Temp Worker - How Much Emergency Fund Do I Need?

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SkinnyTestaverde
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Temp Worker - How Much Emergency Fund Do I Need?

Post by SkinnyTestaverde »

Hi all, before I begin, I want to thank you all and the moderators for creating a great community here.

My situation is this: I'm 31 years old, single, and currently employed in the financial services industry as a contractor. My contracts are quarterly and I believe I will be employed at least through the end of the current year, with a reasonable likelihood of indefinite continuing employment. However, as a temporary worker, I've come to the conclusion that you can never truly count on a contract extension. In my case, the primary advantage is that my pay is above six-figures for work that would almost certainly fetch less if I were a permanent full-time employee of the institution for which I work.

I have no debt and use my credit cards only for monthly liquidity, paying them off in full when the bill arrives. I currently have $20k in a high-yield online savings account and $10k in I-Bonds purchased in April 2019. I typically keep $2k or less in checking as I'm not big fan of providing large banks with low-cost demand deposits. I also have $50k in a Roth IRA, $25k in a Traditional IRA (rolled over from a junk 401(k) plan at a previous employer), and a taxable account of about $10k. Monthly expenses hover around $2.5k but are often higher in Q4 due to holiday travel and spending.

In the medium term, I would like to get out of the contracting game as I dislike the lack of benefits and lack of stability. I'm also quite worried that as a relatively young worker, I run the risk of being pigeonholed as a "temp" by HR when seeking future roles and thus only able to obtain more contracting gigs. For these reasons, I feel like the maximum amount of time I should continue to do this work before seeking more stable permanent employment is one to two years.

Financial goals include saving for a downpayment on a house and building a large taxable account that I could draw from in the event that I am fortunate enough to be able to retire early. I would like this fund to be completely separate from my emergency fund, mental accounting be damned. However, developing a sizeable taxable account is a much bigger priority for me than having a down payment since I am currently comfortable renting.

In the past, when I have been between contracts, I have found employment in about 6 to 8 weeks - had I been less selective, I could have probably cut that time down to 4 weeks. The possibility of an upcoming recession gives me pause, however, as contractors are the first to be cut and the likelihood of me being out of work for 12+ weeks significantly increases.

I hate keeping money around in cash, and I would much rather invest as much as possible every month to make hay while the sun shines, but I understand the need for dry powder and am not opposed to building up a large cash reserve. Given these circumstances, how much of an emergency fund should I have?
Topic Author
SkinnyTestaverde
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Re: Temp Worker - How Much Emergency Fund Do I Need?

Post by SkinnyTestaverde »

Does anyone have any comments on this situation? I can't be the only contractor out there. Usually emergency funds are a much-discussed topic on Internet investing and personal finance forums! :D

To summarize: $20k in high-yield savings, $10k in I-Bonds, $2k in checking, $75k in retirement accounts, $10k in taxable investments. $2.5k expenses per month. Job status uncertain beyond 2019, however, I believe there is a good probability it will continue. Thoughts?
Coburn
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Re: Temp Worker - How Much Emergency Fund Do I Need?

Post by Coburn »

1. Whats the pay difference between full-time and contract worker for your industry in your locale? What is your locale? How long have you been at this current job?

2. Minimum of 6 months in EF...so your 8 is better than that, but shoot for 12 months.

One option you could try is to set your EF to 9 months and at the start of a new contract - set aside one month additional cash each month. If the contract gets renewed, you can move that 3 months of cash to your taxable investment account. If no new contract, then your 1 year EF is right there.

3. If full-time work is your desire then you should focus on finding it now...why wait 1-2 years later? It's certainly not going to be easier to find FT work when the recession does come.
sschoe2
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Re: Temp Worker - How Much Emergency Fund Do I Need?

Post by sschoe2 »

Yea anytime I was a temp/contractor I considered finding direct employment my other part time job. Noone in my profession (Chemist) likes temping/contracting because the agencies rip you off horribly. No or substandard benefits and you are earning as little as 1/2 as much as a directly employed worker would be.
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SkinnyTestaverde
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Re: Temp Worker - How Much Emergency Fund Do I Need?

Post by SkinnyTestaverde »

Coburn wrote: Sun Sep 29, 2019 6:14 pm 1. Whats the pay difference between full-time and contract worker for your industry in your locale? What is your locale? How long have you been at this current job? Located in the NY metro area. Have been here for 1 year thus far. I'm not sure about the industry as a whole, but in my case, I'm earning about 40% more than a comparable full-time employee. I believe this is largely due to my industry experience and the particular requirements of the present employer, so I wouldn't expect this to be comparable at another job.

2. Minimum of 6 months in EF...so your 8 is better than that, but shoot for 12 months. Would you consider going beyond 12 months, or is 12 enough? I want to have cash, but not too much cash, as there's an enormous opportunity cost for someone my age to hold cash rather than productive investments.

One option you could try is to set your EF to 9 months and at the start of a new contract - set aside one month additional cash each month. If the contract gets renewed, you can move that 3 months of cash to your taxable investment account. If no new contract, then your 1 year EF is right there. Good idea

3. If full-time work is your desire then you should focus on finding it now...why wait 1-2 years later? It's certainly not going to be easier to find FT work when the recession does come. Agreed - I've been a little complacent on this point, partly due to the feeling of not wanting to rock the boat while I have a good thing going. But ultimately I need to make the jump.
sschoe2 wrote: Mon Sep 30, 2019 8:20 am Yea anytime I was a temp/contractor I considered finding direct employment my other part time job. Noone in my profession (Chemist) likes temping/contracting because the agencies rip you off horribly. No or substandard benefits and you are earning as little as 1/2 as much as a directly employed worker would be. Agreed, what you described is usually the case. I'm very fortunate to find myself in a situation where I am earning more than the FTEs, but the lack of stability / benefits is still less than ideal. But I completely agree about shady recruiters and temp agencies and have dealt with more than my share. Being forced to take these junk roles seems to be an unfortunate reality for many workers of my generation.
KlangFool
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Re: Temp Worker - How Much Emergency Fund Do I Need?

Post by KlangFool »

OP,

What is your asset allocation?

As per my opinion,

A) 1 year of the emergency fund.

B) The asset allocation of 70/30.

The next recession would be very bad. You need to be survive first before thinking about the long-term return of the stock.

KlangFool
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gr7070
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Re: Temp Worker - How Much Emergency Fund Do I Need?

Post by gr7070 »

Your 8 months is plenty.

You also have a Roth IRA that you can withdraw the contributions from tax- and penalty-free.

I wouldn't want to forgo tax-advantaged savings to boost my taxed EF any further. If you really feel like you need more I'd continue to add to the Roth - where as normally I wouldn't use a Roth IRA if there is room to increase a traditional 401k.
KlangFool
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Re: Temp Worker - How Much Emergency Fund Do I Need?

Post by KlangFool »

gr7070 wrote: Mon Sep 30, 2019 1:22 pm Your 8 months is plenty.

You also have a Roth IRA that you can withdraw the contributions from tax- and penalty-free.

I wouldn't want to forgo tax-advantaged savings to boost my taxed EF any further. If you really feel like you need more I'd continue to add to the Roth - where as normally I wouldn't use a Roth IRA if there is room to increase a traditional 401k.
gr7070,

Wiki entry on how to use Roth IRA as an emergency fund.

https://www.bogleheads.org/wiki/Roth_IR ... gency_fund

KlangFool
clip651
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Re: Temp Worker - How Much Emergency Fund Do I Need?

Post by clip651 »

I don't think there is a right answer for everyone. But in general, as a temp worker (or really anyone without long term job security) your emergency fund should be on the higher side.

Details are important though - how much can you cut expenses if you are unemployed?

What are you doing for health insurance, and what happens to that if you're unemployed? What if you get sick or injured and are then temporarily unable to work, and your contract job drops you? etc.

If you are unemployed for longer than your emergency fund lasts, do you have other safety nets? Some people could easily move in with family, get a roommate, or move to a lower cost of living area. Other people would find it much harder to do those things.

How big is your retirement portfolio? If you lost your job in a recession and market crash, and had to spend from that after going through your emergency fund, how long would that last you?

Are you only responsible for yourself, or are others depending on you (spouse, kids, elderly parents, etc)?

You don't have to answer all of these questions here on this thread if you don't want to. But just some ideas to consider as you consider how big of an emergency fund you want to hold. If you think your emergency fund is probably/maybe big enough, but aren't sure, you can keep adding to it while also adding to other long term investments. Split contributions in half or in whatever ratio makes sense to you.

best wishes,
cj
HomeStretch
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Re: Temp Worker - How Much Emergency Fund Do I Need?

Post by HomeStretch »

12-month emergency fund.

Consider opening a Solo 401k.

Your temp worker employment status may negatively impact your ability to obtain a mortgage as buying a property is one of your financial goals.

Employment market is very good right now. Better to get the salaried position sooner rather than later. In down times, temp workers are (usually) the first to go regardless of position as it’s a quick way for companies to cut costs.

A 40% premium is okay but paying for benefits and employer payroll taxes yourself can eat up a large chunk of that premium. When you calculate the premium hopefully you are doing an apples-to-apples comparison to a salaried worker who (usually) receives paid time off making their denominator smaller than yours when calculating hourly salary rate.
Coburn
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Re: Temp Worker - How Much Emergency Fund Do I Need?

Post by Coburn »

In your case, extend the EF to 1 year with additional rolling 3 month safety net (as discussed) as long as you continue to be a non-FT worker.

Even if your 401k can be borrowed against in tough times...don't go there.
trueblueky
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Re: Temp Worker - How Much Emergency Fund Do I Need?

Post by trueblueky »

Maybe your emergency funds needs to cover:
* Recession hits, takes months to find next gig, plus
* Next gig requires relocation (think NY to SF)

So, you need $2500/month for 12 months plus what for the move?
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FelixTheCat
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Re: Temp Worker - How Much Emergency Fund Do I Need?

Post by FelixTheCat »

I have my own sole proprietor business and some times my invoices are months late. The first time it happened it changed my way of thinking from monthly expenses to quarterly/annual expenses. I got a budgeting tool called YNAB. YNAB helped me prepare for future expenses and taught me to budget for months in advance for all expenses planned and unplanned.

It has a weeks free trial period if you want to check it out. https://www.youneedabudget.com/
Felix is a wonderful, wonderful cat.
Topic Author
SkinnyTestaverde
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Re: Temp Worker - How Much Emergency Fund Do I Need?

Post by SkinnyTestaverde »

KlangFool wrote: Mon Sep 30, 2019 12:58 pm OP,

What is your asset allocation? Currently 70-30 consisting of the S&P 500 index and bonds, but the bonds involve credit risk as they are all in the Vanguard High Yield Fund. I purchased the fund as a 20-year-old right near the bottom in February 2009 and have held it in the Roth since. Sometimes it's better to be lucky than good. :D

As per my opinion,

A) 1 year of the emergency fund. This seems to be the consensus - I will target $30k in high yield savings for the EF.

B) The asset allocation of 70/30. Thank you, KlangFool - I have read many of your posts on this forum and appreciate your wisdom and perspective.

The next recession would be very bad. You need to be survive first before thinking about the long-term return of the stock. Agreed, and being able to remember 2008, I think we were somewhat "lucky" with the relatively short duration of the crash - it wasn't like the 1970s where stocks were beaten down year after year. The next recession could well be longer.

KlangFool
gr7070 wrote: Mon Sep 30, 2019 1:22 pm Your 8 months is plenty.

You also have a Roth IRA that you can withdraw the contributions from tax- and penalty-free. Thank you - I'm a big fan of the Roth. One wrinkle for this tax year is that my increased MAGI means I am likely to be phased out. It's certainly not a bad problem to have but it does limit my ability to use this strategy going forward.

I wouldn't want to forgo tax-advantaged savings to boost my taxed EF any further. If you really feel like you need more I'd continue to add to the Roth - where as normally I wouldn't use a Roth IRA if there is room to increase a traditional 401k.
clip651 wrote: Mon Sep 30, 2019 1:57 pm I don't think there is a right answer for everyone. But in general, as a temp worker (or really anyone without long term job security) your emergency fund should be on the higher side. Thank you, cj - agreed and although the missed opportunity costs hurt, I completely understand the necessity of an emergency fund.

Details are important though - how much can you cut expenses if you are unemployed? Probably not by much, I would say $2k is the bare minimum if I remain in the NYC area as even the basics are outrageous here.

What are you doing for health insurance, and what happens to that if you're unemployed? What if you get sick or injured and are then temporarily unable to work, and your contract job drops you? etc. I buy health insurance on the exchange and currently pay about $300 per month. I would have to continue buying this to avoid a medical catastrophe in the event I get laid off and fall ill, although I do include this in the $2,500 of monthly expenses.

If you are unemployed for longer than your emergency fund lasts, do you have other safety nets? Some people could easily move in with family, get a roommate, or move to a lower cost of living area. Other people would find it much harder to do those things. I currently live with roommates, and although parents would take me in, I would never want to burden them like that unless it were a truly dire situation.

How big is your retirement portfolio? If you lost your job in a recession and market crash, and had to spend from that after going through your emergency fund, how long would that last you? This would depend on market losses, but I believe I could pull out $25k worth of Roth contributions.

Are you only responsible for yourself, or are others depending on you (spouse, kids, elderly parents, etc)? Only myself, although I would do what I could to help my parents and siblings if they ever needed it

You don't have to answer all of these questions here on this thread if you don't want to. But just some ideas to consider as you consider how big of an emergency fund you want to hold. If you think your emergency fund is probably/maybe big enough, but aren't sure, you can keep adding to it while also adding to other long term investments. Split contributions in half or in whatever ratio makes sense to you. Thank you

best wishes,
cj
HomeStretch wrote: Mon Sep 30, 2019 2:14 pm 12-month emergency fund.

Consider opening a Solo 401k. I will definitely look into it - thank you

Your temp worker employment status may negatively impact your ability to obtain a mortgage as buying a property is one of your financial goals. Agreed - I'm still a long way off from any real property purchases but it's definitely something that would hinder me. Hopefully I will not still be contracting by the time I am ready to purchase a house :D

Employment market is very good right now. Better to get the salaried position sooner rather than later. In down times, temp workers are (usually) the first to go regardless of position as it’s a quick way for companies to cut costs. Agreed, and I have admittedly been too complacent about looking for full time work, as my present company has continued to treat me well and has renewed my contract several times. But things can change very fast, as I saw during 2008.

A 40% premium is okay but paying for benefits and employer payroll taxes yourself can eat up a large chunk of that premium. When you calculate the premium hopefully you are doing an apples-to-apples comparison to a salaried worker who (usually) receives paid time off making their denominator smaller than yours when calculating hourly salary rate. Yes, the 40% is factoring in the benefits that FTEs have access to that I lack. Nevertheless, I would rather have the long-term stability of a full-time job with benefits.
Coburn wrote: Mon Sep 30, 2019 2:29 pm In your case, extend the EF to 1 year with additional rolling 3 month safety net (as discussed) as long as you continue to be a non-FT worker. I agree and appreciate your help - this seems like the safest approach. Additional funds could be taken from the I-Bonds & Roth in a truly terrible situation.

Even if your 401k can be borrowed against in tough times...don't go there. Agreed - would like to avoid this at all costs
trueblueky wrote: Mon Sep 30, 2019 2:46 pm Maybe your emergency funds needs to cover:
* Recession hits, takes months to find next gig, plus
* Next gig requires relocation (think NY to SF)

So, you need $2500/month for 12 months plus what for the move? Great point. I am something of a minimalist, so I wouldn't be willing to ship my cheap IKEA furniture across the country. I would probably acquire used furniture through Craigslist if I lost my job and ended up in a new city. My guess is that I could move for about $5,000 including transportation, security deposit on a new place, and furniture.
FelixTheCat wrote: Mon Sep 30, 2019 2:56 pm I have my own sole proprietor business and some times my invoices are months late. The first time it happened it changed my way of thinking from monthly expenses to quarterly/annual expenses. I got a budgeting tool called YNAB. YNAB helped me prepare for future expenses and taught me to budget for months in advance for all expenses planned and unplanned. Thanks! I remember this when it was just a desktop program; it seems like they have now adopted the SaaS model. Will check it out, especially since you found it helpful for dealing with the issue of intermittent income.

It has a weeks free trial period if you want to check it out. https://www.youneedabudget.com/
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Tamarind
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Re: Temp Worker - How Much Emergency Fund Do I Need?

Post by Tamarind »

If I were you I'd do 12 months, but really that's based on your own "sleep well" point when you are in between contracts. Ask yourself how long you'd like to have before you need to panic. :)

My cash holdings are almost 20% of my total liquid net worth, but that percentage is always dropping. That is made up of EF and savings for a planned home reno. Retirement funds are 75/25, no cash. Yes there is a trade-off, but an EF is not completing directly with investments esp for a young person who can't easily tap retirement accounts. The EF is there for a different purpose, IMO.
KlangFool
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Re: Temp Worker - How Much Emergency Fund Do I Need?

Post by KlangFool »

SkinnyTestaverde wrote: Mon Sep 30, 2019 4:16 pm
KlangFool wrote: Mon Sep 30, 2019 12:58 pm OP,

What is your asset allocation? Currently 70-30 consisting of the S&P 500 index and bonds, but the bonds involve credit risk as they are all in the Vanguard High Yield Fund. I purchased the fund as a 20-year-old right near the bottom in February 2009 and have held it in the Roth since. Sometimes it's better to be lucky than good. :D
SkinnyTestaverde,

I would exchange this bond fund to some other bond fund that is less correlated with the stock. This is a bad choice in term of diversification.

KlangFool
Coburn
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Re: Temp Worker - How Much Emergency Fund Do I Need?

Post by Coburn »

Do focus on finding a FT gig.

Self funding your IRA/Roth is small potatoes compared to getting back in w/FT job that has a proper 401k (plus any employer match). medical, and other goodies.

That's when your net worth can really grow.
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whodidntante
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Re: Temp Worker - How Much Emergency Fund Do I Need?

Post by whodidntante »

You are running a service business and the service is, well, whatever it is you do. I don't think that labeling what is more or less expected periods of no income an "emergency" is all that useful. It is basically the standard. What you have is lumpy income, like a lot of small business owners. You get the big payday, and then you run lean waiting on the next one.

If you continue to be a contractor, adopt a conservative asset allocation with a couple of years in fixed income, or whatever you would like. You can keep this in cash if you like, but that's not really necessary unless you just can't stand the idea of losing any money. Prepaying low-interest debt is not something I would recommend until you have plenty of fixed income to drawdown.

But overall you'll find things get a lot easier to manage if you just stop thinking in buckets, and stop trying to have buckets of money that you won't accept any loss within.

The problem with down payments is everyone seems to project a purchase in two years, but sometimes it's 6 months, 3 years, 5 years, 8 years, 20 years, or never. I would personally hate to have a huge pile of cash that long. So for a downpayment, I would keep it lumped in with my portfolio which is equity heavy because I'm willing to wait or maybe the housing market is just as bad as the stock market. But a person who wants to think they can have certainty about five years from now should consider Rick Ferri's inflation fighter portfolio, which would still include some equities.
Topic Author
SkinnyTestaverde
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Re: Temp Worker - How Much Emergency Fund Do I Need?

Post by SkinnyTestaverde »

whodidntante wrote: Mon Sep 30, 2019 6:08 pm You are running a service business and the service is, well, whatever it is you do. I don't think that labeling what is more or less expected periods of no income an "emergency" is all that useful. It is basically the standard. What you have is lumpy income, like a lot of small business owners. You get the big payday, and then you run lean waiting on the next one. That's a really good way to think about it - and it has really strengthened my resolve to build up more savings and switch to FT work

If you continue to be a contractor, adopt a conservative asset allocation with a couple of years in fixed income, or whatever you would like. You can keep this in cash if you like, but that's not really necessary unless you just can't stand the idea of losing any money. Prepaying low-interest debt is not something I would recommend until you have plenty of fixed income to drawdown. Was thinking about building up a layer of intermediate-term munis in taxable after I hit the 12 months in high yield savings

But overall you'll find things get a lot easier to manage if you just stop thinking in buckets, and stop trying to have buckets of money that you won't accept any loss within. Very true - I'm admittedly guilty of some mental accounting with the EF, "house fund," etc.

The problem with down payments is everyone seems to project a purchase in two years, but sometimes it's 6 months, 3 years, 5 years, 8 years, 20 years, or never. I would personally hate to have a huge pile of cash that long. So for a downpayment, I would keep it lumped in with my portfolio which is equity heavy because I'm willing to wait or maybe the housing market is just as bad as the stock market. But a person who wants to think they can have certainty about five years from now should consider Rick Ferri's inflation fighter portfolio, which would still include some equities.I think this is a good way to look at it, and I'm comfortable with the risk of some principal loss if I have a decent probability of ending up with a higher down payment than I would by sitting in cash
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