Emergency/Rainy Day Fund

[born2invest]

Do you have one?

How big is it?

Why do you have one and what do you use it for?

[Harvey Specter]

Do you have one?

How big is it?

Why do you have one and what do you use it for?
Kinda. big enough, maybe(hopefully).

A large portion of the revolving credit account on my house is untapped. Therefore, if anything bad happens, we have to drain the account before the bank reduces the limit.

The RC is used for everything though in general the overdrawn amount declines each month.

[born2invest]

Anyone use their credit card as a pure emergency fund?

[False Profit]

I never used to have a rainy day fund but because PEB has been a spine tingler recently I've taken to holding back some cash to buy on the dips.

I've enough in the green to sell when I need money.

[False Profit]

I never used to have a rainy day fund but because PEB has been a spine tingler recently I've taken to holding back some cash to buy on the dips.

I've enough in the green to sell when I need money.

[peat]

My credit card and RCF are NOT considered part of 'the emergency fund'. They are there (available) though and would only be used if absolutely necessary.
I see a convergence in utility from the cash/short term part of my portfolio.
I consider 6 months as the period of time the emergency fund should be able to cover living expenses for.

[TimmyTP]

Do you have one?

Yes


How big is it?
6-12 months' living expenses, depending on the TimmyTP Discomfort Index (TDI).
I still work for a living, so TDI is an industry non-standard, unscientific measure of the stability my medium-term income and unplanned outgoings:
- how well I think the industry sector in which I work will perform in the next 12 months
- how well I think the services I offer will fit/adapt in the next 12 months
- the likelihood and scale of any major uninsured expenses, such as my house falling down or my cars spontaneously combusting
Medical and accident risk is not factored into this calculation, as I have some reasonably hefty insurance, which I blindly hope will cater for that


Why do you have one
1. so I can sleep peacefully
2. because I have a healthy appreciation of cashflow
3. see 1



what do you use it for?
See 1 above.
I think you might be asking what ppl do with it though. I keep it in boring-as term deposits or similar, distributed across 3 institutions, one of which is overseas, but only holds around 15% because this is not supposed to be a currency bet!

If the TDI is low, I am allowed to do whatever my wife likes with some or all the 7-12 month part, keeping the 1-6 sacrosanct. Some examples are shares, an old (but interesting) car, a big holiday and a swimming pool - the 'normal' sorts of things that we lucky folk in the rich countries like to do or plan. Probably the next time I 'play', it will be to make a direct investment in a local business, although my son wants me to buy a fire engine.

Hope that is of interest. What about you?

[born2invest]

Hope that is of interest. What about you?

I have $2000 in an online savings account.

I have it there if I get a large car bill or medical bill such as the MRI I had recently and didn't want to wait 5 months on the public waiting list. I don't see why people have 6 months expenses set aside which would be around $11,000 in my case when it could sit there for 5, 10, 20 years earning 3% interest when you could purchase shares and earn 10% plus a year and always sell if you really needed to.

[peat]

I don't see why people have 6 months expenses set aside which would be around $11,000 in my case when it could sit there for 5, 10, 20 years earning 3% interest when you could purchase shares and earn 10% plus a year and always sell if you really needed to.

Because you may be forced to sell at a loss if you have little discretion in the time you need to liquidate the investment.

[Harvey Specter]

I don't see why people have 6 months expenses set aside ...
Because you are young.

If I lose my job, through fault, injury, sickness, my family still needs to eat and pay the mortgage. However, rather than earning the 3% interest, that is why I have a super sized revolving credit, cost me nothing to maintain (other than a bit of disappline), yet gives me access to 6 figure amounts as quick as I can withdraw it.

TimmyTP reminded me - my work provides income insurance should I have a injury, sickness (80% of salary for as long as I need it) and I also have Southern Cross.

$2k wouldn't last my family more than a fortnight and that's just normal living, not unexpected bills. Tyres on my car probably cost that to replace.

[TimmyTP]

I have $2000 in an online savings account.

I have it there if I get a large car bill or medical bill such as the MRI I had recently and didn't want to wait 5 months on the public waiting list. I don't see why people have 6 months expenses set aside which would be around $11,000 in my case when it could sit there for 5, 10, 20 years earning 3% interest when you could purchase shares and earn 10% plus a year and always sell if you really needed to.

That's fair and reasonable.

Like so many things, it is all about your standpoint. For this topic, that would be affected by your age, number of dependents, stage in your career, expectations re living standards and the size of your other investments, to name just a few. Your personality and experience re risk tolerance is a major factor, of course.

In my case, I have seen enough disasters and missed enough opportunities to convince me that it is important to keep a healthy chunk of accessible cash. I also want to be able to pick and choose who I work for, should I find myself needing to find alternative income. Horses for courses, innit?

A thought-provoking subject, by the way - thanks for raising it.

[born2invest]

Lets say for example an emergency fund of $100k.

I may lose my job or have a large house or medical bill which wipes out $50k of money every 5 years.

If I invest it and earn 10% interest it compounds to $161k over 5 years, at 3% interest it will be $116k. A difference of $45k.

If I use 50k of it, I will have $66k left at 3% but at 10% I will have $111k left.

I understand the need to have money set aside, but why keep it in such a low earning place such as an online saver or 6 monthly term deposit.

You can always sell the shares. Over a 5 year period, even if it may suffer a stock market crash at some stage within the 5 years, the law of averages will mean you will have more set aside due to compounding at a higher rate.

[born2invest]

Quick question...

If you own a rental property and you withdraw 50k for say a large medical bill, can you offset this interest against the income?

[Harvey Specter]

Lets say for example an emergency fund of $100k.At the peak (or should that be trough) of the GFC, you lose your job and are unlikely to find one for another year. Your investments are down 50% but you are glad you had some surplus cash in a rainy day fund.

If you have no dependents, and an easily transferable job, then 1-2 months may be sufficient. If you have parents that can bail you out, you may as well go out drinking tonight - who needs a rainy day fund (that's what I did when I was young).

[born2invest]

At the peak (or should that be trough) of the GFC, you lose your job and are unlikely to find one for another year. Your investments are down 50% but you are glad you had some surplus cash in a rainy day fund.

If you have no dependents, and an easily transferable job, then 1-2 months may be sufficient. If you have parents that can bail you out, you may as well go out drinking tonight - who needs a rainy day fund (that's what I did when I was young).

If you didn't have one when you were 25 like me then what age or point in your life did you decide to put together a rainy day fund with months worth of living expenses in it?

[Harvey Specter]

If you didn't have one when you were 25 like me then what age or point in your life did you decide to put together a rainy day fund with months worth of living expenses in it?I was lucky as I had a good job and I knew my parents would bail me out if things turned out bad (in fact they still would). However, we dont always want to rely on our parents so once I got a mortgage, I put the RC in place as we had more than 20% equity. The wedding took a fair chunk of that RC but then it built back up again quite quickly, then the kid came and the wife stopped working so it now only reduces at a very slow rate (we are lucky that we can buy what we want so could easy cut back if needed).

So to answer your question, I put it in place when I got responsibilities and stopped living the care free, high disposal income lifestyle ie. when mortgage, marriage, or kid happened (in what ever order) .

[born2invest]

I was lucky as I had a good job and I knew my parents would bail me out if things turned out bad (in fact they still would). However, we dont always want to rely on our parents so once I got a mortgage, I put the RC in place as we had more than 20% equity. The wedding took a fair chunk of that RC but then it built back up again quite quickly, then the kid came and the wife stopped working so it now only reduces at a very slow rate (we are lucky that we can buy what we want so could easy cut back if needed).

So to answer your question, I put it in place when I got responsibilities and stopped living the care free, high disposal income lifestyle ie. when mortgage, marriage, or kid happened (in what ever order) .

Wise decision.

Do you withdraw from this revolving credit to invest into shares from time to time?

[Harvey Specter]

Wise decision.

Do you withdraw from this revolving credit to invest into shares from time to time?no - keep it completely separate (lies through his teeth - have taken short term loans but only where I knew money was coming in like over subscription refunds).I invest through a separate legal entities so it creates paper work.

[Mista_Trix]

My girlfriend and I are working towards having $20k in the bank - currently $4k.

The old adage of 3 months expenses each seems to be a good fit. $20k is the amount that would pay the mortgage and any bills for both of us for three months in case anything happened. We've both got insurance, but companies can be notoriously slow to pay out at times, and both of us feel better knowing its there (30 years, $200k mortgage, no dependents, 2x $70k salaries).

It seems like a waste, but when you sit down with someone and have a serious conversation about - if you were both in a car accident and your partner died, could you; cover any medical bills for yourself before insurance kicked in, same with funeral expenses, same with mortgage.

It seems a bit dark, but its a calculation you only need to do once, build up the money, and have it just sitting there. Plus if 2008 happens again and there's a massive correction, your not left without cash to pick up bargains.

[born2invest]

My girlfriend and I are working towards having $20k in the bank - currently $4k.

The old adage of 3 months expenses each seems to be a good fit. $20k is the amount that would pay the mortgage and any bills for both of us for three months in case anything happened. We've both got insurance, but companies can be notoriously slow to pay out at times, and both of us feel better knowing its there (30 years, $200k mortgage, no dependents, 2x $70k salaries).

It seems like a waste, but when you sit down with someone and have a serious conversation about - if you were both in a car accident and your partner died, could you; cover any medical bills for yourself before insurance kicked in, same with funeral expenses, same with mortgage.

It seems a bit dark, but its a calculation you only need to do once, build up the money, and have it just sitting there. Plus if 2008 happens again and there's a massive correction, your not left without cash to pick up bargains.

Why would you not use a revolving credit and offset that 20k. It doesn't make sense to have 20k in a savings account earning 3% interest when you have mortgage payments of 6%

[Mista_Trix]

Why would you not use a revolving credit and offset that 20k. It doesn't make sense to have 20k in a savings account earning 3% interest when you have mortgage payments of 6%

Yip its offset against the mortgage, ballances half a percent off whatever our mortgage rate is (with some stupid fees as well), so its better than just having it sitting in the bank.