So in the comments to my last post, I got a (tiny) bit of flack for being 20-something and wanting to have an emergency savings. I thought I'd start a new post where people could comment on the pros and cons of emergency savings and the different types of accounts (ie, under the mattress, savings account, money market, CDs, bonds, mutual funds, etc.)
Do you see value in having an emergency savings account? I know I do. A couple people have suggested HELOCs, credit cards, mutual funds, etc., but I personally need to know that we can pay our bills for two to three months WITHOUT burdening ourselves with debt (I have a strong aversion to paying interest). I also want to make sure the emergency money is always there, I would have hated to have been laid off tech worker in 2002 with my savings in stocks and mutual funds.... that would have been a very painful position to be in.
Likewise, in the event of an extended layoff, I wouldn't want to tap a HELOC right away (although I would do it if I ran out of emergency money). Personally, I don't want the added stress of an additional house payment while unemployed, especially if my job prospects don't offer as much compensation as the position I just left.
Maybe I'm thinking about this with too much emotion... for me, emergency savings is a form of security blanket. I am hoping it allows us time to think rationally in the event of a layoff, so we don't have to scramble to take the first job that comes our way, and I'm hoping it would allow us to keep our retirement accounts whole.
I've told you how I feel. Do you have emergency savings and where do you keep it? Do you have enough to pay your expenses for six months? or do you just keep less? or more?
23 comments:
I didn't see anyone giving you flak for being 26 and wanting to have an emergency savings. Why distort things? The point people were making is that there are better options than i-bonds. I thought the comments were helpful.
I agree, the comments were very helpful, that's why I think it would be beneficial to continue the discussion.
Rather than mix the discussion about ibonds and CDs in with discussion about emergency funds, I thought we could have a seperate area for people to discuss their opinions about emergency funds in general and their strategies and thoughts.
Before we had children we used to have an emergency fund. I wish we had one now, but we can barely pay all of our bills and daycare is expensive.
I think people in the previous post were commenting that young people don't need savings, that they should invest everything. I can see where they are coming from, but I don't necessarily agree. If you have no kids, no mortgage, and almost no debt, then maybe you can get away with not having savings.
When I was 27, I was layed off after about a year of hearing that "layoffs" would be happening. It was stressful, and I was glad that I had an emergency fund to carry me through my months of looking for the "right" job. Now, as I embark on buying a house, I will have 10-12 months of money in an interest bearing account that is not marked for anything but emergencies. I support the emergency savings blanket!
i have my emergency savings in an ING direct acct. all thru my adulthood i have had ups and downs and if i had any $ in savings it helped me greatly thru those times (tho i often didn't have anything saved up). i look forward to building it higher than present (was $5K but i moved and had to tap it. almost back up to $5K again, but want it to surpass that by as much as possible. future is always uncertain!)
wanted to add to my last comment -- when i have more than $5K i normally fund my roth till max. at moment it's maxed for the year.
An emergency fund is a very good thing, regardless of age. Honestly, I wish I had thought ahead as much as you are when I was your age (10 years ago).
I have a very small emergency fund ($1,000) and it's certainly not enough to support my family for 3 months or even 1. Right now, my primary goal is to reduce my debt and the emergency fund is more for things like large auto/home repairs and other unexpected large-ish expenses.
$.02
Assuming that emergencies are going to be rare, I'd prefer to invest the money, and if needed tap the investment, or a HELOC when needed. If the emergencies occur frequently, this may not be advisable. But if they occur maybe a couple of times in a lifetime (hopefully never), then one probably does not need to park money in a low-interest bearing account for a looong time :-)
You can't afford not to have an emergency fund. I'm also 26, and have a reasonable one, though it's not where I want it to be. I just keep mine in an INGDirect savings acct - earning 3.3% right now, and still about as liquid as you need.
If it's a true emergency, you may have trouble getting credit (HELOC or otherwise), and/or drawing that could impair your future short-term creditworthiness.
I think 3 months is a minimum, and even then only if you have other non-allocated (or money that could be easily re-allocated without severely damaging your plans) money invested. You should have some reasonable measure of liquidity. What if your car transmission goes out? Or your A/C in your house? Those can be multi-thousand dollar repairs - do you REALLY want to tap your stock fund for it?
My apologies! I misread your previous post.
Every financial plan I write includes a provision for emergency funds. Three to six months living expenses is usually considered adequate but it could be more if your job(s) are unstable.
A money market fund with a national brokerage would be ideal. You want check-writing and/or a debit card. The idea is to be able to get at it in an emergency, right?
A savings account or CDs at your local bank are not much good on weekends, holidays or if your bank is underwater, a la Katrina.
Mutual funds or other securites cannot be accessed if the financial markets are closed, as was the case the week of 9/11/2001. And they are subject to market fluctuations.
As for HELOCs, your lender would likely freeze your line of credit if the collateral is destroyed (tornado, fire, flood, Katrina). Lines of credit have great uses but an emergency fund is not one of them.
thc- no problem! It helped spur a good conversation.
Thanks for bringing up the money market fund at a national brokerage, that probably would be the most easily accessible option. Also, I never thought about a HELOC being frozen if the house was destroyed... I guess I just never thought it through that far.
I agree that an emergency fund is vital at any age. Though it's a question of how large it is and how liquid it needs to be.
I keep 1k in my checking account as my small emergency fund. This covers unforseen car expenses and such. Then I keep about 3 months salary in my ING account for bigger emergencies.
I used to have a money market that could write checks, but honestly, it's only about 4 days to get money from ING, and I have the 1k in my checking to last me until then.
Personally, I think an emergency fund is more important than paying off debt. You can be debt free and have no emergency fund, lose your job, then be worse off than you started. As always, Pay Yourself First. The $35 or whatever you save in interest is not worth the risk of having no safetey net.
There are a lot of opinions out there on setting aside funds for emergencies. It's another one of those risk vs rewards type situations we all agonize over.
Everyone's situation and risk tolerances are a bit different and unfortunately, there is not a one-size-fits-all approach even though having "3-6 months in monthly expenses invested in a safe, liquid account” seems to be the general rule. But that leads to all kinds of interpretations; you’ll just have to decide what makes you most comfortable.
Since the post above mine mentioned using a HELOC, I just want to make sure people are aware that HELOCs are secured debt, meaning you risk losing your home if you can't pay what you owe. Seems counter-intuitive to me to borrow money from a lender to keep from falling into debt during an emergency.
You also run the risk of the HELOC being terminated which, however unlikely, in theory could happen. Therefore I would not recommend solely relying on a HELOC for emergency savings. However, HELOCs do make sense as a backup plan to an already established emergency fund because you never know how much you'll actually need when emergency strikes and you could deplete your reserves.
To me, the real value of an emergency fund is the fact that it is 100% liquid and secure. If I can't get to it today, its value as an emergency fund is lowered.
Savvy saver – haven’t read the comments on the previous post, but yes, I bonds are a poor choice for an emergency account because you usually can't get at your money for the first 6 months. Good post to stir up some interesting discussion though!
This is a great conversation, but I think the real problem is how many people have no savings, no credit and no plan when the emergencies come. It is hard for young adults (18-29) to create an emergency fund in a society that is designed for us to live beyond our means.
I was an unemployed tech worker from December 2002 to Jan 2004. Currently 35 yrs old. In addition to the emergency fund, its good practice to watch the cash flow like a hawk. And in good times, be sure you don't setup required payments that will hurt cash flow in those emergency times (e.g. choose 30 yr mortgages vs 15 yr, choose term life over perm life, etc.) Watch the cash flow. My 2 cents.
I believe in emergency savings.
The amount needed depends on your financial situation.
My emergency savings are a combination of cash (money market), savings (to be sure I can pay this month's credit card bill, which I pay in full every month), and some blue chip stocks that I can get rid at any moment's time.... (years of emergency living there).
Money and Investing
I think we all agree that having an Emergency Fund is important. And I agree that it's important to find the right vehicle for these savings. I think it's most important to focus on what your emergency plan is first and then use your emergency funds as a tool to augment that plan.
As an emergency unfolds, I draw down my accounts as follows:
1) $3,000 in my Citibank Checking - accessible via ATMS & bank branches worldwide. American dollars in hand will get you to safety when all hell breaks loose.
2) $12,000 in ING Direct - Hopefully, the Citibank cash can tie me over til I can access this. Should support me for 6 months. I cut all discretionary spending at this time.
3) Brokerage account - Things are pretty dire if I have to access this account immediately. Hopefully the ING Account can buy me time as I sell bonds & stocks in anticipating of a draw down.
I'm thinking of adding a 6 months bond buffer between my ING Direct account and Brokerage account.
I agree with the comments reiterating the importance of emergency accounts. To me, the slight disagreement (as previously mentioned) is when questions of 'how much' and 'where should those emergency funds be parked?' are asked. For me, I accept that emergency funds will almost certainly make less than money in other investments. But this is because as emergency funds, Im more worried about accessibility and liquidity. In order to balance return and liquidity- my personal preference is to tier money (also previously mentioned). A small amount (1 month) in traditional accounts- where I can access the money within the time frame (this usually works out to money in checking simply because I havent yet transfered it to other accounts). I then like a few months security in risk-adverse accounts like (relatively) high interest bearing no risk accounts (e.g. ING). For my piece of mind, that is enough of a blanket where I can then access other funds if necessary.
I disagree with most of the comments -- I think most of you are being overly cautious and costing yourself potential returns.
The risks aren't as high as most of you think. Yes, there is a chance you work in tech and invest in tech -- but you could always diversify. There is a chance you could lose your house and not have a HELOC; but if you planned ahead, you could have other lines of credit available (e.g. credit cards and margin debt).
Of course, if you think there is a decent chance you (or your spouse) will get laid off, I would keep more cash. But for most of us, I think keeping our expenses down and having some reserve lines of credit would suffice. (see http://www.financialreference.com/blog/2005/08/23/you-dont-need-cash/)
Great discussion...lots of stuff to think about. Having never had an "emergency fund" before (and yet being a laid off tech worker in 2003) I am tinkering with what this means to me as I establish financial stability.
I think this is a really personal decision about security and risk.
Given my previous experience of relying on drastically reduced expenses and moving the auto loan to an existing HELOC (interest only payments, interest tax-deductible) in order to reduce monthly expenses (for ex.) I tend toward Brian's model, but not 100%.
I am currently re-evaluating my original decision to have ~3 months expenses in ING and investigating a more tiered approach (freedom account in ING + $1k buffer...and...???)
And the rest is TBD really. I want to take advantage of the fact that I have a 35k HELOC open to me, good credit with many empty cards with high balances, and Roth contributions as part of an emergency plan...so that my (newly) saved money can go to work for me making more.
That's the current theory ;)
I totally agree with having an emergency savings. I subscribe to Mary Hunt's philosophy, and I'm trying to get savings together for *all* anticipated emergencies, including car repairs, illness, and unemployment. I'm one of those who thrives on having a buffer of lots of money, and emergency savings is the way to go.
Emergency Funds in a savings account when you are carrying debt will cost you money.
If you're in a debt situation then you may be better off paying down your loans and having a line of credit in place to cover any emergencies.
My latest post gives an example where it can cost you almost $1000 a year to have money $6000 in a savings account when your are paying down a $200,000 mortgage.
Do the math for your own situation and see if your emergency fund is costing you money.
Having an emergency fund is important regarding of age. It should be cash in the bank. An emergency fund should not be a credit line whether it is a HELOC or that extra credit card.
Anyone who has credit card debt, really needs to focus on getting that paid off. Start off with a baby e-fund and then once you get the credit cards paid off, I think you should try to do a 6 month e-fund.
Theresa :)
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