 29, 2019 5:14 am
Valuethinker wrote:
Tue Jan 29, 2019 4:16 am
As I understand it in the US case, the eligibility rules are quite restrictive. The qualification period is long and the term of benefits is not long, and the amounts are strictly limited.

UK is somewhat similar. There are quite strict rules about taking any job that comes up, even if unsuited, etc. Payment levels are small compared to a middle class income. There are asset limits - owning a house might disqualify you, etc.
Ah. In Sweden, there's the governmental one, which doesn't replace that much income (though more than my expenses). Then you can additionally sign up for an "income insurance", which will cover more, though it will cost you an insurance premium. Most Swedes with a high-paying job have an income insurance in addition to the governmental unemployment insurance.
There is private unemployment insurance in the US, too. But I've never heard of anyone buying it. Those who are worried about it seem to prefer to self-insure.

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Re: An emergency fund cautionary tale

Post by Old_Dollar » Tue Jan 29, 2019 6:48 am

willthrill81 wrote:
Mon Jan 28, 2019 11:29 pm
fortyofforty wrote:
Mon Jan 28, 2019 9:58 pm
An emergency fund is priority number one in your financial plan.
I completely agree with the spirit of your post, but I would make one change here. It's not that an emergency fund is your number one priority but rather liquidity. This liquidity need not come from a 'designated fund for emergency purposes'. It could even come from an 'overfunded' position of stocks (e.g. if you need $10k of liquidity, then put $20k in VTSAX). Yes, selling stocks in a downturn is not ideal, but (1) it's actually fairly unlikely that stocks will be down 50% at the precise moment that you need that money, and (2) the opportunity cost of holding cash reserves is not to be underestimated. I'm not saying that anyone should hold their 'EF' in stocks, only that they could in a sensible way. But certainly the person who has a balanced portfolio for other reasons can certainly draw from their fixed income holdings with a lesser likelihood of them being in a significant drawdown than stocks.

And a Roth IRA can actually be a great place for someone to 'store' their liquid funds. That's where 2/3 of ours is.
I really like Betterments explanation of this.
I am here solely to learn about investing.

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Re: An emergency fund cautionary tale

Post by carol-brennan » Tue Jan 29, 2019 6:52 am

I have funds equivalent to 4 months of living expenses in a money market and 4 years of living expenses in CDs. I wish I had been furloughed!

P.S. My cell phone is 5 years old and works fine. My car is 15 years old and runs great. My condo is paid for and has been for 15 years. If I don't use something for a year, I sell it ("use it or lose it" rule). I suspect that many of those living paycheck to paycheck have consumeritis.

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fortyofforty
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Re: An emergency fund cautionary tale

Post by fortyofforty » Tue Jan 29, 2019 7:18 am

Ari wrote:
Tue Jan 29, 2019 5:14 am
Valuethinker wrote:
Tue Jan 29, 2019 4:16 am
As I understand it in the US case, the eligibility rules are quite restrictive. The qualification period is long and the term of benefits is not long, and the amounts are strictly limited.

UK is somewhat similar. There are quite strict rules about taking any job that comes up, even if unsuited, etc. Payment levels are small compared to a middle class income. There are asset limits - owning a house might disqualify you, etc.
Ah. In Sweden, there's the governmental one, which doesn't replace that much income (though more than my expenses). Then you can additionally sign up for an "income insurance", which will cover more, though it will cost you an insurance premium. Most Swedes with a high-paying job have an income insurance in addition to the governmental unemployment insurance.
In this most recent case, Federal workers were not allowed to apply for unemployment payments because, technically, they were not unemployed, they simply were not getting paid.
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Nate79
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Re: An emergency fund cautionary tale

Post by Nate79 » Tue Jan 29, 2019 7:46 am

Independent George wrote:
Mon Jan 28, 2019 11:53 pm
willthrill81 wrote:
Mon Jan 28, 2019 11:29 pm
Yes, selling stocks in a downturn is not ideal, but (1) it's actually fairly unlikely that stocks will be down 50% at the precise moment that you need that money, and (2) the opportunity cost of holding cash reserves is not to be underestimated. I'm not saying that anyone should hold their 'EF' in stocks, only that they could in a sensible way.
I agree on the second point, but disagree on the first. A sudden stock drawdown of 50% is precisely the most likely time someone will get laid off, and therefore need to sell to pay bills. If you own a business, that is the most likely time your sales will decline, or your renters will be unable to pay.
What if stocks drop much more than 50%? 50% decline is certainly not the floor for stocks, they have dropped much more in the past (-85% in the Great Depression).

We include our emergency fund (which is a combination of savings account, bonds, etc) in our portfolio allocation. Therefore the short duration savings account can be offset with stock allocation in our 401k such that there is no portfolio drag.

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Re: An emergency fund cautionary tale

Post by unstoppable » Tue Jan 29, 2019 7:55 am

I have a 5 year emergency fund, and people look at me like I have two heads...I was once borrowing money from anyone with a pulse, stressing to make every payment, I never want to go back to that level of urgency to make ends meet. At the ~2-3% Ally savings/CD rates...I feel fine with a small 'tax' of loss to potential inflation/purchase power.

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Re: An emergency fund cautionary tale

Post by unstoppable » Tue Jan 29, 2019 7:56 am

Old_Dollar wrote:
Tue Jan 29, 2019 6:48 am
willthrill81 wrote:
Mon Jan 28, 2019 11:29 pm
fortyofforty wrote:
Mon Jan 28, 2019 9:58 pm
An emergency fund is priority number one in your financial plan.
I completely agree with the spirit of your post, but I would make one change here. It's not that an emergency fund is your number one priority but rather liquidity. This liquidity need not come from a 'designated fund for emergency purposes'. It could even come from an 'overfunded' position of stocks (e.g. if you need $10k of liquidity, then put $20k in VTSAX). Yes, selling stocks in a downturn is not ideal, but (1) it's actually fairly unlikely that stocks will be down 50% at the precise moment that you need that money, and (2) the opportunity cost of holding cash reserves is not to be underestimated. I'm not saying that anyone should hold their 'EF' in stocks, only that they could in a sensible way. But certainly the person who has a balanced portfolio for other reasons can certainly draw from their fixed income holdings with a lesser likelihood of them being in a significant drawdown than stocks.

And a Roth IRA can actually be a great place for someone to 'store' their liquid funds. That's where 2/3 of ours is.
I really like Betterments explanation of this.
Although, I'm a loyal Betterment user/investor...They have a strong conflict of interest with that article...sure, of course it makes more sense to add more money to Betterment instead of outside banks...

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Re: An emergency fund cautionary tale

Post by rich126 » Tue Jan 29, 2019 8:04 am

Everyone is in a different situation. You have some earning very little money and it is hard to tell them to save when they need every penny for basic services (food, electricity, rent). I've been lucky and never was in that situation (although starting out, like many, didn't have much in savings for a few years) but talk to a lot of people in low paying jobs (restaurants).

Its easy to tell people to cut expenses but some are really living on bare bones.

Others, well, they are often house poor and greedy. I've worked in the government and years ago when a furlough was likely to happen I overheard a GS12 who was married to an attorney say they couldn't afford to miss a paycheck. The had a 2nd (or 3rd?) mortgage, etc. I was thinking "Geez, you are making decent money, have two incomes, are in your 40s and you can't afford to miss a paycheck?" Now maybe there were other reasons like a severe medical/financial hardship somewhere but I doubt that.

My understanding was that the federal employees could get unemployment but once they got back pay they would have to repay it. Not sure if that was correct. I wasn't part of the non-paid employees.

And it is possible some of these people have savings but just not a large emergency fund. As you mentioned, a federal job is pretty secure so if I'm a young person I'd prioritize getting my matching money in the 401K TSP first, then saving for the emergency fund otherwise you are giving up free money.

I do know that each furlough certainly hurts the functioning of the government because its the talented people (using in tech jobs) that get fed up and can move on easily for substantially more money. And its the slackers (who make up probably 10-20% of the workforce) who stay since they know they wouldn't have it as good in private industry.

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Re: An emergency fund cautionary tale

Post by willthrill81 » Tue Jan 29, 2019 8:05 am

unstoppable wrote:
Tue Jan 29, 2019 7:56 am
Old_Dollar wrote:
Tue Jan 29, 2019 6:48 am
willthrill81 wrote:
Mon Jan 28, 2019 11:29 pm
fortyofforty wrote:
Mon Jan 28, 2019 9:58 pm
An emergency fund is priority number one in your financial plan.
I completely agree with the spirit of your post, but I would make one change here. It's not that an emergency fund is your number one priority but rather liquidity. This liquidity need not come from a 'designated fund for emergency purposes'. It could even come from an 'overfunded' position of stocks (e.g. if you need $10k of liquidity, then put $20k in VTSAX). Yes, selling stocks in a downturn is not ideal, but (1) it's actually fairly unlikely that stocks will be down 50% at the precise moment that you need that money, and (2) the opportunity cost of holding cash reserves is not to be underestimated. I'm not saying that anyone should hold their 'EF' in stocks, only that they could in a sensible way. But certainly the person who has a balanced portfolio for other reasons can certainly draw from their fixed income holdings with a lesser likelihood of them being in a significant drawdown than stocks.

And a Roth IRA can actually be a great place for someone to 'store' their liquid funds. That's where 2/3 of ours is.
I really like Betterments explanation of this.
Although, I'm a loyal Betterment user/investor...They have a strong conflict of interest with that article...sure, of course it makes more sense to add more money to Betterment instead of outside banks...
They are far from the only ones who offer that advice though.
“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

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Re: An emergency fund cautionary tale

Post by willthrill81 » Tue Jan 29, 2019 8:14 am

rich126 wrote:
Tue Jan 29, 2019 8:04 am
Everyone is in a different situation. You have some earning very little money and it is hard to tell them to save when they need every penny for basic services (food, electricity, rent). I've been lucky and never was in that situation (although starting out, like many, didn't have much in savings for a few years) but talk to a lot of people in low paying jobs (restaurants).

Its easy to tell people to cut expenses but some are really living on bare bones.
Those making below a 'living wage' are likely to indeed have a genuinely hard time saving anything of significance. But those making above that level certainly can if they wish, and I'm speaking from experience.

My wife and I lived for four years below the 'poverty level'. I really don't like that term because we had a good vehicle, a nice apartment, ate well including at least one restaurant meal a week, cable TV, air conditioning, etc. and still saved enough over that period to pay cash for a trip to Hawaii. But we didn't buy things like alcohol, tobacco, lottery tickets, etc.
rich126 wrote:
Tue Jan 29, 2019 8:04 am
My understanding was that the federal employees could get unemployment but once they got back pay they would have to repay it. Not sure if that was correct. I wasn't part of the non-paid employees.
That's my understanding as well. So it would, in effect, have been an interest free loan to get them through the unpaid period.
rich126 wrote:
Tue Jan 29, 2019 8:04 am
And it is possible some of these people have savings but just not a large emergency fund. As you mentioned, a federal job is pretty secure so if I'm a young person I'd prioritize getting my matching money in the 401K TSP first, then saving for the emergency fund otherwise you are giving up free money.
As I mentioned above, liquidity is the real need. Care is needed if the only source of one's liquidity is a 401k due to the restrictions on in service withdrawals that exist for most plans, although if your 'emergency' is a job loss, then you can obviously access the 401k from that employer easily.
“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

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Re: An emergency fund cautionary tale

Post by Old_Dollar » Tue Jan 29, 2019 8:25 am

unstoppable wrote:
Tue Jan 29, 2019 7:56 am
Old_Dollar wrote:
Tue Jan 29, 2019 6:48 am
willthrill81 wrote:
Mon Jan 28, 2019 11:29 pm
fortyofforty wrote:
Mon Jan 28, 2019 9:58 pm
An emergency fund is priority number one in your financial plan.
I completely agree with the spirit of your post, but I would make one change here. It's not that an emergency fund is your number one priority but rather liquidity. This liquidity need not come from a 'designated fund for emergency purposes'. It could even come from an 'overfunded' position of stocks (e.g. if you need $10k of liquidity, then put $20k in VTSAX). Yes, selling stocks in a downturn is not ideal, but (1) it's actually fairly unlikely that stocks will be down 50% at the precise moment that you need that money, and (2) the opportunity cost of holding cash reserves is not to be underestimated. I'm not saying that anyone should hold their 'EF' in stocks, only that they could in a sensible way. But certainly the person who has a balanced portfolio for other reasons can certainly draw from their fixed income holdings with a lesser likelihood of them being in a significant drawdown than stocks.

And a Roth IRA can actually be a great place for someone to 'store' their liquid funds. That's where 2/3 of ours is.
I really like Betterments explanation of this.
Although, I'm a loyal Betterment user/investor...They have a strong conflict of interest with that article...sure, of course it makes more sense to add more money to Betterment instead of outside banks...
The conflict is obvious. However their argument seems rather solid and as a non-Betterment user I tend to agree with their conclusion.
I am here solely to learn about investing.

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Re: An emergency fund cautionary tale

Post by JoeRetire » Tue Jan 29, 2019 8:35 am

fortfun wrote:
Mon Jan 28, 2019 10:09 pm
A good friend of mine just had her house foreclosed.
Because they had no emergency fund?

Or because they were house poor?
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Re: An emergency fund cautionary tale

Post by student » Tue Jan 29, 2019 8:36 am

willthrill81 wrote:
Tue Jan 29, 2019 8:14 am
My wife and I lived for four years below the 'poverty level'. I really don't like that term because we had a good vehicle, a nice apartment, ate well including at least one restaurant meal a week, cable TV, air conditioning, etc. and still saved enough over that period to pay cash for a trip to Hawaii. But we didn't buy things like alcohol, tobacco, lottery tickets, etc.
+1. I was a poor graduate student. What helps me was no alcohol, no tobacco, no lottery tickets (well, maybe one or two a year), no car (take buses), no vacations (well, I did visit home about once a year), no apartment (rented a room). I did eat out at the cafeteria and "cheap" restaurants a lot but I did go to regular restaurants about once a week.

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Re: An emergency fund cautionary tale

Post by simplesimon » Tue Jan 29, 2019 8:41 am

Everybody's situation is different. Have as big of an emergency fund that will allow you to stick to your long term plan.

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Re: An emergency fund cautionary tale

Post by wolf359 » Tue Jan 29, 2019 8:42 am

Grt2bOutdoors wrote:
Mon Jan 28, 2019 10:21 pm
dekecarver wrote:
Mon Jan 28, 2019 10:15 pm
celia wrote:
Mon Jan 28, 2019 10:08 pm
A study showed that about 50% of Americans wouldn't be able to cover a $400 emergency:
https://www.washingtonpost.com/news/won ... 0-expense/

That's a far cry from several months of living expenses!
I'd be interested in reading that study and knowing what metrics were used. The way news is reported today and I'm not referring to "fake news", the veracity is often questionable depending who is writing the article much less actually doing the research to support the reporting.
I recall seeing the study coming from the Liberty Street Economics blog of The Federal Reserve Bank of New York. What usually happens is the blurb is picked up by various news outlets and disseminated through a small paragraph highlighting that x% say they can’t come up with enough cash to pay for a $400 emergency. I believe it too. Usually those who have access to credit will use a card, it’s what happens when the bill arrives that confirms they can’t handle it - they make monthly payments thereby perpetuating the debt spiral.
The latest report is here: https://www.federalreserve.gov/publicat ... 201805.pdf
It's published each May based on the previous year's survey conducted in the Fall.

https://www.federalreserve.gov/publicat ... 201805.pdf

This survey and report were prepared by the Consumer and Community Development Research Section of the Federal Reserve Board’s Division of Consumer and Community Affairs (DCCA). It has been published annually for the last 5 years.

The survey question about meeting a $400 expense is meant to be a measure of household economic vulnerability. (They attempted to measure it other ways as well, including the ability to meet household bills, and details of how exactly unexpected expenses are actually covered.) The fact that the response to that question has been improving is a measurement of the economy improving over that timeframe. (When first asked, only 50% of respondents could cover such an expense. The number is now 59%.)

The way the question is phrased, covering the expense means using entirely cash, savings, or a credit card paid off at the next statement (referred to, altogether, as “cash or its equivalent”).

The survey itself is very well done, documented, and statistically designed for accuracy. There is an entire appendix explaining the survey methodology, assumptions, methods, and how it was conducted. The press focused on that one question, but the intent of the report is to present a complete picture of how US households are doing overall. It's not a study of emergency funds.

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Re: An emergency fund cautionary tale

Post by nisiprius » Tue Jan 29, 2019 8:56 am

A very important point--a question that can be surprisingly difficult to answer in real life--is this:

If I lose my job, what can I expect in unemployment benefits?

It's hard to answer because it is not really something you can bring up with HR, and the details are different in every state. Still, it's important to find out if you can--do I probably get it, and, if so, about how much?
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Re: An emergency fund cautionary tale

Post by NoProbLlama » Tue Jan 29, 2019 10:15 am

Old_Dollar wrote:
Tue Jan 29, 2019 6:48 am
I really like Betterments explanation of this.
Thanks for sharing this link. I hadn't seen it before & I'm always a sucker for stochastic simulation graphs.

Our setup is 3 months of expenses at Ally & another 3 months in the Fidelity brokerage (structured similar to what the Betterment link above describes).

When we were younger & retirement savings wasn't quite enough max 401k & Roth, we used the Roth IRA to stash our 2nd tier of EF savings (since you can never get those contribution years back). As our income & savings rate grew, we shifted the Roth IRA to our retirement AA & moved the EF setup to the brokerage acct.

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Re: An emergency fund cautionary tale

Post by Calico » Tue Jan 29, 2019 10:22 am

rich126 wrote:
Tue Jan 29, 2019 8:04 am


My understanding was that the federal employees could get unemployment but once they got back pay they would have to repay it. Not sure if that was correct. I wasn't part of the non-paid employees.

I live in the DC area and this was on the news... a lot. Those who were furloughed and not working (and not getting paid) could collect unemployment but would have to pay it back. But those who were required to come into work without pay could NOT collect unemployment because technically, they were still working. It was hard on a few people like TSA workers who don't get paid a lot to begin with. They were living in their cars at the airport because they said they didn't have the gas money to go back and forth.

I mainly feel sorry for the workers who didn't have emergency funds because they they literally just used their funds for an emergency, are on the low end of earnings for a government job, they were new graduates and just started working (and are trying to pay off student debt first), or were disabled and had high medical bills that didn't allow them to save as much. I have a little less sympathy for those who could have saved money but choose, instead to spend. These are the same types of neighbors who tease me (in a friendly way) for driving an "old car" and such. I did feel bad for them because I like them, but they should have known better.

I struggled and lived like I was poor until I got an emergency fund built up. It wasn't easy, but the peace of mind it gives is wonderful. I eased up on my frugality when I reached 6 months in reserve (although I am still adding to it as my goal is to have a year's worth of expenses saved). It takes a long time though when living in a high cost of living area. =

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Re: An emergency fund cautionary tale

Post by Jack FFR1846 » Tue Jan 29, 2019 10:33 am

I've got a big emergency fund setup as cash, melting into my investments. Paying for a special needs school tuition plus a college tuition means my actual cash reserves are high, sitting in my credit union checking account, my Redneck Megamoney account and my Ally account. But it's also in my US Savings bonds, which I have used in the past to supplement outflow and take advantage of tax free treatment of the interest. I count my savings bonds as both emergency funds (I can take paper bonds over to my credit union and the funds are instantly available....faster than redneck or ally) and bond portion of my investments. So while I'm now at about 8 years of spending in my ef, most of that is also part of my investments.
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Re: An emergency fund cautionary tale

Post by Dave111 » Tue Jan 29, 2019 10:53 am

Let's not forget the people effected by this shutdown are Federal employees. These are not poorly paid people making minimum wage, etc.

These are people who are well paid for the job description. They also enjoy an excellent benefit package that most people in the private sector would love to have. The have excellent long term disability coverage. They have pensions to help secure a comfortable retirement.

To me the media coverage was as usual; overblown to exaggerate the plight of the "victim". The truth for most of them is if missing one paycheck leaves you in line for food handouts, you need to look at your lifestyle decisions. There are exceptions of course.

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Re: An emergency fund cautionary tale

Post by GoldStar » Tue Jan 29, 2019 11:01 am

Dave111 wrote:
Tue Jan 29, 2019 10:53 am
Let's not forget the people effected by this shutdown are Federal employees. These are not poorly paid people making minimum wage, etc.

These are people who are well paid for the job description. They also enjoy an excellent benefit package that most people in the private sector would love to have. The have excellent long term disability coverage. They have pensions to help secure a comfortable retirement.

To me the media coverage was as usual; overblown to exaggerate the plight of the "victim". The truth for most of them is if missing one paycheck leaves you in line for food handouts, you need to look at your lifestyle decisions. There are exceptions of course.
While I agree that the media exaggerates everything - I'm not sure you can make this generalization either. I wouldn't think maintenance crew and administrators of the national park service, for example, "well paid". (If so - I'd love to be a janitor at the Smithsonian! but looking at salary data - I see thousands of employees making 20K to 40K):
https://www.federalpay.org/employees/na ... rk-service

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Re: An emergency fund cautionary tale

Post by bengal22 » Tue Jan 29, 2019 11:03 am

There is a difference between not having any savings and not having an emergency fund. I suspect those impacted by a furlough had no savings.

I can shift monies from my taxable funds to my vanguard prime account in one business day. That should handle any normal emergency short of nuclear war or a zombie apocalypse.

There is a cost to having money tied up in an emergency fund.

If I have a significant expense coming up in the very near future I may put some money in cash in preparation . May be sacrilegious but that may involve a little timing.

I would have enough money in a taxable account to handle emergencies. Money in an IRA for me is not liquid.
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Re: An emergency fund cautionary tale

Post by GoldStar » Tue Jan 29, 2019 11:06 am

nisiprius wrote:
Tue Jan 29, 2019 8:56 am
A very important point--a question that can be surprisingly difficult to answer in real life--is this:

If I lose my job, what can I expect in unemployment benefits?

It's hard to answer because it is not really something you can bring up with HR, and the details are different in every state. Still, it's important to find out if you can--do I probably get it, and, if so, about how much?
The safe answer is "Nothing" regardless of what you find out. I've seen people fall into the trap of using past RiFs at a company to decide that benefits would be good if they were let go - but companies can change these benefits at any time. If a company paid one-week for each year of service with a prior lay-off - it doesn't mean they will do that for a future one. Also - if you fall on the wrong side of a political battle and are fired rather than laid-off - its possible to get zero benefits from either the company or government.

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