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Emergency fund in my situation

Posted: Sat Nov 10, 2018 10:56 am
by sergio
I've been recently debating how much I need in my emergency fund. Most of the posts I see say "6+ months of living expenses, minimum". However, here is my somewhat different situation:

1. Job: I am partner at software company where our revenue for the last 20 years has been slowly increasing while our costs have been decreasing. 80%+ of our revenue is recurring, so it's pretty stable and we have an enormous cash cushion. Hard to believe we'd ever close up shop overnight, and as partner, we'd be the last ones to get dropped.

2. House/Car: I live in a middle unit townhouse, so maintenance expenses are pretty low (HOA is $230/month). Mechanicals are newer, and the roof, windows, appliances, deck, and door were all replace 4 years back. Car is 8 years old and has had almost no major issues.

3. Health: We have a high deducible ($3.6k/$7.6k). The first $3.6k I can easily pay with cash flow. My HSA money market has $4k in it for the rest, and another $17ish invested. I really don't want to ever withdraw the invested portion.

4. I already max out my 401k, Roth (myself + spousal), and HSA).

I'm looking to start throwing as much spare cash as possible towards the mortgage, but want to make sure I've considered all possible factors in my situation.

Re: Emergency fund in my situation

Posted: Sat Nov 10, 2018 11:31 am
by SimonJester
I still stand by 3 to 6 months of living expenses. While your job income is stable what if you got sick and had to take off 6 months while hospitalized? After you pay the deductible I am sure you have co insurance.

You live in a town home, what if the roof is damaged and they assess each unit $10K for repair.

An 8 year old car with "almost no major issues" seems like you could need the emergency fund at some point..

Emergency fund is for all these things that we cannot think of that might crop up and severely impact our financial lives.

Re: Emergency fund in my situation

Posted: Sat Nov 10, 2018 12:13 pm
by Atomic
The answer is personal, but it all comes down to assessing risk. Job loss, job curtailment due to major medical or personal injury, or legal jeopardy, property damage or loss, were on my mind when I decided 6-9mo expense was appropriate. As I thought about each possibility, and the other insurance devices I have for each (unemployment, short term disability, long term disability, medical insurance, home insurance) I made a mental list of probability x consequence for each event and then sized up the normal and extra spending that might come with each event.

Re: Emergency fund in my situation

Posted: Sat Nov 10, 2018 12:15 pm
by 8foot7
How much is left on your mortgage and how long do you expect it to take you to pay it off?

One way to look at it is a paid off mortgage reduces your required expenses so you need less in your fund....

Re: Emergency fund in my situation

Posted: Sat Nov 10, 2018 12:21 pm
by runner540
In my opinion these questions are indicative of being late in the economic cycle and long bull market. After 2008, I invest aggressively but keep a large emergency fund.

Re: Emergency fund in my situation

Posted: Sat Nov 10, 2018 12:53 pm
by KlangFool
OP,

1) A better question would be under your circumstances, why you cannot afford a larget emergency fund?

2) What is the interest rate of your mortgage?

3) I keep 1 year of the emergency fund. My portfolio is at 20 times my annual expense. My portfolio is big enough that I can afford to keep 1 year of the emergency fund. It will not change my FI date at all.

KlangFool

Re: Emergency fund in my situation

Posted: Sat Nov 10, 2018 1:34 pm
by averagedude
You make some sound arguments for keeping less than 6 months in emergency savings. It usually is a personal choice. Me personally, we always kept a years worth of expenses in emergency savings in fixed income and my retirement accounts we invested 100% in stocks. I did this to remain debt free and if we ever needed a vehicle i would pay cash and then build it back up. Amazingly when you pay cash for a vehicle, you are more likely to buy used and tend to keep your vehicles longer.

Re: Emergency fund in my situation

Posted: Sat Nov 10, 2018 1:41 pm
by sergio
KlangFool wrote:
Sat Nov 10, 2018 12:53 pm
OP,

1) A better question would be under your circumstances, why you cannot afford a larget emergency fund?

2) What is the interest rate of your mortgage?

3) I keep 1 year of the emergency fund. My portfolio is at 20 times my annual expense. My portfolio is big enough that I can afford to keep 1 year of the emergency fund. It will not change my FI date at all.

KlangFool
4.5% interest with $60/month PMI. I'd like to pay down asap now to (1) maximize my savings in interest (we cannot deduct interest), since paying extra now gets us the biggest savings (2) get rid of PMI and (3) get this paid off before kids start going to college so we can use the cash flow to help them.

I think at the very least were going to keep 4 months of expenses in pure cash. I'm just not 100% sure about keeping a 1+ yrs in cash like some recommend. I'm at about 3 months now, what I may do is build up to 4 mos ASAP and perhaps build up to 6mos very slowly. If we need to withdraw, of course building the fund back up would be priority #1.

When I was single and rented I must've kept like $3k in cash (basically for major auto repairs) + HSA as my only emergency fund.

Re: Emergency fund in my situation

Posted: Sat Nov 10, 2018 1:48 pm
by averagedude
I believe you have thought it out well.

Re: Emergency fund in my situation

Posted: Sat Nov 10, 2018 2:02 pm
by KlangFool
sergio wrote:
Sat Nov 10, 2018 1:41 pm
KlangFool wrote:
Sat Nov 10, 2018 12:53 pm
OP,

1) A better question would be under your circumstances, why you cannot afford a larget emergency fund?

2) What is the interest rate of your mortgage?

3) I keep 1 year of the emergency fund. My portfolio is at 20 times my annual expense. My portfolio is big enough that I can afford to keep 1 year of the emergency fund. It will not change my FI date at all.

KlangFool
4.5% interest with $60/month PMI. I'd like to pay down asap now to (1) maximize my savings in interest (we cannot deduct interest), since paying extra now gets us the biggest savings (2) get rid of PMI and (3) get this paid off before kids start going to college so we can use the cash flow to help them.

I think at the very least were going to keep 4 months of expenses in pure cash. I'm just not 100% sure about keeping a 1+ yrs in cash like some recommend. I'm at about 3 months now, what I may do is build up to 4 mos ASAP and perhaps build up to 6mos very slowly. If we need to withdraw, of course building the fund back up would be priority #1.

When I was single and rented I must've kept like $3k in cash (basically for major auto repairs) + HSA as my only emergency fund.
sergio,

<<(1) maximize my savings in interest (we cannot deduct interest), since paying extra now gets us the biggest savings (2) get rid of PMI and (3) get this paid off before kids start going to college so we can use the cash flow to help them.>>

(1) and (2) makes sense. (3) does not make sense.

A) What if the money market fund pays 5% or more in a few years? Why would you pay off a 4.5% mortgage?

B) What if you cannot "cash flow" your kids' college education? Then, you will need to take a more expensive student loan for your kids.

Pay down enough to get rid of the PMI. But, it may not make sense to go beyond that.

<<When I was single and rented>>

You have a family to feed and you will lose your house if you do not pay your mortgage.

KlangFool

Re: Emergency fund in my situation

Posted: Sat Nov 10, 2018 2:09 pm
by sergio
KlangFool wrote:
Sat Nov 10, 2018 2:02 pm
sergio wrote:
Sat Nov 10, 2018 1:41 pm
KlangFool wrote:
Sat Nov 10, 2018 12:53 pm
OP,

1) A better question would be under your circumstances, why you cannot afford a larget emergency fund?

2) What is the interest rate of your mortgage?

3) I keep 1 year of the emergency fund. My portfolio is at 20 times my annual expense. My portfolio is big enough that I can afford to keep 1 year of the emergency fund. It will not change my FI date at all.

KlangFool
4.5% interest with $60/month PMI. I'd like to pay down asap now to (1) maximize my savings in interest (we cannot deduct interest), since paying extra now gets us the biggest savings (2) get rid of PMI and (3) get this paid off before kids start going to college so we can use the cash flow to help them.

I think at the very least were going to keep 4 months of expenses in pure cash. I'm just not 100% sure about keeping a 1+ yrs in cash like some recommend. I'm at about 3 months now, what I may do is build up to 4 mos ASAP and perhaps build up to 6mos very slowly. If we need to withdraw, of course building the fund back up would be priority #1.

When I was single and rented I must've kept like $3k in cash (basically for major auto repairs) + HSA as my only emergency fund.
sergio,

<<(1) maximize my savings in interest (we cannot deduct interest), since paying extra now gets us the biggest savings (2) get rid of PMI and (3) get this paid off before kids start going to college so we can use the cash flow to help them.>>

(1) and (2) makes sense. (3) does not make sense.

A) What if the money market fund pays 5% or more in a few years? Why would you pay off a 4.5% mortgage?

B) What if you cannot "cash flow" your kids' college education? Then, you will need to take a more expensive student loan for your kids.

Pay down enough to get rid of the PMI. But, it may not make sense to go beyond that.

<<When I was single and rented>>

You have a family to feed and you will lose your house if you do not pay your mortgage.

KlangFool
I am very well aware of the bolded point... haha.

Good point on the mortgage. I'll pay to get rid of PMI asap and then re-consider my options from there depending on our situation at the time, interest rates, and a bunch of other unpredictable factors.

Re: Emergency fund in my situation

Posted: Sat Nov 10, 2018 11:45 pm
by CurlyDave
sergio wrote:
Sat Nov 10, 2018 10:56 am
...I'm looking to start throwing as much spare cash as possible towards the mortgage, but want to make sure I've considered all possible factors in my situation...
I would far rather put money into a taxable brokerage account than into paying down a mortgage.

1. Over any considerable period of time it will produce a far higher return than the rather puny interest rates of today's mortgages.

2. It can be considered a second-tier EF, useable for any future need. Once an excess principal payment has been made, it is gone forever. If you have a real emergency after that, the bank is not going to give it back, or even give you credit for making extra payments. Your monthly obligation is still there.

Re: Emergency fund in my situation

Posted: Sun Nov 11, 2018 12:19 am
by Nissanzx1
Some of the things you listed like cars, appliances, roofing, windows aren't emergencies and need separate Sub-accounts for saving. They are Wear items.

As for the emergency fund, it can be whatever you are comfy with. I have a brother in law that's an MD and kept about $40K for EF. He was hit by a drunk driver heading to work and had to be off work for 4 months while providing for his 6 children. Medical bills in the many 10's of thousands. Their EF wasn't quite enough. The lawsuit took 3 years and he barely got enough to get the medical bills settled. The point is, life can really romp you. Be prepared.

I would agree that getting rid of your mortgage is a goal that should be made a priority for you if have no other consumer debts.

Re: Emergency fund in my situation

Posted: Sun Nov 11, 2018 12:56 am
by whodidntante
I don't think you need an emergency fund. You can pay most things out of cash flow and it would seem that you have plenty socked away.

Re: Emergency fund in my situation

Posted: Sun Nov 11, 2018 3:04 am
by camillus
An alternative to paying off your mortgage is investing in a taxable account. This resolves the question of an emergency fund, as the taxable account is available to you, where as home equity is not.

If at any point you'd rather pay off your mortgage, you retain the flexibility to do so. However, you cannot easily do a cash-out refinance to invest.

Re: Emergency fund in my situation

Posted: Sun Nov 11, 2018 2:34 pm
by sergio
Thanks everyone for all the suggestions. The big thing I was missing was: what if I need to take a few months off work ? I think I'm going to go with 4 months of take home pay + health insurance premiums, and pad it off with another $5k for just in case. Which turns out to be about 6 months of expenses when I did the quick math, haha.

I also like the idea of investing a taxable account. Once the EF is finalized, I'll pay down the mortgage to the point of no PMI ASAP. Then I'll consider whether to put more in the mortgage, invest in taxable accounts, some combination of the two, or something completely different depending on what life throws my way in the meantime.

Re: Emergency fund in my situation

Posted: Sun Nov 11, 2018 2:52 pm
by stan1
Here's what we did. After maxing our 401K and IRA contributions each year we made first one then eventually two extra mortgage principal payments each year. This was easy because we get paid bi-weekly so the extra payment towards principal lined up with the months we got three paychecks. Simultaneously we also put money into a taxable investing account. As that account got larger we realized it was very liquid and didn't hesitate to sell holdings rarely if we wanted to buy a new car or do some remodeling work on our home. We decided we only needed a few thousand dollars in our checking accounts but we did also keep some CDs. We understood we could use our taxable account as an emergency fund. Eventually the taxable account got so large that we said to ourselves why not just pay off the mortgage? The 2018 tax changes definitely made this a good decision for us because now we are able to claim a standard deduction that is much higher than our itemized deductions. It all worked for us. Sometimes people let the tail wag the dog when it comes to taxes. Owing capital gains taxes just means you've made money.

Re: Emergency fund in my situation

Posted: Sun Nov 11, 2018 7:46 pm
by delamer
For me, an emergency fund’s sole purpose is to replace lost income in the event you aren’t working — either due to unemployment or illness. The size should depend on your expenses, job security, and, maybe, health.

There should be separate savings to deal with the inevitable car repair, home repair, and medical bills.