Emergency Cash "Rules"

[Tortoise]

I'm interested in hearing what "rules" some of you may have for yourselves regarding when you would allow yourself to dip into your emergency cash.

The reason I ask is that it took me several years to accumulate an emergency fund consisting of 12 months of typical expenses. It's an interesting psychological exercise to see such a large chunk of cash in my account and think to myself, "This money is off-limits. For the rest of my life, I will not touch this money unless there is an emergency that requires more money than I have in my non-emergency accounts."

Specifically, I feel like I definitely shouldn't contribute any money from the emergency fund to known, predictable expenses like a down-payment on a house or buying a new car. Is that approach pretty typical for some of you, too?

Meanwhile, I have friends, family, and coworkers who have been buying their first homes and starting families over the past several years. Yet it seems like most of them buy their cars with auto loans--not cash--and I get the impression that none of them has saved up an emergency fund of anywhere near 12 months of expenses.

And yet here I am, still renting my home, sitting on a big pile of cash that I won't touch for years until my car dies. And also sitting on an even bigger pile of emergency cash that I may never touch for the rest of my life.

It's a strange feeling being this financially conservative, that's all.

[AdamA]

Specifically, I feel like I definitely shouldn't contribute any money from the emergency fund to known, predictable expenses like a down-payment on a house or buying a new car. Is that approach pretty typical for some of you, too?

I'm with you on this, but I'll bet opinions will vary. 

I just like having the security that comes with holding all of the cash. 

I'd use it only if I lost my job or had some kind of unexpected badness occur that insurance wouldn't cover.

[Alanw]

Sitting on a big pile of cash is a great feeling especially if a "real" emergency occurs.  Once you achieve that goal, and it appears you have, then feel free to use additional cash savings for other things such as a home down payment, new car, vacation or whatever pleases you.  I don't believe saving beyond the 12 month emergency fund is necessary especially if it deprives you of other items you want or need.  Remember, HB said that it is okay to spend some money and enjoy your life.

[hoost]

Specifically, I feel like I definitely shouldn't contribute any money from the emergency fund to known, predictable expenses like a down-payment on a house or buying a new car. Is that approach pretty typical for some of you, too?

We have similar rules for our emergency fund, although we hold only 6 months of expenses vs. 12 as our emergency fund (we're Dave Ramsey fans and go with his recommendation of 6 months).  We don't view buying a car or house as an emergency.  These are (and should be!!!) planned expenses and not emergencies.  We view those planned expenses as inevitable and hold them in cash; I'm not comfortable with subjecting that money to the whims of the market.

Meanwhile, I have friends, family, and coworkers who have been buying their first homes and starting families over the past several years. Yet it seems like most of them buy their cars with auto loans--not cash--and I get the impression that none of them has saved up an emergency fund of anywhere near 12 months of expenses.

I have friends doing the same thing, or talking about doing the same thing.  At the end of the day, it seems to me that the people who don't need their jobs tend to be the most valuable; it's sort of the idea of having f* you money.  When you're not afraid to tell the truth and do what's right, it seems to me that you become more valuable (at least I've convinced myself of this).  It makes me feel even more secure in my job.

And yet here I am, still renting my home, sitting on a big pile of cash that I won't touch for years until my car dies. And also sitting on an even bigger pile of emergency cash that I may never touch for the rest of my life.

It's a strange feeling being this financially conservative, that's all.

Yes, we also still rent and have a nice pile of cash (we're fans of the 100% down plan).  At the end of the day, I think it helps to figure out what's most important to you.  To us, our freedom is most important.  We both like our jobs (for the most part), but we like them because we don't need them; we can walk away at any time.  To us, doing the right thing is more important than moving up in the company; and doing what we enjoy is more important than having a fancy title.  I think at the end of the day, this leads you to both moving up and making more money.  That's been my experience so far; we'll see if it proves true over the next several years.  If it doesn't...oh well.  We'll be okay. 

[Ad Orientem]

I don't have any hard and fast "rules" about emergency money. That said I approach expenditures from this fund as being strictly for unanticipated "needs" as opposed to "wants." The term "emergency" is something that probably cannot be strictly defined and and we could all come up things that we might quibble over whether or not it qualifies. I think this is one of those things where the famous quip from a Supreme Court Justice might apply. There was a fierce debate over the definition of pornography in a case, and he finally said "I can't define it, but I sure as hell know it when I see it."

[Lone Wolf]

And yet here I am, still renting my home, sitting on a big pile of cash that I won't touch for years until my car dies. And also sitting on an even bigger pile of emergency cash that I may never touch for the rest of my life.

It's a strange feeling being this financially conservative, that's all.

Your strategy will keep you very safe.  On top of that, I also get the sense that it makes you feel good.  Feeling slightly out of step with the Joneses is such a small price to pay for all of that!  The Joneses are likely making an entirely different set of calculations based on an entirely different set of personal needs, desired and values.

If a little validation will further sweeten the deal, let me say that I heartily approve of what you are doing. 

I'd dip into the emergency fund only if the expenditure is extremely important and we'd cut to the bone in every other area of life.  It's supposed to be there for those times when life has knocked you on your ass.  You know that "future/hypothetical you" is not going to want to worry about money so "thrifty/clever you" has things all set up for the smoothest possible transition through life's rough patches.

[Greg]

Couldn't you have somewhat of a layered approach to an emergency fund? For instance, keeping about a month in pure cash, then 2-5 months worth in short term bonds, then I/EE bonds after that?

Kinda like a shallow end of the pull to progressively getting deeper and deeper the more you swim out. During a situation (such as losing your job), you would somewhat know this in advance and can immediate pull from your cash position while slowing waiting on cashing out less liquid investments as needed. Then when out the of the emergency you build up the "safety-ladder" again.

That's at least my thought process for my stuff.

[Tortoise]

Thanks for your ideas, everyone!

Yes, we also still rent and have a nice pile of cash (we're fans of the 100% down plan).

You plan to buy your home with cash? Wow. Interesting crowd on this PP forum!

The term "emergency" is something that probably cannot be strictly defined and and we could all come up things that we might quibble over whether or not it qualifies. I think this is one of those things where the famous quip from a Supreme Court Justice might apply. There was a fierce debate over the definition of pornography in a case, and he finally said "I can't define it, but I sure as hell know it when I see it."

If a little validation will further sweeten the deal, let me say that I heartily approve of what you are doing. 

Thanks for the moral support!

Couldn't you have somewhat of a layered approach to an emergency fund? For instance, keeping about a month in pure cash, then 2-5 months worth in short term bonds, then I/EE bonds after that?

Good suggestion. Yes, that's actually similar to how I've structured my emergency fund: a month in physical cash, about 5 months in very short-term (< 1 year) bonds, and about 6 months in short-term (1-3 year) bonds.

I currently don't invest in any I/EE savings bonds, but they seem to be a favorite among some of this forum's regulars. As I build up even more cash, I'm sure I'll look into adding some of those bonds to the mix.

[Greg]

Good suggestion. Yes, that's actually similar to how I've structured my emergency fund: a month in physical cash, about 5 months in very short-term (< 1 year) bonds, and about 6 months in short-term (1-3 year) bonds.

I currently don't invest in any I/EE savings bonds, but they seem to be a favorite among some of this forum's regulars. As I build up even more cash, I'm sure I'll look into adding some of those bonds to the mix.

That's probably a good way too for having more layers as you said there. I was just thinking of going from most liquid of cash to less liquid. I/EE bonds are your "deep cash" portion that you hope to not have to touch and can just let it earn interest as you use the more liquid cash available. Same goes for the idea of having physical gold and balancing with ETFs. You'd hold onto the "deep gold" and sell off the more liquid ETFs.

[moda0306]

Known, predictable expenses should really be added to the top of "emergency fund" expenses.  When this is things like vacations & unnecessary home improvements, it has the side effect of acting like an emergency fund if you DO have to tap your emergency fund for reasons that scare you out of taking a vacation or remodeling the bathroom.  So if you have $50k 1 year of living expenses, and you have another $10k of "home improvement (not maintenance... unnecessary improvements) & vacation" money on top of it, if you lose your job, you can then decide whether to use that $10k for more emergency fund or not.  Options always make me feel better, whether or not I actually exercise.

What is NOT fun is having a looming $8,000 Home Depot credit card payment to make for a remodel you did, otherwise it starts bearing 20% interest... unless this was for vital improvements/maintenance that you couldn't afford at the time or you're especially handy and can get $20,000 worth of remodeling done for $8,000, this can lead to stress at the worst possible times.

[Tortoise]

Known, predictable expenses should really be added to the top of "emergency fund" expenses.  When this is things like vacations & unnecessary home improvements, it has the side effect of acting like an emergency fund if you DO have to tap your emergency fund for reasons that scare you out of taking a vacation or remodeling the bathroom.  So if you have $50k 1 year of living expenses, and you have another $10k of "home improvement (not maintenance... unnecessary improvements) & vacation" money on top of it, if you lose your job, you can then decide whether to use that $10k for more emergency fund or not.  Options always make me feel better, whether or not I actually exercise.

Very good point, Moda. I hadn't quite thought of it like that, but it makes a lot of sense.

At the end of the day, I think it helps to figure out what's most important to you.  To us, our freedom is most important.  We both like our jobs (for the most part), but we like them because we don't need them; we can walk away at any time.

Hoost, I meant to comment on this before: How is it that you're free to walk away from your job at any time, despite how young you are (I seem to remember you saying somewhere that you're fairly young)? Are you part of the ERE crowd, with minimal living expenses and relatively huge retirement savings? Or do you mean it's so easy for you to find a new job at any time that you feel virtually zero pressure to remain at your current one?

[hoost]

At the end of the day, I think it helps to figure out what's most important to you.  To us, our freedom is most important.  We both like our jobs (for the most part), but we like them because we don't need them; we can walk away at any time.

Hoost, I meant to comment on this before: How is it that you're free to walk away from your job at any time, despite how young you are (I seem to remember you saying somewhere that you're fairly young)? Are you part of the ERE crowd, with minimal living expenses and relatively huge retirement savings? Or do you mean it's so easy for you to find a new job at any time that you feel virtually zero pressure to remain at your current one?

Tortoise,

Yes, my fiance and I are 26.  We have tried to keep our lifestyle to a reasonable level with low fixed expenses.  She paid off her debt (student loans and a car) within the first year and a half or so of starting work, and I finally paid off all of mine (student loans, car, credit cards...I was a bit of a spendthrift in college) about a month and a half ago.  We've both been blessed with well-paying jobs, and she had been saving quite a bit since paying off her debt.

If we both quit, we would still have to work eventually, but at current expenses we could probably live for close to two years before touching our emergency fund or retirement savings (recall we've been saving for a house).  If that happened though, our spending could easily drop by about 30-50% which would make it last even longer.  Now that I'm no longer making debt payments, I would anticipate that we will be able to save considerably more.

Our plan is to live off of her income and save mine.  I wouldn't say we're in the ERE crowd; we're more fans of MMM, although he is much more frugal than we are.  We both still waste a lot of money (at least in my eyes) eating out and having friends over for big bbq's and buying random crap we don't need, but we try to stay focused on our long term goals of having the flexibility to do whatever we want to in the future.  We have to "pump the brakes" from time to time and remind ourselves of those goals, although having a budget also makes doing this easier.  Having money put away, for us, buys us our freedom.  That said, I don't even necessarily want to retire; I like my job.  I just don't want to need my job, because being able to say "no" is one of the reasons I like it.

Sorry, that got a bit long-winded, but hopefully I answered your question. 

[Figuring It Out]

This has been such a refreshing thread to read! I don't know why, maybe because it embraces such a conservative approach to money.

I've had an interesting few years when it comes to investing and cash. I used to have all of my money in cash, because of market fears and indecision and a lack of time to figure things out, plus I knew I had a large home remodeling project coming up that I wanted to pay cash for. After doing the remodel, which has been and is being done in stages with cash on a paid-for home, I have about a six-month emergency fund, which actually makes me nervous. I loved having a year's worth. My emergency fund, though, isn't part of my PP.

Is there a definitive, HB answer on this? I might have used to know, but don't anymore.

Also, couldn't physical gold count as emergency cash, because one could drive to the coin shop and sell it if needed.

And on a side note, of my PP cash, half of it is in Merk Hard Currency Fund and half in cash. Any thought on this?

[Ad Orientem]

This has been such a refreshing thread to read! I don't know why, maybe because it embraces such a conservative approach to money.

I've had an interesting few years when it comes to investing and cash. I used to have all of my money in cash, because of market fears and indecision and a lack of time to figure things out, plus I knew I had a large home remodeling project coming up that I wanted to pay cash for. After doing the remodel, which has been and is being done in stages with cash on a paid-for home, I have about a six-month emergency fund, which actually makes me nervous. I loved having a year's worth. My emergency fund, though, isn't part of my PP.

Is there a definitive, HB answer on this? I might have used to know, but don't anymore.

Also, couldn't physical gold count as emergency cash, because one could drive to the coin shop and sell it if needed.

And on a side note, of my PP cash, half of it is in Merk Hard Currency Fund and half in cash. Any thought on this?

I don't think there is a definitive HB rule on cash other than that the cash part of your PP should be backed by the US Government (or your home country). You will get varying opinions on whether or not the cash part of your PP can also double as your emergency cash reserve. My view is that it can... provided that it is large enough to cover the minimum of six months of essential living expenses. Otherwise I would suggest holding your emergency cash reserve separate from the PP until your PP gets big enough. 

As for gold, I'd have to say the answer is no. Gold should not be counted as part of your emergency cash reserve. Can it be used in a real emergency? Of course. That is one of the aspects of physical gold that helps a lot of us sleep at night. It is the financial equivalent to catastrophic health insurance. But gold works differently than cash and you don't want to tap into your gold for anything other than rebalancing purposes unless you have the proverbial midsummer blizzard on Miami Beach. In other words it is there as SHTF insurance. Otherwise you could be cashing in your gold at a loss which you don't want to be doing. The beauty of the PP is that if it's done right you never sell assets at a loss.

Cash is cash. Gold is gold. They are there for different reasons.

[buddtholomew]

I too am extremely conservative and maintain approximately 2-3 years of living expenses in Cash, CD's and IT Tax-Exempt instruments. The rationale is to have sufficient funds available in the event of a job loss. Also, Psychologically having this cash available makes me feel even more secure in my current position (similar to what Hoost is saying). I'm not afraid to voice my opinions in the office in fear of losing my job.

[craigr]

Also, couldn't physical gold count as emergency cash, because one could drive to the coin shop and sell it if needed.

It could, but it's volatile over the short run. I think cash is cash and should be t-bills. If you have more than a year saved, then maybe short term treasuries if you want some more yield but still pretty stable.

And on a side note, of my PP cash, half of it is in Merk Hard Currency Fund and half in cash. Any thought on this?

I think owning other country's currency is riskier than keeping put in the currency where you live. I just looked at that fund and it has a 1.30% expense ratio which is high as well. This fund is basically for currency speculators if that's what you really wanted to own.

Also there are no "hard currencies" any more as none I know are linked to gold convertibility. So I'm not sure what they mean by calling it a hard currency fund. They hold a lot of New Zealand bonds which is fine for what it is and I think New Zealand is a great country. But it isn't a hard currency that's for sure! The New Zealand economy has also had ups and downs as any economy so the worm can always turn.

After a brief look. I see that fund was significantly more volatile than the Vanguard Short Term Treasury or Intermediate Treasury Bond funds as well. Yet it performed about the same the past several years as the much safer short term treasury fund and much worse than the intermediate treasury bond fund. Below is a chart comparing the MERKX fund with Vanguard Short Term Treasury (VFISX), Intermediate Term Treasury (VFITX) and iShares Very Short Term Treasury (SHV - basically a treasury money market ETF):




Personally, I'd just stock to a t-bill fund or a t-bill ladder if you feel so inclined for your cash. You want it very stable. If you want to chase yield, I would do it with the variable portfolio funds and I'd be more likely to do it with cheap index funds of your choosing rather than funds with high expense ratios.

[Figuring It Out]

Thank you for that research and feedback, craigr. I originally invested in it to protect against currency devaluation of the dollar, still important to me. Should gold or something else provide that same protection?

[craigr]

Thank you for that research and feedback, craigr. I originally invested in it to protect against currency devaluation of the dollar, still important to me. Should gold or something else provide that same protection?

I personally believe that gold is the strongest currency protection you can have. It floats independent of any currency on the planet and no single central bank can dictate the price.

[jackely]

Did HB recommend a stash of emergency cash outside the PP? I don't recall.

If he did I don't see the point. I maintain the 25% ratio right down to the reserve cash sitting in my checking account. Given the (negative) rate of return on cash lately I especially don't see the point.

[Ad Orientem]

Did HB recommend a stash of emergency cash outside the PP? I don't recall.

If he did I don't see the point. I maintain the 25% ratio right down to the reserve cash sitting in my checking account. Given the (negative) rate of return on cash lately I especially don't see the point.

I don't really remember HB differentiating between the two. I think counting the PP's 25% cash allocation for emergency purposes is fine, as long as you have enough to meet your needs. Otherwise you need an external cash reserve sufficient for 6-12 months of living expenses.

[craigr]

I posted an update to my post above about the use of the Merk fund for cash in the portfolio. Hope it helps:

https://web.archive.org/web/20160324133 ... -for-cash/

[jackely]

I don't really remember HB differentiating between the two. I think counting the PP's 25% cash allocation for emergency purposes is fine, as long as you have enough to meet your needs. Otherwise you need an external cash reserve sufficient for 6-12 months of living expenses.

I think there might be different perspectives on this thread as to what constitutes "cash". When I look at the bottom-line numbers in my portfolio I only see a cash value so in one sense it is all cash to me.

I suspect others are thinking along the lines of liquidity - the ease at which the "cash" becomes spendable to meet one's needs in an emergency situation. Based on where I have the cash portion of my portfolio I'm not so sure I have 6-12 months worth if we are talking about actual "cash" cash as in physical bills I can get my hands on easily.

[MachineGhost]

I suspect others are thinking along the lines of liquidity - the ease at which the "cash" becomes spendable to meet one's needs in an emergency situation. Based on where I have the cash portion of my portfolio I'm not so sure I have 6-12 months worth if we are talking about actual "cash" cash as in physical bills I can get my hands on easily.

I think a small portion of the 25% ULTRA SHORT TERM TREASURY BOND ALLOCATION should be in FEDERAL RESERVE NOTES just because you never know when the next bank boliday or dysfunctional ATM network from an EMP attack will occur.  Generally, 6-12 months of living expenses in FRN's is suitable.  This should apply to the GOLD ALLOCATION also in terms of bullion coins and junk silver.

Argentina is such an instructive example.  We don't want to be buying cars or canned food as inflation hedges because we didn't take liquidity in ULTRA SHORT BONDS or GOLD quite seriously.

How come we never hear from people in such countries on this forum?  Are they all just clueless about the PP?
PP seems kinda elitist in that only the Anglo-Saxon citizens seem to be true believers.

[TBV]

How come we never hear from people in such countries on this forum?  Are they all just clueless about the PP?
PP seems kinda elitist in that only the Anglo-Saxon citizens seem to be true believers.

Tal vez el problema es la barrera del idioma.

[MediumTex]

How come we never hear from people in such countries on this forum?  Are they all just clueless about the PP?
PP seems kinda elitist in that only the Anglo-Saxon citizens seem to be true believers.

Tal vez el problema es la barrera del idioma.

Perhaps some of them who would otherwise join us don't speak English.