WÎLL THÉRE BE A NEW STANDARD FOR EFs?

[dancinmama]

Another thread got me thinking about this. Before this recession, the rule of thumb for a fully funded emergency fund was 3-6 months.

Because so many people have been out of work for so much longer than that, do you think the standard for the length of time an EF should cover will be longer going forward?

Will you do anything different going into the future?

Where will you park your EF money?

DH and I have built up our EF to cover one year and are considering stretching it to two. It's currently in a MM earning close to nada.

[thyme4change]

Suze Orman is now saying 9 months.

[stl76]

I would think the EF level would be dependent on a lot of things. Your comfort level, how fast you can find replacement employment (meaning how marketable are your skills), is your home paid for, etc.

[haapai]

There never was any kind of mathematical rationale behind the old rules of thumb.

I think that we might be moving toward an era of fixed and discretionary expenses instead of x number of months of bare-bones expenses. One of the problems with an EF denominated in months is that if you spend it during a period of unemployment (or underemployment) and fail to regain your old level of income, it might just take you forever to build it back up again.

[Deleted]

I don't know, I am fine with 3-6 months but then again I have multiple streams of income and would rather work on increase the amount of streams vs building my EF.

[thyme4change]

I'll say it - technically, I don't have an emergency fund. I have money in checking, savings, on-line savings, money markets, mutuals and stocks. If I have an emergency, I can pull from where-ever seems best. I will continue to grow that pool of money for as long as I've got income coming in.

[ohmomto2boys]

I'll say it - technically, I don't have an emergency fund. I have money in checking, savings, on-line savings, money markets, mutuals and stocks. If I have an emergency, I can pull from where-ever seems best. I will continue to grow that pool of money for as long as I've got income coming in.

This is how we look at our savings as well. We keep a certain amount in our savings and when it increases, we move some of it to the money market account, Roth or 529's. 401k is already being funded directly. If we hit a big emergency - we could pull from whatever would make the most sense.

[yogiii]

Jun 30, 2011 13:14:11 GMT -5 ohmomto2boys said:

I'll say it - technically, I don't have an emergency fund. I have money in checking, savings, on-line savings, money markets, mutuals and stocks. If I have an emergency, I can pull from where-ever seems best. I will continue to grow that pool of money for as long as I've got income coming in.

This is how we look at our savings as well. We keep a certain amount in our savings and when it increases, we move some of it to the money market account, Roth or 529's. 401k is already being funded directly. If we hit a big emergency - we could pull from whatever would make the most sense.

Basically the same with us too. Actually we probably keep too much in our ING account. I should open up a taxable account and move it there, but I get lazy and chicken. I'll put it on my summer to do list. Phil says you only need 5k in savings

[midjd]

Same here. Though from what I can tell from conversations with friends/family members, the people who already had an EF aren't changing, and the people who have never had an EF aren't changing either...

[Deleted]

Ditto. I just have a pecking order. I'd pull from checking, then savings, then post-tax mutual funds/investments, then ROTHs, then 529's, and then 401k.

I will say that in light of the economy, it does make me consider accessability a lot more than I used to. I'm more likely to load up a ROTH IRA than a 401k.

[phil5185]

Because so many people have been out of work for so much longer than that, do you think the standard for the length of time an EF should cover will be longer going forward?

Before 401ks, IRAs, etc - we didn't think like that (6 months EF). We kept the family wealth account in stock funds with a broker. An actual cash EF was in the $500 to $1000 range. Long work stoppages were funded by selling stock.

Maybe people will return to that model?

[Deleted]

I need to keep things in separate piles.

I try to keep an emergency $20 in my wallet, but I have to keep it hidden behind my library card because if it were sitting there with the other cash, I would spend it.

In the same vein, I need to keep the "emergency" savings away from my "I'm hoping to move next year" or "I want to go to Thailand" savings. Or, well, I'd already be in Thailand.

I'm not sure if the key point is 3 months or 6 months. For me, it is just "not for Thailand"

[❤ mollymouser ❤]

For us, our "emergency fund" consists of those assets which are not tied up in retirement accounts, and which are or can be liquidated, if needed. In the good old days, this was called (rather generically) "savings" ... a concept which seems foreign to some people, these days.

For us, any money that we're not using for budgeted purposes gets automatically shifted into "savings."

[Peace77]

Before 401ks, IRAs, etc - we didn't think like that (6 months EF). We kept the family wealth account in stock funds with a broker. An actual cash EF was in the $500 to $1000 range. Long work stoppages were funded by selling stock.

Maybe people will return to that model?

Only people who do not remember the stock market crash of the Great Depression and later stock market crashes.

People who had all their wealth in the stock market, LOST IT.

The idea of an emergency fund is not to make money, it is an insurance policy. If the worst happens, your family can still eat and pay the bills.

$5k is NOT enough. Ask anyone who has been in the hospital recently.

[Tiny]

I've got a multi layered EF - I keep a 5K 'base' in a MM account (pathetic interest), 5K in CDs (pathetic interest) and then the bulk of the EF in investments (doing tons better than the MM and CDs) - I'd have to sell if I needed to access the money. I'd use up the 10K in MM and CDs first which would get me thru a couple of months (along with the dribs and drabs of money I have in a couple of passbook savings accounts) if I had 0 dollars coming in. If I had some money (income) like say unemployment the 10K would last alot longer. I'd start to sell off investments as needed.

It doesn't make much sense to me to keep more than 2 or 3 months of EF money liquid... It's not like I'm gonna need EVERY penny of my EF in a suitcase by midnight on the day I have to start tapping the EF... I expect it would be a monthly draw kind of situation, so by having 2 months (maybe 3) liquid - I can start the process of tapping the illiquid assets in some sort of order that makes sense at the time I need the money.

I guess maybe it depends on how much money you have in your EF. I can see keeping 10K or less in low interest accounts - but when your EF gets to be much more than that you start to have flexibility which means you could put the overage into riskier or more longterm investments. I still marvel about the 80K a VERY conservative friend had in checking... as her EF... earning less that 1% interest... makes my head hurt to think about it.

[Tiny]

To answer the OP question about length of EF changing...
I'm not sure it really will. I think the majority of people have a hard enough time just saving up 1 month's worth of 'expenses'. I think for many people 1 month of 'EF' money might be 1 month of income (net pay) since they are living paycheck to paycheck. (I don't mean that paycheck to paycheck in a bad way - just that they've allocated their net income to their expenses - shelter/transportation/food with little wiggle room and are aware of that an aren't taking on additional expenses). I think for many people saving up that much money (one month net income) would be seen as very difficult and would take them a very long to do. Saving up 3/6/or 9 months of 'income' might seem undoable and not worth even attemption.
I think the general advice would be to work on saving up 3 to 6 months - assuming that the target audience has ZERO saved. I would think that someone who's savvy enough to have saved up 3 or 6 months of expenses (or income or whatever measure they are using) it would start to become obvious if they needed to save more than 3/6 months... since in theory they'd be thinking about why they needed to save, how they would spend the money, and be paying more attention to their job situation.
I could be wrong though... maybe people just hear/read that the 'experts say to save 20K!' so they immediately start saving up 20K and assume all will be right with the world when they have the 20K and don't think about it any further....

[cronewitch]

I have never had an emergency fund. I sometimes have had a savings account but not for decades they don't pay interest. I don't seem to have emergencies that can't be handled from cash flow. Even long unemployed stretches have had unemployment insurance and not required more money. Little things like an appliance breaking I have had credit to get new if I didn't have cash. I didn't have a credit card until I was 34 but if I needed something the person selling would finance like a furnace.

My biggest emergency so far has been a broken pipe in the upstairs bathroom. I used my HELOC then got some from the insurance company but still owe some. I went ahead and had three rooms remodeled but not all was from damage, I wanted new bathtubs and bathroom floors in a big tile and tub surrounds so did it all at the same time. My HELOC is 2.24% so not a bad way to pay for major things like my car.

I don't have much debt so if I had a problem I could stop saving for retirement or investing in stocks for a couple of months.

The entire secret is to live well below my means. I earn 58,800 but can save 30K or so. If unemployed I would get about 2K a month unemployment and cut back other spending to not need to dip into other money.

[bobosensei]

DH and I downsized our EF a lot. We moved what we felt to be the excess into a taxable vanguard index fund. We can liquidate it easily enough if needed. We only keep about 10k in the money market account. And I do feel like 5k would be enough for us given our situation (no kids, young, free healthcare in the military, no debt, cars only a few years old, secure job for DH, live on one income though we currently have two, don't own a home, etc.). So between the money market account earmarked for emergency money and the taxable vanguard account we have a year's worth of expenses saved up.

[Peace77]

The problem with including unemployment in your EF is that it may not be there.

If your company comes up with an excuse, no matter how lame, that your job loss is your fault, there is no unemployment. That may be turned around if there is an appeal but that takes time.

Receiving unemployment, means that you are ready, able and available to work. But, in an emergency that is not always the case.

If you become ill or are in a serious car accident and are in the hospital, how long will your emergency fund last?

At that point, you have no income (after sick and vacation time has been exhausted), you have a large hospital bill and you may need to repair or replace your car as well.
If your spouse needs to take time off to be with you, care for you, or worst of all, has been injured in the same accident, then you may be wishing you had more saved in your EF.

[cronewitch]

Jul 7, 2011 9:53:37 GMT -5 Peace77 said:

The problem with including unemployment in your EF is that it may not be there.

If your company comes up with an excuse, no matter how lame, that your job loss is your fault, there is no unemployment. That may be turned around if there is an appeal but that takes time.

Receiving unemployment, means that you are ready, able and available to work. But, in an emergency that is not always the case.

If you become ill or are in a serious car accident and are in the hospital, how long will your emergency fund last?

At that point, you have no income (after sick and vacation time has been exhausted), you have a large hospital bill and you may need to repair or replace your car as well.
If your spouse needs to take time off to be with you, care for you, or worst of all, has been injured in the same accident, then you may be wishing you had more saved in your EF.

I have about 750 hours of vacation and sick time and am 63 so would apply for SS if I needed more money and couldn't work. My rental income would continue and dividends and capital gains. I would draw some from investments to make up the shortfall and my ISO would give me more money.

I had a biopsy last year and he said if I had cancer he would support me. My car insurance would cover car accidents and if I totaled my car and couldn't replace it I would drive my truck.

[alabamagal]

Jun 30, 2011 11:25:55 GMT -5 dancinmama said:

Another thread got me thinking about this. Before this recession, the rule of thumb for a fully funded emergency fund was 3-6 months.

Because so many people have been out of work for so much longer than that, do you think the standard for the length of time an EF should cover will be longer going forward?

Will you do anything different going into the future?

Where will you park your EF money?

DH and I have built up our EF to cover one year and are considering stretching it to two. It's currently in a MM earning close to nada.

I believe that the economy runs in cycles. Things are down now and hopefully on the way up. If the economy is growing (and I am not saying that it is just yet!) you should need less of an EF. It is when things are going good that you need more of an EF.

We don't have a separate EF account. I honestly can't think of an emergency where you need 6 months of expenses in cash right now (other than paying ransom to a kidnapper, at least according to the TV shows). We have enough cash and credit to get through day to day emergencies (car repairs, home repairs, etcl). We also have a lot of potential cash flow through our business if we choose to take payouts from the business. As owners, we can basically choose how much money to take as salary. We also have accounts that we can access and have cash transferred to our checking account within 3-5 business days.

[Angel!]

Jul 7, 2011 9:53:37 GMT -5 Peace77 said:

If you become ill or are in a serious car accident and are in the hospital, how long will your emergency fund last?

At that point, you have no income (after sick and vacation time has been exhausted), you have a large hospital bill and you may need to repair or replace your car as well.
If your spouse needs to take time off to be with you, care for you, or worst of all, has been injured in the same accident, then you may be wishing you had more saved in your EF.

That is why you have health insurance, car insurance, & disibility.

[Deleted]

Our last "emergency" was needing to come up with $14k to pay state and federal taxes. We were informed on April 15th and the money was due on the 18th. We were caught unprepared because of the way the company DH works for changed its witholding calculations and didn't tell anyone. And of course they didn't provide the corrected W2s to the CPA firm who does all the Ex Pat taxes until the 11th. We're paying a higher % of taxes on our investment income.

Each of our properties has its own EF. Although I visit them every year I don't live in them and am not as attuned to what might need replacement. I did a lot of work this year on one house where the tenants have changed. Little surprises like a lot of termite damage in the lanai and it looks like replacement of the living room carpet which is only 6 years old.

I really do like Phil's perspective of keeping the money invested in broad based mutual funds over the long run and risk a short term decline if you need to dip into your reserves in the short term. Unfortunately I think we'll always have to have a bigger EF, say $50k until we start selling off a couple of the houses.

[dancinmama]

Jul 7, 2011 11:22:49 GMT -5 cronewitch said:

I have about 750 hours of vacation and sick time

Smart girl, crone. DH has the max vacation allowed banked. He has for years. It has more than doubled in value. Now THAT was a good investment!! ;D

[Peace77]

Yesterday at 9:53am, peace77 wrote:
If you become ill or are in a serious car accident and are in the hospital, how long will your emergency fund last?

At that point, you have no income (after sick and vacation time has been exhausted), you have a large hospital bill and you may need to repair or replace your car as well.
If your spouse needs to take time off to be with you, care for you, or worst of all, has been injured in the same accident, then you may be wishing you had more saved in your EF.

Angel D wrote:

That is why you have health insurance, car insurance, & disibility.

[/blockquote]

Insurance never covers all the bills. After health insurance has paid its portion, there are still plenty of bills to pay to the hospital, doctors, ambulance, surgeons, and other related services.

Car insurance won't cover your deductible and likely won't be enough to replace a totaled car.

Disability insurance typically replaces only a portion of the income. It won't cover your spouse taking off work to care for you. There is also normally a waiting period of several weeks before you start to receive benefits.

There may be other expenses associated with an illness or accident that you don't anticipate. A friend of mine spent around $1k just for lodging for herself while her husband was in a specialty hospital.

She will need several years to pay off the bills from that hospital stay despite excellent insurance.

[dcmetrocrab]

I noticed that on YM, the recommended and reported EF savings for some had gone up to 12 months during the height of the recession.

[telephus44]

I'm with Phil on 5K as an EF. That's what I'm aiming for. To echo other posters, I won't need every penny at the same time. I have other accounts that I can pull from if I had to, and I'll have time to decide what I want to do. And similar to cronewitch, almost everything that has come up as an emergency so far we can just cover from standard cash flow - car repairs, extra money due at tax time, our latest fiasco where DS destroyed DH's docking station and monitor... we can do this because we live on less than we make.

I do believe that the advice that the gurus pitch will/has change/d - from 3 months, to 3-6 months, to 6-12 months... it amazes me that the longer your EF get, the more it seems like retirement. How long you can go without a paycheck, right? I'm aiming for a 50 year EF ;-)

[Deleted]

Jul 8, 2011 23:36:17 GMT -5 Peace77 said:

Yesterday at 9:53am, peace77 wrote:
If you become ill or are in a serious car accident and are in the hospital, how long will your emergency fund last?

At that point, you have no income (after sick and vacation time has been exhausted), you have a large hospital bill and you may need to repair or replace your car as well.
If your spouse needs to take time off to be with you, care for you, or worst of all, has been injured in the same accident, then you may be wishing you had more saved in your EF.

Angel D wrote:

That is why you have health insurance, car insurance, & disibility.

[/blockquote]

Insurance never covers all the bills. After health insurance has paid its portion, there are still plenty of bills to pay to the hospital, doctors, ambulance, surgeons, and other related services.

Car insurance won't cover your deductible and likely won't be enough to replace a totaled car.

Disability insurance typically replaces only a portion of the income. It won't cover your spouse taking off work to care for you. There is also normally a waiting period of several weeks before you start to receive benefits.

There may be other expenses associated with an illness or accident that you don't anticipate. A friend of mine spent around $1k just for lodging for herself while her husband was in a specialty hospital.

She will need several years to pay off the bills from that hospital stay despite excellent insurance.


[/quote]
My mom's insurance, which I was on until two years ago, does cover everything and she has over 1 year of vacation/sick time. Never say never.

[Nazgul Girl]

Our latest "emergencies", if they can be called that, are our primary residence suddenly having roof problems, and finding out the same week t hat the taxes on our rental went up an unexpected $1000, which we now have to scrounge up without disturbing our primary investments. If we didn't have about $10k in EF's, we'd be hurting. As it is, we're not happy to see the cash go, but we won't owe anything, either. New roof goes on in two weeks or so, property taxes will be paid by Aug. 31st. We also have had to come up with $8k cash for legal fees for my husband's defense in the civil lawsuit the nutbag brought against him in federal court last year (with another $ 10k in legal fees due to her nuisance lawsuits last year ). Not a good 12 months financially, but at least we'll have a dry house this winter, and she seems to have gone away. I don't think $5k in an EF would have done it for us.