How big is your emergency fund?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills

How big is your Emergency Fund?

Less than $2,000
20
7%
$25,000 - $75,000
117
42%
$76,000 - $150,000
49
17%
$76,000 - $150,000
49
17%
$160,000 - $250,000
15
5%
Greater than $250,000
31
11%
 
Total votes: 281

Grt2bOutdoors
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How big is your emergency fund?

Post by Grt2bOutdoors » Tue May 24, 2011 3:19 pm

A recent article in the Wall Street Journal regarding the inability for a majority of Americans to raise or access $2,000 in an emergency has led to this poll.

How big is your emergency fund in dollars? Emergency fund is defined as totally liquid funds. That includes cash, cd's, savings account, money market funds, highly liquid government bonds including agency securities (fannie mae/freddie mac), commercial paper rated A1/P1, savings bonds. In essence, funds that are accesible within 3 business days. Anything else is not liquid as in "immediately" available.

Do not include your home equity, illiquid closely held businesses, property, land, taxable securities, IRA's. HELOC's are questionable if the bank reserves right to revoke accessibility.
Last edited by Grt2bOutdoors on Fri May 27, 2011 10:00 am, edited 1 time in total.

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Taylor Larimore
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Liquid emergency fund ?

Post by Taylor Larimore » Tue May 24, 2011 3:28 pm

Hi GRT2BOUTDOORS:
How big is your emergency fund? -- Emergency fund is defined as totally liquid funds.
We have no need for a separate emergency fund. Our portfolio is almost totally liquid.
"Simplicity is the master key to financial success." -- Jack Bogle

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Post by Sidney » Tue May 24, 2011 3:35 pm

Our entire portfolio is liquid; everything is in stock mutual funds or bond funds (or TIPS) - alll could be liquid in three business days; there'd be some tax consequences though. But we hold no cash except what is in the checking account prior to paying the next few bills.
Last edited by Sidney on Tue May 24, 2011 3:38 pm, edited 1 time in total.
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Re: Liquid emergency fund ?

Post by Grt2bOutdoors » Tue May 24, 2011 3:37 pm

Taylor Larimore wrote:Hi GRT2BOUTDOORS:
How big is your emergency fund? -- Emergency fund is defined as totally liquid funds.
We have no need for a separate emergency fund. Our portfolio is almost totally liquid.
Hi Taylor,

You truly are one of those rare breeds. :)

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Re: How big is your emergency fund?

Post by NoVa Lurker » Tue May 24, 2011 3:45 pm

GRT2BOUTDOORS wrote:A recent article in the Wall Street Journal regaring the inability for a majority of Americans to raise or access $2,000 in an emergency has led to this poll.

How big is your emergency fund in dollars? Emergency fund is defined as totally liquid funds. That includes cash, cd's, savings account, money market funds, highly liquid government bonds including agency securities (fannie mae/freddie mac), commercial paper rated A1/P1, savings bonds. In essence, funds that are accesible within 3 business days. Anything else is not liquid as in "immediately" available.

Do not include your home equity, illiquid closely held businesses, property, land, taxable securities, IRA's. HELOC's are questionable if the bank reserves right to revoke accessibility.
This has been covered many times before, but by this definition, you would pick up a lot more than what I really think of as an "emergency fund." Hence Taylor's response.

My wife and I keep our non-tax-preferred savings in a mix of corporate notes and Vanguard mutual funds, which could all be liquidated into our checking account pretty quickly (I would think in about 3 business days).

That puts us in a very high bracket in your survey, even though my usual standard for our emergency fund is only $10K, since we have secure jobs (and high credit card maxes in a reasonable worst-case scenario).

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Post by Snowjob » Tue May 24, 2011 3:52 pm

I can borrow at 1.75% against my taxable portfolio in case of an emergency at interactive brokers and not worry about selling anything.

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stemikger
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Post by stemikger » Tue May 24, 2011 3:58 pm

I have 6 months of expenses in an ING accont. Having said that I'm think of rolling over an IRA with $16,000 plus putting the $12,000 in a Roth and borrowing from that if I ever need it.

I already asked this on a seperate thread and I'm not sure it is worth all the trouble.

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Post by Sam I Am » Tue May 24, 2011 4:04 pm

Message deleted.
Last edited by Sam I Am on Wed Oct 23, 2013 1:36 pm, edited 1 time in total.

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Post by fire5soon » Tue May 24, 2011 4:09 pm

I'm the sole provider for a family of four and have a very risk averse wife. That translates into an emergency fund covering 1 year of expenses.
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G-Money
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Post by G-Money » Tue May 24, 2011 4:21 pm

Snowjob wrote:I can borrow at 1.75% against my taxable portfolio in case of an emergency at interactive brokers and not worry about selling anything.
I'll preface this by saying I've never had a margin account and I know almost nothing about investing on margin.

This chart from IB shows that if your investment drops 25%, you'll get a margin call. I read that to mean that if you had a real emergency, you couldn't access more than half of your pre-margin assets without triggering a margin call. Plus, assuming you have mostly stocks in your taxable account, you need to worry about market drops triggering a margin call.

I don't dispute that the ability to access a margin account increases your available resources to use in case of emergency, I'm just not sure how much it does so.

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Post by Grt2bOutdoors » Tue May 24, 2011 4:30 pm

G-Money wrote:
Snowjob wrote:I can borrow at 1.75% against my taxable portfolio in case of an emergency at interactive brokers and not worry about selling anything.
I'll preface this by saying I've never had a margin account and I know almost nothing about investing on margin.

This chart from IB shows that if your investment drops 25%, you'll get a margin call. I read that to mean that if you had a real emergency, you couldn't access more than half of your pre-margin assets without triggering a margin call. Plus, assuming you have mostly stocks in your taxable account, you need to worry about market drops triggering a margin call.

The one problem with margin accounts - the broker is fully reliant on outside banks providing the credit necessary to extend margin to you. Two scenarios to think about - 1)credit dries up, now your margin account is inaccessible 2)Stock market tanks - value of securities take a sharp haircut, now you have considerably less to borrow against. What now?
I don't dispute that the ability to access a margin account increases your available resources to use in case of emergency, I'm just not sure how much it does so.

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Post by Rodc » Tue May 24, 2011 4:36 pm

I answered based on "cash".

I could "cash" out non-401K and college funds withing three days, but did not count them. Or even 401K I suppose.

However if worst came to worst, the fact is they would be come part of my emergency fund.
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touchdowntodd
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Post by touchdowntodd » Tue May 24, 2011 4:46 pm

looks like im in the majority ...

cant concieve of someone having a $25k+ Efund .. but i understand everyones cost of living is different
tryin to do this right... thanks guys

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nisiprius
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Post by nisiprius » Tue May 24, 2011 4:48 pm

You know, I think the whole "emergency fund" thing needs re-thinking.

I'm grateful to Livesoft for giving me a conceptual kick in the butt on this once.

The concept makes sense when you're starting out. And it also makes sense in the context of stock investments. It probably is a concept that goes back to pre-401(k) days when most workers did not invest their own money for their retirement.

Here's what make sense. Let's say you are starting out and have close to zero in savings and in an investment portfolio.

Then it makes sense to save up, let's say the typical "six months' of something," in cash, and to save it up before putting any money into stocks. Since the typical target retirement fund is close to 90% stocks and the typical investment-book advice is similar--if not 200% stocks (sigh) that means, no "investing." And, of course, in a 401(k) where you can't get it out, but just, you know, a bank account or something.

OK. Life goes on, you have your emergency fund, now, as your investment portfolio grows, if there is a portion of it that is liquid, accessible, and doesn't fluctuate too much, that can gradually displace your dedicated cash emergency fund. Eventually, by the time your portfolio is many years of something, you don't need a segregated emergency fund because the "emergency amount" is now a small fraction of the whole portfolio, and even if you have to "sell into a bear market" you are only selling a small fraction of your portfolio into a bear market. And, hey, it's an emergency.

Perhaps, just perhaps, there is an argument against all-in-one funds like Target Retirement, because you can't selectively draw down just the bonds... but of course you can always exchange it for its components and then selectively draw down the bonds first.

As for the "six months' something," six months living expenses or whatever, really, a high priority should be to find out how the unemployment insurance in your state works, because it varies wildly from state to state. A tough subject too because you can hardly raise it with your employer! But the canonical emergency is "job loss," and what you need to have is not exactly your living expenses, but the difference between your living expenses and what unemployment will pay. Of course the big unknown is "how long you will be out of work," but I think the difference in unemployment benefits might be big enough to consider.

The weird thing, of course, is that I haven't run into any serious data-based discussions of what "emergencies" people actually run into or what the statistical size distribution is.

There's also the issue of how fast you can get to the money. Hours? A day? Three days? Five? It is sometimes amazing how the overnight delays add up, and how picky banks can be about "available" funds when you actually want them to issue a teller's check.
Last edited by nisiprius on Tue May 24, 2011 5:20 pm, edited 1 time in total.
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CABob
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Post by CABob » Tue May 24, 2011 4:49 pm

My number is either --

Zero, since I don't have any funds that I call an emergency fund.
or
A very large number since my entire portfolio is readily liquid if I really needed it.
or
Some number in between (6 digit) which would be accounts that I consider to be cash including MM funds, bank savings accounts, EE savings bonds, checking accounts, and the money currently in my wallet and the nickle I found on the sidewalk this morning.
Bob

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Post by kellyfj » Tue May 24, 2011 5:33 pm

I've had probably EVERY emergency you can think of
- Flooded basement requiring us to cover our $1k deductible
- Thousands of dollars in car repairs for two cars
- Unexpected surgeries for 2 of my dependents with 3 months of each other
- Lawsuit costing $8k so far
- Car accident requiring us to cover our $1k deductible

all in the last 18 months (yeah it's been quite a ride).

I've been able to cover it with bonuses from work and a $5k "level 1" emergency fund. My "level 2" emergency fund is $25k and I've never touched it. Which makes me wonder if I should be like nisiprius and rethink the level 2 fund (e.g. putting it in my Roth IRA).

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Post by Snowjob » Tue May 24, 2011 5:37 pm

G-Money wrote:
Snowjob wrote:I can borrow at 1.75% against my taxable portfolio in case of an emergency at interactive brokers and not worry about selling anything.
I'll preface this by saying I've never had a margin account and I know almost nothing about investing on margin.

This chart from IB shows that if your investment drops 25%, you'll get a margin call. I read that to mean that if you had a real emergency, you couldn't access more than half of your pre-margin assets without triggering a margin call. Plus, assuming you have mostly stocks in your taxable account, you need to worry about market drops triggering a margin call.

I don't dispute that the ability to access a margin account increases your available resources to use in case of emergency, I'm just not sure how much it does so.
T-reg requirements are at 50% Equity which is enforced at the end of the day, maintenance margin is 25% Equity which is enforced real time during the day. In any case, for the record I'm not holding 20k in a few stocks with the intentions of withdrawing 10 on margin in the even that I need a new car. However, if for example I have 200k I certainly wouldnt think twice about borrowing 30K in the event of a severe emergency. (Job loss not withstanding) Especially if it avoids triggering taxable gains. You can also write off your interest on your taxes.

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Post by epilnk » Tue May 24, 2011 6:04 pm

CABob wrote:My number is either --

Zero, since I don't have any funds that I call an emergency fund.
or
A very large number since my entire portfolio is readily liquid if I really needed it.
or
Some number in between (6 digit) which would be accounts that I consider to be cash including MM funds, bank savings accounts, EE savings bonds, checking accounts, and the money currently in my wallet and the nickle I found on the sidewalk this morning.
Same here. We have no need for a dedicated emergency fund; we'd just take what we need from the portfolio and rebalance.

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Post by TenS2XS » Tue May 24, 2011 7:57 pm

I'm in the same boat. I have some of my CDs designated as a part of the E fund. I don't go very long with those. And a portion of a credit union savings account to be used if quick access is needed. My spreadsheet totals them and divides by our monthly living expenses and shows me the number of months of living expenses I have earmarked.

I include those funds in my AA calculations because ideally, I won't have to use it and by not counting it I feel that my true AA would be slightly skewed. I've been advised here to not count it and I understand why, but I choose to include it.

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Re: How big is your emergency fund?

Post by grabiner » Tue May 24, 2011 8:21 pm

GRT2BOUTDOORS wrote:How big is your emergency fund in dollars? Emergency fund is defined as totally liquid funds. That includes cash, cd's, savings account, money market funds, highly liquid government bonds including agency securities (fannie mae/freddie mac), commercial paper rated A1/P1, savings bonds. In essence, funds that are accesible within 3 business days. Anything else is not liquid as in "immediately" available.
I have a virtual emergency fund in my bond allocation. While the bond allocation is in my retirement account, I could effectively sell low-risk bonds within three business days, by selling stocks in my taxable account and moving bonds to stock in the retirement account. (And the tax cost is trivial; since I have a large taxable account, I have a fair number of shares with small gains, and the gains would be wiped out by loss carryovers anyway).

Thus, although I have only a small money-market fund and checking and savings account, I consider myself to have a large emergency fund.
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Re: How big is your emergency fund?

Post by iceport » Tue May 24, 2011 8:32 pm

nisiprius wrote:You know, I think the whole "emergency fund" thing needs re-thinking.

I'm grateful to Livesoft for giving me a conceptual kick in the butt on this once.

The concept makes sense when you're starting out. And it also makes sense in the context of stock investments. It probably is a concept that goes back to pre-401(k) days when most workers did not invest their own money for their retirement.
nisiprius, I follow your whole line of reasoning, and agree in general. But what do you suggest people do for non-emergency, predictable expenses, if they don't otherwise need an emergency fund? I'm talking about expenses of various sizes: car repairs; car replacements; new roof; new deck, major appliances, etc.?

I've settled into using something like a sinking fund in a credit union savings account that I add to with every paycheck, just like I add to a defined contribution plan. The difference is, I know I'm going to use it eventually. Need a car? Pay with cash from the sinking fund. Want to upgrade your furnace? Glad that fund is there.

I can't imagine having the discipline to withdraw from a retirement portfolio for those sorts of things without losing control. If not a separate fund, what do you use? Then if you have that separate fund for the expected larger expenses of life, the beauty is, it doubles nicely as an emergency fund.

--Pete

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Re: How big is your emergency fund?

Post by epilnk » Tue May 24, 2011 8:56 pm

petrico wrote:
nisiprius wrote:You know, I think the whole "emergency fund" thing needs re-thinking.

I'm grateful to Livesoft for giving me a conceptual kick in the butt on this once.

The concept makes sense when you're starting out. And it also makes sense in the context of stock investments. It probably is a concept that goes back to pre-401(k) days when most workers did not invest their own money for their retirement.
nisiprius, I follow your whole line of reasoning, and agree in general. But what do you suggest people do for non-emergency, predictable expenses, if they don't otherwise need an emergency fund? I'm talking about expenses of various sizes: car repairs; car replacements; new roof; new deck, major appliances, etc.?

I've settled into using something like a sinking fund in a credit union savings account that I add to with every paycheck, just like I add to a defined contribution plan. The difference is, I know I'm going to use it eventually. Need a car? Pay with cash from the sinking fund. Want to upgrade your furnace? Glad that fund is there.

I can't imagine having the discipline to withdraw from a retirement portfolio for those sorts of things without losing control. If not a separate fund, what do you use? Then if you have that separate fund for the expected larger expenses of life, the beauty is, it doubles nicely as an emergency fund.

--Pete
Cars come out of the portfolio too. Every large expense does, emergency or not.

When we bought our current home we estimated the cost of renovating the seriously dreadful kitchen and held back that much of the downpayment. Since we were planning to spend it almost immediately we kept that somewhat separate as a large cash component of the portfolio. But we figured out how to make the absurd floor plan kind of work by doing a much smaller and fairly inexpensive renovation, so we rolled the difference into our regular allocation. Four years later when we decided to spend that amount on a backyard pool instead, we just paid for it out of the taxable portion of our vanguard portfolio and rebalanced. The assets we sold may or may not have been worth more in 2006 than they were in 2010 - I didn't check - but we're happy with the approach and we find it easy to manage.

Our kitchen is still cramped and tiny. But it doesn't matter so much since we're usually out by the pool. :)

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Re: How big is your emergency fund?

Post by epilnk » Tue May 24, 2011 8:56 pm

petrico wrote:
nisiprius wrote:You know, I think the whole "emergency fund" thing needs re-thinking.

I'm grateful to Livesoft for giving me a conceptual kick in the butt on this once.

The concept makes sense when you're starting out. And it also makes sense in the context of stock investments. It probably is a concept that goes back to pre-401(k) days when most workers did not invest their own money for their retirement.
nisiprius, I follow your whole line of reasoning, and agree in general. But what do you suggest people do for non-emergency, predictable expenses, if they don't otherwise need an emergency fund? I'm talking about expenses of various sizes: car repairs; car replacements; new roof; new deck, major appliances, etc.?

I've settled into using something like a sinking fund in a credit union savings account that I add to with every paycheck, just like I add to a defined contribution plan. The difference is, I know I'm going to use it eventually. Need a car? Pay with cash from the sinking fund. Want to upgrade your furnace? Glad that fund is there.

I can't imagine having the discipline to withdraw from a retirement portfolio for those sorts of things without losing control. If not a separate fund, what do you use? Then if you have that separate fund for the expected larger expenses of life, the beauty is, it doubles nicely as an emergency fund.

--Pete
Cars come out of the portfolio too. Every large expense does, emergency or not.

When we bought our current home we estimated the cost of renovating the seriously dreadful kitchen and held back that much of the downpayment. Since we were planning to spend it almost immediately we kept that somewhat separate as a large cash component of the portfolio. But we figured out how to make the absurd floor plan kind of work by doing a much smaller and fairly inexpensive renovation, so we rolled the difference into our regular allocation. Four years later when we decided to spend that amount on a backyard pool instead, we just paid for it out of the taxable portion of our vanguard portfolio and rebalanced. The assets we sold may or may not have been worth more in 2006 than they were in 2010 - I didn't check - but we're happy with the approach and we find it easy to manage.

Our kitchen is still cramped and tiny. But it doesn't matter so much since we're usually out by the pool. :)

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529 account as a source of emergency fund

Post by livesoft » Tue May 24, 2011 9:00 pm

Sinking fund? Sounds suspicious to me.

I have sold equities in taxable (I have no cash in taxable) a few times in the past 12 months in order to make ends meet. If the transaction messes up my asset allocation, then I rebalance by an exchange a suitable amount of bonds in tax-advantaged to replace the equities. The transactions are more trivial to do than typing in this post to this thread.

Need a new car? Sell $80K of equity funds in taxable.
Need to pay off the mortgage? Sell $200K of equity funds in taxable.
Need to pay college expenses for the month? Sell $5K of equity funds in taxable.
Need to pay off that no-fee 0%-interest credit card cash advance? Sell $50K of equity funds in taxable.

There is absolutely no withdrawal of any money from a retirement account for any of this.

And there really is no need for a 'separate cash fund' for any of these expenses.

But I am surprised at how many folks admit to this strategy in this thread. It is pleasantly refreshing. In other threads on emergency funds, many folks would not even admit to a two-tiered emergency fund, much less placing cash needs in a tax-advantaged account.
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Post by lmpmd » Tue May 24, 2011 9:02 pm

I have more than most in my emergency fund. But maybe in essence it's not purely an emergency fund - but a having money around/spending fund. There's a lot of possible expenses for me in the next 5 years. Things I might be spending money on. I find it hard to estimate what I might spend. My kids could go to law or medical school and I might want to help them out (even though that will spoil them). My wife might want a home renovation and I'm not always the boss (no comments). So I have 3 buckets, bricks and mortar savings account, VG money market, and short term tax exempt bond fund.

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Post by Manbaerpig » Tue May 24, 2011 10:12 pm

how does one have no cash in taxable? do you take a loan from your 401k to pay your credit card/mortgage/buy a hamburger?

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Post by scrabbler1 » Tue May 24, 2011 10:17 pm

As I have mentioned in other threads, I have different layers or tiers of funds based on their ease of accesibility and relative preservation of principal.

I would consider my "emergency fund," even though I never called any of my funds that term, to be my Tier 1 (bank checking account worth about $2,000) funds and my Tier 2 (muni bond funds worth just under $100k) funds. All have checkwriting privileges and are linked electronically.

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Post by Rob5TCP » Tue May 24, 2011 10:20 pm

I just asked the same question earlier - I changed it to emergency fund.
Here is the link - about 100 responses.

What is amazing is the size of some people's emergency fund.

http://www.bogleheads.org/forum/viewtop ... 1306291778

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Post by livesoft » Tue May 24, 2011 10:29 pm

Manbaerpig wrote:how does one have no cash in taxable? do you take a loan from your 401k to pay your credit card/mortgage/buy a hamburger?
Sorry. I have no cash in my taxable brokerage and mutual fund accounts. I have no saving accounts, no CDs, no money market fund shares, no secret stash of twenties or higher denominations in the house or wallet.

I have a checking account that a paycheck is deposited into every 2 weeks from where I pay all my bills. I live paycheck to paycheck nowadays.
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Post by KCJayhawker » Tue May 24, 2011 10:39 pm

Typically between $5-$10k. It's variable because I use it to pay unexpected expenses and increase it when possible. Probably should make a push to $15k, but that won't happen until I drop this $850/mo daycare bill for my son in the fall.

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Post by Opponent Process » Tue May 24, 2011 10:45 pm

nisiprius wrote:The concept makes sense when you're starting out.
essentially, poor people need one, rich people don't.
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Post by bpp » Tue May 24, 2011 10:47 pm

nisiprius wrote:There's also the issue of how fast you can get to the money. Hours? A day? Three days? Five? It is sometimes amazing how the overnight delays add up, and how picky banks can be about "available" funds when you actually want them to issue a teller's check.
I think this is the key thing, really. In the case of a disaster, natural, man-made or some combination (tornado, earthquake, tsunami, hurricane/typhoon, flood, nuclear meltdown, terrorist attack...), I think one should always have enough money available immediately (less than one day) to get one's family out of town and set up temporarily somewhere else, while waiting to be able to tap less immediately liquid funds.

And recall that the New York Stock Exchange was closed for a week after 9/11.

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Post by Sheepdog » Tue May 24, 2011 10:58 pm

In retirement and taking regular distributions to meet expenses, there isn't any emergency fund as such. All of my investments are needed and available to meet any expense, so isn't everything my emergency fund?
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Post by epilnk » Wed May 25, 2011 12:01 am

Opponent Process wrote:
nisiprius wrote:The concept makes sense when you're starting out.
essentially, poor people need one, rich people don't.
Basically, yes.

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Post by letsgobobby » Wed May 25, 2011 1:24 am

normally $40,000, but right now it is a combination "emergency fund/home down payment" and consequently it is temporarily larger.

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Post by bpp » Wed May 25, 2011 9:27 am

epilnk wrote:
Opponent Process wrote:
nisiprius wrote:The concept makes sense when you're starting out.
essentially, poor people need one, rich people don't.
Basically, yes.
Because...rich people never find themselves in the middle of a disaster?

Note that credit cards don't work without electricity.

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Post by huntertheory » Wed May 25, 2011 9:37 am

I think nisi has an interesting approach there. I agree that the emergency fund is important -- if not crucial -- if you're just starting out. Say the young person or couple with $X in student debt, a twelve-month rent contract, and various other liabilities and expenses. Doesn't make sense to put all your savings in your 401k and keep $100 in your bank account, living check to check. Bad things can happen.

But I agree that maybe the emergency fund can be "phased out" -- i.e. once you have taxable investments that exceed whatever the emergency fund would be that you can access.

The only difference this would make, I suppose, would be for asset allocation purposes, particularly for tax efficiency purposes. Specifically, you wouldn't have to keep $20-50K in high yield savings or short term bonds or a money market, and could allocate more of your taxable to tax efficient stocks and keep your fixed income in your tax deferred accounts.

But again, I wouldn't start phasing out the emergency fund until you well exceed that amount in your taxable portfolio, and there's nothing wrong with having a month or two of expenses in your checking account. Nobody ever went broke with cash.

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kenyan
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Post by kenyan » Wed May 25, 2011 9:40 am

Right now, the definition is fluid in our lives; our taxable account doubles as a down payment savings and an emergency fund. As a result, our emergency fund is far larger (and perhaps too conservatively invested) than we would otherwise want.

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Post by huntertheory » Wed May 25, 2011 10:30 am

Here's a follow-on question, related to volatility. If you think liabilities/future consumption should be tied to duration or volatility (i.e. retirement in 30 years weighted more to equities; college savings in 15 years a mix of equities and bonds; buy a house in five years maybe a few equities but more short term to intermediate duration bonds; wedding in six months sitting in cash/savings), what kind of duration or risk/return profile is acceptable for your emergency fund?

I would think that's a function of how big it is and how big your portfolio is. If you need $15,000 cash and your net worth is $20,000, probably need it all in cash. If you have $1,000,000 but six months of expenses for you is only around $30,000, probably can have it in whatever you want and not even look at it as a current liability?

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Post by PaddyMac » Wed May 25, 2011 11:36 am

Being self-employed we like to have $20-25K in a separate savings account that can be used for bad cash flow, but we're starting to rethink that now. We haven't touched it in a couple of years and our income has transformed itself from fairly erratic (if the phone rings you're busy or you have to cover late-paying clients), to fairly steady income due to rising royalty income paid monthly. At the moment, our income would continue for at least a year (maybe 2) if we had to suddenly stop work for a health or other emergency. So I'm thinking of reducing the savings account to just $10K.

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Post by Sam I Am » Wed May 25, 2011 11:38 am

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Post by fredflinstone » Wed May 25, 2011 11:45 am

I do not have an emergency fund. I bet Jack Bogle doesn't either. It seems unnecessary if you have lots of liquid assets in taxable accounts.

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Post by sperry8 » Wed May 25, 2011 11:53 am

I think of this very differently than most. I'm retired. And I don't want to sell my stock holdings into a bear market. What if the bear lasts a long time? Everything I've learned from Bogleheads states that I should 'stay the course'. In order to do this I keep >5 years of my money in cash/CDs/money markets. That means that I can live off my emergency portfolio for 5 years without having to sell any stocks when I don't want to.
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Post by FabLab » Wed May 25, 2011 12:32 pm

sperry8 wrote:I think of this very differently than most. I'm retired. And I don't want to sell my stock holdings into a bear market. What if the bear lasts a long time? Everything I've learned from Bogleheads states that I should 'stay the course'. In order to do this I keep >5 years of my money in cash/CDs/money markets. That means that I can live off my emergency portfolio for 5 years without having to sell any stocks when I don't want to.
This is pretty much my approach as well. Though I'm not dogmatic about it. And, if I come across an alternative approach that not only provides higher return but allows me to sleep at night as restfully, I might change it up.
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Post by renditt » Wed May 25, 2011 12:38 pm

nisiprius wrote:You know, I think the whole "emergency fund" thing needs re-thinking.

I'm grateful to Livesoft for giving me a conceptual kick in the butt on this once.

The concept makes sense when you're starting out. And it also makes sense in the context of stock investments. It probably is a concept that goes back to pre-401(k) days when most workers did not invest their own money for their retirement.

Here's what make sense. Let's say you are starting out and have close to zero in savings and in an investment portfolio.

Then it makes sense to save up, let's say the typical "six months' of something," in cash, and to save it up before putting any money into stocks. Since the typical target retirement fund is close to 90% stocks and the typical investment-book advice is similar--if not 200% stocks (sigh) that means, no "investing." And, of course, in a 401(k) where you can't get it out, but just, you know, a bank account or something.

OK. Life goes on, you have your emergency fund, now, as your investment portfolio grows, if there is a portion of it that is liquid, accessible, and doesn't fluctuate too much, that can gradually displace your dedicated cash emergency fund. Eventually, by the time your portfolio is many years of something, you don't need a segregated emergency fund because the "emergency amount" is now a small fraction of the whole portfolio, and even if you have to "sell into a bear market" you are only selling a small fraction of your portfolio into a bear market. And, hey, it's an emergency.

Perhaps, just perhaps, there is an argument against all-in-one funds like Target Retirement, because you can't selectively draw down just the bonds... but of course you can always exchange it for its components and then selectively draw down the bonds first.

As for the "six months' something," six months living expenses or whatever, really, a high priority should be to find out how the unemployment insurance in your state works, because it varies wildly from state to state. A tough subject too because you can hardly raise it with your employer! But the canonical emergency is "job loss," and what you need to have is not exactly your living expenses, but the difference between your living expenses and what unemployment will pay. Of course the big unknown is "how long you will be out of work," but I think the difference in unemployment benefits might be big enough to consider.

The weird thing, of course, is that I haven't run into any serious data-based discussions of what "emergencies" people actually run into or what the statistical size distribution is.

There's also the issue of how fast you can get to the money. Hours? A day? Three days? Five? It is sometimes amazing how the overnight delays add up, and how picky banks can be about "available" funds when you actually want them to issue a teller's check.
Agree with pretty much everything Nisi says.

The key is to have enough assets, which are both liquid, quickly accessible and stable, so if you would have to sell them in an emergency you a) get the money quickly and b) don't suffer a sizeable loss due to poor market conditions.

For me, that's the cash in various brokerage / savings accounts and also my limited term muni bond fund.

Good point also on the 6 months 'rule': I have been with my employer a long time, so in case I would get terminated, I would receive a sizeable severance package, which covers my expenses for many months.

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Post by compounder » Wed May 25, 2011 3:07 pm

To me a key aspect to the emergency fund is cash set aside in the event of the death of a spouse/significant other. Should that occur, it is reassuring to know that at a minimum one year of liquid cash is readily available. No thinking required as to which assets to liquidate, etc.

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Post by Sidney » Wed May 25, 2011 3:33 pm

compounder wrote:To me a key aspect to the emergency fund is cash set aside in the event of the death of a spouse/significant other. Should that occur, it is reassuring to know that at a minimum one year of liquid cash is readily available. No thinking required as to which assets to liquidate, etc.
Why not just leave a note.
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Re: Liquid emergency fund ?

Post by Winthorpe » Wed May 25, 2011 3:38 pm

Taylor Larimore wrote:We have no need for a separate emergency fund. Our portfolio is almost totally liquid.
Nisiprius wrote:You know, I think the whole "emergency fund" thing needs re-thinking.
I agree with this line of thinking. I don't see any need for say $20k or $50k sitting in a savings account making 0.2% for the true emergency that will likely never happen, especially for a person with a significant investment portfolio.

Now, for the typical Dave Ramsey caller or young person just starting out, I think setting emergency money aside is a great idea.

I think too many people confuse the "emergency fund" with money needed for future large purchases, like replacing an old car at some time in the future. I think it's fine and prudent to put money in a savings account for a car you expect to buy in 3 or 6 months.

I don't have money in an "emergency" fund, but should something horrible happen, I could scramble up at least $50k by Monday.

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Re: Liquid emergency fund ?

Post by Winthorpe » Wed May 25, 2011 3:40 pm

Taylor Larimore wrote:We have no need for a separate emergency fund. Our portfolio is almost totally liquid.
Nisiprius wrote:You know, I think the whole "emergency fund" thing needs re-thinking.
I agree with this line of thinking. I don't see any need for say $20k or $50k sitting in a savings account making 0.2% for the true emergency that will likely never happen, especially for a person with a significant investment portfolio.

Now, for the typical Dave Ramsey caller or young person just starting out, I think setting emergency money aside is a great idea.

I think too many people confuse the "emergency fund" with money needed for future large purchases, like replacing an old car at some time in the future. I think it's fine and prudent to put money in a savings account for a car you expect to buy in 3 or 6 months.

I don't have money in an "emergency" fund, but should something horrible happen, I could scramble up at least $50k by Monday.

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Post by abuss368 » Wed May 25, 2011 3:41 pm

Cash is King!

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