Why Do We Keep An Emergency Fund

[SomeDay]

Many articles written by financial experts recommend that we all should keep 3-6 months of emergency fund in the form of cash.

On average, a household spend about $3000 a month so 3-6 months of cash for emergency is $9000-$18,000, that's a lot of money sitting there in the saving account without earning anything.

I think instead of keeping that emergency fund without earning any interest. We should take that $9000-$18,000 and invest in the low risk stocks or bonds that earn 4%-5% a year.

If we do run into into an emergency and need cash, we can always withdraw the money by selling the low risk/bonds from above. We can also use credit cards to pay for emergency and pay off the balance in full a few days later without having to pay the credit card interests.

[Nutria]

Many articles written by financial experts recommend that we all should keep 3-6 months of emergency fund in the form of cash.

On average, a household spend about $3000 a month so 3-6 months of cash for emergency is $9000-$18,000, that's a lot of money sitting there in the saving account without earning anything.

The sophisticated ones don't say "cash". They'll say "low risk" and "liquid".

I think instead of keeping that emergency fund without earning any interest. We should take that $9000-$18,000 and invest in the low risk stocks or bonds that earn 4%-5% a year.

Whoa, you haven't looked at bond yields in a few decades!!! Nothing that's low-risk earns 4-5% anymore.

If we do run into into an emergency and need cash, we can always withdraw the money by selling the low risk/bonds from above.

The problem is that bond values fluctuate in value based on current market interest rates for that kind of bond.

I've just finished accumulating that fund, and will move the money into a short-term (impacted less by interest rate hikes, and recovers value quicker) bond fund.

We can also use credit cards to pay for emergency and pay off the balance in full a few days later without having to pay the credit card interests.

Don't let Dave Ramsey here you say that!!!

[disneysteve]

We should take that $9000-$18,000 and invest in the low risk stocks or bonds that earn 4%-5% a year.

Stocks and bonds are not guaranteed. "Low risk stock" is an oxymoron.

The point of your EF is not to make a lot of money on it. The point is to have safe, easily accessible money set aside for emergencies. Early on, it may be the bulk of your savings, and that's fine. As you move along and build wealth, that EF becomes a smaller and smaller sliver of your portfolio and the fact that it's only earning 1% really becomes insignificant.

[feh]

Whoa, you haven't looked at bond yields in a few decades!!! Nothing that's low-risk earns 4-5% anymore.

+1

There's no such thing as a safe investment returning 4-5% these days.

[bjl584]

An emergency fund shouldn't really be viewed as an investment or as an investment opportunity.

It's separate from your portfolio. View it as a cash account for emergencies. It's security and peace of mind. Nothing more.

[scfr]

We are about to tap our "emergency fund*" for the first time. In the past we have had minor things come up (short term unemployment for me, minor weather emergencies) that we were able to cover without tapping the fund. Since we decided to become financially responsible, we have always had additional savings to cover standard upkeep and extra repair/medical issues for people, pets, and property.

But recently our house was hit by a major hail storm. We will be replacing many things on our house, including the roof. So, we will pay out of pocket for the full home insurance deductible. In addition, we have decided to make an not-planned-for roof upgrade (metal instead of shingle), so we will be paying for the upgrade amount out of pocket. The new roof is a requirement, the upgrade is not, but we think it's our best option and the funds are there so we are going to go ahead and do it.

*Re our emergency fund: We no longer keep a separate emergency fund. After decades of savings, we reached a point where we knew we had enough savings to cover darn near anything life threw at us and stopped keeping a separate line item for the EF. But for folks who haven't reached that point yet, I think there does need to be a designated emergency fund. Either a separate physical account, or a separate line on the personal balance sheet. (Some people are good at tracking and separating money on paper, some people need to keep their money piles physically separate. Either is fine. Do what works for you.)

We have never kept our EF in anything other than FDIC insured savings. It's really a relief to be able to take this minor financial setback in stride and not feel any stress about it. We've spent decades getting ready for the sort of event that we know happens to everyone sooner or later.

[Nutria]

It's really a relief to be able to take this minor financial setback in stride and not feel any stress about it. We've spent decades getting ready for the sort of event that we know happens to everyone sooner or later.

A woman in another forum asked "what it all means", if the rainy day fund is "full", 401(k) is being maxed out, etc, etc. Why keep fretting over budgets?

The answer is "control". Disaster hit, and you're still in control of your circumstances. If you were drowning in CC debt and your HELOC was maxed out, then... not so much control.

[scfr]

A couple other thoughts, since I did not have time to post everything I wanted to on my previous post:

In addition to the deductible, we have to cover the "depreciation" amount until after the work has been done and we have submitted invoices to the insurance company. We have already received a check from the insurance company*, but only for the depreciated value of the items damaged. Once we have had the roof, window, gutters, etc replaced we submit invoices to the insurance company and they send us another check for the "depreciation." But in the meantime, we have to pay that out of pocket.

*There is no mortgage lender involved, which makes things much easier.

As far as WHERE you keep your EF, personally I've opted for FDIC insured options only.

But I suppose for some folks a "hybrid" approach might be acceptable, depending on the size of the EF and overall risk factors. Let's imagine a 2 earner household with stable incomes working in different fields (in other words, only minimal danger that both would be laid off at the same time or have income stop due to the government going over a fiscal cliff or something like that), healthy, from a good gene pool health-wise, no dependents, no debt (house owned outright, etc), with a 1 year EF. If a couple in that situation wanted to keep only half of their EF in FDIC insured savings and the other half in another relatively conservative investment vehicle, I wouldn't think that they were crazy.

[Nutria]

[QUOTE=scfr;407972]A couple other thoughts, since I did not have time to post everything I wanted to on my previous post:

In addition to the deductible, we have to cover the "depreciation" amount .../QUOTE]

Did you accidentally reply to the wrong thread?

[Nika]

An emergency fund shouldn't really be viewed as an investment or as an investment opportunity.

I have a problem of losing 4-5 percent each and every year (inflation), when I could be making that. So that is 10% difference, cumulatively.
So if don't have an emergency for over 3 years, than, if you have one when market is down, you are still ahead.

Yes, I think it should be invested, especially in high cost of living places, where EF can add up to a lot of money.

If your basic living expenses are 8k+ per month, than 6 months of it is almost 50K. That a lot of money to leave to erode from inflation.
I think the better strategy is to keep it invested, but build it to more than 6 months. A year perhaps. That way, when the market goes down but you have to draw, you will still have enough, and in the meantime, it can grow.

[Nutria]

Yes, I think it should be invested, especially in high cost of living places, where EF can add up to a lot of money.

If your basic living expenses are 8k+ per month, than 6 months of it is almost 50K. That a lot of money to leave to erode from inflation.
I think the better strategy is to keep it invested, but build it to more than 6 months. A year perhaps. That way, when the market goes down but you have to draw, you will still have enough, and in the meantime, it can grow.

For that much money, a "conservative balanced" investment strategy would be called for. Heavy on bonds and stable, dividend-generating stocks. The highs won't be as high, but the lows won't be as low. And you aren't mandated to withdraw from the stocks first, so that might give them time to rebound a bit.

[scfr]

[QUOTE=Nutria;407973]

A couple other thoughts, since I did not have time to post everything I wanted to on my previous post:

In addition to the deductible, we have to cover the "depreciation" amount .../QUOTE]

Did you accidentally reply to the wrong thread?

Not at all. My point (which I did not make clear, sorry) was that simply having enough to cover the deductible on our homeowner's insurance would not have been enough. Above and beyond the deductible, there is additional money (the "depreciation" amount) that we have to pay out of pocket and wait for reimbursement from the insurance company. In total, it's a substantial amount of money that we needed to have available for immediate use.

[scfr]

that's a lot of money sitting there in the saving account without earning anything.

A basic savings account paying 1% isn't the only option. Long-term CDs are an option. If an emergency arises and you have to withdraw funds, you may face an interest penalty. But if there is no emergency, you will have done quite a bit better than the 1%, especially if you take some time to rate shop.

[corn18]

I have a problem of losing 4-5 percent each and every year (inflation), when I could be making that. So that is 10% difference, cumulatively.
So if don't have an emergency for over 3 years, than, if you have one when market is down, you are still ahead.

Yes, I think it should be invested, especially in high cost of living places, where EF can add up to a lot of money.

If your basic living expenses are 8k+ per month, than 6 months of it is almost 50K. That a lot of money to leave to erode from inflation.
I think the better strategy is to keep it invested, but build it to more than 6 months. A year perhaps. That way, when the market goes down but you have to draw, you will still have enough, and in the meantime, it can grow.

I agree with you in a way, as I have a large EF and put it into stable, short term bond mutual funds. Then watched it erode 1% over 6 months, chickened out and pulled it all back out. Obviously, my tolerance for risk in an EF is low to none. That doesn't make me right and you wrong, just more of a Suze Orman approach: do what makes you happy. There isn't a wrong answer to this question. Just never forget what happened in 2008/2009. If you can tolerate losing 10%-20% of your EF, then your plan is fine.

[richard johnson]

Emergency funds really reduce a person's stress level. I keep a hefty amount in a safe, insured liquid account.