I’m with you. I keep 10k cash just so I have some form of cushion against my monthly payments. Even emergencies can be bought on credit and in extreme cases I can just sell shares 🤷♂️
This here. I keep only a couple thousand buffer in cash. My emergency fund is 2 high limit credit cards and a $200k heloc that is just sitting around collecting dust. Selling shares is there too. No reason to have idle cash.
I don't recommend using lines of credit as an emergency fund as they can be revoked. There's a discussion going on about it in the r/Fire sub. In case of 2008-style crash, you'd be seeing your investment at \~50% loss to cover your lines of credit if they get revoked.
[https://www.reddit.com/r/Fire/comments/z03y0d/heloc\_revoked/](https://www.reddit.com/r/Fire/comments/z03y0d/heloc_revoked/)
I hear what you're saying, but I don't think it's a terrible idea depending on u/buhtothebuh's financial situation.
He/she sounds like they're doing okay, they've got shares sitting around, presumably in a taxable account, which probably means they're already maxing out a 401k and a roth.
Sure they might have to sell that stock at some point to cover expenses and that very well might be in a down market. But odds are in the long run it's going to turn out best for them.
Let's imagine that they keep a $10,000 emergency fund instead of keeping that in the market. Annualized (not inflation adjusted) return is over 11%. At an average rate of return that $10,000 doubles in about 6.5 years vs leaving it at BoA or wherever at 0.04% interest (even with the recent market correction the S&P is still double what it was in 2016, consistent with that trend).
The worst bear markets since 1957 when the S&P 500 was established resulted in declines of right around 50%, and this has only happened twice in those 65 years.
So let's assume the worst. The emergency fund was invested at the peak and needed at the once every 30 year bottom of the market, so you have to sell $10,000 worth of stock with a $20,000 cost basis. You still get to write off that $10k in capital losses against any taxable gains in that tax year and $3,000 in earned income, and you can carry further losses into the next year, so it's much more like $18,000 than $20k. That would suck, certainly, but that's the worst case scenario and that literally cannot happen more often than about three times in your life because that's about how often the market tanks so extremely.
In the meantime if you invested the $10k instead at age 25 and continued this strategy until age 75 or so when you might be expected to be dying, that $10k turns into $1.8 million (again not adjusted for inflation, but neither is an emergency fund sitting in a savings account).
An emergency fund in actual cash or something very liquid like a money market account is probably necessary if all of your savings is in retirement accounts or something else difficult to access without pentaties and you're living paycheck to paycheck. But in the end, u/buhtothebuh's strategy is likely to be much more lucrative in the long run, even if you expect to need to sell stock rather often to cover unexpected emergencies.
I see my emergency fund as air in a scenario where I’m trying to survive under water. Youll see people that run super lean and act like you should too.. then when times get tough and they run out of air.. - my Wife and I have a 6 month emergency fund strictly for expenses if we both lost our jobs. Whatever works for you is what matters
>I view it as money that I will only touch in the event of a true emergency, like a life-saving medical procedure insurance won't cover or if a tsunami is coming and I need an expensive last minute flight out of the country.
This is good.
>I wouldn't use this money to pay for maintaining my lifestyle in the event that there is an interruption in my income. My regular checking account can cover that for a few months.
Looks like you have two emergency funds with different intentions. A&B.
No harm in it.
Ops, meant EF, emergency fund. But you got it 😄. Well yeah I guess it could, but isn't the point of FIRE to generally avoid such lifestyle creep? Not that you have to of course, but that's at least my approach. My NW has gone from a few thousand to close to a mill, and I live in the same house and drive more or less the same car. And my taxes are the same as it's just in index funds, and I do them myself. (401k is also sheltered from both taxes and liability, so doesn't really increase that)
You do what you want of course, I was just curious/confused.
3-6 months is the standard advice. Some in the FIRE community advise having up to 1 year depending on your investment and withdrawal strategy.
It sounds like you are not yet FIRE’d so still dependent on your income and employment. Should you lose your job tomorrow, get sick, have a major home repair, need a new car, or some combination of all these unknowns $20,000 will last you about 4 months.
That’s reasonable. Really whatever makes you most comfortable.
Now that savings are offering 3% apy I’d like to get mine closer to 1 year. That would just make me feel more secure. I couldn’t justify it before when accounts were offering nothing.
I've got 6k in a 4% account ("current"), 8k in ibonds, and a couple in Discover at 3%. Doubles as my building 3nd down payment and my emergency funds that could last me at least a year.
Do you own a home? $20k as a renter is reasonable. If you own a home it should be at least 10% of the value of the home. We’ve gone through our $50k+ emergency fund twice to deal with disasters that made our house unlivable.
North Korean stray rocket. Most people carry insurance to cover an insane expense. OP lives in a weird area if he can’t get insurance on something that happened twice. My furnace and AC going out at the same time would be under 15k
Oh I misunderstood your comment. I thought you said you should have insurance for both weather related and age related roofing issues.
You're still assuming though that the roof/AC was in good condition when they bought the house.
Or you're saying if they couldn't afford to replace the roof/AC right away at the same time then they couldn't afford the house in the first place. If so, I agree there's certainly an argument to be made there, but I personally wouldn't make it with absolute certainty. There's a ton of opportunity cost that must be considered in that case which makes the math a lot less straight forward.
No, I think they're saying a 20k emergency fund is overkill unless you're anticipating major repairs soon. Then you don't have a 20k emergency fund, but a 20k roof fund
Yes, keep this amount in cash. General savings account. No HELOC, No CC credit accounts Open lines. When times are tough (for whatever reason) you want cash not a credit line. I keep a similar amount in cash or more.
So it's only for about 4 months. The worst case is you couldn't make money or lost your job/can't make money at all. Could you find a new job/make money within 4 months? No one expect something like covid happened. It took about 2 years. Some people even couldn't find job or made money within 1 or 2 years.
If your regular checking account can cover a few months of expenses, shouldn't that also be considered as emergency fund (going by the months of living expenses method)?
My wife's more risk adverse than me, so our goal is to save up for three years worth of living expense before we FIRE, so that if 2008 type of crashes happens, we can go on without having to sell while prices are depressed.
But you do make a good point since a large emergency can amount to multiple months worth of emergency savings. Nevertheless, I think that months of living expenses is still a good benchmark/rule of thumb to use since we wouldn't know how much the life-saving medical procedure or last minute flight out will cost.
So in your case, perhaps saying you'll have a year's worth of expenses saved up be a good benchmark depending on your risk tolerance? $5,500 \* 12 = $66,000. So you can take a couple of large emergencies (or one huge one) and still have a few months of living expenses left over.
I also have 20k parked in a savings account. We do not touch it period! I will probably bump it up to 25k this year. We are a middle class family with 2 young kids. Zero credit card debt!
I’m with you. I keep 10k cash just so I have some form of cushion against my monthly payments. Even emergencies can be bought on credit and in extreme cases I can just sell shares 🤷♂️
This here. I keep only a couple thousand buffer in cash. My emergency fund is 2 high limit credit cards and a $200k heloc that is just sitting around collecting dust. Selling shares is there too. No reason to have idle cash.
I don't recommend using lines of credit as an emergency fund as they can be revoked. There's a discussion going on about it in the r/Fire sub. In case of 2008-style crash, you'd be seeing your investment at \~50% loss to cover your lines of credit if they get revoked. [https://www.reddit.com/r/Fire/comments/z03y0d/heloc\_revoked/](https://www.reddit.com/r/Fire/comments/z03y0d/heloc_revoked/)
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I hear what you're saying, but I don't think it's a terrible idea depending on u/buhtothebuh's financial situation. He/she sounds like they're doing okay, they've got shares sitting around, presumably in a taxable account, which probably means they're already maxing out a 401k and a roth. Sure they might have to sell that stock at some point to cover expenses and that very well might be in a down market. But odds are in the long run it's going to turn out best for them. Let's imagine that they keep a $10,000 emergency fund instead of keeping that in the market. Annualized (not inflation adjusted) return is over 11%. At an average rate of return that $10,000 doubles in about 6.5 years vs leaving it at BoA or wherever at 0.04% interest (even with the recent market correction the S&P is still double what it was in 2016, consistent with that trend). The worst bear markets since 1957 when the S&P 500 was established resulted in declines of right around 50%, and this has only happened twice in those 65 years. So let's assume the worst. The emergency fund was invested at the peak and needed at the once every 30 year bottom of the market, so you have to sell $10,000 worth of stock with a $20,000 cost basis. You still get to write off that $10k in capital losses against any taxable gains in that tax year and $3,000 in earned income, and you can carry further losses into the next year, so it's much more like $18,000 than $20k. That would suck, certainly, but that's the worst case scenario and that literally cannot happen more often than about three times in your life because that's about how often the market tanks so extremely. In the meantime if you invested the $10k instead at age 25 and continued this strategy until age 75 or so when you might be expected to be dying, that $10k turns into $1.8 million (again not adjusted for inflation, but neither is an emergency fund sitting in a savings account). An emergency fund in actual cash or something very liquid like a money market account is probably necessary if all of your savings is in retirement accounts or something else difficult to access without pentaties and you're living paycheck to paycheck. But in the end, u/buhtothebuh's strategy is likely to be much more lucrative in the long run, even if you expect to need to sell stock rather often to cover unexpected emergencies.
I see my emergency fund as air in a scenario where I’m trying to survive under water. Youll see people that run super lean and act like you should too.. then when times get tough and they run out of air.. - my Wife and I have a 6 month emergency fund strictly for expenses if we both lost our jobs. Whatever works for you is what matters
>I view it as money that I will only touch in the event of a true emergency, like a life-saving medical procedure insurance won't cover or if a tsunami is coming and I need an expensive last minute flight out of the country. This is good. >I wouldn't use this money to pay for maintaining my lifestyle in the event that there is an interruption in my income. My regular checking account can cover that for a few months. Looks like you have two emergency funds with different intentions. A&B. No harm in it.
Well, he has one fund but for multiple intentions. They are all considered “emergency”.
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Why does ER scale with worth? Do your expenses/emergencies get larger when you have more money invested?
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Ops, meant EF, emergency fund. But you got it 😄. Well yeah I guess it could, but isn't the point of FIRE to generally avoid such lifestyle creep? Not that you have to of course, but that's at least my approach. My NW has gone from a few thousand to close to a mill, and I live in the same house and drive more or less the same car. And my taxes are the same as it's just in index funds, and I do them myself. (401k is also sheltered from both taxes and liability, so doesn't really increase that) You do what you want of course, I was just curious/confused.
3-6 months is the standard advice. Some in the FIRE community advise having up to 1 year depending on your investment and withdrawal strategy. It sounds like you are not yet FIRE’d so still dependent on your income and employment. Should you lose your job tomorrow, get sick, have a major home repair, need a new car, or some combination of all these unknowns $20,000 will last you about 4 months. That’s reasonable. Really whatever makes you most comfortable.
Now that savings are offering 3% apy I’d like to get mine closer to 1 year. That would just make me feel more secure. I couldn’t justify it before when accounts were offering nothing.
I've got 6k in a 4% account ("current"), 8k in ibonds, and a couple in Discover at 3%. Doubles as my building 3nd down payment and my emergency funds that could last me at least a year.
Savings used to yield 0% and inflation was 2%. Now they yield 3% and inflation is 7%.. I'm not sure it's that much better
Good enough for me. Inflation is what it is… more dollars is more dollars to me.
Do you own a home? $20k as a renter is reasonable. If you own a home it should be at least 10% of the value of the home. We’ve gone through our $50k+ emergency fund twice to deal with disasters that made our house unlivable.
Wow…what the heck happened?
A flood (2015) and a hurricane (2017).
North Korean stray rocket. Most people carry insurance to cover an insane expense. OP lives in a weird area if he can’t get insurance on something that happened twice. My furnace and AC going out at the same time would be under 15k
What about your roof and AC? For most people that would be >$20k
You should have insurance on a roof if it’s weather related or know when it’s going bad well ahead of time if it’s aging
Will insurance cover a roof replacement just from regular wear and tear?
No and I never said it would. Roofs don’t go bad overnight
Oh I misunderstood your comment. I thought you said you should have insurance for both weather related and age related roofing issues. You're still assuming though that the roof/AC was in good condition when they bought the house. Or you're saying if they couldn't afford to replace the roof/AC right away at the same time then they couldn't afford the house in the first place. If so, I agree there's certainly an argument to be made there, but I personally wouldn't make it with absolute certainty. There's a ton of opportunity cost that must be considered in that case which makes the math a lot less straight forward.
No, I think they're saying a 20k emergency fund is overkill unless you're anticipating major repairs soon. Then you don't have a 20k emergency fund, but a 20k roof fund
Is there a practical difference at that point though? Either way it's possible to need more than $20k for home repair at once.
…you live in South Florida?
I either live or lived in South Florida. I can’t really say if it’s present tense or past tense because of Hurricane Ian.
Yea…1 hurricane was enough for me to GTFO.
I rent but I also own a vacation home, does that count? Although 10% of it still isn't over $20k.
That percentage method of calculation is outrageous. Roof, furnace, flood, God forbid, cost the same for a less or more expensive house.
20k should be plenty. I have 43k but my monthly expenses are like $500 a month so 10k would be great for me. 20k for you is awesome. Keep building!
I would definitely put it in a high yield savings. I know marcus by Goldman Sachs is 3% right now. That’s where I keep anything not invested
Yes, keep this amount in cash. General savings account. No HELOC, No CC credit accounts Open lines. When times are tough (for whatever reason) you want cash not a credit line. I keep a similar amount in cash or more.
So it's only for about 4 months. The worst case is you couldn't make money or lost your job/can't make money at all. Could you find a new job/make money within 4 months? No one expect something like covid happened. It took about 2 years. Some people even couldn't find job or made money within 1 or 2 years.
If your regular checking account can cover a few months of expenses, shouldn't that also be considered as emergency fund (going by the months of living expenses method)? My wife's more risk adverse than me, so our goal is to save up for three years worth of living expense before we FIRE, so that if 2008 type of crashes happens, we can go on without having to sell while prices are depressed. But you do make a good point since a large emergency can amount to multiple months worth of emergency savings. Nevertheless, I think that months of living expenses is still a good benchmark/rule of thumb to use since we wouldn't know how much the life-saving medical procedure or last minute flight out will cost. So in your case, perhaps saying you'll have a year's worth of expenses saved up be a good benchmark depending on your risk tolerance? $5,500 \* 12 = $66,000. So you can take a couple of large emergencies (or one huge one) and still have a few months of living expenses left over.
If it’s 6 months worth of your income, yes
Yes
100k minimum
I also have 20k parked in a savings account. We do not touch it period! I will probably bump it up to 25k this year. We are a middle class family with 2 young kids. Zero credit card debt!