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June 07, 2012

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I no longer distinguish my emergency fund from my other money. It is all part of my overall investment portfolio (which is 99% stock, 1% junk bonds).

My reasons are:
1. I am not at risk in case of job loss because
a. If I get laid off, I will receive 6 months salary as severance.
b. I am eligible for retirement and can receive a pension
2. I earn enough every month to fund minor emergencies (up to say $5K) from current income.

If I totalled my car or had a large medical emergeny, I would have to scramble, but otherwise I am in good shape without it.

I would like to see a post outlining what constitutes an "emergency" versus an unplanned expense which could have been anticipated (e.g. 10-yearold A/C dies in the middle of summer). And maybe how to prepare for the various types of emergencies/expenses.

I think this was a great question and a great response. So many people confuse emergency funds with saving and investing funds, and don't know how to allocate their resources in the best manner. The reference to the original post led me to your other articles covering this topic, and I learned a lot from those as well.

I keep my e-fund in my Chase Savings account. The interest is not even worth mentioning, but it's safe and easily accessible. Additionally, I have an online savings account as well, and if I need the money immediately, it would take 2-3 days to transfer between accounts.

I keep it in a money market account, easily accessible, plus I have plenty of room on my credit cards if I needed quicker/instant access.

I have about $5-10K in checking & savings accounts (making essentially no interest in those places, unfortunately). I also have a credit card with a $18K limit, my current salary, and monthly child support checks from my ex. I consider all this my emergency fund, which I'd use in case my family needs to quickly travel somewhere by plane, or to repair the car, replace the furnace, pay for an unexpectedly expensive medical care co-pay etc.

Beyond that type of emergency, I find it helpful to think about emergencies in concrete terms.

What if I lose my job? Like Mark, I'd have a severance payment so it wouldn't be a sudden loss in income--I could plan ahead. Probably I'd immediately rent out my house and move nearer to my family in a large metro area, to increase my access to the family safety net and my chances of getting another job. We currently live on less than half my salary. I'd live on the child support checks plus tap into my taxable investment accounts. My kids' health insurance could be covered under my ex's workplace plan so at least my kids would have medical care.

What about a medical emergency? If I still have my job, anything medical would be totally covered. I also have disability insurance in case I can't work. I'm also close enough to retirement that I could take pension and social security and survive on that if I had to.

What about another stock market crash? I'd lose the 401K but the rest is in guaranteed insurance bonds which probably would still have some value.

What about a global economic meltdown? Umm, then we might be less comfortable. I guess I'd raise rabbits and veggies in my back yard, heat the house via the wood burning fireplace, rent out rooms, and we'd ride our bikes everywhere?

Savings account and CDs.

I think if you have a small portfolio (less than 50k ) then you should have some (10k maybe )in a savings account. However, I really don't see the need for that if you have a larger portfolio. Just my opinion. I feel I would be safe with mutual funds or whatever, provided I have enough in savings just to get by on for a few days.

Depending on your level of risk, you could see more upside with a larger portfolio, if you put some money into a resonably safe ETF (bonds? maybe) and then put a trailing stop on it. Like 5% or so. Could give you the potential to get bigger gains with a little risk.

IF and ONLY IF:

1. You are financially responsible.
2. You own your house with decent equity in it.

A HELOC makes the best emergency fund. You keep a few thousand cash and everything else is invested. If a real emergency comes up and you don't want to liquidate your other investments, you draw on the HELOC and pay it back later at very cheap current interest rates.

I am a little curious FMF, given that you have no mortgage, why you don't have a HELOC and invest most of the rest of your cash? I know you are very debt averse but a HELOC is not debt. It is an option to assume debt in the case of an emergency. Debt that can be paid back at extremely low interest rates or even immediately from liquidated investment assets if they have not had a recent large decline.

Other than a HELOC if you want a big emergency fund most of your options are similar to the cream can. Return is near zero.

Great question! I have been thinking where should I keep my EF lately as well.

Right now, I have 3 buckets for my emergency fund:
1) HSBC checking & online savings account (0.80% APY)
Basically I keep $300 in the checking account, and the rest in online savings account. I enjoy B&M banking experience, while I am also earning interest on the money that locked up(required minimum balance)to avoid monthly fees.
2) another online savings account (0.85% APY)
that is less accessible than bucket#1
3) investment account
Investing in dividend stocks which are less volatile.
I make this move because I think my career is quite stable(been working in the same company for 5 years), and I have additional $9K in bucket#2 for buying a new car. If true emergency comes that I have cashed out all the money in bucket#1 (3 months living expenses) and the stock market crashes, I can tap the car fund and hold on my used car even longer.

I am thinking about buying treasury I-bonds, which currently yield 2.20% and it has inflation protection.
However, I don't know if it is a good idea for me (I am in my late 20s) to lock up the money for 5 years.
(It can be redeem after a year of purchase, but there is a 3 months interest penalty to withdraw within 5 years)

I think Money Markets are the best place for the majority of EFs, especially if the MM pays a decent interest as compared to other savings options.

We don't have an explicit "e-fund." We do have a large amount of cash in checking accounts earning no interest - I don't view the couple hundred dollars a year it could potentially earn as adequate compensation for the hassle of storing it in, say, ING and having a 2-day wait to access it. However, we are also fairly comfortable with decimating this cash cushion to make an investment. We feel we have adequate safety measures:

1) We are both very secure in our jobs
2) Our expenses are around half of our take-home pay (i.e. we save a lot each month) and could be scaled back considerably if absolutely necessary
3) We have high credit card limits
4) We have mutual funds which could be liquidated in an emergency
5) We don't have emergencies

I also really like Apex's suggestion of a HELOC.

Having been thru a layoff in 2008 followed by 13 month period of no job, I have recent experience with how quickly we could expect to burn thru our savings if a subsequent job loss would occur.

My energency fund is my Roth and my HSA. $2000 of the HSA is in cash. Everything over that is automatically transferred to Money Market and stock funds. Entire Roth is in stock funds. If I lost my income, I could draw down my HSA, as we have paid deductibles and other medical expenses from cash flow over the years and are eligible to draw this money tax free at any time.

In the case of a disaster, I'm aware of folks who were able to use HELOC's to make housing repairs while waiting on insurance claims to be processed. HELOC money is available immediately if a tornado takes your roof off or a tree flattens your car. You can always pay that money back with savings or insurance proceeds, but it is nice to have the flexibility. Since not all damage is covered by insurance, the claim may not cover entire essential repairs. As expected, it's easier to get the HELOC before you need it. And it's vital that you don't have a spend-a-holic co-borrower.

The other emergencies I worry about are prolonged illness and disability. We have long term care and disability insurance for these.

I also have a sizeable "play money" fund that we use to save for vacations and fun stuff. This could quickly become cash, be loaned/gifted to a relative or friend in an energency, or buy a decent car if needed. Since I expect to spend from it on adventure or things to make us feel good, I don't call it "emergency fund" though technically, it would be there in an emergency.


At this point, I'm actually a proponent of having at least some of your emergency fund in a set of relatively safe (i.e. blue chip) stocks. You can sell them and turn them into cash almost immediately (for a nominal $8 commission). You can actually get some return. And while there is risk, frankly, the risk of having $50k versus $40k in my emergency fund is not that big of a deal in the grand scheme.

The biggest chunk of our emergency fund is in a cash fund tied to a group universal life policy obtained through work. It earns 4% and is available via a phone call and two week turnaround. I figure credit cards could make any immediate purchase until those proceeds are received. The next bit we would pull from money market funds tied to our brokerage account or cash in our checking account. A next resort would be stock funds my Roh IRA.

My E-Fund is at ING Direct in a savings account. I can get to it quick enough if I need to.

My wife had an inheritance in 2011, now about $170K, that she asked me to put to work to earn some interest but she was very specific that she wanted to be able to liquidate small amounts from time to time. She also definitely doesn't want to have any losses. She also has a disaster cache of about $2K - $3K that is all in US bills which could be useful if for some reason there was an interruption to the banking and credit card system such as might happen with an earthquake or other natural disaster.

I put it all into a mutual fund, symbol STSMX, the Wells Fargo Short Term Muni Bond fund. At Fidelity there is no charge to buy shares and no charge to sell shares that are long term after being held for 60 days. For shares that you purchased that have not been held for 60 days there is a transaction fee of $75. The share price is right around $10/share and the largest daily change I have observed is 1c.

The YTD rate of return has been 3.04%
The 1 year rate of return has been 2.80%
The 2 year rate of return has been 2.87%
The 3 year rate of return has been 3.73%

The interest is paid at the end of each month by giving you additional long term shares that are also free of federal taxes. Contrast this with our credit union savings account at 0.65% or Fidelity's FDRXX, Money Market fund for Morons at 0.1%.

I love the sage advise of people who are either there or have been there.

Thanx Old Limey

My emergency fund is divided as follows:
A) insurance deductibles ($1,000 auto, $500 renter's) and health insurance out of pocket maximum ($950) in my dividend rewards checking account
B) two months' expenses (~$7,200) in my dividend rewards checking account
C) four months' expenses (~$14,400) in an online savings account

Then there are the "secondary" emergency funds: $4,000 and growing set aside to replace my car when the time comes and $70,000 or so set aside to be used as a down payment on a condo. Those two are in an online savings account and then I also have some money in a money market fund at Vanguard that is waiting to be invested.

I don't have high limits on credit cards like some of the other readers, but I do have almost an extra $2,000 in free cash flow each month that normally goes to savings. That is really helpful when cash flow gets tight for a month, without having to dip into savings (just putting less there that particular month).

Keeping the almost $10,000 in my checking account provides a nice buffer such that I will never overdraft, but also means that I have checkwriting capability and B&M access to $10,000 during business hours, which I can then replace from my online savings account within 2-3 business days. I'll probably move the money in the online savings account to a CD ladder shortly to increase the return slightly, since I haven't had to dip into it for ages and Ally has such a great early withdrawal policy.

A couple comments on the HELOC strategy of Emergency fund:

* I used this strategy back in 2001-2003 over a series of layoffs. I had a house in Florida that had run up, and some of the equity was used to live off during periods of low income. Interest was 2.x% back when rates were higher, and deductible. It worked out well.

* In this recent recession, my HELOC was locked, not able to be used, as were many across the country. This was not anything to do with the individual, it was related to if the property was in an area of foreclosures, which kept getting larger. If someone was dependent on the HELOC for an emergency, and went to access it, they were in serious trouble if they didn't have other funds for the emergency. For this reason, I am not using HELOC for emergency any more.

* I use a combo of a savings account linked to my checking with a few thousand, for overdraft and immediate access. Then the next level is online banking. Last level is CD's, I've found a credit union with 5 yr 2.4% with only 60 day penalty if you withdraw.

@CoolMouseLuke,

You are exactly correct on that downside of a HELOC.

However, that period has passed. Housing has reached bottom or near bottom. Unless we have a drastic collapse in the economy that makes rent drop 25% (rents are rising at a faster pace than anytime in the last 20 years) there is no way housing is going to go down like that again from here. It could still drop another 5-10% in some regions but that is not going to scare the banks. I have already detailed the reasons houses can't drop much more due to the large returns investors are making.

So the risk of active HELOC's being locked now for actions beyond the borrowers control are very near zero. Not zero, but about as close as you can get.

Follow-up.

I just got a letter from my credit union on my current ELOC (its on an investment property rather than my primary residence). They are encouraging me to use the line by dropping the interest rate on it from 4.25% to 2% for any new money I draw out and keeping that rate there for 2 years (Interest is higher on a non-primary residence ELOC). Far from wanting me not to use my line they want to incentivise me to use it. I have already developed a strategy to access these funds in a way that moves some of my investment money around and will save me between 3 and 6 grand over the next two years in borrowing costs on my investment capital because of this incentive they are giving me to access this ELOC.

It's just free money for me. Banks are looking for safe ways to get some borrowing done again and HELOCs are being returned to as a safe alternative to traditional lending.

There is a difference between an Emergency Fund and funds available in an emergency. Nobody is going to say "well, I guess I have to let the house get foreclosed on. When I put twenty grand in that taxable mutual fund, I forgot to say it was for emergencies."

That said,a blended approach has been best for me.

6 months in a savings account is sacred to my emotional well being, no matter how bad rates get. But, I'd be lying if I said I didn't feel an equally strong confidence and optimism in the fact that long term savings beyond that goes into a taxable index fund. In the worst of 2008, I would have had another 6 months of expenses covered. What's not to like?

Cash, at home.

"But you are losing money due to inflation and opportunity cost... BLAH BLAH BLAH"

Its your emergency fund, not an investment.

When the stock market nose dives, or your bank fails, you better not have an emergency come up at the same time. Yes, those two things will come back given enough time, but cash will always be there when you need it.

Who wants to have to go to the bank anyway? Do you enjoy waiting in line to be talked down to and mistreated? BTW, you are losing money to inflation at the bank too.

While you are at it, keep some none-emergency cash at home too, and start using it. Your credit card rewards aren't worth it. What do you think happens when you are "rewarded" for a certain behavior? Do you do more of that behavior? That behavior, in this example, is spending money on consumer trash... Stop taking the bait!

Just try using cash for a month if you don't believe me. You will be amazed at how little changes other than you don't have a credit card bill to pay that month.

"Who wants to have to go to the bank anyway? Do you enjoy waiting in line to be talked down to and mistreated?" - DMFF

Wow, you must have a terrible bank! I have banked at 4 different institutions since earning my first paycheck and I can count on no hands the number of bad teller experiences I've had. Never been talked down to, never mistreated, and usually enjoy friendly conversation.

DMFF, what if your house burns down? Even if your money is in a safe, can you really trust its fire rating? I wouldn't. You would be homeless with no emergency fund.

Apex,

A little surprised at your response. I hope you are right that housing has bottomed, I have lots of properties also. But I can't agree the chances of HELOC's locking out are near zero, if it happened once recently, it could certainly happen again. I agree the odds are lower, but not enough for me to use as sole emergency fund again. At best it would be part of the overall solution. I also am in a better financial situation, so wouldn't depend on one thing anyways.

Now utilizing the HELOC for investment gains as you stated, that is really another thing, in my opinion. More power to you, let us know how it works out.

The thing that ticked me off the most during the downturn was that I was ready to use my HELOC and business credit lines to buy more properties, and then when I went to use them, that was when they decided to lock things down. Had the credit available for years, waited to use it, then right when the blood was in the streets and I wanted to buy low, they decided to close the lines with no connection to anything I did. I have moved away from the two companies that did it, but that is painful also(another subject).

ING Savings. But since it takes 4-5 days to clear transfers, I also have a linked ING Checking account and ATM card (which I never use) which gives me immediate access to funds in case of emergency.

Thank you for this article. I hadn't thought about the layering even though I have done that. What this article did do for me is to remind me to reassess where my money is. Like many of the commenters, I have an online account, but wasn't paying attention to what interest I was making. I'm still a firm believer in increasing your money, whether it's immediately liquid or not. I've now used bankrate to find an online account paying 1% interest, so that while my money sits there, it's still earning interest.

I agree that you need to pay attention to your comfort zone and know what kinds of emergency you need to be prepared for. For example, in our immediate savings account, that earns very little interest, but is easy to withdrawn from ATM, I might keep $500. Anything bigger than that, I can use my credit card as an immediate back up while I wait the 2-3 days to access my money from the online account.

I would love to see an article or get some opinions on whether folks keep one account that includes their emergency fund money in addition to other money planned for annual bills, etc. I currently have a separate online account for escrow, homeowner fees, auto insurance premiums than our savings/emergency funds. I'm just wondering if I'm not capitalizing on the interest earned by not keeping it all together.

I have my EM in stocks. Unless someone kidnaps my kid or someone else in my family, I would use credit. Having large sums of cash in an account earning nothing is crazy. I guess it all depends one’s risk tolerance and plan of action to generate income if a job is lost. Spending 10K in cash to replace an A/C or to buy a plane ticket in a time when debt is cheap is crazy. Debt first then cash!

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