Emergency Fund questions

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Topic Author
Bully3000
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Joined: Mon Jan 07, 2019 4:23 pm

Emergency Fund questions

Post by Bully3000 » Thu Jan 10, 2019 10:12 am

Since my divorce almost two years ago I have been doing everything I can to recover financially and get in a financially secure place, I gave up 401k in Divorce since I made an decision to retain the house for purposes of the children being able to keep some normalcy and it has worked out so do not really regret it too much.

No family in country to provide back up or financial assistance
Reasonably stable Commission Sales Job 80-90%% Commission/Salary - been with company a while but not sure if could get a similar paying job with another company since it would require too much travel and not allow my 50/50 custody so if lost job would probably be 50%+ pay cut.
Monthly outgoings including Alimony and Child support $5100
Current Emergency fund $17k sitting in 2.20% Online savings account.

Age 37
Pay Alimony(Another 12 months) and Child support(12 more years)
50/50 custody of Children
Maxing out 401k +4% company match
Maxing out IRA
Maxing out HSA
Overpaying mortgage and if plan works perfect be done most likely 6-8 years(one kid graduate high school and other close behind)

Hoping once kids are well into college I will be financially secure and able to start looking for a second career which is also why I want house paid off even if it doesn't make financial sense with 4% loan and low mortgage payment

I have a habit of over reading and over analyzing everything so even my plan above took months and months for me to put in place, I have another $17k coming in and was deciding whether to place in my online savings at 2.20% or use my betterment 40/60 Stocks/Bonds safety net taxable account to hopefully gain more returns, i just worry about Job loss or reduced income(been with company 10years) and feel like i need 9 months worth of bills to feel at ease and the risk worries me since I am still learning a lot and do not have any experience, think the hit i took in my divorce made me realize how vulnerable I could be and didn't want to experience that feeling again.

How do you all handle emergency funds, where do you keep them and how much do you keep on hand?

Would I be better to put all of my cash in my Betterment rather than leaving half in online savings and continue to add until I get 9 months, split between accounts or am I being an over saver and wasting opportunities leaving this cash here?

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willthrill81
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Re: Emergency Fund questions

Post by willthrill81 » Thu Jan 10, 2019 10:18 am

While we are a single-income household, I am always working under multi-year contracts with a state government, so sudden employment is not a concern for us. We are also well insured, so we don't have a need for six months' expenses in an EF; we have about three months' worth. Most here just store their EF in a high yield savings account (e.g. Ally is popular) currently paying 2.0%. Given our situation, we take a different approach. We keep one month's of expenses in hard cash in a secure but accessible location and another two months' in Vanguard's Wellesley Income fund. Having the hard cash has been very useful apart from emergencies.

In your situation, I think that the standard 6-12 months' of expenses in an EF is reasonable.
“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

Topic Author
Bully3000
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Re: Emergency Fund questions

Post by Bully3000 » Thu Jan 10, 2019 10:21 am

Thanks, I use Barclays online savings it started at 2.05% and has increased to 2.20% and has no minimum deposit or rules regarding transfers etc.

That is what I have also been toying with, maybe leave just two months in my online account and then load my taxable and hope i never need it

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GoldStar
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Re: Emergency Fund questions

Post by GoldStar » Thu Jan 10, 2019 10:29 am

Not sure what "Reasonably stable" means in terms of your sales job. To me - this is a big part of how much your Emergency Fund should be. If we moved towards a recession - and you did lose your job - and it took you 6-12 months to get back to work - and the stock market was tanking at the same time - how would you be sitting if you had investments at Betterment?
Personally - I'd try to get to at least 6 months EF (6 * $5100 = $30,600) before making additional payments towards the mortgage or doing any taxable investments. I'd continue to keep this money in a safe (e.g. not impacted by market swings) place like you are. If you are making additional payments towards the mortgage its not like you can get that money back if you are out of work and need it.

One thing you could do is calculate what your "minimum" expenses would be if you were out of work. You might be able to shave a little off your $5100 monthly if you were forced to (although I'd still use the math above and just allow this to provide additional support beyond 6 months).
Last edited by GoldStar on Thu Jan 10, 2019 10:31 am, edited 1 time in total.

Rupert
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Re: Emergency Fund questions

Post by Rupert » Thu Jan 10, 2019 10:30 am

Many people, myself included, take a tiered approach to saving for emergencies/job loss. Example -- First tier: Cash in a checking account, savings account and/or money market account. Second tier: I Bonds (only the portion available for redemption at any given time), short-term bond index fund, short-term CDs. Third tier: taxable investment account, principal in Roth IRA.

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willthrill81
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Re: Emergency Fund questions

Post by willthrill81 » Thu Jan 10, 2019 10:30 am

Bully3000 wrote:
Thu Jan 10, 2019 10:21 am
Thanks, I use Barclays online savings it started at 2.05% and has increased to 2.20% and has no minimum deposit or rules regarding transfers etc.

That is what I have also been toying with, maybe leave just two months in my online account and then load my taxable and hope i never need it
The whole point of an EF is that the money you need will be there when you need it. Be careful with investing it in volatile assets. Whatever you invest it according to your retirement portfolio asset allocation, then you have essentially reduced your EF by that amount. In a real financial emergency, would you feel comfortable with only two months' of expenses in cash? I chose to put two-thirds of our EF in Wellesley because it has not been a volatile fund; it's worst peak to trough drawdown in 48 years was -18%, and we could handle that much of a reduction. If the money were all in stocks, it could drop 50% or more.

Frankly, I think that having an EF greater in size than six months' expenses is probably, though not necessarily, overkill for the financially informed, but that's just my opinion. Most here have their EF to protect against sudden unemployment, but you shouldn't discount unemployment benefits in that regard either. Once our mortgage is paid off in about a year, unemployment benefits would extend our 'three month EF' to at least six months.
“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

Topic Author
Bully3000
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Re: Emergency Fund questions

Post by Bully3000 » Thu Jan 10, 2019 10:51 am

GoldStar wrote:
Thu Jan 10, 2019 10:29 am
Not sure what "Reasonably stable" means in terms of your sales job. To me - this is a big part of how much your Emergency Fund should be. If we moved towards a recession - and you did lose your job - and it took you 6-12 months to get back to work - and the stock market was tanking at the same time - how would you be sitting if you had investments at Betterment?
Personally - I'd try to get to at least 6 months EF (6 * $5100 = $30,600) before making additional payments towards the mortgage or doing any taxable investments. I'd continue to keep this money in a safe (e.g. not impacted by market swings) place like you are. If you are making additional payments towards the mortgage its not like you can get that money back if you are out of work and need it.

One thing you could do is calculate what your "minimum" expenses would be if you were out of work. You might be able to shave a little off your $5100 monthly if you were forced to (although I'd still use the math above and just allow this to provide additional support beyond 6 months).
My expenses reduce end of this year by around $1000(Alimony) and I did round up all my outgoings and used my highest gas, water and electric and grocery bill so I could trim it down, I will have about $34k saved so I guess basically 6 months "inflated expenses' . I guess this gives me good piece of mind and piece of mind is worth a lot

I guess by reasonably stable I mean I have been around for a long time and have established Territory so fingers crossed not getting fired it is more we are a smallish IT company and privately held so never know what the future holds and I am on a good number and pretty confident once it ends there will be a 50% decrease in earnings so I want to maximize the cash cow as long as I can.
Last edited by Bully3000 on Thu Jan 10, 2019 10:55 am, edited 1 time in total.

Topic Author
Bully3000
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Re: Emergency Fund questions

Post by Bully3000 » Thu Jan 10, 2019 10:54 am

willthrill81 wrote:
Thu Jan 10, 2019 10:30 am
Bully3000 wrote:
Thu Jan 10, 2019 10:21 am
Thanks, I use Barclays online savings it started at 2.05% and has increased to 2.20% and has no minimum deposit or rules regarding transfers etc.

That is what I have also been toying with, maybe leave just two months in my online account and then load my taxable and hope i never need it
The whole point of an EF is that the money you need will be there when you need it. Be careful with investing it in volatile assets. Whatever you invest it according to your retirement portfolio asset allocation, then you have essentially reduced your EF by that amount. In a real financial emergency, would you feel comfortable with only two months' of expenses in cash? I chose to put two-thirds of our EF in Wellesley because it has not been a volatile fund; it's worst peak to trough drawdown in 48 years was -18%, and we could handle that much of a reduction. If the money were all in stocks, it could drop 50% or more.

Frankly, I think that having an EF greater in size than six months' expenses is probably, though not necessarily, overkill for the financially informed, but that's just my opinion. Most here have their EF to protect against sudden unemployment, but you shouldn't discount unemployment benefits in that regard either. Once our mortgage is paid off in about a year, unemployment benefits would extend our 'three month EF' to at least six months.
I do not know too much about it but since I am mostly commission based and my salary does not even cover half my monthly outgoings I am not sure hoe much unemployment insurance would be able to help me although maybe it would just help extend my emergency fund longer and give me more time to find employment again.

I am hoping I can get to or exceed my goal of paying of my mortgage in 6-8 years, that in conjunction with a EF would relieve so much pressure

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lthenderson
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Re: Emergency Fund questions

Post by lthenderson » Thu Jan 10, 2019 11:10 am

Bully3000 wrote:
Thu Jan 10, 2019 10:12 am
How do you all handle emergency funds, where do you keep them and how much do you keep on hand?
We keep our system pretty simple. Our checking account has enough in it to handle a couple months worth of expenses. When the balance gets too large I transfer it into our savings account. I look at these two funds as our emergency fund/car purchase fund/house down payment fund, etc. At minimum, we keep six months of expenses there though we generally have a year's worth of expenses between them. If we need another car, it comes out of there and we build it back up. When there is a year's worth of expenses in them and we have no future plans a large expenditure that might take us below the sixth month expense minimum, the money goes into our taxable account. (All retirement money comes out of any income up front before it goes into checking account.)

Topic Author
Bully3000
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Re: Emergency Fund questions

Post by Bully3000 » Thu Jan 10, 2019 11:15 am

lthenderson wrote:
Thu Jan 10, 2019 11:10 am
Bully3000 wrote:
Thu Jan 10, 2019 10:12 am
How do you all handle emergency funds, where do you keep them and how much do you keep on hand?
We keep our system pretty simple. Our checking account has enough in it to handle a couple months worth of expenses. When the balance gets too large I transfer it into our savings account. I look at these two funds as our emergency fund/car purchase fund/house down payment fund, etc. At minimum, we keep six months of expenses there though we generally have a year's worth of expenses between them. If we need another car, it comes out of there and we build it back up. When there is a year's worth of expenses in them and we have no future plans a large expenditure that might take us below the sixth month expense minimum, the money goes into our taxable account. (All retirement money comes out of any income up front before it goes into checking account.)
Once my Car is paid off I plan to throw that money at my mortgage, i regret buying a new car this year since it is a lot of money to throw away every month so hopefully it will last a long time.

I like the idea of a car fund should you need to buy a new car and do not wish to add additional debts/outgoing expenses.

Thegame14
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Re: Emergency Fund questions

Post by Thegame14 » Thu Jan 10, 2019 11:34 am

ID put it in savings if that makes you more comfortable, but also at age 37 being 60% bonds, is WAAAAAY too conservative, you should be 80% stocks 20% bonds.

Topic Author
Bully3000
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Re: Emergency Fund questions

Post by Bully3000 » Thu Jan 10, 2019 11:54 am

Thegame14 wrote:
Thu Jan 10, 2019 11:34 am
ID put it in savings if that makes you more comfortable, but also at age 37 being 60% bonds, is WAAAAAY too conservative, you should be 80% stocks 20% bonds.
My IRA is 90% stock 10% Bonds, I created another taxable account 60% bonds 40% stock since I figured EF should be relatively safe but I have not needed one ever and hope I never do so wanted the potential to earn more than the 2% savings account.

I think I am going to bump my $17k in EF with the other $17k I have coming in for a total of just over 6 months current living expenses and then leave it in online savings and then build a smaller fund(2-3 months living expenses) in my taxable account as a secondary layer of protection, so if all goes to hell i still have 6+ months living expenses tucked away and best case i never touch it and see some nice gains from my taxable account..

Working a Majority commission Job sure does make you think about your next paycheck constantly.

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willthrill81
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Re: Emergency Fund questions

Post by willthrill81 » Thu Jan 10, 2019 12:04 pm

Bully3000 wrote:
Thu Jan 10, 2019 11:54 am
Thegame14 wrote:
Thu Jan 10, 2019 11:34 am
ID put it in savings if that makes you more comfortable, but also at age 37 being 60% bonds, is WAAAAAY too conservative, you should be 80% stocks 20% bonds.
My IRA is 90% stock 10% Bonds, I created another taxable account 60% bonds 40% stock since I figured EF should be relatively safe but I have not needed one ever and hope I never do so wanted the potential to earn more than the 2% savings account.

I think I am going to bump my $17k in EF with the other $17k I have coming in for a total of just over 6 months current living expenses and then leave it in online savings and then build a smaller fund(2-3 months living expenses) in my taxable account as a secondary layer of protection, so if all goes to hell i still have 6+ months living expenses tucked away and best case i never touch it and see some nice gains from my taxable account..

Working a Majority commission Job sure does make you think about your next paycheck constantly.
Don't forget that the 60% allocation to bonds in your taxable account is effectively another 'layer of protection' already.
“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

wolf359
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Re: Emergency Fund questions

Post by wolf359 » Thu Jan 10, 2019 12:04 pm

Bully3000 wrote:
Thu Jan 10, 2019 11:15 am

Once my Car is paid off I plan to throw that money at my mortgage, i regret buying a new car this year since it is a lot of money to throw away every month so hopefully it will last a long time.

I like the idea of a car fund should you need to buy a new car and do not wish to add additional debts/outgoing expenses.
I'd suggest that rather than throwing money at paying DOWN the mortgage, that you throw that money into a "sinking fund" instead. This is an investment account earmarked to paying OFF the mortgage. The problem with paying extra principal is that you lose the liquidity of having the money, and you don't get the benefit of lower payments which only come when you completely pay it OFF.

The sinking fund should have a greater return than the mortgage interest rate during the years it takes to build, and if the worst happens (job loss or other event that requires liquidity), you still have options.

Yes, you could borrow the money out of your home if you had to, but if you've just lost your job they may not loan you the money.

Nate79
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Re: Emergency Fund questions

Post by Nate79 » Thu Jan 10, 2019 12:19 pm

I discount stocks 80% for valuing an emergency fund. To me they are near worthless in terms of an emergency fund and should not be counted on in the first few tiers of available funds.

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willthrill81
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Re: Emergency Fund questions

Post by willthrill81 » Thu Jan 10, 2019 12:25 pm

Nate79 wrote:
Thu Jan 10, 2019 12:19 pm
I discount stocks 80% for valuing an emergency fund. To me they are near worthless in terms of an emergency fund and should not be counted on in the first few tiers of available funds.
Out of curiosity, how did you arrive at the 80% discount rate?
“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

Topic Author
Bully3000
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Re: Emergency Fund questions

Post by Bully3000 » Thu Jan 10, 2019 12:29 pm

wolf359 wrote:
Thu Jan 10, 2019 12:04 pm
Bully3000 wrote:
Thu Jan 10, 2019 11:15 am

Once my Car is paid off I plan to throw that money at my mortgage, i regret buying a new car this year since it is a lot of money to throw away every month so hopefully it will last a long time.

I like the idea of a car fund should you need to buy a new car and do not wish to add additional debts/outgoing expenses.
I'd suggest that rather than throwing money at paying DOWN the mortgage, that you throw that money into a "sinking fund" instead. This is an investment account earmarked to paying OFF the mortgage. The problem with paying extra principal is that you lose the liquidity of having the money, and you don't get the benefit of lower payments which only come when you completely pay it OFF.

The sinking fund should have a greater return than the mortgage interest rate during the years it takes to build, and if the worst happens (job loss or other event that requires liquidity), you still have options.

Yes, you could borrow the money out of your home if you had to, but if you've just lost your job they may not loan you the money.
I am doing something similar here but there were a couple reasons I wanted cash in the house.

I pay enough extra on auto pay to pay my 30 year loan in 15 years and I also split my paycheck between 2 accounts, one savings(Not my EF) and one for Bills and everything else. then planned to make yearly lump sum payment towards the mortgage but have it sitting in an account just in case also, maybe I should wait longer to make the lump sum pay offs.

I am engaged currently and will be doing a prenup in the next year or 2 and part of this would have the house and contributions to the house listed as separate property protecting that asset which again would be huge for my feeling of security, one Divorce was enough to make me know I do not want to go through that financial burden again and having a paid off or mostly paid of house will leave me in a good place regardless.

Nate79
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Re: Emergency Fund questions

Post by Nate79 » Thu Jan 10, 2019 1:35 pm

willthrill81 wrote:
Thu Jan 10, 2019 12:25 pm
Nate79 wrote:
Thu Jan 10, 2019 12:19 pm
I discount stocks 80% for valuing an emergency fund. To me they are near worthless in terms of an emergency fund and should not be counted on in the first few tiers of available funds.
Out of curiosity, how did you arrive at the 80% discount rate?
Great Depression.

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