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Emergency Fund

5,506 Views | 38 Replies | Last: 3 yr ago by giddings_ag_06
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RockOn
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I think most have recommended a bank money market fund or a money-market bond fund like VMMXX.
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AgOutsideAustin
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AG
Thanks Dave ! How is Tennessee ?
TXTransplant
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I had about 1/3 of my cash savings in a few mutual funds that I first opened about 6 years ago. I've lost about 25%, but I still haven't dropped below the principle that I invested. Haven't pulled anything out (yet) and I'm holding my breath it will stay above that threshold.

The rest is in a "high yield" (1.5% - ha!) savings accounts and my HSA (which I did pull out of some bond funds and into cash).
TriAg2010
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SoupNazi2001 said:

RockOn said:

I think most have recommended a bank money market fund or a money-market bond fund like VMMXX.


Yes many did but many also got lured into thinking stocks can't go down so I will get extra returns out of it.


Any citations for that "stocks can't go down claim?"
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YouBet
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I haven't seen anyone worrying about that (at least on here) but that doesn't mean anything. It's meant to be almost a purely liquid account IMO. I have ours in an online savings account earning somewhere around 1.5% last time I looked. And I'm fine with that. Don't care that it isn't earning anything.
TXTransplant
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SoupNazi2001 said:

TXTransplant said:

I had about 1/3 of my cash savings in a few mutual funds that I first opened about 6 years ago. I've lost about 25%, but I still haven't dropped below the principle that I invested. Haven't pulled anything out (yet) and I'm holding my breath it will stay above that threshold.

The rest is in a "high yield" (1.5% - ha!) savings accounts and my HSA (which I did pull out of some bond funds and into cash).


You haven't dropped below the principal because you invested 6 years ago. If you invested it in the last couple of years you would be underwater and there is still a relatively high chance we could go much lower. If that coincides with a job loss, that is the problem. Not worth the risk in my opinion unless you overfund the emergency fund to handle a potential loss.


I'm fortunate in that I have access to cash that's about equal to one year of my salary before taxes. And that doesn't include the principle in my Roth. I've been unemployed before, so I'm actually pretty conservative with my savings. I'm also not worried about being furloughed or laid off, and my biggest expense (mortgage) is $1500/month.

But I'm sure a lot of people are pooping their pants right now.
PeekingDuck
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SoupNazi2001 said:

Here is one for you, got the most stars in the thread.

https://texags.com/forums/57/topics/3089771/replies/55840960
Here's one what? I must be missing something.
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OasisMan
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So far so good
nactownag
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Also a good example for why paying down debt makes sense. A nice pile of cash and less debt makes a crisis less scary financially
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No Bat Soup For You
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If they invested their emergency fund ten years ago in a non taxable account they'd be up way more than the 25% they would have just lost. Not a great example.

Now if someone just invested their emergency fund six months ago they'd be SOL. It's a risk.
Cyp0111
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You're also picking a long cycle bull market.
John Francis Donaghy
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SoupNazi2001 said:

nactownag said:

Also a good example for why paying down debt makes sense. A nice pile of cash and less debt makes a crisis less scary financially


Agreed, paying down mortgage debt has also been chastised here for years because of you know, math, at least not exponential math though.


Times like these are exactly why I don't pay extra towards my mortgage. I'd much rather have the cash to draw on in times of need than a mortgage with a lower balance.
JSKolache
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Meh. You dont lose $$ unless you sell. XOM is still paying $0.87 dividends. That's 8% at current prices. You wont see that rate in a savings account, ever.
John Francis Donaghy
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SoupNazi2001 said:

John Francis Donaghy said:

SoupNazi2001 said:

nactownag said:

Also a good example for why paying down debt makes sense. A nice pile of cash and less debt makes a crisis less scary financially


Agreed, paying down mortgage debt has also been chastised here for years because of you know, math, at least not exponential math though.


Times like these are exactly why I don't pay extra towards my mortgage. I'd much rather have the cash to draw on in times of need than a mortgage with a lower balance.


It depends on how you did it. If you allocated extra money to your mortgage over the year's, but still invested and still maintained sufficient liquidity for an emergency fund, in times like this it feels good to be debt free.


Debt free is nice. Enough assets to pay all your living expenses for years on end is the definition of security.

Plus, if things go south before you get to the debt free point, you'll still have bills to pay, and a lot less cash reserves to do it. It's actually a fairly high-risk approach until you pay everything down to 0. I just don't have the risk tolerance for that sort of approach, nor do I plan to live in my current house long enough to pay it off ecen with a very aggressive approach. So to each their own.
Grown Pear
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I'd also like to add that it's important to continually review your current and near future life plans/goals/etc.

Don't get me wrong, this market gave me a gut punch to my investment acct and Roth IRA. But in a perverse sort of way I'm almost "lucky" in a sense. I'm intentionally in between jobs right now... knowing that, I shifted a good bit of my assets into cash for living expenses and emergencies. About a years worth of living expenses if I "really cut things out". Just found out my start date at new job got pushed back 2 whole months which sucks... but I'm prepared. I'm also calculating how much I can throw back in the market.

Sure would be nice having a paycheck though....
cjsag94
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SoupNazi2001 said:

Here is one for you, got the most stars in the thread.

https://texags.com/forums/57/topics/3089771/replies/55840960


And I stand by that recommendation still. I will qualify that opinion by saying if your "emergency fund" is all the money you have access to in the world, then keep it safe. But say you have $50,000 and you view your emergency fund as being $20,000... Then invest your "emergency fund" with the rest of it.

Sure, you can pick the worst 3 weeks we've ever had and make your case.. But I'm willing to take my chances on the 99.9% of the rest of the time that things are significantly better.

HSEAG13
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Alright this thread happened to hit me at a time in my life where I'm semi going through this. I've got a 10K CD that was left to me from a deceased relative with a maturity date of next year currently earning 1.25 interest each month. Would it be worth it pull it out and throw it in a bond stock? The penalty Doing this is 25$ and I'll front that to make it an even 10K. It's not a part of my emergency fund, but I had planned to use it as a down payment for my next move in 2-5 years. I'm looking for something that will appreciate more than what I'm getting now (shooting for 5%/yearly return), or if this is even a wise move. I'm just mad that I didn't move it out sooner (going on 6 years) because I was using it as a backup to my rainy day fund.
cjsag94
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Bonds have not been immune to this drop, except treasuries. If you want $10,000 and nothing less.. cd or cash is your answer.
Waltonloads08
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SoupNazi2001 said:

Many people over the last 10 years have worried about their emergency fund not earning hardly any interest with many advocating investing it in stocks. This market and situation is Exhibit A on why you don't focus on returns for an emergency fund and have at least 3-6 months worth of expenses. Losing your job sucks enough, losing 25%+ of your emergency funds is just an additional kick in the nuts..


People's emergency funds used to exist in savings accounts that actually generated a decent return with compound interest.

Now, you mostly lose purchasing power through inflation while your savings accounts earn precisely dick.

RockOn
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From casual observation, those that seek return on an emergency fund have 2 related issues working against them.

1 - too high of monthly expenses ($5,000/mo x 6 = $30,000 vs. $1,200/mo x 6 = $7,200)
2. - too low of savings rate. With a savings rate of 75% you can build a 6 month emergency fund in 2 months of earnings. At that point, who cares what you earn on it over a year?

After 2 months of working, the rest goes in to investments. Then at the end of that first year you have 5.2x your emergency fund in investments.
cjsag94
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RockOn said:

From casual observation, those that seek return on an emergency fund have 2 related issues working against them.

1 - too high of monthly expenses ($5,000/mo x 6 = $30,000 vs. $1,200/mo x 6 = $7,200)
2. - too low of savings rate. With a savings rate of 75% you can build a 6 month emergency fund in 2 months of earnings. At that point, who cares what you earn on it over a year?

After 2 months of working, the rest goes in to investments. Then at the end of that first year you have 5.2x your emergency fund in investments.


I don't know what message or point this post is trying to suggest....

People spend too much and don't save enough?

How does that correlate to people seeking a return (any return?) on their safe money?
cjsag94
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nactownag said:

Also a good example for why paying down debt makes sense. A nice pile of cash and less debt makes a crisis less scary financially


You are correct... The COMBINATION of those 2 things is nice for some people.

However, in my experience, people pay down debt at the expense of building that pile of cash. At times like this, they now find that a lower (or even zero) mortgage balance, but minimal liquidity, does absolutely nothing for them. They are looking at forbearance, or equity loans for liquidity... Worst case is selling the house because they no longer qualify for loans and find out a paid off home doesn't feed your family or keep the lights on... And have insufficient piles of cash.

There are 2 main positions in the pay off debt discussion...

No mortgage equals safety and security.

Or

I'm saving plenty and now decide with my incremental dollars, do I save more or pay extra on debt.

I see way to many people who believe the former.

Fyi, entering retirement creates this same scenario for far too many people. They walk into retirement and realize they are used to living on $7500/month, and social security brings them $4500 (half of what they earned working). Mortgage payment was $800 per month. Now see that had they saved that extra couple of thousand a year for all those years, instead of sending it to the bank, they'd have more options now.

You can do both.. but you have to have sufficient cash flow and liquidity regardless of your path.
mm98
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I've got about 6 months in my bank savings and about another 6-8 months that I moved into a money market.

I figure in a worst case scenario, I lose my job and have the desire to leave the energy business and get into something more stable, I'll need a larger cushion in the transition.

Plus my son is autistic and I have to keep a little more than most in case he ever needs anything.
YouBet
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Sounds like we have two different philosophies here that require two different strategies:

1. Conservative liquid emergency fund with no need to earn return or little return
2. More aggressive liquid emergency fund that can be partially invested

Mine is #1 and I give two sh^ts about earning a stock market equivalent return on it. I'll do that with the other 99.9% of my money. I have 1.5% in my online savings account and I'm fine with that because I want the security of knowing my principal is there if I need it right now.

The second option feels more like my HSA. I maintain a minimum balance in the cash account while investing everything over $2k (in my HSA's case). I'm good with that strategy with my HSA because I look at it solely as an investment vehicle like an IRA.
permabull
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evestor1
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As a landlord my emergency fund has always been a major topic.

I've floated between 3-5k of rental net income each month for years.
I've worked a full time job as well. So unemployment is a factor.


Years ago, my emergency fund was a formula of (Cost of Life) - (Unemployment + Net Rental Income) and then adjusted out for when unemployment voids. I was laid off for a few weeks and it opened my eyes.

Since being laid off once ...

My emergency fund is now what i call a disaster fund equal to (Cost of Life + Cost of Rentals) x 12 months


And lastly - never let a company own your primary phone. This will be a minor emergency when you get escorted out and you cannot call the wife to say "hey, i am headed home b/c i dont have a job, but its okay b/c we've done this before"


ORAggieFan
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hypeiv said:

Is an emergency fund only for personal finances or should small businesses have one too... Seems like a bunch couldnt make it make past a few weeks much less 3-6 months.
Well, I think emergency plans take into account minimum needed to survive while changing habits. For an individual that would be things like eating out, buying new clothes, whatever. For a business, you cut spending so your reserves get you through. That is often done by cutting the cost of people.

Don't equate layoffs as being irresponsible in saving.

That said, I'm sure many will fail because they don't even have that minimum.
AgOutsideAustin
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"And lastly - never let a company own your primary phone. This will be a minor emergency when you get escorted out and you cannot call the wife to say "hey, i am headed home b/c i dont have a job, but its okay b/c we've done this before"

^^^^^ Great advice I had that happen before and even though nothing was bad there were pictures and texts from my family that were on that phone. I didn't want the ass that fired me going through it and I know he would.

Never again.

Now I always keep a personal phone and if a company wants my laptop and phone they can have it at a moment's notice and it won't bother me.
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