On Emergency Funds

[fidgiegirl]

Hi all

You may or may not recall a thread I started a few months ago where I queried the forum about next steps in our finances. One of the items that stood out there was to build up our EF, which we are working on, and we also have a car fund. However, in reading more here and in MMM Forums, I am wondering if we don't need to find different vehicles for that EF "cash." Currently we have it all in our credit union. $10K is in our high-yield checking (2.something%) and $4K (car fund) is in a savings there (earning approx .000000000000001%).

People have mentioned Vanguard, people have mentioned TIPS, CDs are not any better than our high-yield checking (we could get that rate on up to $20K, previously $30K, grrr). I'm not too too keen on relying on Roth IRAs as an EF though in a true true emergency I would use them - only because we can't make up those contributions later if we did have to dip in.

Then there's MMM's approach of having an open LOC ready to go in case of emergency. Part of me says, well, why not, if it's a real, truly, GOTTA HAVE IT RIGHT NOW money emergency we already have a bunch of credit cards. We wouldn't starve. But then I say, ha! I like being able to pay cash and it's hard to pay that stuff off if times got crappy than to save when times are good. So ok, I already killed the CC idea. But the LOC is still tempting . . . but what would the difference be, really truly? Except that MMM has other - and a lot - of savings that aren't tagged "emergency fund" to dip into in order to pay off any use of an LOC or CC.

I'm also trying to think of what would be the emergency that could happen. We are both teachers and our employment and/or employment outlook (in my case, since my position is less sure than his) is secure, though there are always possibilities for disabilities, accidents, etc. that could have us be out of work. If we had a baby or medical that doesn't have to be paid TODAY. If the roof blew off or something I could see that as an emergency, or any number of plumbing or exploding water heaters or things like that. Just trying to think how absolutely RIGHT-NOW accessible does the $$ need to be, and how much of it. Obviously a rainy day will come, but it doesn't always mean that it rains so hard you need a boat right this second.

Also, I got taken to task (gasp!) on the MMM forums for advocating the Dave Ramsey approach of keeping $1000 EF around for a person asking about paying off her CCs. They just COULD NOT see why someone would hang on to that money when they had debt to pay. Well, I did use that strategy very well when I was paying off my CCs, because I never had to add to them. But I kind of feel like paying off the mortgage v. having a certain sized EF is the same conundrum, just on a bigger scale - bigger loan/bigger EF.

We did a mortgage payoff calculator and I was stunned to learn that if we sock $2000 onto our mortgage in month 5 (this would be our tax refund) we will save MORE THAN $2000 in interest over the life of the loan! That's like a 50% return. Or a 100% return?! I suck at the math of this, clearly. :) At any rate - a huge return compared to having that $2000 sit in any EF, anywhere!

Other thoughts on emergency funds? Ideas for where to park them?

[Dhiana]

My #1 rule about personal money decisions is do what helps me sleep at night :)
So keep your money where you feel most comfortable keeping it.

I will tell you that having your EF in a super easily accessed place is a HUGE stress relief when you get that phone call. That emergency call that you can't imagine could possibly happen to you or your family. The amount of interest hat money is or isn't making will be the last thing on your mind.

My husband found a great job here in Japan and we felt we had enough saved up for him to quit his job a month early, take a vacation before starting his new job. One month of Cobra wouldn't hurt us too bad...just a couple of days before we were to move, earthquake/tsunami struck Japan. We had no idea if there would be a job for him anymore, we already gave notice on the rental so we had to move out, find a new place, pay more Cobra...I'm still working on replenishing our EF from the disaster we weren't even here for!!

When true emergencies happen the last thing you want to be doing is sitting in the bank dealing with line of credit stuff and how much higher bills will be later because you have to pay that back. You want to grab your cash and resolve the problems at hand.
Eeking out every last penny from my money is important but the true value of an EF to me is its easy accessibility. Having this helps me sleep at night.
Set up your EF how it works best for you and your family, Dave Ramsey style, MMM style or your own combination thereof.

[rosarugosa]

Kelli: It's funny because I'm pondering essentially the same thing a thread over :)
I do have a HELOC with nothing owed on it, and to Dhiana's point, accessing it is as simple as writing a check. It's with a local bank with a branch within a stone's throw, so I imagine we could get cash in hand easily enough as well.
When I was talking to Mom a couple of years ago about doing something better with the $40K she was keeping in her NO interest checking account (not even earning that .000000000000001%), she asked "but what if YOU needed to borrow a very large sum of cash right away?" I told her that if I ever said that I needed $40K in cash right this very minute, it would mean I was doing crack and that she shouldn't give it to me. Still, it's nice to know that I still have the Bank of Mom to count on in an emergency. :)

[ApatheticNoMore]

Having a LOC of credit for an emergency seems disasterous to me. Private sector jobs don't come with that kind of security. It can be here one day gone the next, I learned that at a very early age (mid 20s - laid off in the recession, my first real job and only a couple years in), shocking, yea and that is exactly the level of security I have expected from jobs ever since, though I've had jobs I've stayed at years.

Besides I'd deliberately take risks if I thought it would advance my career. Take a 6 month contract position with nothing lined up after if it was in an area I wanted to work in. Yes, I'd do it if it seemed promising, but not if I thought doing so meant borrowing from Visa if I spent some time between jobs. Other than unemployment I can't think of too many emergencies, medical stuff maybe. Most of those who go bankrupt from medical bills have insurance, or so I've heard, but medical is so expensive you might never have enough.

[Kestra]

I've been thinking about this as well, so I don't have a good answer. When we got married DH and I agreed to keep $15,000 each, in cash - high interest savings account, for our emergency fund. So, about a year's worth of expenses. Now, 4 years later, we are planning to buy a condo soon, so we both have a lot more in non-retirement fund cash, but I also have a lot in retirement accounts that could be accessed within a week or so, just with some tax withheld. Once we buy a condo, our monthly expenses will be higher but I just can't decide how much cash I want to hold back as an amount I would need ASAP. If I needed the money a bit slower, there are credit cards, and my retirement accounts (of course, only as a last resort). Our jobs are both quite secure, and since we only spend 50% of our income, probably 70% or so, when we buy, the worst case scenario of losing both our jobs at the same time seems unlikely.

What is the biggest expense we could have in one chunk? A few thousand for a furnace or hot water heater or a condo special assessment? We have insurance for most dental work, Rx drugs, etc.

I'm inclined towards having $5000 in a high interest savings account and the rest in various investments, that are more or less accessible. I think I will also consider getting a HELOC, just to have on hand when we buy. But then sometimes I think I should have $10,000, which is closer to 6 months of expenses. But I want to get my retirement accounts maxed out asap, to get the tax reduction, so I keep going in circles with my thinking. Luckily, DH will decide what exactly to do with his own money. He's much more conservative than I am, so will probably keep $10,000-20,000 of cash around. And his retirement amounts are already maxed, so he has less of a dilemma than I do.

[artist]

I have our EF in a money market account. I have a debit card with a visa log on it attached to that account for quick "instant" access to the money. I can also transfer money to my checking account in about four business days.

QUOTE=fidgiegirl;121559]Hi all

You may or may not recall a thread I started a few months ago where I queried the forum about next steps in our finances. One of the items that stood out there was to build up our EF, which we are working on, and we also have a car fund. However, in reading more here and in MMM Forums, I am wondering if we don't need to find different vehicles for that EF "cash." Currently we have it all in our credit union. $10K is in our high-yield checking (2.something%) and $4K (car fund) is in a savings there (earning approx .000000000000001%).

People have mentioned Vanguard, people have mentioned TIPS, CDs are not any better than our high-yield checking (we could get that rate on up to $20K, previously $30K, grrr). I'm not too too keen on relying on Roth IRAs as an EF though in a true true emergency I would use them - only because we can't make up those contributions later if we did have to dip in.

Then there's MMM's approach of having an open LOC ready to go in case of emergency. Part of me says, well, why not, if it's a real, truly, GOTTA HAVE IT RIGHT NOW money emergency we already have a bunch of credit cards. We wouldn't starve. But then I say, ha! I like being able to pay cash and it's hard to pay that stuff off if times got crappy than to save when times are good. So ok, I already killed the CC idea. But the LOC is still tempting . . . but what would the difference be, really truly? Except that MMM has other - and a lot - of savings that aren't tagged "emergency fund" to dip into in order to pay off any use of an LOC or CC.

I'm also trying to think of what would be the emergency that could happen. We are both teachers and our employment and/or employment outlook (in my case, since my position is less sure than his) is secure, though there are always possibilities for disabilities, accidents, etc. that could have us be out of work. If we had a baby or medical that doesn't have to be paid TODAY. If the roof blew off or something I could see that as an emergency, or any number of plumbing or exploding water heaters or things like that. Just trying to think how absolutely RIGHT-NOW accessible does the $$ need to be, and how much of it. Obviously a rainy day will come, but it doesn't always mean that it rains so hard you need a boat right this second.

Also, I got taken to task (gasp!) on the MMM forums for advocating the Dave Ramsey approach of keeping $1000 EF around for a person asking about paying off her CCs. They just COULD NOT see why someone would hang on to that money when they had debt to pay. Well, I did use that strategy very well when I was paying off my CCs, because I never had to add to them. But I kind of feel like paying off the mortgage v. having a certain sized EF is the same conundrum, just on a bigger scale - bigger loan/bigger EF.

We did a mortgage payoff calculator and I was stunned to learn that if we sock $2000 onto our mortgage in month 5 (this would be our tax refund) we will save MORE THAN $2000 in interest over the life of the loan! That's like a 50% return. Or a 100% return?! I suck at the math of this, clearly. :) At any rate - a huge return compared to having that $2000 sit in any EF, anywhere!

Other thoughts on emergency funds? Ideas for where to park them?[/QUOTE]

[fidgiegirl]

He's much more conservative than I am, so will probably keep $10,000-20,000 of cash around. And his retirement amounts are already maxed, so he has less of a dilemma than I do.

Your finances are separate, then?

[awakenedsoul]

I believe that large emergency funds attract money. I keep a year's living expenses in my EF. It's such a psychological boost. I don't believe in HELOC's or cc's for emergencies. To me, those mean that you can't afford your expenses. (I was in that position a while back.) It really shifts our energy to have savings and not touch it. Most people can't save money. If they earn more, they spend more. I found that as I built up my EF, I became more organized and prepared. Now I do the maintenance on my home and car before something goes wrong. When I was in debt, any uexpected repair threw me into a tailspin...

[rosarugosa]

ANM: I'm thinking of the HELOC as a good potential solution for an emergency of the "new furnace right away" variety. It allows one to make an immediate purchase while pulling money from another source to pay off the HELOC loan almost immediately, but not within 24 hours. A credit card is satisfactory for a similar type of emergency. A HELOC would allow us to buy a car ASAP, which we might need to do at some point, and a credit card line might not be enough (not really sure, we luckily don't need to care usually what cc limits are, since we pay off every month and don't push to the limits). We do have enough in our e-fund to replace a car, but it would take a few days to get our hands on the cash. Job loss is a whole different ball game. Fortunately, my employer offers reasonable severance, and then there is unemployment if necessary, so we would have a good buffer before the stuff really hit the fan. With the house paid off and no other debts, I imagine we could weather most storms.
I agree that a solid EF has enormous psychological benefits.
Kestra: It sounds like you two are in a good position as far as cash reserves go. Happy condo-hunting!

[Life_is_Simple]

I told her that if I ever said that I needed $40K in cash right this very minute, it would mean I was doing crack and that she shouldn't give it to me.

:laff:;):laff::):laff::D:laff:

[Kestra]

Your finances are separate, then?

Yes. We got married at 31, both had assets, and like to manage our own money. We're both savers but have totally different money management styles and are comfortable with different things. We'd drive each other crazy if we combined our money. Everything's open book though. I track everything for both of us and we discuss things when needed of course. But technically we can do whatever we want with our own money.

[ToomuchStuff]

I only learned what the term HELOC meant, in the last two years. Pretty sad, considering some of the people I know. That aside, my S-i-l who works for a national or regional credit union, was talking with my mom a while back, when she was considering using a HELOC for a basement remodel project. We both learned that if you don't use the HELOC within a certain period of time, it goes away.
I am old fashioned, and my EF, is at a local CU, but in a savings account (with its pitiful interest, that is better then no interest checking). I am also trying to grow it for a roof replacement fund, and if I was out of work, my expenses would rise.

[softweave]

Four years ago, I went to a car dealership to test drive a particular model and to my surprise drove home in a new car. I was able to write a check for the purchase price because I had a HELOC to borrow from until I could pull money from savings. Although my CC limit was more than the price of my new car, the dealer wouldn't accept CC car purchases.

[dado potato]

My personal choice for a vehicle replacement fund is Vanguard's Short-term Municipal Bond Fund, ticker symbol VWSTX. For certain other reserves and "the unexpected", I have savings at Alliant Credit Union, based in Chicago.

The question of "where to park" these funds is a very good one. Safety of principal needs to be high, and that means that yield will be comparatively low. Also, you need to feel comfortable with the accessibility, ie, the ability to move funds in X number of days time from savings into your regular checking account.

[fidgiegirl]

dado potato, thanks for that info. I knew you had mentioned that fund somewhere else and couldn't remember what it was called. I will do some more reading to understand these kinds of funds better, but if I may - why did you choose this particular one? What is it about it that made it the final selection when there are soooooo many funds out there to choose from? Thank you!

[dado potato]

FG:
At the time I made the determination, VWSTX was comparatively low in annual expense ratio at 0.2%. The portfolio of municipal securities was over 1400 bonds, of which 19% were rated AAA. 60% were rated AA, and 19% were rated A (in other words, bond rating agencies were saying there was minimal risk of default). The after-tax yield currently close to .4% is competitive, compared to other relatively low-risk alternatives.

I consider VWSTX "the one to beat". If there is some other fund better suited to savings for vehicle replacement, I am not aware of it. Bring it on...

Alliant Credit Union appeals to me not only for the yield, which is comparatively high, but also for the financial management tools available free on the credit union website: Budget, Cash Flow Calendar, Net Worth Calculator, etc. It is not a hard-headed Norwegian, but more of a bleeding-heart liberal factor, that Alliant CU is part of the credit union system. Not a bank. However, that said, I consider it "the one to beat". If there are better rates and services available somewhere else, I would consider moving my savings, but I am not aware of any better alternative.

[junkman]

FG:
I consider VWSTX "the one to beat". If there is some other fund better suited to savings for vehicle replacement, I am not aware of it. Bring it on...

VWSTX doesn't perform well compared to its peer group. In fact (according to Morningstar), it has underperformed its category average (ST nat'l muni) over the last three years.

In thinking you can substitute a bond fund for true cash-equivalents, you're making the same mistake that yield-hogs always do and confusing 'low default rates' with 'won't default'. That it's a risk you can take. But it's a risk that could blow up in your face just as easily.

[pcooley]

We have our emergency fund in an ING savings account. It earns something like .75%, which is still better than our credit union. Philosophically, I would like to just keep it all in the credit union, but with that paying something along the lines of .05%, I just cannot commit to switching it over, in spite of the fact our $6000 earns something shy of $4 a month. I'm not so sure about ING's being bought by Capital One, but all those banks are doing things I don't approve of, I'm sure. We have a small amount of savings in the Permaculture Credit Union, which lends out money to people buying energy efficient cars and building projects guided by Permaculture principles, but that doesn't pay much back in terms of interest either.

Beyond that, I just get frustrated with fiscal instruments. I don't want to worry about money market accounts, and all the rest of it, though I probably should. We have a good amount squirreled away in a retirement account, but I couldn't tell your if it's a 401K or what -- it's just the retirement account offered by our work.

We're still pushing most of our money into paying off the mortgage. I know that there are people who feel that paying such a low interest rate loan off is not worthwhile, but we only have about 2.5 years to go at our current rate of payment, and I'll rest a lot easier when the house is ours.

[dado potato]

junkman,

I am well aware of the risks involved. Not sure I agree that a mistake has been made... perhaps time will tell. The duration of the muni funds in the peer group may be a tad longer than VWSTX. I prefer the shorter duration, due to the risk of rising interest rates... but with shorter average maturities and shorter duration, yield can be expected to be less. (Ye Olde Yield Curve.)

Nothing I say is to be construed as investment advice.

[junkman]

junkman,

I am well aware of the risks involved. Not sure I agree that a mistake has been made... perhaps time will tell. The duration of the muni funds in the peer group may be a tad longer than VWSTX. I prefer the shorter duration, due to the risk of rising interest rates... but with shorter average maturities and shorter duration, yield can be expected to be less. (Ye Olde Yield Curve.)

Nothing I say is to be construed as investment advice.

dado,

The 'risk' in munis isn't in their maturity, but in their credit quality. Yes, eventually, interest-rates will go up. That's what all prices do: they fluctuate, and an interest-rate is nothing but a price.

Who issues munis, and how good are their balance sheets? They're crap, due to over-promising and underfunding. When the US economy blows up --and it will shortly-- munis are going to get re-priced downward. It won't be a gradual repricing. It will be sudden and horrendous. Those who own the underlying assets directly and who can hold to maturity will do far better about salvaging value than bond fund owners who will suffer the full brunt of the re-pricing, because bond funds have no maturity.

That said, I'm long a lot of individual munis, as is any properly-diversified bond investor, and I've done well by them. E.g. on a recently called hospital muni, I ended up making 14.2% per year over my holding-period, which is why I don't screw around with short-term bond funds. Expenses --no matter how small-- eat into profits disproportionately to funds with longer maturities.

But to each, his own. If you're happy with the risks and low returns of VWSTX, go for it. But don't tout the fund to anyone else as a good idea, because it isn't. It's high-risk investment behavior disguised as "cash-management". The two are very different things.

Charlie

[dado potato]

I use VWSTX as a vehicle replacement fund. I find it rather convenient to make regular monthly contributions to this fund. The fund doesn't need to get bigger than the price I plan on paying for my next car. So, while it may not fit your purposes as a muni bond investor, the short (under 2-year) average duration makes sense to me for my purpose.

I do agree that the holder of a bond is in a different position than a holder of a bond fund, relative to risks and costs. But unless the exact time of replacing a vehicle is known in advance (which in my case it is not ), I don't see the practicality of holding a muni bond to maturity (or call date) ... for the stated purpose.