What is that so-called emergency cash fund anyway?

[Anonymous]

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@bada_bing wrote:

"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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 I agree.

[Anonymous]

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@Anonymous wrote:

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.

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I agree. I just had this conversation with my husband.

[Anonymous]

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@heyitsyeh wrote:

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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Yep!

[Anonymous]

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@Aerydink wrote:

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.

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Thanks for the information!!

[Anonymous]

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@Anonymous wrote:

I am rebuilding savings because of several crises over the past 2 years, including unemployment and winding up on food stamps in 2013-2014.  I now have two savings accounts that are just starting.  One to cover non-emergency purchases outside of my regular spending, one an emergency fund.  I'd like my emergency fund to be three-six months salary (not necessarily just expenses) which would provide a good cushion to live off of if the unforseeable happens.  A regular savings account with Chase is the non-emergency money, I'm not super interested in gaining interest on that one since it would be the most used outside of the checking and credit card.  The Emergency fund is with Capital One 360. It's not super accessible but it doesn't need to be.  

This year I hope to establish a brokerage account with someone like Sharebuilder or Fidelity. 

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Good luck rebuilding!!

[Anonymous]

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@mongstradamus wrote:

i have been actually thinking about my emergency fund the last few days, i am only getting .90% interest from alliant , I have been thinking about putting more into cd ladder i have right now or maybe buying some ibonds. Those options aren't the most liquid solutions in the world. 

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Please let us know what you decide to do. Good luck!!

[Anonymous]

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@barbaralee wrote:

This is something that we are still considering, but we are leaning towards a Betterment account. Still doing research on it, though, but the reviews (both peer and professional) that I have read on it are very good. Hubby is also considering some sort of bonds to invest in for a down payment for a house. In all honesty, I am terribly clueless, and have vague ideas. I manage our bills checking account, he manages our investments. We have a wife cook, husband grill approach to our finances, lol.  

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I'm hoping to get here someday. Currently, I manage it ALL!!

[Anonymous]

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@Al209 wrote:

I would strongly suggest against putting your emergency in an IRA, CDs or Bonds.  A regular savings account isn't earning very much interest, but that's not the point of the emergency fund.  The main point is to have liquid cash available if an emergency comes up.  None of those options are particularly liquid.  You may also have to pay a fee or a fine of some kind to free up your money if you need it early.  Since it's an emergency you're not going to want pay someone a fee to get your money.

My emergency fund is earning 0.90% with Discover bank.  It's not a lot, but the point is to have it available if necessary. 

There are ways to increase your return, but in all cases you're either increasing the risk or sacrificing liquidity.  The emergency fund should be stored in a cash account with the lowest possible risk.  If you're using an investment account to increase return, you've tied your emergency fund to the market.  If the market crashes and you end up losing your job, you're going to need to use your emergency fund.  If it's tied to the market, the value probably went down and you won't have time for the value to come back.

That's not to say investment accounts are bad, they just shouldn't be used to hold your emergency fund.  If the market crashes and you have 20 years until retirement, that's plenty of time for your account to recover.  But if the market crashes and you have a house payment due in 2 weeks, you're going to have accept some pretty steep losses.

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Excellent advice! Thanks!

[Anonymous]

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@Anonymous wrote:
I listen to suze orman she used to say to have a 6 month emergency fund but after the recession changed it to an 8 month one.

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Good advice!

[mongstradamus]

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@beautifulblaquepearl wrote:

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@mongstradamus wrote:

i have been actually thinking about my emergency fund the last few days, i am only getting .90% interest from alliant , I have been thinking about putting more into cd ladder i have right now or maybe buying some ibonds. Those options aren't the most liquid solutions in the world. 

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Please let us know what you decide to do. Good luck!!

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i don't know if this is the correct decision but i am going to half with ally 5 yr cd ladder, which has already started. I have them staggered to a year apart. The other half will be going into my "high yield savings" at alliant. I know .90% is below rate of inflation but i don't really have that much in emergency savings any extra money is going into my IRA. 

Talking about IRA i think i need to do some rebalancing into either domestic small cap or total stock market. Since international has been out performing my domestic to international ratio is an bit too high for me for international. I think its getting close to over 35%