$2,467 is a minimum emergency fund

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Fishing50
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$2,467 is a minimum emergency fund

Post by Fishing50 » Tue Oct 15, 2019 12:02 pm

https://papers.ssrn.com/sol3/papers.cfm ... id=3455696

Jorge Sabat & Emily Gallagher study finds:
Our key finding is that the threshold point is $2,467 with a 95% confidence interval of $1,814–$3,011 (in 2019 dollars) or roughly 1 month of income for the average low-income household – which is far less than the savings amounts implied by common rules of thumb (typically 3–6 months of income).
Further evidence to support federal employees and military members keep lower emergency fund. I suggest getting excess emergency fund invested in a taxable account.
It's perfectly legal, go ask the IRS, they'll say the same thing. I actually feel stupid telling you this, I'm sure you would've investigated the matter yourself. Andy Dufresne

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Re: $2,467 is a minimum emergency fund

Post by simplesimon » Tue Oct 15, 2019 12:50 pm

Fishing50 wrote:
Tue Oct 15, 2019 12:02 pm
https://papers.ssrn.com/sol3/papers.cfm ... id=3455696

Jorge Sabat & Emily Gallagher study finds:
Our key finding is that the threshold point is $2,467 with a 95% confidence interval of $1,814–$3,011 (in 2019 dollars) or roughly 1 month of income for the average low-income household – which is far less than the savings amounts implied by common rules of thumb (typically 3–6 months of income).
Further evidence to support federal employees and military members keep lower emergency fund. I suggest getting excess emergency fund invested in a taxable account.
What part of the paper supports your claim above?

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Re: $2,467 is a minimum emergency fund

Post by ReformedSpender » Tue Oct 15, 2019 12:53 pm

Most of these studies are subjective. I'd wager the liquidity of one's EM fund is certainly higher.

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Re: $2,467 is a minimum emergency fund

Post by junior » Tue Oct 15, 2019 12:57 pm

If you find yourself unable to pay your mortgage after losing your job and running through a 1 month emergency fund, send the bill to professors Gallagher and Sabat.

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Re: $2,467 is a minimum emergency fund

Post by iamlucky13 » Tue Oct 15, 2019 1:27 pm

The instinct here is to read this as a decrease relative to what many of us have as emergency funds, an instinct the authors reinforce by comparing it to the 3-6 month advice. However:
...for the average low-income household
$2,467 is an increase compared to the majority of Americans who reportedly have less than $1000 in liquid savings.

That said, it sounds like they calculated a threshold where it is unlikely a typical household will run short of liquid funds due to an unanticipated expense, but while 95% confidence is a good level for deciding to treat a hypothesis as true from a statistical, I question it as a criteria of acceptance for high severity risks. Also, the abstract doesn't report if this is lifetime confidence, annual, or other. I don't have time to read the paper at the moment.

But at face value, my reading is their criteria leaves 6.4 million US households likely to experience a major financial hardship.

So it would be an improvement over the status quo, but that doesn't make it an adequate target.

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Re: $2,467 is a minimum emergency fund

Post by Nate79 » Tue Oct 15, 2019 1:36 pm

Even though this savings level is less than what typical financial advisors target for people 3-6 months of expenses vs 1 month of income this study was all about very low income households which struggle today to even have savings of $400. It was not about home owners, it was not about average income folks, and it wasn't about what the real target should be for the average household. It was more about how much the bottom rung of households should target to keep them off of the streets. I think it is foolish to not have access to many months of expenses worth of money (as cash, securities, low interest rate credit, etc) for average income households. I would always target higher than how much money keeps me from living on the street.

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Re: $2,467 is a minimum emergency fund

Post by JackoC » Tue Oct 15, 2019 1:38 pm

junior wrote:
Tue Oct 15, 2019 12:57 pm
If you find yourself unable to pay your mortgage after losing your job and running through a 1 month emergency fund, send the bill to professors Gallagher and Sabat.
I skimmed and searched the paper for key terms, didn't read it entirely. But the string 'unempl' only comes up once, mentioning at the beginning Suze Orman's advice to keep an 8 month fund because she says that's an average period of unemployment, as example of rules of thumb far in excess of what low income people (the paper is focused on lowest 30% of incomes it says) actually have in liquid savings.

It seems the finding is mainly the liquid savings level which gives the biggest bang for buck, biggest change in the slope of the 'savings hardship relationship' for 'expense shocks'. IOW even though it mentions general liquid savings rules of thumb at the beginning, it really seems to be more examining the kind of finding that a large % of American households can't pay cash to meet an emergency expense of $400 even assuming their employment situation hasn't changed (emergency repair to house or car, a relatively minor unexpected OOP medical or prescription bill, etc) and searching out what number is optimal for that kind of sudden expense, at low income. It doesn't seem after that one mention of unemployment to be considering what happens if you're suddenly unemployed, nor challenging the idea that might last for months, nor directly challenging the idea that you then need some months expenses in liquid savings. Though it does indirectly address the last noting that poorer people often qualify for various emergency govt or private charitable assistance they might not if they have too much saved (not value judging that last point, but practically speaking it has some truth I think).

If you think it's pretty plausible you could be unemployed for months, and don't think you would or could maintain your lifestyle, even with cutbacks, by using govt or charitable assistance, then this paper is not a good basis to have liquid savings less than several months worth of expenses IMO.

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Re: $2,467 is a minimum emergency fund

Post by Uncorrelated » Thu Oct 17, 2019 1:02 pm

junior wrote:
Tue Oct 15, 2019 12:57 pm
If you find yourself unable to pay your mortgage after losing your job and running through a 1 month emergency fund, send the bill to professors Gallagher and Sabat.
If you find yourself unable to retire at 70 because your 6-month emergency fund generated enough cash drag to create a 5-year deficiency in your retirement fund, send the bill to junior.

An emergency fund is not magic, it's simple math. Cost of selling = transaction costs (around 0.1%) + adverse selection costs (around 0%) per emergency. Cost of having an emergency fund = 6 months of cash multiplied by the the equity risk premium (5%) per year. If you use a low cost broker you need at least 20 emergencies per year before transaction costs outstrip the opportunity costs of an emergency fund.

If your investments are sufficiently liquid, you don't need an earmarked amount of cash to survive an emergency. I wouldn't even call job loss an emergency.

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Re: $2,467 is a minimum emergency fund

Post by wolf359 » Thu Oct 17, 2019 1:13 pm

simplesimon wrote:
Tue Oct 15, 2019 12:50 pm
Fishing50 wrote:
Tue Oct 15, 2019 12:02 pm
https://papers.ssrn.com/sol3/papers.cfm ... id=3455696

Jorge Sabat & Emily Gallagher study finds:
Our key finding is that the threshold point is $2,467 with a 95% confidence interval of $1,814–$3,011 (in 2019 dollars) or roughly 1 month of income for the average low-income household – which is far less than the savings amounts implied by common rules of thumb (typically 3–6 months of income).
Further evidence to support federal employees and military members keep lower emergency fund. I suggest getting excess emergency fund invested in a taxable account.
What part of the paper supports your claim above?
The government shutdown of 2018-19 lasted for 35 days. Many federal workers and military members were caught with insufficient reserves. Federal contractors were in a worse position -- they never got backpay.

Even federal employees and military members should keep a sufficient emergency fund. The length of shutdowns cannot be predicted.

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Re: $2,467 is a minimum emergency fund

Post by wolf359 » Thu Oct 17, 2019 1:20 pm

Uncorrelated wrote:
Thu Oct 17, 2019 1:02 pm
junior wrote:
Tue Oct 15, 2019 12:57 pm
If you find yourself unable to pay your mortgage after losing your job and running through a 1 month emergency fund, send the bill to professors Gallagher and Sabat.
If you find yourself unable to retire at 70 because your 6-month emergency fund generated enough cash drag to create a 5-year deficiency in your retirement fund, send the bill to junior.

An emergency fund is not magic, it's simple math. Cost of selling = transaction costs (around 0.1%) + adverse selection costs (around 0%) per emergency. Cost of having an emergency fund = 6 months of cash multiplied by the the equity risk premium (5%) per year. If you use a low cost broker you need at least 20 emergencies per year before transaction costs outstrip the opportunity costs of an emergency fund.

If your investments are sufficiently liquid, you don't need an earmarked amount of cash to survive an emergency. I wouldn't even call job loss an emergency.
Actually, I agree with this. My greater requirement is liquidity. I do maintain cash, but it's really the liquidity I need to pay current bills. That allows me the time and flexibility to raise additional money when needed. My true emergency fund is my taxable investment portfolio.

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Re: $2,467 is a minimum emergency fund

Post by MathWizard » Thu Oct 17, 2019 1:35 pm

By minimum, the authors really mean minimum. Not advisable, minimum.

For this minimum, they even state that it is rational to hold debt rather than go below this minimum.

This is just saying that cash flow is important, which any business owner would tell you.

I was in this situation during grad school, and never want to be there again.

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Re: $2,467 is a minimum emergency fund

Post by Lee_WSP » Thu Oct 17, 2019 1:54 pm

wolf359 wrote:
Thu Oct 17, 2019 1:20 pm
Uncorrelated wrote:
Thu Oct 17, 2019 1:02 pm
junior wrote:
Tue Oct 15, 2019 12:57 pm
If you find yourself unable to pay your mortgage after losing your job and running through a 1 month emergency fund, send the bill to professors Gallagher and Sabat.
If you find yourself unable to retire at 70 because your 6-month emergency fund generated enough cash drag to create a 5-year deficiency in your retirement fund, send the bill to junior.

An emergency fund is not magic, it's simple math. Cost of selling = transaction costs (around 0.1%) + adverse selection costs (around 0%) per emergency. Cost of having an emergency fund = 6 months of cash multiplied by the the equity risk premium (5%) per year. If you use a low cost broker you need at least 20 emergencies per year before transaction costs outstrip the opportunity costs of an emergency fund.

If your investments are sufficiently liquid, you don't need an earmarked amount of cash to survive an emergency. I wouldn't even call job loss an emergency.
Actually, I agree with this. My greater requirement is liquidity. I do maintain cash, but it's really the liquidity I need to pay current bills. That allows me the time and flexibility to raise additional money when needed. My true emergency fund is my taxable investment portfolio.
I'd also add and not subject to a non-black-swan serious decline in value. Short to intermediate term bond funds fit this criteria well. Long term bond funds should also work.

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Re: $2,467 is a minimum emergency fund

Post by junior » Thu Oct 17, 2019 4:03 pm

Uncorrelated wrote:
Thu Oct 17, 2019 1:02 pm
If you find yourself unable to retire at 70 because your 6-month emergency fund generated enough cash drag to create a 5-year deficiency in your retirement fund, send the bill to junior.

An emergency fund is not magic, it's simple math. Cost of selling = transaction costs (around 0.1%) + adverse selection costs (around 0%) per emergency. Cost of having an emergency fund = 6 months of cash multiplied by the the equity risk premium (5%) per year. If you use a low cost broker you need at least 20 emergencies per year before transaction costs outstrip the opportunity costs of an emergency fund.

If your investments are sufficiently liquid, you don't need an earmarked amount of cash to survive an emergency. I wouldn't even call job loss an emergency.
Who is this hypothetical person your advice is for, someone so wealthy so as to not be worried about labor concerns like job loss (and you posit their emergency fund is replaced with 100% equities, said equities are correlated with job loss due to stock market crashes), but yet this very wealthy person is somehow posited as unable to retire at 70 if they have cash drag due to an emergency fund? :confused

Or is the idea that equities aren't risky because the equity risk premium guarantees you'll get 5% per year and not lose 50% of your portfolio when you need your money?

Either way I disagree with your math.

If you are so wealthy and psychologically thick-skinned that a second great depression wouldn't harm your 100% equity funded lifestyle or cause you to lose sleep at night, then sure, go 100% stock and keep no emergency fund with my blessing.

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Re: $2,467 is a minimum emergency fund

Post by Uncorrelated » Thu Oct 17, 2019 4:33 pm

junior wrote:
Thu Oct 17, 2019 4:03 pm
Uncorrelated wrote:
Thu Oct 17, 2019 1:02 pm
If you find yourself unable to retire at 70 because your 6-month emergency fund generated enough cash drag to create a 5-year deficiency in your retirement fund, send the bill to junior.

An emergency fund is not magic, it's simple math. Cost of selling = transaction costs (around 0.1%) + adverse selection costs (around 0%) per emergency. Cost of having an emergency fund = 6 months of cash multiplied by the the equity risk premium (5%) per year. If you use a low cost broker you need at least 20 emergencies per year before transaction costs outstrip the opportunity costs of an emergency fund.

If your investments are sufficiently liquid, you don't need an earmarked amount of cash to survive an emergency. I wouldn't even call job loss an emergency.
Who is this hypothetical person your advice is for, someone so wealthy so as to not be worried about labor concerns like job loss (and you posit their emergency fund is replaced with 100% equities, said equities are correlated with job loss due to stock market crashes), but yet this very wealthy person is somehow posited as unable to retire at 70 if they have cash drag due to an emergency fund? :confused

If you are wealthy to the extent that you can go 100% equities, not worry about job loss, not worry about risk during stock crashes, and not need an emergency fund due to your enormous equity portfolio, a cash drag due to a 6 month emergency fund isn't going to make a difference either way in your retirement outcome.

What this has to do with a thread about a study of low income households is beyond me.
The math is just as valid for low income households as for high income households. Retirement math doesn't care whether you are a high income or low income household. Your savings rate and investments are important. Asset allocation isn't directly related to wealth.

Over a 40 year period, the cash drag associated with a 6 months emergency fund is around 7.5 years of expenses (inflation adjusted, excess performance of total stock market since 1979 compared to savings account). That is extremely significant, for low income households as well for high income households.

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Re: $2,467 is a minimum emergency fund

Post by junior » Thu Oct 17, 2019 5:14 pm

I edited my post: if you have enough wealth to survive a great depression with a 100 percent equity portfolio and no emergency fund then go for it.

But if you are low income, your math doesn't account for the heavy risk that comes with 100 percent equity portfolio and no emergency fund. Also the inabity to sleep at night that goes with such a portfolio even if the numbers work out as a theoretical exercise.

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Re: $2,467 is a minimum emergency fund

Post by Lee_WSP » Thu Oct 17, 2019 6:12 pm

junior wrote:
Thu Oct 17, 2019 5:14 pm
I edited my post: if you have enough wealth to survive a great depression with a 100 percent equity portfolio and no emergency fund then go for it.

But if you are low income, your math doesn't account for the heavy risk that comes with 100 percent equity portfolio and no emergency fund. Also the inabity to sleep at night that goes with such a portfolio even if the numbers work out as a theoretical exercise.
I don't think this is a problem the vast majority of low income people even think about. Usually because they're probably just trying to make it to the next paycheck to begin with.

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Re: $2,467 is a minimum emergency fund

Post by Random Musings » Thu Oct 17, 2019 9:00 pm

I'll ignore these ivory tower thoughts and stick with simpleton rule of thumb of at least 3 to 6 months of expenses. Hiwver, there are many factors to consider.

I keep mine in ST treasuries these days. A little tax inefficient, but not a big deal.

The real sad fact is that many people don't have savings at all. Another sad fact is the type of papers being published these days.

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Mathematically Derived EF

Post by gr7070 » Sat Oct 19, 2019 1:32 pm

[Thread merged into here, see below. --admin LadyGeek]

This study actually used some real statistics to come up with a number

https://www.cnbc.com/amp/2019/10/18/min ... -fund.html

Less than $2500!

That will make some Bogle*heads* explode. Granted this is only for the lowest earning 30%tile.

So, when helping out someone less fortunate we should probably refrain from the usual 3-6 months (and more for many Bogleheads) and stick with roughly 1 month - a much more manageable amount, and apparently nearly as effective.

Money quote (literally):
"$2,467. If you have that much saved, your probability of falling into financial hardship (not being able to pay rent, bills or medical care) is low.

To get to that number, Gallagher and Sabat, who are also assistant professors of finance, used data from the Survey of Income and Program Participation (SIPP) to graph the relationship between falling into hardship in the next six months and how much you have saved as a buffer. They looked at financial information on more than 70,000 lower-income households, which the report defines as those earning under 200% of the poverty line. To put that into context, that's up to about $30,000 a year for a family of four, says Gallagher. This group represents "about 30% of the U.S. working-age population," she adds.

They found that if you have very little saved — say $200 to $500 — each additional dollar you set aside dramatically reduces your likelihood of falling into financial hardship. But once you have at least $2,467, "all of a sudden, saving an additional dollar didn't seem to be that helpful anymore," says Gallagher. "It still reduced your probability of falling into hardship a little bit, but it wasn't nearly as effective as when you were at low levels of savings.""
Last edited by gr7070 on Sat Oct 19, 2019 1:41 pm, edited 1 time in total.

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Re: $2,467 is a minimum emergency fund

Post by LadyGeek » Sat Oct 19, 2019 1:48 pm

I merged gr7070's thread into the on-going discussion.
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Re: $2,467 is a minimum emergency fund

Post by gr7070 » Sat Oct 19, 2019 1:59 pm

One thing important for this small of an EF targeted for very low income families, I strongly suspect getting another job of similar pay is relatively easy, even with lesser
valued skills, that an extended unemployment is unlikely.

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Re: $2,467 is a minimum emergency fund

Post by H-Town » Sat Oct 19, 2019 2:08 pm

Uncorrelated wrote:
Thu Oct 17, 2019 1:02 pm
junior wrote:
Tue Oct 15, 2019 12:57 pm
If you find yourself unable to pay your mortgage after losing your job and running through a 1 month emergency fund, send the bill to professors Gallagher and Sabat.
If you find yourself unable to retire at 70 because your 6-month emergency fund generated enough cash drag to create a 5-year deficiency in your retirement fund, send the bill to junior.

An emergency fund is not magic, it's simple math. Cost of selling = transaction costs (around 0.1%) + adverse selection costs (around 0%) per emergency. Cost of having an emergency fund = 6 months of cash multiplied by the the equity risk premium (5%) per year. If you use a low cost broker you need at least 20 emergencies per year before transaction costs outstrip the opportunity costs of an emergency fund.

If your investments are sufficiently liquid, you don't need an earmarked amount of cash to survive an emergency. I wouldn't even call job loss an emergency.
This is a moot point.

1) Cash drag due to 6 months living expense is immaterial. If your portfolio is impacted by this cash drag, you better save more.
2) There are other factors that have bigger impact: fund expenses which are assessed on the entire portfolio, tax drag (due to fund placement, tax inefficiencies, poor tax planning, etc.).
3) Once your portfolio is big enough, let's say $1M, this talk about emergency fund is irrelevant. The % of cash in your portfolio is now a personal preference. No material impact whatsoever.

The moral of the story? Save and save some more. Focus on financial independence goal, rather than 6 month emergency cash fund.

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Re: $2,467 is a minimum emergency fund

Post by grabiner » Sat Oct 19, 2019 3:56 pm

Uncorrelated wrote:
Thu Oct 17, 2019 1:02 pm
If you find yourself unable to retire at 70 because your 6-month emergency fund generated enough cash drag to create a 5-year deficiency in your retirement fund, send the bill to junior.

An emergency fund is not magic, it's simple math. Cost of selling = transaction costs (around 0.1%) + adverse selection costs (around 0%) per emergency. Cost of having an emergency fund = 6 months of cash multiplied by the the equity risk premium (5%) per year. If you use a low cost broker you need at least 20 emergencies per year before transaction costs outstrip the opportunity costs of an emergency fund.
The cost is a lot less than this, because the fair comparison is to bond returns, not stock returns, at least if you have any bonds. If you keep a $10K emergency fund in the bank rather than contributing it to your 401(k), the loss at the same risk level is the difference between the after-tax return on the bank account and the tax-free return on a low-risk bond fund in your 401(k). That is likely about $100 per year.

And if you max out your retirement accounts, or keep your emergency fund in your Roth IRA, you eliminate even that tax difference. The cost of holding a money-market fund rather than a bond fund is very low. At the moment, with the flat yield curve, you lose $28 per year by holding an emergency fund in Vanguard Prime Money Market rather than investing in Total Bond Market Index in your Roth IRA. And even if the curve steepens, the difference is not entirely a lost cost, as the bond fund does have more risk if rates rise or corporate bonds default.
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Re: $2,467 is a minimum emergency fund

Post by dknightd » Sat Oct 19, 2019 4:11 pm

MathWizard wrote:
Thu Oct 17, 2019 1:35 pm
By minimum, the authors really mean minimum. Not advisable, minimum.

For this minimum, they even state that it is rational to hold debt rather than go below this minimum.

This is just saying that cash flow is important, which any business owner would tell you.

I was in this situation during grad school, and never want to be there again.
Agreed. $2467 is way way better than zero.There was a time that $2345 would have been enough to make me feel comfortable. Now I like to keep 10 times that. Mostly becuase my expenses have increased.

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Re: $2,467 is a minimum emergency fund

Post by dknightd » Sat Oct 19, 2019 4:30 pm

Uncorrelated wrote:
Thu Oct 17, 2019 1:02 pm
junior wrote:
Tue Oct 15, 2019 12:57 pm
If you find yourself unable to pay your mortgage after losing your job and running through a 1 month emergency fund, send the bill to professors Gallagher and Sabat.
If you find yourself unable to retire at 70 because your 6-month emergency fund generated enough cash drag to create a 5-year deficiency in your retirement fund, send the bill to junior.

An emergency fund is not magic, it's simple math. Cost of selling = transaction costs (around 0.1%) + adverse selection costs (around 0%) per emergency. Cost of having an emergency fund = 6 months of cash multiplied by the the equity risk premium (5%) per year. If you use a low cost broker you need at least 20 emergencies per year before transaction costs outstrip the opportunity costs of an emergency fund.

If your investments are sufficiently liquid, you don't need an earmarked amount of cash to survive an emergency. I wouldn't even call job loss an emergency.
If you have to borrow at 20% interest on credit cards, you may never climb out. If you do not have enough credit, you might find yourself living on the street.
If you have big enough investments perhaps you do not need a separate emergency fund.
I suspect you have more than $2000 in your checking account. To you this is for convenience, for others it might be an emergency fund.

If you can not retire at 70, it was not becuase you had an emergency fund. More likely it was because you did not have an emergency fund.

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Re: $2,467 is a minimum emergency fund

Post by JackoC » Sat Oct 19, 2019 4:40 pm

Uncorrelated wrote:
Thu Oct 17, 2019 4:33 pm
junior wrote:
Thu Oct 17, 2019 4:03 pm
Uncorrelated wrote:
Thu Oct 17, 2019 1:02 pm
If you find yourself unable to retire at 70 because your 6-month emergency fund generated enough cash drag to create a 5-year deficiency in your retirement fund, send the bill to junior.

An emergency fund is not magic, it's simple math. Cost of selling = transaction costs (around 0.1%) + adverse selection costs (around 0%) per emergency. Cost of having an emergency fund = 6 months of cash multiplied by the the equity risk premium (5%) per year. If you use a low cost broker you need at least 20 emergencies per year before transaction costs outstrip the opportunity costs of an emergency fund.

If your investments are sufficiently liquid, you don't need an earmarked amount of cash to survive an emergency. I wouldn't even call job loss an emergency.
Who is this hypothetical person your advice is for, someone so wealthy so as to not be worried about labor concerns like job loss (and you posit their emergency fund is replaced with 100% equities, said equities are correlated with job loss due to stock market crashes), but yet this very wealthy person is somehow posited as unable to retire at 70 if they have cash drag due to an emergency fund? :confused
1. The math is just as valid for low income households as for high income households. Retirement math doesn't care whether you are a high income or low income household. Your savings rate and investments are important. Asset allocation isn't directly related to wealth.

2. Over a 40 year period, the cash drag associated with a 6 months emergency fund is around 7.5 years of expenses (inflation adjusted, excess performance of total stock market since 1979 compared to savings account). That is extremely significant, for low income households as well for high income households.
1. It's true you could construct a scenario where working years' income, savings, and targeted retirement spending all scale linearly. Then it doesn't matter if high or low income. Practically speaking though most people who'd would get far enough into the topic of retirement saving to hold the beliefs you do about 'cash drag' (which I don't agree with, see below) would actually have quite a lot of money compared to median and their retirements will be fine if markets don't perform really poorly. OTOH people in the bottom 30% of incomes (paper discussed was based on), especially if you excluded people just starting out, and add in having families, just don't save by and large. They don't perceive that as possible. Except via forced or quasi-forced savings vehicles, which tends to get off topic into public policy.

2. But this logic is more questionable at its root IMO. If you *knew* that equities would return 5% more (or even a more reasonable ERP estimate in today's environment, 3%: 1/CAPE=3.5% real expected return of stocks, long term TIPS yields is ~0.5%)...but you don't. The concept of calculating a 'cash drag' as if equity returns are known leaves out risk, so is outside the basic 'modern finance' risk and return framework on which 'investment theory' discussion here is based, at least as a default assumption.

I agree on looking at whole portfolio and if say it has a big taxable account portion, and 40% 'bonds' fits the investor's risk tolerance and stage of life, then that 40% could also be the 'emergency fund'. 'Emergency fund' is partly a rhetorical device of personal finance guru's I think. It all comes down to risk and risk tolerance. Some people are risk tolerant enough to put $ No. 1 and every subsequent $ into stocks. They will take both long term investment risk, and short term unemployment risk with that set up. And some people are more able or willing to deploy various safety nets (public assistance, private charity, The Bank of Mom and Dad, etc) to cover unemployment risk...or even retirement. But for most people I think the advice to put their early $'s of savings (over and above annual use it or lose it tax deferred account contributions) into safe investments against unemployment risk, till several months of expenses, is sound advice. Later on the 'bond' portion of 'portfolio' can cover that, I agree.

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Re: $2,467 is a minimum emergency fund

Post by Clever_Username » Sat Oct 19, 2019 8:27 pm

How do they feel about having an emergency plan, but not necessarily a designated pot of money marked "emergency fund"?
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Re: $2,467 is a minimum emergency fund

Post by nisiprius » Sat Oct 19, 2019 8:39 pm

Emergency fund discussions run into problems in three areas.

1) "Emergencies" really need to be separated into two big categories. a) Job loss, and b) all other emergencies. Job loss is a special case, if for no other reason than unemployment compensation.

2) It is almost meaningless to try to think about job loss without having a assessment of reasonable expectations for unemployment compensation. I think it's bizarre that the paper doesn't even mention this. A random Google hit says that "nearly ninety-seven percent of American workers are eligible for some form of unemployment insurance coverage." I suspect this is wildly optimistic for low-income workers (because of being undocumented, for example), but still. Another random hit turns up this chart:

Image

It's not unreasonable to say that unemployment compensation is often "worth" something in the ballpark of $500/week times 26 weeks = $13,500. That is, there is a built-in emergency fund.

3) In the case of relatively well-off middle-income families, "mass affluent," with six-digit investment portfolios, I agree that as a practical matter, you don't necessarily need cash; anything low-volatility and relatively liquid will do. For example, a bond fund in a Roth IRA with a checkwriting feature.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

prioritarian
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Re: $2,467 is a minimum emergency fund

Post by prioritarian » Sat Oct 19, 2019 11:19 pm

I not only have no emergency fund but I aggressively limit the amount of cash I have available. I can always use a credit card or withdraw cash from the MM fund in my taxable account with a debit card.

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nisiprius
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Re: $2,467 is a minimum emergency fund

Post by nisiprius » Sun Oct 20, 2019 5:33 am

prioritarian wrote:
Sat Oct 19, 2019 11:19 pm
I not only have no emergency fund but I aggressively limit the amount of cash I have available. I can always use a credit card or withdraw cash from the MM fund in my taxable account with a debit card.
1) People can kid themselves if they think that can "always" use a credit card or a home equity line of credit. Read some more about what happened to people in 2006. Personal credit can dry up just when you need it. Of course banks want you to think you can "always" borrow money when we are in a normal situation and they "always" have money they want to lend.

2) If you have a money market fund and you can draw on it with a debit card, that is, in fact, a perfectly reasonable emergency fund. The characteristics of an emergency fund are liquidity at the unknown and surprising time when you need it, and low enough volatility that you find it tolerable to use it when needed regardless of market fluctuations. A money market fund, of course, has no volatility at all.. Nobody ever said an emergency fund needs to earn zero interest or be in a bank. If you wouldn't mind... very roughly how large is the size of that money market fund compared to a month of your routine living expenses?
Last edited by nisiprius on Sun Oct 20, 2019 11:04 am, edited 1 time in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: $2,467 is a minimum emergency fund

Post by Silverado » Sun Oct 20, 2019 6:01 am

prioritarian wrote:
Sat Oct 19, 2019 11:19 pm
I not only have no emergency fund but I aggressively limit the amount of cash I have available. I can always use a credit card or withdraw cash from the MM fund in my taxable account with a debit card.
Well sure, If your investment plan includes funds in a MM fund, you can do say you don’t keep cash, but you are pretty close to having cash.

We have maintained a robust amount of cash as an EF, and I don’t view it as a drag at all in the long term. Not anymore than any other 'almost required' consumer good like a TV, car, microwave, and so on.

I am certainly more comfortable with the larger stock portion we have in our investment portfolio knowing we have a solid EF. So, while the dollars are considered separate between investment and EF, there is overlap with Sleep Well At Night mental/emotional accounting.

Since the cash EF gets chewed up by inflation, the amount will decrease in time as our retirement portfolio both grows and migrates less stock heavy. Again, emotionally, this keeps me comfortable.

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Re: $2,467 is a minimum emergency fund

Post by RobLyons » Sun Oct 20, 2019 6:17 am

nisiprius wrote:
Sun Oct 20, 2019 5:33 am
prioritarian wrote:
Sat Oct 19, 2019 11:19 pm
I not only have no emergency fund but I aggressively limit the amount of cash I have available. I can always use a credit card or withdraw cash from the MM fund in my taxable account with a debit card.
1) People can kid themselves if they think that can "always" use a credit card or a home equity line of credit. Read some more about what happened to people in 2006. Personal credit can dry up just when you need it. Of course banks want you to think you can "always" borrow money when we are in a normal situation and they "always" have money they wand to lend.

2) If you have a money market fund and you can draw on it with a debit card, that is, in fact, a perfectly reasonable emergency fund. The characteristics of an emergency fund are liquidity at the unknown and surprising time when you need it, and low enough volatility that you find it tolerable to use it when needed regardless of market fluctuations. A money market fund, of course, has no volatility at all.. Nobody ever said an emergency fund needs to earn zero interest or be in a bank. If you wouldn't mind... very roughly how large is the size of that money market fund compared to a month of your routine living expenses?

Agreed. We just experienced an emergency (major wind storm) and I'm glad we have our EF.

$1,000 home owners deductible
$1,000 to cleanup the yard - insurance does not cover - the crews do not take credit card!
$500 auto insurance deductible

If not anything else, having a small EF allowed me to sleep last night..
"Great parenting sets the foundation for a better world"

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Re: $2,467 is a minimum emergency fund

Post by getthatmarshmallow » Sun Oct 20, 2019 8:45 am

Neat read. Of course the research isn't meant to say "how big of an emergency fund should you have" but "what's the number that's worked for low income households.". Not going to change my plans.

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Re: $2,467 is a minimum emergency fund

Post by a_movable_life » Sun Oct 20, 2019 8:50 am

Back when I was making 10 an hour and in Nursing school, one day I had my refrigerator die, and my car wouldn't start. That double hit would have sunk some people I know. 2.5K seems a good number for those people in a similar situation.

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Re: $2,467 is a minimum emergency fund

Post by Lee_WSP » Sun Oct 20, 2019 10:16 am

I think it may be perfectly reasonable to have the ultra liquid & ultra safe portion of the emergency fund restricted to one month's salary. The other five to 12 months salary/living expenses can then be invested in safe assets such as bond funds. It's not like the prevailing wisdom on the boards is to tell retirees to have 20% money market cash so they can withdraw against it.

To be fair, I'm not 100% sure what the prevailing wisdom is on order of operations for withdrawals during retirement, but I do not see us telling them to keep a large amount of cash on hand. So, it would seem to me that keeping the rest of the e-fund in bonds is perfectly reasonable. If it's good enough for someone with no income whatsoever, why isn't it good enough for the rest of us?

prioritarian
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Re: $2,467 is a minimum emergency fund

Post by prioritarian » Sun Oct 20, 2019 3:29 pm

nisiprius wrote:
Sun Oct 20, 2019 5:33 am
The characteristics of an emergency fund are liquidity at the unknown and surprising time when you need it.
Having a substantial MM fund in taxable is a recent occurrence due to interest rates being fairly close to "core CPI", given that more drag seems to be developing I will likely liquidate this position and allocate to muni and LT-bond ETFs*. Most of the time, I only have between $3-4K of liquid cash-like asset. Why have more when almost all of my expenses are payed for with (1.5%-2% reward) credit cards?

nisiprius wrote:
Sun Oct 20, 2019 5:33 am
People can kid themselves if they think that can "always" use a credit card
My ~$90,000 in card "credit" was unaffected by the great recession. I don't own a house and am extremely "car-lite" so my major risks are medical. Given that I work in biomedicine, I'm very aware of the pitfalls people with decent insurance can suffer, so have spent significant effort in reducing these risks.

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Re: $2,467 is a minimum emergency fund

Post by Caduceus » Tue Oct 22, 2019 7:28 am

I've generally been quite comfortable holding very little cash per se in an emergency fund. I think overall financial resilence is more important that some arbitrary number in a fund. If you keep fixed costs low (live in a small house, rent a small place), don't own a vehicle, try to be very aggressive about not having recurring costs - in other words, have as little fixed commitments as possible - you are in much better shape than someone with a large emergency fund and equally large recurring fixed commitments.

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Re: $2,467 is a minimum emergency fund

Post by esteen » Mon Nov 11, 2019 1:41 pm

Lee_WSP wrote:
Sun Oct 20, 2019 10:16 am
I think it may be perfectly reasonable to have the ultra liquid & ultra safe portion of the emergency fund restricted to one month's salary. The other five to 12 months salary/living expenses can then be invested in safe assets such as bond funds.
Caduceus wrote:
Tue Oct 22, 2019 7:28 am
I've generally been quite comfortable holding very little cash per se in an emergency fund. I think overall financial resilence is more important that some arbitrary number in a fund.
Agree with folks like Lee_WSP and Caduceus in that it's important to have at least SOME hard cash, but doesn't mean 3-6 months expenses. I used to have 4-5mo expenses sitting (relatively) idle in my bank savings account - I now have moved that to more like ~2mo expenses and maintain other options for reserves e.g. maintain excellent credit, have home equity, accumulated a large pool of Roth IRA contributions, etc. None of those are as perfectly immediate, or as without consequence, as cold hard cash but a combo serves me best rather than being so conservative that I am hoarding lots of idle cash.

I think each person's situation is different, and some families with high risk jobs and large uneven expense loads should have more in cash than I - and others with less overhead and even more reliable income and assets have even less. One of the many 'it depends' answers :D :beer

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