DISQUS

CJ · 1 year ago

You also have to realize that some parts of an emergency fund go towards things like family emergencies. What would happen if you had to take off 2 weeks of work and fly across the country to go to a family member's funeral. You'd have to factor in 2 weeks worth of pay (if you didn't have vacation pay), airfare, food (eating out almost every day), lodging, funeral expenses, lawyer fees, etc. It all adds up.

Also, I'd rather have too much than too little. Good article though.

GeekMan · 1 year ago

I've always had trouble with figuring out the amount someone needs to keep in their emergency fund, especially for high earners with high living costs. For example, if a couple living in a big city had monthly expenses of $10,000 does that mean they should keep $60K IN CASH in the bank?! What if they have no outstanding debt, aside from a mortgage? What if their kids are just entering college? What if they could easily make those payments using only one spouse's salary? What if, what if, what if? Basically, there must be some sort of cutoff amount kept in an emergency fund beyond which it no longer makes sense. If you earn enough to pay $10,000/month in expenses without being in financial pain then there HAS to be a better way to prepare for emergencies than keeping $60K in a cash emergency fund. Doesn't there?

Kyle · 1 year ago

I personally have 3 months in my emergency fund, which might be a bit on the low side. But if worse comes to worst, I could always liquidate some of my taxable stock portfolio to pay the bills if I had to. Once you have significant taxable investments, I think the need to have a large emergency fund diminishes somewhat.

Curt · 1 year ago

Another thing to consider, is higher paying jobs usually take a longer time to find. So, if you are a CTO, it could take longer to find your next job. Therefore, the higher your salary the bigger your emergency fund should be.

Anca · 1 year ago

For job loss, a better idea than relying on an emergency fund, is an emergency plan: always having an up-to-date resume, a list of companies or job sites to search, and an interview outfit. That will save time and money right off the bat.

Flexo · 1 year ago

CJ: That's an excellent example of when you might need to use an emergency fund, and it can certainly add up. As Kyle mentions, you can have a multi-tiered set of emergency funds. I suggested five components, only two of which conform to the generally-accepted "emergency fund" term. So you can have a set amount in these first two tiers (cash on hand and liquid savings account) while using investments (and even credit if that's a good option for an individual) for further emergencies. The Roth IRA is one of my favorites because you can access your contributions (not earnings) tax-free and penalty-free.

Anca: Very true. Always be prepared for unexpected job loss.

APFB · 1 year ago

I have not taken the time to properly calculate my monthly expenses. We just have a lump sum that we continue to contribute to that we label as our emergency fund. As you said, if we had a reason to access our emergency fund, we likely would have reason to drop a number of other expenses.

JoeTaxpayer · 1 year ago

The decision is tough. When I first started, I decided to load up the 401(k) and take advantage of the matching funds. I quickly had enough in the account that I could borrow $10,000 if I needed to. As my income went up, and I bought a house, I secured an equity line. While I had some liquid reserves, the rate on savings was so low, that my wife agreed we could just pay down the mortgage, refinance reducing both the term, and the rate, and know that the equity line was there in an emergency.

I think at the CTO level, these guys should have enough assets that the term 'emergency fund' doesn't apply. They have assets they can tap for the purpose.
Joe

Clare · 1 year ago

I've been thinking about these questions for a while now. Thanks for writing this.

ajc · 1 year ago

I think that the right size for a fund that handles true emergencies is ZERO. Anything else is a provision, that you should be able to plan for ...

After all, is it worth $8k a year for you to 'insure' yourself against emergencies with cash on hand, when there are so many other ways to do it that can actually MAKE you money?

Here's some ideas just published today: http://7million7years.com/2008/08/13/more-on-em...

Flexo · 1 year ago

AJC: Can't agree with you completely. Some emergencies can be anticipated and you can plan for those accordingly (death of an aging parent, etc.) but there are many other things that cannot be planned for. You don't want there to be much delay in getting access to funds when necessary, you don't want to have added expenses (taxes, withdrawal penalties), and you don't want to affect your long-term investing strategy. You also don't want to experience an emergency while the only funds you have available are invested in the stock market or real estate when it happens to be a down year. You need at least a portion of your funds in low-risk, highly-liquid accounts.

Making money and protecting yourself in the event of the emergency are unrelated tasks.

A "market opportunity," as you wrote about in your article, is not an emergency. Sure, you want to have funds available if you want to time the market or buy into a particular investment, and you can do that however you want (measuring the risk vs. anticipated short-term return), but most people wouldn't consider a market opportunity an emergency.

BTG · 1 year ago

Really interesting article. I remember when I was researching my "BTG Explains: what is an emergency fund" article I read everything under the sky about how much you should have in an emergency fund, and nobody considered the cost of moving. It didn't even occur to me until I read this! I think this is a huge point that is really necessary, especially if the emergency fund is supposed to help cover you when you lose your job: moving is absolutely something you'd have to consider! I'm gonna go back and re-edit it my post to include your views on moving.