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Jwodie 
LSU Fan
New Orleans
Member since Sep 2009
3905 posts
| Emergency fund opinions (Posted on 2/11/13 at 8:46 pm)
In terms of liquidity and total amount, what is your opinion on what would constitute the following descriptors relative to an emergency fund:
1. Necessary
2. Good
3. Great
4. Overkill (i.e., use some of it on other things such as paying down debt)
Given this is not salary specific your answers can be in the form of number of months sufficient to pay your total current monthly bills.
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I Love Bama 
Alabama Fan
Alabama
Member since Nov 2007
27131 posts
| re: Emergency fund opinions (Posted on 2/11/13 at 8:51 pm to Jwodie)
1. 2 months
2. 4-6 months
3. 6-8 months
4. one year
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saving$
LSU Fan
Member since Nov 2012
34 posts
| re: Emergency fund opinions (Posted on 2/11/13 at 8:53 pm to Jwodie)
1. 4 months
2. 6 months
3. 12 months
4. 13+ months
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Vols&Shaft83 
Tennessee Fan
Member since Dec 2012
3281 posts
| re: Emergency fund opinions (Posted on 2/11/13 at 9:00 pm to I Love Bama)
quote:
1. 2 months
2. 4-6 months
3. 6-8 months
4. one year
This
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foshizzle
LSU Fan
Member since Mar 2008
25135 posts
| re: Emergency fund opinions (Posted on 2/11/13 at 9:21 pm to Jwodie)
The answer totally depends on what cash you can access and how easily you can do it. Liquidity is key.
Generally speaking you don't want to have lots of cash just lying around uninvested. So an ideal solution would be to have an untapped home equity line for emergencies so you can invest cash elsewhere. If you suddenly need a couple of grand just write yourself a check on the equity line and pay it back over the year.
Another choice is to sock away as much as you can in your Roth and withdraw from it for emergencies. It's easy to do and there are no penalties, plus you should be putting money in your Roth anyway to get the tax-free returns. This is my second choice.
But having a dedicated taxable savings account for this is not necessary nor is it particularly desirable. What you want is the ability to get cash in a hurry when you need it, but otherwise have investments working for you to the maximum extent possible during normal times. Both a HELOC and a Roth do this much better than a savings account.
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Fat Bastard 
New Orleans Saints Fan
Paradise
Member since Mar 2009
13493 posts
| re: Emergency fund opinions (Posted on 2/11/13 at 9:21 pm to Jwodie)
quote:
1. Necessary- 6 months
2. Good-9 months
3. Great-12 months
4. Overkill (i.e., use some of it on other things such as paying down debt- 18+ months
This post was edited on 2/11 at 9:22 pm
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foshizzle
LSU Fan
Member since Mar 2008
25135 posts
| re: Emergency fund opinions (Posted on 2/11/13 at 9:25 pm to Jwodie)
quote:
4. Overkill (i.e., use some of it on other things such as paying down debt)
Debt isn't necessarily bad if the rate is low enough. Occasionally I will hear of someone who doesn't pay down credit card debt for fear of not having a sufficient emergency fund. This is a bad idea.
Always pay down the credit card to the maximum unless you have one of those special "teaser" rates. If you need money suddenly you can always charge it to the card, but in the meantime pay it down ASAP.
But if you are only paying, say, 2% interest there is no hurry. That's the rate of inflation and there is no financial need to pay it down unless you just feel like it.
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Jwodie
LSU Fan
New Orleans
Member since Sep 2009
3905 posts
| re: Emergency fund opinions (Posted on 2/11/13 at 9:26 pm to foshizzle)
quote:
Generally speaking you don't want to have lots of cash just lying around uninvested.
This is becoming my concern...
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Jwodie
LSU Fan
New Orleans
Member since Sep 2009
3905 posts
| re: Emergency fund opinions (Posted on 2/11/13 at 9:30 pm to foshizzle)
quote:
Debt isn't necessarily bad if the rate is low enough. Occasionally I will hear of someone who doesn't pay down credit card debt for fear of not having a sufficient emergency fund. This is a bad idea.
Agreed. However my desire would entail using a portion of my current emergency fund to start knocking out higher interest rate student loans.
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matthew25 
Ole Miss Fan
Member since Jun 2012
1529 posts
| re: Emergency fund opinions (Posted on 2/11/13 at 9:42 pm to Jwodie)
6 months, at least.
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LSUtoOmaha
LSU Fan
Nashville
Member since Apr 2004
20472 posts
| re: Emergency fund opinions (Posted on 2/11/13 at 9:44 pm to matthew25)
This question really needs to depend on who we are talking about.
A 24 year old single guy who has been working for two years does not need to have 60k in the bank. I have 10k in a money market and don't really see the need to go beyond that.
If you are 35, with 2 kids and a wife who doesn't work, then yes, you probably want to have tens of thousands of dollars liquid.
This post was edited on 2/11 at 9:46 pm
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LSUtigerME
LSU Fan
Walker, LA
Member since Oct 2012
151 posts
| re: Emergency fund opinions (Posted on 2/11/13 at 10:36 pm to I Love Bama)
quote:
1. 2 months
2. 4-6 months
3. 6-8 months
4. one year
This.
It also depends on how you define emergency fund as well in terms of liquidity. I don't think this full amount should be in a low interest savings account. Maybe only 2 months there. The rest in liquid investment/higher return accounts.
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fishfighter
LSU Fan
Baton Rouge
Member since Apr 2008
11216 posts
 Online
| re: Emergency fund opinions (Posted on 2/12/13 at 7:16 am to matthew25)
quote:
6 months, at least.
This and thank God I had it.
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Ziggy
New Orleans Saints Fan
Ponchatoula, LA
Member since Oct 2007
18594 posts
| re: Emergency fund opinions (Posted on 2/12/13 at 8:35 am to foshizzle)
What amount of HELOC do you recommend having available?
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dewster 
Maryland Fan
TN
Member since Aug 2006
4439 posts
| re: Emergency fund opinions (Posted on 2/12/13 at 8:58 am to matthew25)
quote:
6 months, at least.
How liquid does this have to be?
6 month's worth lying around in a savings or money market account earning .5% would drive me crazy.
This post was edited on 2/12 at 9:00 am
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Sigma 
Auburn Fan
Member since Dec 2005
994 posts
| re: Emergency fund opinions (Posted on 2/12/13 at 9:55 am to foshizzle)
quote:
Another choice is to sock away as much as you can in your Roth and withdraw from it for emergencies. It's easy to do and there are no penalties, plus you should be putting money in your Roth anyway to get the tax-free returns. This is my second choice.
I wish you would stop advising people to do this. Or at least add a disclaimer that this should be an option only in catastrophic circumstances.
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Teddy Ruxpin
LSU Fan
New Orleans, LA
Member since Oct 2006
12375 posts
| re: Emergency fund opinions (Posted on 2/12/13 at 10:03 am to Sigma)
quote:
I wish you would stop advising people to do this. Or at least add a disclaimer that this should be an option only in catastrophic circumstances.
The idea is completely legitimate from how I see it (and doesn't require a "catastrophe") I guess we may have to spell it out for some people though.
If you have $5,000 and you don't have any in a ROTH IRA, then you can keep the $5,000 in a cash account doing nothing, while also incurring the opportunity cost of not contributing to your ROTH IRA. If you contribute to the IRA and an emergency hits, you can have the money in a few days at worst and pay no penalty. If the emergency never comes you have just maxed your current year ROTH contribution and get the tax benefits/return from that. You can also start saving towards a "more liquid" cash account emergency fund if your heart desires.
If you just keep the $5,000 in cash and the emergency comes, well, you are in the same place as you would be with the money in the ROTH, except you earned a shitty return the whole time. If the emergency doesn't come you just lost out on the year or years worth of returns on that money.
I think we assume some level of financial knowledge or we'd be here all day talking about not spending more than you make.
This post was edited on 2/12 at 10:08 am
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Sigma
Auburn Fan
Member since Dec 2005
994 posts
| re: Emergency fund opinions (Posted on 2/12/13 at 10:07 am to Teddy Ruxpin)
Of course but if April 15 passes and you haven't replaced the 5000, then that opportunity is lost forever. And let's be honest, it takes a fair amount of discipline to do in the first place.
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Teddy Ruxpin
LSU Fan
New Orleans, LA
Member since Oct 2006
12375 posts
| re: Emergency fund opinions (Posted on 2/12/13 at 10:11 am to Sigma)
quote:
Of course but if April 15 passes and you haven't replaced the 5000, then that opportunity is lost forever.
Ya, but if you weren't going to contribute in the first place, then you can't really say you "lost" it when the emergency actually hit.
If you kept in cash in the emergency hit, you lose out on contributing to a ROTH already due to the fact you never did contribute.
Under foshizzle's scenario, at least you attempted to contribute and take advantage of that taxable year. The fact it didn't work out is basically immaterial. No penalty occurs to the contributor and no harm has been done. You just got unlucky with the emergency.
quote:
And let's be honest, it takes a fair amount of discipline to do in the first place.
Some people can't be helped, no matter what advice they are given. 
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Sigma
Auburn Fan
Member since Dec 2005
994 posts
| re: Emergency fund opinions (Posted on 2/12/13 at 10:21 am to Teddy Ruxpin)
A mathematical argument can definitely be made for using the Roth for an emergency fund in this way. My point is that if it is done regularly, the odds of missing out on contribution opportunity are pretty high. Not to mention if >5500 is withdrawn, the total cannot be replaced in a single tax year. IMO an IRA is a retirement account and should be treated like one.
I didn't even mention that the 5k contribution you put in could easily be worth 3k when you might have an emergency, in your scenario. The investment vehicles used for Roths and Em Funds should be completely different.
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