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Emergency fund opinions
Posted on 2/11/13 at 8:46 pm
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.
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.
5
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
2. 4-6 months
3. 6-8 months
4. one year
Posted on 2/11/13 at 8:53 pm to Jwodie
1. 4 months
2. 6 months
3. 12 months
4. 13+ months
2. 6 months
3. 12 months
4. 13+ months
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
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.
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.
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 2/11/13 at 9:22 pm
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.
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...
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.
Posted on 2/11/13 at 9:42 pm to Jwodie
6 months, at least.
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.
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 2/11/13 at 9:46 pm
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.
Posted on 2/12/13 at 7:16 am to matthew25
quote:
6 months, at least.
This and thank God I had it.
Posted on 2/12/13 at 8:35 am to foshizzle
What amount of HELOC do you recommend having available?
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 2/12/13 at 9:00 am
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.
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 2/12/13 at 10:08 am
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.
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.
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.
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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