Emergency fund checkup

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B4Xt3r
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Emergency fund checkup

Post by B4Xt3r » Wed Jul 11, 2018 11:22 am

Hi All,

I've got a question about emergency funds. I currently have 8 months of expenses in contributions to Roth IRAs using a 10:90 split between vanguard total stock market and vanguard short-term bond mutual funds.

I realized that I forgot about an important "emergency" expense, namely the moving costs associated with the move to a new job. In this thread, I'm hoping that someone can help me come up with an estimate of how much additional my emergency fund should include in order to cover the ability to u-haul (or similar) my way to any job in the continental US. Let's assume a 2000 mile road trip, below are simply guestimates.
  • 7.2% of house selling price to cover realtors fees and real estate transfer tax (for a 300k house, this is $21.6k - ouch!)
  • $3k to cover renting a u-haul, boxes, moving helpers, etc.
  • $1.5k to cover gas, staying at hotels, food on the road etc.
  • $0.8k for lawyer's fees
  • $0.7k for title insurance
  • $1k for house inspection(s)
  • $1k for a deposit
What am I missing?

-buzz-
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Re: Emergency fund checkup

Post by -buzz- » Wed Jul 11, 2018 12:11 pm

Roth IRAs are for retirement savings. Emergency funds should be kept outside so you can access them without taxes or penalties. Also, an outside EF protects you from raiding the IRA when something happens.

If you have equity in your current house, the costs of selling your current home would be deducted from your equity at closing. You shouldn't need to come up with cash out of pocket.

If you plan to buy right away in the new location, you would need some cash for home inspections, earnest money/deposit, etc.

You might be able to get relocation assistance from the new employer. That depends on the employer and the level of the position. At a minimum, you should ask the question during the interview process so you know the deal. You don't want to count on that being available so you do need to be able to fund it yourself.

It could be smart to rent for a while in the new location before jumping into buying a house. Take time to get to know the area and see that the job is going as expected before buying a house.

As far as costs, I had an employee move about 500 miles. Single guy living in a 2 BR apartment. The cost was about $8k to have him professionally moved, which included supplies, packing, loading, transport, and unpacking. I'd guess that doing it yourself would cut the cost in half.
Last edited by -buzz- on Wed Jul 11, 2018 12:17 pm, edited 1 time in total.

UniversityEmployee9
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Re: Emergency fund checkup

Post by UniversityEmployee9 » Wed Jul 11, 2018 12:14 pm

-buzz- wrote:
Wed Jul 11, 2018 12:11 pm
Roth IRAs are for retirement savings, not for parking emergency funds. Emergency funds should be kept outside so you can access them without taxes or penalties.
Contributions can be withdrawn at any time, tax and penalty free. For this reason, many bogleheads actually use Roth IRAs as a part of their emergency fund strategy.

lotusflower
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Re: Emergency fund checkup

Post by lotusflower » Wed Jul 11, 2018 12:53 pm

Most people don't consider those expenses as "emergency" expenses. Most emergencies are hard to predict — will you be hit by a car and injured, or have flood damage to your house, or lose your job? So to handle these low-probability risks you set aside a big lump of money for them, and then move on to more productive types of planning.

themesrob
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Re: Emergency fund checkup

Post by themesrob » Wed Jul 11, 2018 12:54 pm

We recently moved from NY to FL. We didn't have a house to sell, so I can't speak to that part of the expenses. But moving-wise: I HIGHLY recommend pricing out the cost of renting a U-haul and doing it yourself. I was shocked at how expensive it was going to be -- $~2300 just for the truck (not at a prime moving time, and that was for a smaller truck that would move a 2 bedroom apartment -- you may need a larger one if you've got a house), plus ~100 boxes of various sizes and supplies (reams of packing paper, tape, tons of those good heavy blankets to wrap art/electronics/furniture, dollies, etc.), gas and tolls for the truck, lodging, a couple guys to help at both the origin and destination...I was estimating $4500 at the low end.

Add in the value of your time/sweat, the fact that you don't have the protection of moving insurance (if your nicer items break, it's on you), and the general stress level of driving a moving truck long distance (though I was excited about seeing what it was like to actually be weighed at a weigh station)...when I found out that reputable cross-country movers would provide all the supplies, pack our stuff, load/unload it, and provide additional insurance for ~$6000, I didn't think twice.

B4Xt3r
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Re: Emergency fund checkup

Post by B4Xt3r » Wed Jul 11, 2018 1:04 pm

UniversityEmployee9 wrote:
Wed Jul 11, 2018 12:14 pm
-buzz- wrote:
Wed Jul 11, 2018 12:11 pm
Roth IRAs are for retirement savings, not for parking emergency funds. Emergency funds should be kept outside so you can access them without taxes or penalties.
Contributions can be withdrawn at any time, tax and penalty free. For this reason, many bogleheads actually use Roth IRAs as a part of their emergency fund strategy.
Yes, this is what I'm doing but slightly off the current topic. Let's try to remain on said topic.

B4Xt3r
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Re: Emergency fund checkup

Post by B4Xt3r » Wed Jul 11, 2018 1:07 pm

-buzz- wrote:
Wed Jul 11, 2018 12:11 pm
Roth IRAs are for retirement savings. Emergency funds should be kept outside so you can access them without taxes or penalties. Also, an outside EF protects you from raiding the IRA when something happens.
Generally true, but many ppl cannot max out retirement accounts and then the ROTH IRA can be a helpful option to store emergency funds. That said, this is off-topic, so let's try to refrain from where to put the emergency fund and instead discuss the amount I should save for one-time moving expenses.
-buzz- wrote:
Wed Jul 11, 2018 12:11 pm
As far as costs, I had an employee move about 500 miles. Single guy living in a 2 BR apartment. The cost was about $8k to have him professionally moved, which included supplies, packing, loading, transport, and unpacking. I'd guess that doing it yourself would cut the cost in half.
^ Thanks. Did he also move into a 2BR apartment?

B4Xt3r
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Re: Emergency fund checkup

Post by B4Xt3r » Wed Jul 11, 2018 1:08 pm

lotusflower wrote:
Wed Jul 11, 2018 12:53 pm
Most people don't consider those expenses as "emergency" expenses. Most emergencies are hard to predict — will you be hit by a car and injured, or have flood damage to your house, or lose your job? So to handle these low-probability risks you set aside a big lump of money for them, and then move on to more productive types of planning.
It seems prudent to plan for a job loss, in which I would incur the expenses of buying/selling a house and moving. Seems prudent in my emergency fund to have these set aside.

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dratkinson
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Re: Emergency fund checkup

Post by dratkinson » Wed Jul 11, 2018 2:19 pm

What are you missing? An EF should be refillable. A rIRA (all your tax-advantaged accounts) is not.

If you remove $5K from your rIRA to pay for this move, you'll lose the otherwise tax-free market growth from now until withdrawn in retirement. Assume 7% market growth over 40yrs and you are giving up ~$75K, ~$70K of it tax-free. Expensive move.

What would your retired self prefer you do? Pay for this move by cashing out part of your rIRA (give up ~$70K tax-free growth), or by using another source (savings, CC,...)? Assuming you paid off a CC relatively quickly, you'll probably not owe $70K in interest.


Save your rIRA (all your tax-advantaged accounts) for a doomsday-scenario emergency, ...or retirement.


To ease your mind, you may consider your rIRA contributions to be your temporary EF... while you quickly build up something more robust in taxable (savings + investing). After which they (savings + investing in taxable) become your primary + extended-tier EFs.
Last edited by dratkinson on Wed Jul 11, 2018 3:20 pm, edited 2 times in total.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

mega317
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Re: Emergency fund checkup

Post by mega317 » Wed Jul 11, 2018 3:01 pm

It doesn't make sense to me to increase your emergency fund by 21k to account for realtor fees, etc. You're headed down the road of mental accounting at that point, and also setting yourself up for significant cognitive bias around your transaction.

Regarding the rest of your numbers, I think you are getting so detailed as to point out the imprecision in determining an emergency fund at all. I mean you want to increase your emergency fund by 8k, but you are adding it to a completely arbitrary number for which the margin of error is much greater than 8k. What if your emergency is 3 months or 15 months?

B4Xt3r
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Re: Emergency fund checkup

Post by B4Xt3r » Wed Jul 11, 2018 3:19 pm

dratkinson wrote:
Wed Jul 11, 2018 2:19 pm
What are you missing? An EF should be refillable. A rIRA (all your tax-advantaged accounts) is not.

If you remove $5K from your rIRA to pay for this move, you'll lose the otherwise tax-free market growth from now until withdrawn in retirement. Assume 7% market growth over 40yrs and you are giving up ~$75K, ~$70K of it tax-free. Expensive move.

What would your retired self prefer you do? Pay for this move by cashing out part of your rIRA (give up ~$70K tax-free growth), or by use another source (savings, CC,...)? Assuming you paid off a CC relatively quickly, you'll probably not owe $70K in interest.


Save your rIRA (all your tax-advantaged accounts) for a doomsday-scenario emergency, ...or retirement.


To ease your mind, you may consider your rIRA contributions to be your temporary EF... while you quickly build up something more robust in taxable (savings + investing). After which they (savings + investing in taxable) become your primary + extended-tier EFs.

"You can think it, but don't do it." --Buford T. Justice, movie "Smokey and the Bandit"

Image
Thank you for the comment, but I am not missing that an EF should be refillable. Edit "should be" but not always "can be"

B4Xt3r
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Re: Emergency fund checkup

Post by B4Xt3r » Wed Jul 11, 2018 3:22 pm

mega317 wrote:
Wed Jul 11, 2018 3:01 pm
It doesn't make sense to me to increase your emergency fund by 21k to account for realtor fees, etc. You're headed down the road of mental accounting at that point, and also setting yourself up for significant cognitive bias around your transaction.

Regarding the rest of your numbers, I think you are getting so detailed as to point out the imprecision in determining an emergency fund at all. I mean you want to increase your emergency fund by 8k, but you are adding it to a completely arbitrary number for which the margin of error is much greater than 8k. What if your emergency is 3 months or 15 months?
Sorry, but I have to disagree with this comment. I am attempting to roughly estimate all known expenses incurred in a move. I know that there are many variables that are unknown. However, not saving for known costs of, albeit, mostly unknown magnitude does not strike me prudent.

lotusflower
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Re: Emergency fund checkup

Post by lotusflower » Wed Jul 11, 2018 9:45 pm

B4Xt3r wrote:
Wed Jul 11, 2018 3:22 pm
However, not saving for known costs of, albeit, mostly unknown magnitude does not strike me prudent.
Prudence is having an emergency fund. Congrats, you've exceeded the standard recommendation of 6 months.

As others pointed out nobody saves money for home selling costs, it just comes out of the home escrow settlement. You don't need a cash reserve for that. Now the move might cost you money, but you've already got the estimate going, and it's 3-5 thousand bucks. For most people that's about one month of expenses. But then again the recommendation here is 6 months in your EF, and you've already got 8. Instead of 8 months, perhaps you can readjust that you have got 7 months + moving expenses, and then you can focus on deciding how many months you really need.

Remember you have absolutely no idea how long you might be out of work, 2 months, 7, 8, 20 months??? Maybe it's more prudent to have a 20-month emergency fund (or 21 months since you want to have the moving expenses covered). The overarching point is that emergencies aren't very predictable and so your energy is probably better spent on other planning once you've got a decent amount squirreled away.

ThePrince
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Re: Emergency fund checkup

Post by ThePrince » Wed Jul 11, 2018 9:51 pm

UniversityEmployee9 wrote:
Wed Jul 11, 2018 12:14 pm
-buzz- wrote:
Wed Jul 11, 2018 12:11 pm
Roth IRAs are for retirement savings, not for parking emergency funds. Emergency funds should be kept outside so you can access them without taxes or penalties.
Contributions can be withdrawn at any time, tax and penalty free. For this reason, many bogleheads actually use Roth IRAs as a part of their emergency fund strategy.

A poor use of an awesome retirement account type.

B4Xt3r
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Re: Emergency fund checkup

Post by B4Xt3r » Thu Jul 12, 2018 7:20 am

ThePrince wrote:
Wed Jul 11, 2018 9:51 pm
UniversityEmployee9 wrote:
Wed Jul 11, 2018 12:14 pm
-buzz- wrote:
Wed Jul 11, 2018 12:11 pm
Roth IRAs are for retirement savings, not for parking emergency funds. Emergency funds should be kept outside so you can access them without taxes or penalties.
Contributions can be withdrawn at any time, tax and penalty free. For this reason, many bogleheads actually use Roth IRAs as a part of their emergency fund strategy.

A poor use of an awesome retirement account type.
Man, people really have a poor time understanding that a rIRA is a fantastic place for an emergency fund in the case where someone cannot afford to max out all retirement accounts and save an emergency fund.

B4Xt3r
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Re: Emergency fund checkup

Post by B4Xt3r » Thu Jul 12, 2018 7:26 am

OP here, I'd like to reiterate that I'm not asking for advice for about where to put my emergency fund nor wether or not to save for moving expenses. I'm only asking as to whether or not I have reasonably estimated all one-time costs associated with selling a ~$300k house, moving ~1500 miles, and buying another ~$300k house.

KlangFool
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Re: Emergency fund checkup

Post by KlangFool » Thu Jul 12, 2018 7:41 am

B4Xt3r wrote:
Thu Jul 12, 2018 7:26 am
OP here, I'd like to reiterate that I'm not asking for advice for about where to put my emergency fund nor wether or not to save for moving expenses. I'm only asking as to whether or not I have reasonably estimated all one-time costs associated with selling a ~$300k house, moving ~1500 miles, and buying another ~$300k house.
B4Xt3r,

1) It is not reasonable for you to assume that. You should rent for a while at the new location and make sure that the job is stable before you buy a new house. So, you may need to pay for the mortgage of the old house plus renting at the same time. That is more likely.

Prepared for 6 months mortgage of the old house plus renting is a better approach.

2) If you do not have the money to buy a new house, you would not buy a new house. So, it is your decision.

3) But, it is a better approach to increase your emergency fund to 1 year or longer to account for the possibility of longer unemployment.

KlangFool

MnD
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Re: Emergency fund checkup

Post by MnD » Thu Jul 12, 2018 7:52 am

You don't set up an 8-month expenses emergency fund and then speculate about various specific emergencies (job loss and cross-US relocation) and add to it for those specific possible things. Have some liquid assets and continually build net worth and usually that works out fine.

-buzz-
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Re: Emergency fund checkup

Post by -buzz- » Thu Jul 12, 2018 11:18 am

B4Xt3r wrote:
Wed Jul 11, 2018 1:07 pm
-buzz- wrote:
Wed Jul 11, 2018 12:11 pm
As far as costs, I had an employee move about 500 miles. Single guy living in a 2 BR apartment. The cost was about $8k to have him professionally moved, which included supplies, packing, loading, transport, and unpacking. I'd guess that doing it yourself would cut the cost in half.
^ Thanks. Did he also move into a 2BR apartment?
I think so, but the size of the destination does not matter in terms of the cost. The main cost drivers for a professional move are the volume of household goods, the distance, and things that require special handling (piano, pool table, etc.).

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dratkinson
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Re: Emergency fund checkup

Post by dratkinson » Thu Jul 12, 2018 2:50 pm

B4Xt3r wrote:
Thu Jul 12, 2018 7:26 am
OP here, I'd like to reiterate that I'm not asking for advice for about where to put my emergency fund nor wether or not to save for moving expenses. I'm only asking as to whether or not I have reasonably estimated all one-time costs associated with selling a ~$300k house, moving ~1500 miles, and buying another ~$300k house. [My edit.]
Oh, that's different. If you sell a ~$300K house, then you have a much larger EF to cover your move. So no need to raid your rIRA as CCs should easily cover your temporary expenses. Your retired self will thank you, even if you must make only the CCs' min payments for a few months. This is the best case.

Worst case*. However, if your house does not sell, then you are looking a continuing your current mortgage payments + renting at your new location. I could see this becoming a greater financial drain than your moving costs.

* Happened to one of my coworkers. They assumed the old house would sell quickly so bought another immediately at new location. (Mid-1980s Omaha housing glut, new homes selling for ~$10K less than their mortgage, and they didn't what to accept any loss.) They had been paying double mortgages for >1yr when I lost track of them.


Agree you should plan to rent for ~1yr after the move. Will give you time to evaluate the area and decide if you like working for your new employer.


Do you know your house will sell quickly? If "yes", then you don't have anything serious to worry about. And planning to rent temporarily will give you time to let your finances stabilize and make better plans.


Plan for the worst, hope for the best.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

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