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

avalpert
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Post by avalpert » Thu May 26, 2011 10:16 am

NoVa Lurker wrote:Avalpert - I don't mean to pile on, but you should take a deep breath and read some definitions of what an emergency fund is. Maybe start here:

http://www.bogleheads.org/wiki/Emergency_fund

It is not about having cash in your pocket to bribe border patrol; it's a question of how you allocate your finances.
Okay, here is the definition in the wiki:
Funds set aside for unexpected expenses and kept separate from retirement or other investments. The quantity of emergency funds is usually specified as an integer multiple of monthly expenses, e.g., Six months to one year's worth of expenses. Emergency funds should be invested in a highly liquid, low risk vehicle (e.g., money market, bank savings account).
The goal of the emergency fund is to provide a cushion of liquidity[1] in the event of unexpected expenses.
So, the goal of the fund is "a cushion of liquidity in the event of unexpected expenses". How does my scenario not fit that - the unexpected event is the request for a bribe at the border, in this instance the liquidity needed is cash in hand.

Explain how this definition excludes my scenario?

To me, I want to feel protected against reasonably possible bad events - job loss, huge stock market crash, a natural disaster that might actually affect me, etc.
See, and for me I want to be protected against even unlikely, or seemingly impossible or unimagined, bad events so long as the cost to do so is not unreasonable.

Your emergency fund seems to be more about peace of mind (in which case those who don't need the fiction of a separate fund for peace of mind choose not to have it) while mine is actually to fund emergencies - it is about risk management.

My proposition here would be that, using the definition from the wiki, you should be thinking about it as a true risk management tool and true risk management is not limited to 'reasonably possible' events.

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Random Musings
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Post by Random Musings » Thu May 26, 2011 10:47 am

If need be, an emergency fund could include tax-deferred assets (taking into consideration penalties and taxes), home equity, basically all of one's assets.

RM

livesoft
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Post by livesoft » Thu May 26, 2011 10:50 am

GRT2BOUTDOORS wrote:Wow! What an interesting string of comments.
IMO, cash is still the number 1 "greaser of palms" to make things happen. Sometimes you need that if you want to jump on an opportunity or need to get out of a jam quick (like in a mugging - i'm sure they would not accept Mastercard, Visa or 50 shares of VTSMX settling in two days to let me go quick).
My wife was mugged before we were married. The perps made her drive around in her car at gunpoint while they went through her purse, so technically she was also kidnapped. They found about $2 in coins in her purse and no other cash. Thankfully, she was unhurt.

The police caught the muggers a few days later due to evidence they left in the car. They went to jail.
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Post by Sidney » Thu May 26, 2011 11:34 am

avalpert wrote:
NoVa Lurker wrote:Avalpert - I don't mean to pile on, but you should take a deep breath and read some definitions of what an emergency fund is. Maybe start here:

http://www.bogleheads.org/wiki/Emergency_fund

It is not about having cash in your pocket to bribe border patrol; it's a question of how you allocate your finances.
Okay, here is the definition in the wiki:
Funds set aside for unexpected expenses and kept separate from retirement or other investments. The quantity of emergency funds is usually specified as an integer multiple of monthly expenses, e.g., Six months to one year's worth of expenses. Emergency funds should be invested in a highly liquid, low risk vehicle (e.g., money market, bank savings account).
The goal of the emergency fund is to provide a cushion of liquidity[1] in the event of unexpected expenses.
So, the goal of the fund is "a cushion of liquidity in the event of unexpected expenses". How does my scenario not fit that - the unexpected event is the request for a bribe at the border, in this instance the liquidity needed is cash in hand.

Explain how this definition excludes my scenario?

To me, I want to feel protected against reasonably possible bad events - job loss, huge stock market crash, a natural disaster that might actually affect me, etc.
See, and for me I want to be protected against even unlikely, or seemingly impossible or unimagined, bad events so long as the cost to do so is not unreasonable.

Your emergency fund seems to be more about peace of mind (in which case those who don't need the fiction of a separate fund for peace of mind choose not to have it) while mine is actually to fund emergencies - it is about risk management.

My proposition here would be that, using the definition from the wiki, you should be thinking about it as a true risk management tool and true risk management is not limited to 'reasonably possible' events.
I think it is more a question of common usage & understanding of the term. I doubt most people consider cash in their pocket as an emergency fund. Maybe I am wrong -- try a poll.

As to cash in the sock drawer (or safe), I believe that topic was thrashed to oblivion once before.

In any case, "pocket money" sitting in zero return assets isn't really the issue raised by the anti-cash crowd. The emergency fund question relates to tying up larger amounts of money (e.g. months or years of expenses) in a zero return asset.
I always wanted to be a procrastinator.

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Post by SP-diceman » Thu May 26, 2011 11:35 am

avalpert wrote: See, and for me I want to be protected against even unlikely, or seemingly impossible or unimagined, bad events so long as the cost to do so is not unreasonable.
Yeah, but were talking emergency funds,
I keep that money in my “reasonable unimagined events” fund.

(very, very, very, difficult to plan for since its “unimagined”)


Thanks
SP-diceman

lazyday
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Post by lazyday » Thu May 26, 2011 11:46 am

bpp wrote:None of the cards were useful when/where there was no power. Places that did have power had no communications network for a while (landlines, cell phones, internet), so credit cards could not be used. One of the major banks' ATM network also went down, so its customers could not get cash even if they had power where they lived. All this in one of the most technologically advanced countries in the world.
Thanks.

This is making me rethink avoiding holding over $100 cash at home.

Much as I hate to have cash around, I might move up to $300 or $500, in cash or cash and travellers checks. (On top of existing credit cards, maybe two thousand minimum in bank accounts, min 1k Ibonds, plus portfolio.)

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Post by Scott S » Thu May 26, 2011 11:51 am

Info on mine is in my sig. What's interesting to me is how much animosity the idea of holding several months' worth of cash outside of one's AA can create. :wink:

- Scott
My Plan: (Age-10)% in bonds until I reach age 60, 50/50 thereafter. Equity split: 50/50 US/Int'l, Bond split: 50/50 TBM/TIPS.

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Re: Liquid emergency fund ?

Post by Fallible » Thu May 26, 2011 12:54 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.
A "totally liquid" portfolio is the key. I think it ties in with what Jonathan Clements has said about emergency savings, or at least six months' worth of them because he did advocate "some" emergency money. In his '98 book, "25 Myths You've Got to Avoid - if you want to manage your money right," he calls six months worth of living expenses in a savings account or CD "utter bunk" because the money would be "ravaged by inflation and taxes." He also wrote about this in his WSJ columns and got some flack for it (I think at one point he said he had a month's worth of emergency savings). I and a few other investors I knew decided back then to follow his advice and we're glad we did.

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Post by bpp » Thu May 26, 2011 7:15 pm

lazyday wrote:
bpp wrote:None of the cards were useful when/where there was no power. Places that did have power had no communications network for a while (landlines, cell phones, internet), so credit cards could not be used. One of the major banks' ATM network also went down, so its customers could not get cash even if they had power where they lived. All this in one of the most technologically advanced countries in the world.
Thanks.

This is making me rethink avoiding holding over $100 cash at home.
Me too. :)
Much as I hate to have cash around, I might move up to $300 or $500, in cash or cash and travellers checks. (On top of existing credit cards, maybe two thousand minimum in bank accounts, min 1k Ibonds, plus portfolio.)
I wouldn't expect travellers checks to be very useful. Most people are not very familiar with them.

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Post by bpp » Thu May 26, 2011 7:17 pm

NoVa Lurker wrote:I live in Virginia, so I am not buying earthquake insurance or keeping an extra $5K in a safe at home in case of an earthquake!
You do get hurricanes there though, don't you?
Same considerations would apply.

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Re: Liquid emergency fund ?

Post by Scott S » Thu May 26, 2011 7:35 pm

Fallible wrote:I think it ties in with what Jonathan Clements has said about emergency savings, or at least six months' worth of them because he did advocate "some" emergency money. In his '98 book, "25 Myths You've Got to Avoid - if you want to manage your money right," he calls six months worth of living expenses in a savings account or CD "utter bunk" because the money would be "ravaged by inflation and taxes." He also wrote about this in his WSJ columns and got some flack for it (I think at one point he said he had a month's worth of emergency savings).
That's kinda strong language for 6 months' worth of cash. Doesn't seem like the amount of interest an FDIC or MM account would pay on that sum would trigger much for taxes, and if inflation ate it fast enough to cause trouble, that would be its own emergency.

But then, I'll cut him a little slack -- in 1998, it was madness to be investing in anything but the high-flying stock market. :lol:

- Scott
My Plan: (Age-10)% in bonds until I reach age 60, 50/50 thereafter. Equity split: 50/50 US/Int'l, Bond split: 50/50 TBM/TIPS.

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Post by livesoft » Thu May 26, 2011 8:07 pm

bpp wrote:
NoVa Lurker wrote:I live in Virginia, so I am not buying earthquake insurance or keeping an extra $5K in a safe at home in case of an earthquake!
You do get hurricanes there though, don't you?
Same considerations would apply.
True. Folks usually have a few supplies at hand for natural disasters and a go-bag. And if they had to buy them at the last moment, they would cost less than $100. So there would be no real need for $5K at home or in the bank for a hurricane. Better would be a tanked-up SUV that could drive through 1-foot of water and over or around fallen trees, so that one could leave the affected area without a hassle.

In the disasters that have affected me, cash was useless.
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Post by JW-Retired » Thu May 26, 2011 8:15 pm

livesoft wrote: Two phrases: "tax-loss harvesting" and "capital loss carryover".
I will not be paying taxes on any capital gains for quite a long time.

But yes, taxes would be a concern in many cases.
I have TLH capital loss carryover but I'd rather use it against income at $3K/year forever. A nice car or two would use a lot of it up.

What do you say about the simple investment diversity issue?
JW

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Post by livesoft » Thu May 26, 2011 8:26 pm

JW Nearly Retired wrote:
livesoft wrote: Two phrases: "tax-loss harvesting" and "capital loss carryover".
I will not be paying taxes on any capital gains for quite a long time.

But yes, taxes would be a concern in many cases.
I have TLH capital loss carryover but I'd rather use it against income at $3K/year forever. A nice car or two would use a lot of it up.
It's true that I would rather use up the losses when I am retired and withdrawing from my taxable account tax-free. That way, I can convert IRAs to Roths while in a zero or low tax bracket. However, that's no reason to have cash in a low-interest taxable account. And my carryover losses are substantial, so a car purchase would not make a dent in the amount anyways in my situation. (And I wouldn't pay $80K today or in the past for a car.)
What do you say about the simple investment diversity issue?
JW
Explain please.
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Post by JW-Retired » Fri May 27, 2011 7:52 am

livesoft wrote:Quote:
What do you say about the simple investment diversity issue?
JW

Explain please.
livesoft
livesoft,
I think you would agree that there is a small but finite probablility some kind of crazy event could cut you off from your brokerage account for an intolerable period. Could be something personal like your account was hacked, or could be national like an EMP attack or a 46 foot tsunami wiping out Manhattan. Could be anything. Whatever the small risk of this event occuring might be, having some other type of account in a CU/bank too clearly reduces your overall risk by diversification. At least some of the disasters that can be dreamed up would not paralyze a brick and mortar bank.

Furthermore, I'm not so convinced that the chance of some wild unforseen disaster is really all that small. Stuff happens.
JW

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Post by livesoft » Fri May 27, 2011 9:03 am

We have taxable brokerage accounts at 3 different institutions. We have checking accounts at 2 different institutions, though one has had basically a $0.00 balance since it was opened. We have retirement accounts at 4 different institutions. We have 2 jobs in completely different fields. We have family. My spouse is a trained member of a CERT. We live between two ponds stocked with fish. Our yard has edible berries and other plants growing in it. We have widely geographically located friends and family. We are financially independent. We do not live in Libya. We are not sailing a yacht from Somalis to the Seychelles. We are not trying to escape across a border where cash & gold are needed for bribes.

We do not need ready cash in case a 'deal' at a garage sale comes along.

In crazy events that I have lived through, ready cash did not help out at all. While our portfolio has no cash, it is also not 100% stocks. We have plenty of short-term bond funds in our retirement accounts.

Don't you think it is surprising that no one has admitted they needed to use more than what was in their checking account the first week of an emergency?
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Post by avalpert » Fri May 27, 2011 9:16 am

livesoft wrote:
Don't you think it is surprising that no one has admitted they needed to use more than what was in their checking account the first week of an emergency?
Not at all. We are talking about rare risks occurring and you are holding up as evidence that your single life hasn't experienced it (yet) and the possibly few thousand people who have read this post no offering an experience that fits your needs - what a ridiculously minuscule sample from which you draw bold conclusions.

As I said before, it will probably work out for you but is poor risk management and for those for whom it doesn't work out the cost can be extraordinary - so hardly seems worth taking the risk. But go for it, I didn't begrudge those who made a fortune off of MBSs and were lucky enough before the unexpected risk showed up either why would I begrudge you the few basis points on your portfolio by not taking basic liquidity insurance positions.

Really, your strong positioning here is no more rational than those who though Dow 30,000 was really the most likely outcome of the tech boom - except they had far more potential upside in being right (even if the downside was more likely). Sometimes, you protect the extremely unlikely downside when the potential upside of not doing so is small.

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Post by Grt2bOutdoors » Fri May 27, 2011 9:32 am

livesoft wrote:We have taxable brokerage accounts at 3 different institutions. We have checking accounts at 2 different institutions, though one has had basically a $0.00 balance since it was opened. We have retirement accounts at 4 different institutions. We have 2 jobs in completely different fields. We have family. My spouse is a trained member of a CERT. We live between two ponds stocked with fish. Our yard has edible berries and other plants growing in it. We have widely geographically located friends and family. We are financially independent. We do not live in Libya. We are not sailing a yacht from Somalis to the Seychelles. We are not trying to escape across a border where cash & gold are needed for bribes.

We do not need ready cash in case a 'deal' at a garage sale comes along.

In crazy events that I have lived through, ready cash did not help out at all. While our portfolio has no cash, it is also not 100% stocks. We have plenty of short-term bond funds in our retirement accounts.

Don't you think it is surprising that no one has admitted they needed to use more than what was in their checking account the first week of an emergency?
True - though in early 2009, just about the same time the market melted down - both my spouse and I, though employed in completely different fields and having a strong family network nearly lost our jobs at the same time. It was within a near 90% certainty at at the time. That "o no" bucket allowed us to sleep well, even though we had a near 90% certainty of unemployment. My checking account balance alone would not have been sufficient to carry us through.

There is one other point I'd like to bring out - do you notice the one thing in common with all that you listed above - all of those institutions where you likely hold accounts (brokerage) likely rely upon financing from banks, the same banks that were withholding liquidity back in the meltdown crisis - some had it, many did not have it to give out or lend. Now, you are partially dependent on those 3 brokerage accounts - I can practically guarantee you that although different institutions, they likely shop at the same banks for financing. Have you thought of that? If the one stop shopping place for financing closed up - what would you do then? You can respond with sell your investments - but the catch here is when everyone is running for the door at the same time - guess what? some are bound to be trampled. Now, institutions have a much easier time exiting because they have tons of "high paid staff" to monitor risk - can any individual say the same? Although having cash yields nil in pure financial terms, one could also make the argument that having such "real liquidity" in times of crisis will prove it's enormous value.
Had there not been widespread intervention back then - well, one can just think of some scenarios - 1929; 1933 or much much worse.

As far as the fish and berries argument - people are nomadic, they will travel as far as necessary to obtain food for themselves. I think it'd be much a different story if you said you had a "turret with an automatic weapon" to guard your food supplies. Ponds can be over-fished as well. It pays to maintain some insurance to protect your assets. :wink:

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Post by PS 5@50 » Fri May 27, 2011 9:34 am

Great Poll and very interesting commentary. I have been somewhat surprised by this Board's emphasis on emergency funds as I tend to buy into the "liquid assets" school of thought: If I have a major emergency, I'll sell some investments, the tax implications will be secondary at that point to the real emergency.

Two thoughts and suggestions:

1. Given the fairly well articulated arguments from Nisi (and others) I'd suggest that someone strongly take a look at the "Asking Portfolio Questions" sticky and think about modifying the reference to Emergency Funds that doesn't have much context. Frequently I see the board's response to portfolio suggestions initially respond to the poster relative emergency fund and I think we can agree it is not as black and white as perhaps some believe.

2. Another useful analogy in looking at this is to term life insurance. When you are relatively young and have a family but not a significant nest egg, term life insurance makes sense. As you get older and build investments, you effectively "self-insure". I think the same is true for emergency funds. They are useful when you are starting out, but pretty meaningless once you have a couple years salary in investments.

PS
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Post by bpp » Fri May 27, 2011 9:53 am

livesoft wrote:Don't you think it is surprising that no one has admitted they needed to use more than what was in their checking account the first week of an emergency?
No, because this is the Bogleheads board. I keep enough cash in my (equivalent of a) checking account that had it been necessary (say Fukushima Daiichi had gone full China Syndrome when the wind was blowing our way), I could have relocated the family to another part of the country while waiting for less liquid assets to be liquidated. Fortunately it hasn't come to that.
Last edited by bpp on Fri May 27, 2011 7:01 pm, edited 1 time in total.

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Post by JW-Retired » Fri May 27, 2011 10:03 am

livesoft wrote:We have taxable brokerage accounts at 3 different institutions. We have checking accounts at 2 different institutions, though one has had basically a $0.00 balance since it was opened. We have retirement accounts at 4 different institutions.
Didn't realize you had 3 brokerage accounts! That adds a lot of geographical and institutional diversification. I have one taxable brokerage account and one CU savings account and retirement accounts at VG. A different kind of diversification but less of it.
Peace.

I still prefer my 6-months of cash in savings.
JW

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Post by livesoft » Fri May 27, 2011 10:07 am

GRT2BOUTDOORS wrote:.... My checking account balance alone would not have been sufficient to carry us through.
I have already admitted that our checking account balance would not last more than 2 weeks (we are living paycheck to paycheck) unless we started paying the minimum on our credit cards. However, there are investments beyond the checking account just as you had.
As far as the fish and berries argument - people are nomadic, they will travel as far as necessary to obtain food for themselves. I think it'd be much a different story if you said you had a "turret with an automatic weapon" to guard your food supplies. Ponds can be over-fished as well. It pays to maintain some insurance to protect your assets. :wink:
Here is the reality when the power fails for a week: All the neighbors start giving you all the frozen foods they have in their freezers. You cook the food outside on your propane grill. If there are nomads roaming to steal your food, do you think they will care about a wad of your paper money?

As with bpp, we have resources to evacuate and leave the area of a natural disaster. Indeed, we have done so in the past.

So while I don't begrudge anyone from keeping large amounts of cash in their home safe, I question whether it is simply a fake peace of mind or if it is really useful to have. So far, I have not seen any evidence that it is useful for me to have. Furthermore, the Japanese experience with their home cash boxes during the March tsunami suggests it did people no good.

I think it is better to be prepared.
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Post by Grt2bOutdoors » Fri May 27, 2011 10:21 am

@ Livesoft - agreed. I have an extra propane tank kept full, a freezer stocked full, berry bushes, canned food, bottled water, a "go" bag (actually two), first aid kit, extra batteries, chem lights, lead emitting tube with the accessories, sharpened implements and "cash".

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Post by evelynmanley » Fri May 27, 2011 10:36 am

My emergency solution:

$250 in one-dollar bills and several rolls of quarters in my earthquake (or fire, whatever) emergency backpack in the hall closet and the same amount in my house safe. $100 in one-dollar bills and rolls of quarters in my emergency kit in my car. This is for peace of mind, which outweighs any concerns that this gets stolen.

3 credit cards with $30k line of credit on each, no outstanding balance on any of them.

I keep a typical balance of $15k in a BOFA business checking account, because I want a brick-and-mortar bank nearby where I can easily access an ATM and talk to humans face-to-face if there are any problems. Also this account is linked to my grown children's BOFA accounts in case *they* have an emergency and need some cash immediately.

$20k in Ally "high-yield" savings. This might seem too much to be sitting around in a paltry 1% account, but this is more for a sense of security than anything else, mostly in case my children might have a true emergency--they travel overseas quite a bit. (I'm a worrier.)

$90k in several Ally 5-year CDs @ 2.39%.

The rest is invested in Vanguard ROTHs and IRAs.

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Post by GeorgeMichaelBluth » Fri May 27, 2011 10:56 am

evelynmanley wrote:My emergency solution:

$250 in one-dollar bills and several rolls of quarters in my earthquake (or fire, whatever) emergency backpack in the hall closet and the same amount in my house safe. $100 in one-dollar bills and rolls of quarters in my emergency kit in my car. This is for peace of mind, which outweighs any concerns that this gets stolen.
One-dollar bills??? I think I know where to find you in case of said emergency... :wink:

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Post by SP-diceman » Fri May 27, 2011 11:14 am

GeorgeMichaelBluth wrote:
evelynmanley wrote:My emergency solution:

$250 in one-dollar bills and several rolls of quarters in my earthquake (or fire, whatever) emergency backpack in the hall closet and the same amount in my house safe. $100 in one-dollar bills and rolls of quarters in my emergency kit in my car. This is for peace of mind, which outweighs any concerns that this gets stolen.
One-dollar bills??? I think I know where to find you in case of said emergency... :wink:
It would be tough to have planned correctly for disaster, break out your crisp $100 bill and have someone tell you: “sorry cant make change for that“. :)


Thanks
SP-diceman

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Post by livesoft » Fri May 27, 2011 11:27 am

^ One wouldn't need to stockpile spare toilet paper with such a stash.
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Post by tadamsmar » Fri May 27, 2011 11:51 am

I think everyone should monetize this discussion.

The question should be: What's the cheapest way to cover emergencies?

This requires some estimates of the probability of needing various levels of cash in an emergency, estimates of rates or return, etc.

And it has to be different depending on your individual options for accessing funds and/or borrowing.

The downside of keeping a $25,000 emergency fund in low interest bearing account is your opportunity cost vs putting it in your long-term asset allocation. Is it worth the cost?

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Post by malloc » Fri May 27, 2011 12:53 pm

After reading this blog I have had a reserve fund...........several times.
Something that has not been mentioned here is the psychological effect.
If living paycheck to paycheck, the possibilities one even considers are fairly limited.
Decide on your AA and stick with it. Not that this is bad.

With a few $$ in the bank, I found myself open to considering some other possibilities.
No I a not talking about silly investments.
A lot lf thought went into "do I really want a mortgage in retirement?"
The math does not change as one approaches retirement ,but the "marginal utility" does.

Other possibilitied come to mind as well when you have a few unobligated $$ in the bank.
The change in one's point of view is quite remarkable.

By the way, I am currently rebuilding my fund......again.

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Post by Rodc » Sat May 28, 2011 8:49 am

bpp wrote:
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.
By some definition if you are rich you have lots of money, so you don't need to play the budget by envelop game. You have a very large margin of error, so you do not need to play the envelop game.

Banks don't work without electricity either so, so by that logic you better keep a few thousand dollars in cash at home.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Post by AndroAsc » Sat May 28, 2011 6:31 pm

I'm amazed by the many responses we get here that typically says "I don't need a liquid emergency fund, I can always sell assets to cover it".

Really?

Technically, it is correct. But I find this plan problematic.

What if you need an emergency fund and it coincides with a market downturn? You would be forced to liquidate assets a point where you really do not want to. Sure, you could say "I can sell my bonds", but what happens if both bonds and stocks are down? And even if you sell the asset class that has not dropped the least, your asset allocation is also going to be out of proportion. Similar considerations if you sell at a market peak, you will be unnecessarily taxed for capital gains. Again, you can do this buy selling bonds, but your asset allocation is going to be out proportion.

And what happens if one emergency comes after another? How long are you going to leave your portfolio out of proportion?

I think the problem with this mentality is that many people think that their taxable investments are different from their 401k/IRA investments. They are not. Both are meant for retirement. Both should not be touched. Period.

Another popular one I've seen is "I'll just borrow from <insert> that has a low interest rate of 1-2%"

Even if it is a low interest rate, I still feel it is risky. As before, Murphy's Law, crap will happen simultaneously. You may wreck your car and need to pony up a few thousand bucks, and next month you lose your job, the ceiling from your home collapses due to some severe storm as a result you end up in the hospital lose part of your physical ability that will require 2yrs of rehabilitation and definitely prevent you from performing the duties of your previous job that you lost btw... you get the idea. The last thing you need is to have a loan hovering above your head...

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Post by Sidney » Sat May 28, 2011 8:02 pm

Similar considerations if you sell at a market peak, you will be unnecessarily taxed for capital gains. Again, you can do this buy selling bonds, but your asset allocation is going to be out proportion.
Assuming you don't have tax loss carry-forwards (which means you either weren't invested in 2008-09 or forgot to TLH), you make the most tax efficient sale on the taxable side and re-balance in tax-deferred.
I always wanted to be a procrastinator.

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Post by livesoft » Sat May 28, 2011 8:15 pm

AndroAsc wrote:I'm amazed by the many responses we get here that typically says "I don't need a liquid emergency fund, I can always sell assets to cover it".

Really?
Yes, really. What would satisfy you? If I had $2 million in a stable value fund in my IRA, would that be enough? Or would I still need $5000 under my mattress in $20 bills?
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KCJayhawker
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Post by KCJayhawker » Sun May 29, 2011 8:01 am

evelynmanley wrote:My emergency solution:

$250 in one-dollar bills and several rolls of quarters in my earthquake (or fire, whatever) emergency backpack in the hall closet and the same amount in my house safe. $100 in one-dollar bills and rolls of quarters in my emergency kit in my car. This is for peace of mind, which outweighs any concerns that this gets stolen.

3 credit cards with $30k line of credit on each, no outstanding balance on any of them.

I keep a typical balance of $15k in a BOFA business checking account, because I want a brick-and-mortar bank nearby where I can easily access an ATM and talk to humans face-to-face if there are any problems. Also this account is linked to my grown children's BOFA accounts in case *they* have an emergency and need some cash immediately.

$20k in Ally "high-yield" savings. This might seem too much to be sitting around in a paltry 1% account, but this is more for a sense of security than anything else, mostly in case my children might have a true emergency--they travel overseas quite a bit. (I'm a worrier.)

$90k in several Ally 5-year CDs @ 2.39%.

The rest is invested in Vanguard ROTHs and IRAs.
That part is evident by your need to keep several stashes of cash including one in your car...

mcblum
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efund

Post by mcblum » Sun May 29, 2011 8:53 am

Let's face it: We all have different circumstances. I have a CC pension which lightens up my need for an efund. I also have a job. My wife, working for a private company, could be let go if the company needs to tighten up. Therefore, she feels the need, even though we could live on my pension alone, to keep 10k in a savings account. Better to have it and not need it then need it and not have it.

Re those people who are short in their retirement accounts:
I do not believe that all of them are crazy spenders. Most people who live from paycheck to pay check need every cent to support a modest life style and are at the whim of the economy. Sometimes, after expenses, there is really nothing left. Saving can be very hard on a limited income.

I am 67 and I have only had the discretionary income and the knowledge to invest for about twenty years. I did not know what a mutual fund was before 1991. I wish they taught Bogleheadism in high school!
This is one reason why I am still working and need to work for about six more years. It is tough to catch up but I'm doing it.
Marty

matt
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Post by matt » Sun May 29, 2011 10:24 am

livesoft wrote:We have taxable brokerage accounts at 3 different institutions. We have retirement accounts at 4 different institutions.
Does anyone remember back in 1999 how some investors thought they were diversifying by splitting their assets between 5 U.S. Large Growth funds? Sure, they reduced their unsystematic risk a little bit, but it did not change their systematic risk at all.

The same thing applies with having many brokerage accounts. Yes, you are protecting against a problem occurring at just one brokerage, but you are ignoring the "systematic" risk that I pointed out earlier: if the financial markets are closed, you can not access any of your brokerage accounts. Brokerage account "diversification" is not an effective strategy in and of itself.

An interesting question is also which is more likely, a problem with a single account being shut off or the market's closing and shutting off all of them. It would seem like a single account problem is more likely, but so far in my investing lifetime that hasn't happened, but a market closing has.

norm
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Post by norm » Sun May 29, 2011 11:06 am

Having grown up in very poor circumstances it gives me a sense of security to know that I have enough cash (CDs, savings account and a short term bond fund) to cover any emergency or to make a large purchase. Every so often as the emergency fund increases I take X amount and switch it to my portfolio.

As a retired widower my emergency fund gives me the peace of mind of knowing that I can rely on myself if a real emergency arises and don't have to go to one of my children for help.

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market timer
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Post by market timer » Sun May 29, 2011 11:19 am

JW Nearly Retired wrote:I have TLH capital loss carryover but I'd rather use it against income at $3K/year forever. A nice car or two would use a lot of it up.
I don't understand this comment. Is there a way to convert tax losses into automobiles?

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House Blend
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Post by House Blend » Sun May 29, 2011 11:57 am

market timer wrote:
JW Nearly Retired wrote:I have TLH capital loss carryover but I'd rather use it against income at $3K/year forever. A nice car or two would use a lot of it up.
I don't understand this comment. Is there a way to convert tax losses into automobiles?
If you sold equities to buy a car, then the realized gain (if any) would cancel against previously realized losses. All else being equal, you'd rather use those losses to deduct $3K/year from your gross income, saving tax at your marginal rate. Buying the car means some of those losses are only sparing you from the lower LT capital gains rate.

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market timer
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Post by market timer » Sun May 29, 2011 12:09 pm

House Blend wrote:
market timer wrote:
JW Nearly Retired wrote:I have TLH capital loss carryover but I'd rather use it against income at $3K/year forever. A nice car or two would use a lot of it up.
I don't understand this comment. Is there a way to convert tax losses into automobiles?
If you sold equities to buy a car, then the realized gain (if any) would cancel against previously realized losses. All else being equal, you'd rather use those losses to deduct $3K/year from your gross income, saving tax at your marginal rate. Buying the car means some of those losses are only sparing you from the lower LT capital gains rate.
Thanks, for a moment I thought there could be something more promising here.

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Post by epilnk » Sun May 29, 2011 1:31 pm

AndroAsc wrote:I'm amazed by the many responses we get here that typically says "I don't need a liquid emergency fund, I can always sell assets to cover it".

Really?

Technically, it is correct. But I find this plan problematic.

What if you need an emergency fund and it coincides with a market downturn? You would be forced to liquidate assets a point where you really do not want to. Sure, you could say "I can sell my bonds", but what happens if both bonds and stocks are down? And even if you sell the asset class that has not dropped the least, your asset allocation is also going to be out of proportion. Similar considerations if you sell at a market peak, you will be unnecessarily taxed for capital gains. Again, you can do this buy selling bonds, but your asset allocation is going to be out proportion.

And what happens if one emergency comes after another? How long are you going to leave your portfolio out of proportion?

I think the problem with this mentality is that many people think that their taxable investments are different from their 401k/IRA investments. They are not. Both are meant for retirement. Both should not be touched. Period.
Both should not be touched? You clearly have a very different relationship with money than I have. Our taxable account is there to be used - for college (we don't max the 529s), for retirement, for emergencies, for cars, for home improvements, even (gasp!) for vacations. If we left it untouched we would probably fund a very nice retirement, of course, but we prefer to smooth consumption.

In the serial disaster scenario above the whole thing can be spent down. This leaves us with a more modest retirement regardless of what the market is doing - $10k of cash won't have made much if any difference since we'd be greatly exceeding the reserve. In the smaller disaster, where a $10k expense occurs during a 50% bond and equity drop, the $10k emergency costs us $20k in the absence of a $10k cash reserve. I'm fine with that.

Obviously this strategy is only for people who are well along in their savings goals and would be inappropriate for anyone that hadn't reached the point where they could absorb this (or a much larger outlay). We maintained a generous efund during our earlier investment years but we no longer consider it important. Of course cash can easily build up in our direct deposit account - we don't rush to invest it. But we don't have a target reserve either.

But so what if I'm forced to liquidate "when I don't want to"? I don't market time my emergencies, and long term I'm going to do best by optimizing the high probability events, not the low probability events. My asset allocation might be out of proportion for a day if I log in immediately, or a year if my lazy butt didn't deal with it at all. Probably a couple of weeks knowing me but a temporary shift in my portfolio balance is not urgent and in an actual emergency I doubt this would be a priority.

Avoiding capital gains is never a primary goal. While I try to optimize tax efficiency of the total portfolio, I still consider gains to be a good problem to have. I don't avoid taxes by making sure the asset doesn't increase in value.

It seems that some here are trying to plan for the perfect emergency. My strategy is to plan the rest of my life; when an emergency arises I will throw money at it to try to make it go away. But I won't have a large stash of ready cash to throw until the power is back on and markets reopen.

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Post by AndroAsc » Sun May 29, 2011 2:29 pm

epilnk wrote:Both should not be touched? You clearly have a very different relationship with money than I have. Our taxable account is there to be used - for college (we don't max the 529s), for retirement, for emergencies, for cars, for home improvements, even (gasp!) for vacations. If we left it untouched we would probably fund a very nice retirement, of course, but we prefer to smooth consumption.
I guess the thing that you are missing is that whenever someone says "I'll liquidate XYZ to raise cash", I am assuming that person is selling something from his taxable investments (not tax deferred). The issue I see here is that many people equate tax-deferred investments for retirement and taxable investments as somehow not for retirement(?), which is not logical.

I think the distinction I am making is between taxable investment money held in brokerages and taxable non-investment money held in the bank. You spend taxable non-investment money, but taxable investment money should for all purposes be used for retirement and not liquidated to raise cash for an emergency.

An emergency fund in my opinion is a buffer zone that one creates to prevent the situation where you will need to sell your retirement portfolio assets (be it in a 401k on in a taxable brokerage account). I may be quite dogmatic about this, but any cashing out of my portfolio before retirement even in an emergency is a big no-no.

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Post by Sidney » Sun May 29, 2011 2:39 pm

I think the distinction I am making is between taxable investment money held in brokerages and taxable non-investment money held in the bank. You spend taxable non-investment money, but taxable investment money should for all purposes be used for retirement and not liquidated to raise cash for an emergency.
In an emergency, money is money. The money doesn't know or care what it is being used for. If you had a finite e-fund and it was exhausted (say for an unexpected medical emergency), you'd still tap your investment stash if your roof blew off in a tornado -- right? Or are you saying if you tapped out your e-fund and your kid needed a bone marrow transplant that you would not dip into your retirement fund?

So to me, the line between an emergency fund and other taxable funds is artificial.
I always wanted to be a procrastinator.

epilnk
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Post by epilnk » Sun May 29, 2011 3:08 pm

AndroAsc wrote:
epilnk wrote:Both should not be touched? You clearly have a very different relationship with money than I have. Our taxable account is there to be used - for college (we don't max the 529s), for retirement, for emergencies, for cars, for home improvements, even (gasp!) for vacations. If we left it untouched we would probably fund a very nice retirement, of course, but we prefer to smooth consumption.
I guess the thing that you are missing is that whenever someone says "I'll liquidate XYZ to raise cash", I am assuming that person is selling something from his taxable investments (not tax deferred). The issue I see here is that many people equate tax-deferred investments for retirement and taxable investments as somehow not for retirement(?), which is not logical.

I think the distinction I am making is between taxable investment money held in brokerages and taxable non-investment money held in the bank. You spend taxable non-investment money, but taxable investment money should for all purposes be used for retirement and not liquidated to raise cash for an emergency.

An emergency fund in my opinion is a buffer zone that one creates to prevent the situation where you will need to sell your retirement portfolio assets (be it in a 401k on in a taxable brokerage account). I may be quite dogmatic about this, but any cashing out of my portfolio before retirement even in an emergency is a big no-no.
No. You are misunderstanding me. We spend taxable investment money held at Vanguard, even outside an emergency. We live well below our means, so the arrow going into the taxable portfolio is much larger than the arrow coming out. But the arrow is bidirectional.

For example I need to replace the damn car and if I ever force myself to do this the money comes from the portfolio. I could move that to cash now. I could have done this 3 years ago when I made the decision to replace the car. Actually at the rate I'm moving I could just stop investing for a while and let it build up in the bank account. When I finally do write the check I could look back and calculate which would have been "best". But we have reached the point where it doesn't matter at the micro level. Long term it makes more sense to stay invested.

Our taxable portfolio is definitely intended to supplement our small tax protected savings. However we do not lose sight of the reality that two of the four members of our family have reduced life expectancies. Saving everything for retirement is only reasonable for those who can reasonably plan to have a retirement. It may be appropriate for you, but it is not even remotely attractive to me (the likely survivor) to shoot for the big fat retirement account when a smaller one will do. That's not my brass ring. Life is happening now.

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Post by AndroAsc » Sun May 29, 2011 8:22 pm

Sidney wrote:In an emergency, money is money. The money doesn't know or care what it is being used for. If you had a finite e-fund and it was exhausted (say for an unexpected medical emergency), you'd still tap your investment stash if your roof blew off in a tornado -- right? Or are you saying if you tapped out your e-fund and your kid needed a bone marrow transplant that you would not dip into your retirement fund?

So to me, the line between an emergency fund and other taxable funds is artificial.
I admit the line i draw between my emergency fund and other taxable investments is artificial, but I guess I do like that clear distinction.

The way I operate is that an emergency fund should have sufficient funds to cover 90% of emergencies. I define emergencies as unplanned events that are foreseeable but have a low probability of occurring, such as:
1) Enough funds to cover living expenses and health insurance premium for at least 1 year. In the "new economy" I would prefer 2 years, and it's something I am working towards to.
2) Major repair costs (e.g. need to purchase a new car when its wrecked in an accident, major structural repairs to a home due to a natural disaster, etc.)
3) Annual out of pocket expenses (deductible and copayment) for health insurance or other type of insured catastrophe.

I also have a "sinking fund" to which I contribute regularly for scheduled and expected medium-to-big ticket items such as:
1) Annual cost of car maintenance
2) Purchase cost of big ticket items (car, major appliances and electronics)
3) Relocation costs when moving

The use of the "sinking fund" is to prevent me from tapping on the emergency fund for events that are scheduled to occur or will inevitably occur within a reasonable time frame.

In my opinion, the problem that arises if one does not make a distinction, is that it becomes "too easy" for one to start liquidating retirement assets (like how many Americans raided their 401k during unemployment) and that will undoubtedly cause future problems ahead. It's a slippery slope that I rather not face. I prefer to try to meet tomorrow's problems with due consideration for future problems that any current solution may create.

I do admit that everyone's personal situation is different, but this model has worked well for me. I will admit that if I have a six-figure portfolio, I would probably not be so meticulous, since even a 10k emergency is only 1% of the portfolio.

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priorities

Post by mcblum » Mon May 30, 2011 6:54 am

Does every one have a short list "order of liquidation"; what order to sell things in to keep financially stable?

Something like:
cash in pocket
checking account
savings account
credit card
money market fund
taxable account
tax free account
tax deferred account
I see the credit card as a way to pay sudden obligations and give time to organize final payment of a debt.
Marty

blevine
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Post by blevine » Mon May 30, 2011 8:35 am

There are 2 loosely related concepts mixed together.

ACCESS to cash for physical emergencies
vs
ASSET ALLOCATION for financial emergencies.

Financial emergencies, I agree with the concept that
it's less important as you age. If your AA is more than 50% bonds,
you have assets to spend if you lose your job. That said, with
bond rates low and money market fund rates near zero, bank
savings accts are usually competitive with funds, so I look at that
as another option for my 50% AA in fixed income. There are times
I keep little in the bank, right now I keep more.

Physical emergencies, I keep multiple bank accounts, each with ATM
card, carry multiple brands of credit cards, and try to keep a little cash on hand for taxis (car break down) etc. I'll keep 5-10k in each of 2 checking accts to have access at ATMs. Anything more would be in a savings acct if rates were competitive with VG funds. Keep cash on hand relative to where I am at any point in time (traveling keep more, at home less).

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runthetrails
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Re: 529 account as a source of emergency fund

Post by runthetrails » Tue May 31, 2011 1:07 pm

livesoft wrote: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.
I will say that the tax drag of a cash e-fund account causes me to cringe a lot less than spending 80K on a car! :-)

Prudent Saver
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Post by Prudent Saver » Mon Jul 11, 2011 12:23 am

I could get my hands on $50K tomorrow, if needed. $100K within 3 days.

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Post by marylandcrab » Mon Jul 11, 2011 6:32 am

On Friday night lightening hit my neighbors house and burned it down. A total loss - not only did they lose their pictures and memories, they lost everything instantly. They were out of the country and their cars were in the garage. They had to fly home immediately and pay those last minute airfares.

I'm sure insurance will pay up, but they have to live somewhere in the meantime and get some things to see them through. While I'm sure the red cross stepped up, what do you do immediately?

As a business owner I keep 100k in a money market. We tap into that during cash flow issues. We own it personally and "loan" it to the company. We're down to about 20k right now, and honestly it makes me VERY anxious - that doesn't even cover a payroll. But I'd have access to other "personal" funds if I had to.

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