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What is that so-called emergency cash fund anyway?

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bada_bing
Frequent Contributor

Re: What is that so-called emergency cash fund anyway?

"Emergency fund" is just a concept of keeping the first small bit of savings liquid when you are first starting out. Once you have a small amount against life's little bumps, further savings can be put to work in less liquid but better returning investments. The concept of what is an "emergency fund" changes depending on your overall financial health. As you (hopefully) accumulate more assets, the amount of an "emergency fund" liquid savings can go down.

 

At 55 yo, my "emergency fund" now consists of $2500 in cash in the home safe. That's what I estimate would hold me until I could access the rest of my savings. I don't need much for an emergency fund now, because I'm long established with good insurance, no debt, and accumulated assets. When I was younger, with more responsibilities and less backing me, a much larger emergency fund seemed prudent.

 

The important thing is to keep saving, irregardless of what part of savings is designated as "emergency". The designation is arbitrary anyway. The more important thing is making (assets - liabilities) grow. How those assets are designated is secondary.

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Message 11 of 51
Anonymous
Not applicable

Re: What is that so-called emergency cash fund anyway?

One issue I see is what people define as an "emergency".  Your car needs tires? NO, not an emergency and you should plan for that.  Christmas?  NO, plan for it.  Birthdays, vacations, anniversaries?  Plan for that.  None of those are unforseen.

 

Now a root canal?  Most certainly yes.

Message 12 of 51
heyitsyeh
Frequent Contributor

Re: What is that so-called emergency cash fund anyway?

It's all perception isn't it? I think of emergencies as things that you expect to be one-time expenditures and only for a pressing need. Tire rotations will certainly happen more than once in your lifetime, while getting your tire blown may not.

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Message 13 of 51
hajew86
New Contributor

Re: What is that so-called emergency cash fund anyway?

Well sure it's all perception however I would have to say if you're water heater tank cracks that would be classify as an emergency. Insurance and home home warranty will most likely take care of most of the cost however for whatever isn't covered or for your deductible..that's something you cannot necessarily plan for, but be prepared for. 

Message 14 of 51
Aerydink
New Member

Re: What is that so-called emergency cash fund anyway?

From Jan 01, 2010 to Jan 01, 2015 the US inflation rate averaged at roughly 1.7% (coumpounded at 8.2% over five years).  In that same time period, the S&P 500 increased by 89.5%.  If you had invested $10,000 at the beginning of 2010, you'd have $18,950 now.  With inflation, that $18,950 would be worth $1553.90 less than what it was worth in 2010; still, you would have a profit of $7396.10 just by investing and waiting.  Even if you held on to $5000 in an emergency savings account and invested the other $5000, your savings would lose about $410 of value while your investment would gain $4108.05 after inflation—even if you were looking at 2010 dollar values, your $10,000 would become $13,698.05 just by sitting on your hands!

 

I will admit that this is a bit unfair because we've been in an unprecedented bull market these past five or so years, but on average it's generally safe to assume that the stock market will appreciate by 8%-10% annually (thats 48%-60% over five years).

 

This is how rich people get (and stay) rich.  They minimize consumer debt, and only use debt as leverage to make more and better investments.  Having some liquid assets (cash on hand / emergency savings) gives you not only flexibility to spend in an emergency, it also allows you to move large amounds of money around easily, and to jump in on a good investment when it becomes available.  From our perspective, also just allows you to pay off all CC debt before it accrues any interest.  CCs have APRs well over the rate of growth of the S&P 500, and so should be paid off ASAP.


Here's some helpful reading:  http://www.fool.com/how-to-invest/thirteen-steps/step-3-treat-every-dollar-as-an-investment.aspx

 

Steps for good wealth building:

1 - Pay off and clear any collections or liens on your credit reports.

2 - Pay off all high interest loans (typically credit cards, or any loan with an APR over ~10%).

3 - Build a cash cushion of three to six months' expenses (if you have dependants, double that).  If you have to use credit cards to pay for unexpected costs, you will inevitably lose more money.

4 - Fill up tax-advantaged accounts (like 401k, IRA, etc.) to their maximum annual limit.  Not having your capital gains taxed makes a big difference in the long term.

5 - Start investing in non tax-advantaged accounts (brokerage).

6 - Sit tight and watch your wealth grow.

 

Right now, you're stuck between steps 2 and 3 without even considering step 6.

Message 15 of 51
HiLine
Blogger

Re: What is that so-called emergency cash fund anyway?


@Anonymous-own-fico wrote:

@HiLine wrote:

 

Cash is about the only thing that you can have for sure in an emergency. Should an econonic crisis happen and banks close your credit cards, you cannot rely on credit to survive an emergency.

 

Of course you could blow away an emergency fund in one single incident, but so what? That your house could be broken into one day by an advanced thief does not imply that you should not lock your door.

 

People don't realize there is a problem until a problem happens, and this is why insurance exists and why some people still neglect insurance.


 

I don't know if a regular size emergency fund is designed for a full-blown economic crisis, so yes that's where insurance kicks in.

 


As long as the only direct consequence of an economic crisis is the loss of your credit cards, a regular size emergency fund should work. An emergency fund is designed to protect you from temporary, unexpected adverse events and is in no way designed to protect anyone from the economic consequences of an economic crisis, for which risk management would be a more appropriate tool Smiley Wink

Message 16 of 51
tonyjones
Valued Contributor

Re: What is that so-called emergency cash fund anyway?

The goal is to have 5 years salary saved up in savings.

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Message 17 of 51
Revelate
Moderator Emeritus

Re: What is that so-called emergency cash fund anyway?


@tonyjones wrote:

The goal is to have 5 years salary saved up in savings.


For retirement?

 

And MOF - cross-posting FTL Smiley Happy.




        
Message 18 of 51
tonyjones
Valued Contributor

Re: What is that so-called emergency cash fund anyway?


@Revelate wrote:

@tonyjones wrote:

The goal is to have 5 years salary saved up in savings.


For retirement?

 

And MOF - cross-posting FTL Smiley Happy.


For a rainy day, it's nice to have cash on hand.

Current Fico Scores: (December 2023)
Message 19 of 51
barbaralee
Established Contributor

Re: What is that so-called emergency cash fund anyway?

5 years of salary in a savings account seems a tad bit excessive. Even at 20k/ year that is 100k earning the lowest interest rate possible. 6-9 months seems more appropriate for an emergency savings account, IMO. 

Message 20 of 51
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