Capping Emergency Fund

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KlangFool
Posts: 10403
Joined: Sat Oct 11, 2008 12:35 pm

Re: Capping Emergency Fund

Post by KlangFool » Wed Jul 11, 2018 5:03 pm

mega317 wrote:
Wed Jul 11, 2018 2:30 pm
KlangFool wrote:
Wed Jul 11, 2018 7:05 am
mega317 wrote:
Wed Jul 11, 2018 7:01 am
I think some people consider a stock crash and unemployment as an emergency and plan to use their energy emergency fund in an attempt to avoid selling stocks under any circumstances until they recover, which I assume people define as a return to pre-crash prices but I don't really know.
mega317,

A minor correction.

KlangFool
The point I was trying to make was that for some people, unemployment isn't necessary to define an emergency and/or use their nominal EF. Some people don't want to sell stocks when they're "down" regardless of anything else.
mega317,

You lost me here. So, how do they feed their families if they have no income and they do not spend their emergency fund? And, after the emergency fund is exhausted where do they get their money if they do not sell their investment?

KlangFool

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willthrill81
Posts: 6102
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Capping Emergency Fund

Post by willthrill81 » Wed Jul 11, 2018 5:08 pm

KlangFool wrote:
Wed Jul 11, 2018 5:00 pm
willthrill81 wrote:
Wed Jul 11, 2018 4:47 pm
Engineer250 wrote:
Wed Jul 11, 2018 4:40 pm
My EF is also a "contingency fund". I used it to replace my roof several years ago. The alternative would be financing. Some people may have a fund that serves as an EF and a "next car" fund.
Five years ago we created a 'non-monthly expense' fund that covers nearly all such things, including home maintenance, auto maintenance/taxes, gifts, etc. We place a very consistent amount into it monthly and withdraw from it when one of the expenses is incurred. This has greatly smoothed out our monthly expenses. Aside from something like a multi-year medical issue that would eventually drain our HSA, helping a family member or friend financially, or unemployment, I honestly can't think of what we would use our three month's of expenses in our EF for.
willthrill81,

1) How big is that fund in term of months of expenses?
It's purpose is to merely serve as a place to temporarily retain funds before they are dispersed. As such, we normally don't have to keep more than about 1-2 month's of our total expenses in that account, but I never look at that way because that's not how we define how much we need in it.
KlangFool wrote:
Wed Jul 11, 2018 5:00 pm
2) You could do it that way in addition to your 3 months of EF. Or, you could do it my way and keep 12 months of expense as EF to cover all possible contingency.

I am more of the one portfolio and one emergency fund/bucket kind of person. Keep it simple.

KlangFool
I do not consider non-monthly but recurring expenses like auto maintenance to be an emergency or a contingency. It's something that will certainly happen given a relatively short period of time. We could combine that with our EF for the sake of simplicity, but I don't see the point. Keeping them separate is easier for me to mentally manage. I have no intention of spending our EF (may be necessary, I know), but I have every intention of spending every dime we put into our non-monthly expenditure fund sooner or later. I don't even include the balance of our non-monthly expenditure fund in our net worth for this reason, but I do include our EF in our net worth.

Also, I don't keep as big of an EF as most probably should because I always work under multi-year contracts (currently through June, 2020) and could not legally be discharged without a minimum of a full year's notice barring something like me committing a felony. Few have that level of job security.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

KlangFool
Posts: 10403
Joined: Sat Oct 11, 2008 12:35 pm

Re: Capping Emergency Fund

Post by KlangFool » Wed Jul 11, 2018 5:16 pm

willthrill81 wrote:
Wed Jul 11, 2018 5:08 pm

I do not consider non-monthly but recurring expenses like auto maintenance to be an emergency or a contingency. It's something that will certainly happen given a relatively short period of time. We could combine that with our EF for the sake of simplicity, but I don't see the point. Keeping them separate is easier for me to mentally manage.
willthrill81,

To each its own. It is easier for you to keep them separate. It is easier for me to pool them together. I kept my EF big enough that I could buy a new car whenever I need to. I do not need to schedule them. Ditto for auto maintenance, college tuition payment and so on. Essentially, anything that is less than 20K is handled by this emergency fund.

KlangFool

Engineer250
Posts: 1048
Joined: Wed Jun 22, 2016 1:41 pm

Re: Capping Emergency Fund

Post by Engineer250 » Wed Jul 11, 2018 6:13 pm

KlangFool wrote:
Wed Jul 11, 2018 4:56 pm
Engineer250,

Not necessary true. You can withdraw the Roth IRA contribution penalty free before 59 1/2 years old too.

KlangFool
True. But if you do end up tapping a Roth IRA, then you have "wasted" that year's limited contributions, so obviously not a first choice. But I do mentally consider my current year Roth contributions as a backup emergency fund. I hope some day to have a sizeable enough EF/taxable that I no longer need to mentally think about it this way.
KlangFool wrote:
Wed Jul 11, 2018 5:00 pm
I am more of the one portfolio and one emergency fund/bucket kind of person. Keep it simple.

KlangFool
This is my plan as well. Today it's just a meagre EF. But I plan to increase it and also make it just my taxable savings. I plan to keep all of it in a taxable brokerage account. I'll probably make some asset allocation decision with it since part of it will be short term savings, but otherwise won't necessarily bucket it.

For now it is not what I would like it to be even for an EF. But I am working on it.
Where the tides of fortune take us, no man can know.

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