# How do you use your emergency fund?



## mfd (Apr 3, 2009)

I'm curious how people use their emergency fund? Do you only use it for times when you are unemployed? Do you use it for car repairs? What about house repairs? 

Do you begin saving for repairs that you know you are going to need like a new roof? Do you just wait until you need a new roof and hit up the emergency fund? 

Basically do you save in advance for capital expenditures or do wait and use you emergency fund to pay for it?


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## Financial Highway (Apr 3, 2009)

Like i mentioned earlier we do not hold a large sum in emergency funds, but the fund is used only when their is an UNEXPECTED cost, like a major car repair or major cost for anything that we have not accounted for.


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## FrugalTrader (Oct 13, 2008)

mfd said:


> I'm curious how people use their emergency fund? Do you only use it for times when you are unemployed? Do you use it for car repairs? What about house repairs?
> 
> Do you begin saving for repairs that you know you are going to need like a new roof? Do you just wait until you need a new roof and hit up the emergency fund?
> 
> Basically do you save in advance for capital expenditures or do wait and use you emergency fund to pay for it?


All of the above for me! I basically build up a reserve for the time that I need it. If the reserve gets relatively large, I'll make lump sum RRSP or mortgage payments.


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## mfd (Apr 3, 2009)

I don't know if my questions were entirely clear. 

Example. You think you'll need a new roof in 3 years. Do you:

a) begin to save and replace the roof in 3 years which means you'll have an emergency fund + roof money during that time

or 

b) wait until there is a big gaping hole and then just use money from the emergency fund


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## DAvid (Apr 3, 2009)

Our emergency fund is for true emergencies, those sudden unexpected events that could not have been reasonably forecast.

Thus roof repairs, car repairs, and the like are not emergencies, but are allocated in budget. 

We don't usually maintain a lot of cash on hand, but hold it in relatively liquid investments, or retrievable investments. 

DAvid


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## Patricia (Apr 3, 2009)

Our emergency fund is also for true emergencies of which I seem to encounter at least one a year. Last year daughter#2 had to have emergency surgery in Halifax( we're in TO) so the emergency fund covered flight, accommodation and meals for me for 8 days. 
On a trip out west 2 years ago a brand new tire blew outside of North Bay so emergency fund to the rescue as we had to purchase another new tire.


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## Ben (Apr 3, 2009)

It's a good question Jon asks. For me, it's a bit of both.

I keep a large pot of cash at a certain level, and skim off excess to RRSP and mortgage, like FT. The amount of cash on hand is large enough that it could finance any definition of emergency (job loss, furnace repair, etc) without worry. 

I also believe strongly in looking ahead about 5 years for any foreseeable capital expenditures, and saving the cash in advance for those outlays. This would include buying a new car, a new furnace, replacing the roof, etc. For example, about a year ago I started a new savings account specifically for a car purchase that we would expect to make in 4-5 years. 

It is better, in my opinion, to save the money today for those known future purchases when we have known and sufficient cash flow, than to commit to monthly payments down the road when cash flow is far less certain. One can argue that I am missing growth opportunities by keeping so much cash lying around, and indeed it is a boring strategy, but I expect to sleep well all my life through this approach to risk management and financing consumption.


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## MGL (Apr 6, 2009)

My emergency fund is for true emergencies, and only gets tapped if other resources can't be tapped to cover the expenses. In the example of a leaky roof, normal maintenance or expected repairs would come from normal savings for that purpose. Sudden catastrophic damage (i.e. meteor or stray rocket) would come from the emergency fund.

I'm pretty reluctant to touch my emergency savings simply because I'm always afraid that an even bigger emergency could be right around the corner. Since establishing our fund a few years ago, we've encounter numerous "small e" emergencies (unexpected major repairs, etc) but have yet to touch that money. Hopefully we never will!


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## onomatopoeia (Apr 8, 2009)

I use it just for big unexpected expenses. Routine car/house repairs come out of my general cash flow. 

We had to patch our basement wall, that came out of the emergency fund. Partly because the money was readily accessible, and partly because my wife said "if you aren't going to use it for this, what will you use it for" and she was right.


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## Rickson9 (Apr 9, 2009)

mfd said:


> I'm curious how people use their emergency fund? Do you only use it for times when you are unemployed? Do you use it for car repairs? What about house repairs?
> 
> Do you begin saving for repairs that you know you are going to need like a new roof? Do you just wait until you need a new roof and hit up the emergency fund?
> 
> Basically do you save in advance for capital expenditures or do wait and use you emergency fund to pay for it?


This a good question. I would say that all the reasons that you gave are what my wife and I use our emergency fund for - capital expenditures as well as potential unemployment. However if I had to pick one, I would say our emergency fund is more for the latter.


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## junkyardbottles (Apr 3, 2009)

I have never used up my emergency fund...I'd have to be laid off and exhaust my savings first...


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## Thriftysista (Apr 6, 2009)

I have a "car repair" account for unexpected maintenance, a "house repair" account for the same thing, a "pet account" for emergency vet bills and then my "emergency" account would be if either my husband or myself became unemployed. I find that keeping them seperate helps me remember the ongoing maintenance that isn't necessary unforseen to the same degree as a job loss.

I think of the repair accounts as accounts that I am able to withdraw from, where the main emergency account is invested in easily accessible investments for unforeseen job loss scenarios. 

So in answer to your question, if I knew the roof was going to need to be repaired in 3 years, I would get an estimate and bump up the house repair account.


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## johnsazzr (Apr 20, 2009)

junkyardbottles said:


> I have never used up my emergency fund...I'd have to be laid off and exhaust my savings first...



I agree with this...I would rather put a large purchase or repair on my ELOC at prime and pay it down very quickly..I do not consider such expenditures as emergencies, but rather as discretionary. (Ok perhaps not the hole in the roof scenario)


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## indexxx (Oct 31, 2011)

This goes against what everyone says you should do, but I don't have an emergency fund and never have. I want my money to be working for me, so the most I leave in a non-investment account is maybe $1,000 to pay off my monthly cash-back credit card that I use for everything. If an emergency comes up, I tap my line of credit at 5.75%; I think it's more advantageous to allow my investments to continue their uninterrupted compounding than to pay a slight bit of interest for a couple of months. Even if I needed 10k- it's only $48/month to borrow it from the LOC and I always repay it as fast as possible. I'd lose more than that in growth by tapping an investment.

If the banks would pay more than a ridiculous 0.25% (often MUCH less) or whatever, then I might leave more laying around.


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## Financial Highway (Apr 3, 2009)

indexxx said:


> This goes against what everyone says you should do, but I don't have an emergency fund and never have. I want my money to be working for me, so the most I leave in a non-investment account is maybe $1,000 to pay off my monthly cash-back credit card that I use for everything. If an emergency comes up, I tap my line of credit at 5.75%; I think it's more advantageous to allow my investments to continue their uninterrupted compounding than to pay a slight bit of interest for a couple of months. Even if I needed 10k- it's only $48/month to borrow it from the LOC and I always repay it as fast as possible. I'd lose more than that in growth by tapping an investment.
> 
> If the banks would pay more than a ridiculous 0.25% (often MUCH less) or whatever, then I might leave more laying around.


I appreciate where you are coming from, but is an emergency really the time to get in debt. Maybe you lose you or your spouse lose your job, not only is this a bad time to get in debt, but banks might reduce your line of credit. Remember that line of credit is not guaranteed and terms can change at anytime. I understand the chances of this maybe low, but that is the whole point of this.

You don't need to keep the funds in a everyday savings account, you can have it in a GIC or other guaranteed funds.


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## the-royal-mail (Dec 11, 2009)

^ 100% agreed. There are simply way too many inaccurate assumptions in what you quoted.


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## Ethan (Aug 8, 2010)

indexxx said:


> I don't have an emergency fund and never have. I want my money to be working for me, so the most I leave in a non-investment account is maybe $1,000 to pay off my monthly cash-back credit card that I use for everything. If an emergency comes up, I tap my line of credit at 5.75%; I think it's more advantageous to allow my investments to continue their uninterrupted compounding than to pay a slight bit of interest for a couple of months.


I agree completely, this is my philosophy as well. The current low rate environment punishes savers of cash. If an expense of greater than $3k were to come along, I would borrow for 1-2 months. If the event was greater in scope, I have $27k in my TFSA and over $100k equity in my house that I could tap. The opportunity cost of having cash sitting around for rare events is simply too much for me.

If my girlfriend or I were to lose our jobs, we would get a couple weeks severance plus any owed holiday pay. This would likely equate to 5 weeks pay. If for some strange reason we didn't find jobs after 5 weeks there is EI, however we're both chartered accountants in a city with 3.5% unemployment so again I'm not too concerned.


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## crazyjackcsa (Aug 8, 2010)

We just keep a great big "War Chest". It's a full year salary for the pair of us. In there is money in case the furnace breaks, or if we need a new car, or if one of us loses our job.

It's a loosely tiered system. But no money is specifically earmarked for each emergency.


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## GreenAvenue (Dec 28, 2011)

Thriftysista said:


> I have a "car repair" account for unexpected maintenance, a "house repair" account for the same thing, a "pet account" for emergency vet bills and then my "emergency" account would be if either my husband or myself became unemployed. I find that keeping them seperate helps me remember the ongoing maintenance that isn't necessary unforseen to the same degree as a job loss.
> 
> I think of the repair accounts as accounts that I am able to withdraw from, where the main emergency account is invested in easily accessible investments for unforeseen job loss scenarios.
> 
> So in answer to your question, if I knew the roof was going to need to be repaired in 3 years, I would get an estimate and bump up the house repair account.


This is exactly how we do it. That way emergency funds would be used for unemployment, I can't think of anything else at this time but anything could happen of course.


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## brad (May 22, 2009)

crazyjackcsa said:


> We just keep a great big "War Chest". It's a full year salary for the pair of us. In there is money in case the furnace breaks, or if we need a new car, or if one of us loses our job.


That's pretty much our approach too, although we don't have as much money in our war chest. I view a carrying a credit card balance as an emergency, so in the (very) rare instances where I've had to put more on my card than I can pay off in a month, I dip into the fund for that. 

I'm fine with opportunity cost if it helps me sleep at night. Some people lose sleep over opportunity cost; I lose sleep over the possibility of large unexpected expenses and I prefer to have a comfortable (and liquid) cushion.


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## hboy43 (May 10, 2009)

the-royal-mail said:


> ^ 100% agreed. There are simply way too many inaccurate assumptions in what you quoted.


I 100% agree with the guy who has no emergency fund. When you multiply the probability of needing vast quantity of funds on short notice, by the probability of the bank not lending, by the probability of no other help from friends and family ... this becomes a vanishingly small number.

I submit it is you who has way too many inaccurate assumptions embedded in your thinking.

The best emergency fund is building up your net worth rapidly by not doing foolish things with your money, like leaving $50,000 sitting perpetually at 1% and at the same time paying a mortgage at 4%.

However stuff that does happen fairly regularly, I am prepared for. Exhibit one is the ice storm 1998. Exhibit two is the time the entire east coast electricity grid had problems for days (200?). My house can run indefinately upon the failure of the electricity grid. I am not dependant on any municipal water works, gas lines etc.

I mean, which way is it: you are assuming that society can be somehow sufficiently broken down such that a reasonable person with a reasonable credit history can't borrow a reasonable quantity of funds on reasonably short notice, yet it cannot be so broken down that you can see no scenario of massive public infrastructure failure such that you advise taking any steps to insure against this possibility? Of course I am assuming you have no capabilities in this regard. If you are the ultimate boy scout, then I salute you.

Who is really prepared for an "emergency"? The guy with $50,000 in the bank, or the guy who knows he can somehow in all likelyhood muddle through some remote chance of financial inconvenience, but can survive the failure of public infrastructure?

$35,000 sitting in the bank at 1%, or my tractor with backhoe and other attachments and 500 litres of diesel. Lets me see which one would I want to have around for "emergencies"... I'll take the tractor et al thank you.

hboy43


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## Square Root (Jan 30, 2010)

We don't have an emergency fund per se. Been retired 5 years and dividends and pension go in while expenses come out. I started the cash balance quite high ( low 7 digits) and it still around that. This will go down to mid 6 digits once we close the house in Arizona and furnish it. i feel comfortable with this cash balance but in reality we could easily borrow against the portfolio if necessary. When I was working didn't have cash sitting around as was always fully invested, and then some. Things seem to have worked out pretty well.


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## Barwelle (Feb 23, 2011)

I like your thinking, hboy. Money in a bank account, or for that matter, cash, won't provide you much heat in the event that the power goes out. We have a wood-burning stove (my parent's house, not mine) and several week's worth of split wood in our yard. Along with a few months' worth of food, stockpiled just because we live 35km from the nearest grocery store. Though emergencies aren't the intent of having the stove, wood, and food, I sure like the idea of being able to have a warm house and food should there be a disaster.

I bothers me a little bit how an alternative heat source like wood stoves are uncommon. Natural gas furnaces can't operate properly (if at all) when the power is out. Those gas fireplaces might, but they aren't designed to keep a house warm, and you're still relying on the same fuel source.

On the other hand though, I don't see what's wrong with keeping some cash, at least $10,000 depending on what obligations you have, in a HISA. Emergencies don't always come in the form of natural disasters. A fellow I know has cancer. The drugs cost some ridiculous amount like $50 or $100 a day, and they are not covered under provincial health plan. His employer benefits cover it, but what if they didn't? My example isn't perfect, since at that point it wouldn't matter to pull money out of retirement savings, but my point is that it is good to be prepared in more ways than one.


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## Eclectic12 (Oct 20, 2010)

indexxx said:


> This goes against what everyone says you should do, but I don't have an emergency fund and never have. I want my money to be working for me, so the most I leave in a non-investment account is maybe $1,000 to pay off my monthly cash-back credit card that I use for everything.
> 
> If an emergency comes up, I tap my line of credit at 5.75%; I think it's more advantageous to allow my investments to continue their uninterrupted compounding than to pay a slight bit of interest for a couple of months.
> 
> ...


An emergency fund has worked well for me for both car emergencies and family emergencies.

As for investments - that's great as long as there isn't a market-wide drop. Knowing I don't have to sell anything in a bad market simply because of an emergency is worth it to me.

It's also great you are disciplined enough and apparently have the cash flow to pay down the LoC quickly but a lot of people don't. Especially when the expenses of kids are involved.


As for what banks pay - with two exceptions (the main chequing account inflows/outflows) and a secondary backup chequing account, all of my savings is being paid 1.5% or better.


IAC - as long as you are happy, it works for you and sleeping at night is not a problem, c'est la vie.


Cheers


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## Eclectic12 (Oct 20, 2010)

hboy43 said:


> I 100% agree with the guy who has no emergency fund. When you multiply the probability of needing vast quantity of funds on short notice, by the probability of the bank not lending, by the probability of no other help from friends and family ... this becomes a vanishingly small number.
> 
> I submit it is you who has way too many inaccurate assumptions embedded in your thinking.
> 
> [ ... ]


Maybe ... but then again, as one gets older and runs into people who have had their financial institution cancel their borrowing privileges and then other financial institutions reject them because "your old bank must know something we don't", it becomes clear that a catastrophic collapse is not required.

It is rare but I'm sure I'd prefer to avoid the hassle for what little a reasonable emergency fund costs.

Most people I mentioned I had two bank accounts with two ATM cards so I'd have a backup thought I was crazy. They were scrambling when ATM access for one of the two banks disappeared for four days.


Cheers


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## Four Pillars (Apr 5, 2009)

I'm fine with having a reasonable emergency fund, but it has to be appropriate for your situation.

The idea that you "shouldn't be borrowing" if an emergency happens doesn't really hold water.

If you have any debt (mortgage etc) and you have an emergency fund, then you are basically borrowing your emergency fund, since that money could be used to pay down the mortgage or whatever debts you have.

Did I write an article about this topic? Not exactly, but this article covers the same principle:

http://www.moneysmartsblog.com/spending-cash-is-the-same-as-borrowing-if-you-have-debts/


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## Eclectic12 (Oct 20, 2010)

Four Pillars said:


> I'm fine with having a reasonable emergency fund, but it has to be appropriate for your situation.
> 
> The idea that you "shouldn't be borrowing" if an emergency happens doesn't really hold water.
> 
> ...


Like so many things ... it is a balancing act. And as previously mentioned, having kids or an unstable job can change the picture.

A couple of years ago, there was a glitch with the company payroll where some banks didn't receive the employee's pay for three or four days. It was odd to me that some had NSF charges or had to borrow to cover their mortgage payment.

The one that amused me was the payroll person getting a call at 6:30am as the employee's debit card was bouncing while trying to buy gas.


Cheers


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## Four Pillars (Apr 5, 2009)

Eclectic12 said:


> Like so many things ... it is a balancing act. And as previously mentioned, having kids or an unstable job can change the picture.
> 
> A couple of years ago, there was a glitch with the company payroll where some banks didn't receive the employee's pay for three or four days. It was odd to me that some had NSF charges or had to borrow to cover their mortgage payment.
> 
> ...


Haha - that's funny about the gas.

I think there is something to be said for having a bit of float in your main checking account. Call it an emergency fund, call it common sense or whatever.

I don't believe in "just in time" budgeting.


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## indexxx (Oct 31, 2011)

Four Pillars said:


> Haha - that's funny about the gas.
> 
> I think there is something to be said for having a bit of float in your main checking account. Call it an emergency fund, call it common sense or whatever.
> 
> I don't believe in "just in time" budgeting.


Oh, I agree- I just don't subscribe to the 'three months salary' guideline, as that's lost potential in my eyes. As I say, about $1,000 should cover anything that comes up; Any more and I'd tap the LOC. But I always have some cash lying around the house also. My address is...


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## Sampson (Apr 3, 2009)

These discussions are always a little silly for me.

Sure someone living a student lifestyle could probably handle 1 yr with no income nor e-fund. Heck, I used to know plenty of couch surfers that lived meal to meal.

But through one or two newborns, a wife that stays at home, an accident also.

Call me conservative, but if I was in the 2nd situation, I would want a pretty beefy e-fund, just in case.

For those anti-e-funders our there, have you guys actually calculated the opportunity cost of holding 3 months salary. Say you earn a healthy $3000 after tax per month, holding $9k or even $18k in an e-fund.

What is the real rate of return on your investments? I know what the media tells us, the average return is well below the market so maybe 10-15% total return over the past 10 years. Now the opportunity cost on that $9-$18k is only a few hundred bucks or maybe $1-$2k. Not worth thinking about it or fretting over 'lost' opportunity.


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## Patience (Mar 8, 2012)

Hard to say if I've kept an emergency fund. I usually keep a minimum $2500 in the bank to avoid/eliminate bank fees which I suppose could be considered an emergency fund. Cash sitting around feels so inefficient to me. If I had to, I'd be willing to pay low LOC fees to cover a short term emergency, but I've never come accross an emergency that couldn't just be handled. I could sell some shares if it was a large expense, but that would depend on where the market is at. So little requires cash in hand these days that you should have time to gather resources from other sources.

On the other hand for those just starting out with a low or very illiquid networth to fall back on, I could see it being a good idea to have more cash around.


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## Eclectic12 (Oct 20, 2010)

Sampson said:


> These discussions are always a little silly for me.
> 
> [ ... ]
> 
> ...


+1 on the what are real rate of return.

The opportunity cost, IMO is going to constantly changing and is hard to gauge. Then too - there's the individual would actually buy.

Losing the opportunity in Mar 2009 buy say, BNS cheap doesn't really matter if the individual actually buys YLO. These are two extremes but the point is a "lost opportunity" may not be what happens.


Interesting to hear the viewpoints though.


Cheers


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## the-royal-mail (Dec 11, 2009)

Good post Sampson. What the anti e-fund crowd doesn't understand is that e-funds are not about aggressive market returns - they are about saving your butt from living on the streets or mooching off someone else in case the sky falls on your head!

It's the presense of those funds in your account that provides the value.

Not everyone is a cracker jack investor and not every dollar needs to be invested. And credit should not be counted on to keep food on the table.


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## Four Pillars (Apr 5, 2009)

What I don't like are the "rules of thumb" for forth by the pro e-fund and anti-efund people both. Ie You should have N months of salary/costs etc stored away. 

Whether N is a crazy high number, zero months or something in between, it just won't apply to every situation.

As Sampson points out, it is hard to go really wrong with a e-fund, but don't forget that some people have high interest debt. Are they better with a bigger e-fund or smaller e-fund? Some people live at home with their parents, some have high earning spouses, some are multi-millionaires - what are the e-fund rules for them?


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## Sampson (Apr 3, 2009)

I think it often stems from this fascination of 'making money with your money'.

We seldom/never hear debates about having too much insurance. All an e-fund is is self-insurance.

Yeah, maybe some people are over insured, but we don't hear people saying, $300,000 of term-life insurance is too much. Reduce your premiums and coverage to $100,000 and invest the difference.

How can any of us comment on how much is needed? except for our own situation.


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## indexxx (Oct 31, 2011)

Sampson said:


> These discussions are always a little silly for me.
> 
> Sure someone living a student lifestyle could probably handle 1 yr with no income nor e-fund. Heck, I used to know plenty of couch surfers that lived meal to meal.
> 
> ...


Right- but if I borrowed $10k from my LOC @ 5.75%, it's only $575 interest for that year, or $48/month. And surely most investments I'd own would be beating 6% over a year, so I'm ahead with this strategy.


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## brad (May 22, 2009)

indexxx said:


> And surely most investments I'd own would be beating 6% over a year, so I'm ahead with this strategy.


I'm not so sure about "surely."


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## Sampson (Apr 3, 2009)

indexxx said:


> so I'm ahead with this strategy.


This highlights the point I want to make.

Who cares if you are 'ahead' or not?

I don't.

As long as I can do what I want to do, and I have a plan to achieve it, I don't need to earn maximum return. If I get there, that's all I care about, not when I get there, or if I 'beat' the market, or anything else.

I may be different from others in my view, but I NEVER want to be in a compromised situation. If that means I retire 1 year later, or drive a Toyota instead of a Mercedes, I'm ok with that.


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## indexxx (Oct 31, 2011)

Fair enough- everyone has a different approach that works for them in their situation. I have never felt compromised financially as I know I can instantly access a large LOC without paying a fee as I would by cashing something in. Hey, we're all just offering our opinions and ideas.


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## Eclectic12 (Oct 20, 2010)

Sampson said:


> This highlights the point I want to make.
> 
> Who cares if you are 'ahead' or not?
> 
> ...


IMO, it's the big picture.

If I were starting out and had next to nothing in assets and liabilities - then I can see a tiny or no e-fund.

If I'm managing say $150K in investments, a matching RRSP of $150K and a maxed out TFSA of $20K - I'm not going to sweat the "lost opportunity" of say $18K.

Keeping tabs on the rest is more important to me.


As for "over-insurance", I can agree that not a lot of people hear about or seriously evaluate it. However, I have had a couple of people/articles highlight this an area of potential waste.


I really like Four Pillar's comments about the "rule of thumb". It's a nice starting point but YMMV.


Cheers


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## the-royal-mail (Dec 11, 2009)

How far ahead will you be when you are in a period of prolonged unemployment, have no EI and the bank takes away your credit? How will you eat? Credit cards? How will you make the payments?


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## crazyjackcsa (Aug 8, 2010)

Interesting situation just happened to me: 
Our roof was leaking into the attic, so we needed to replace it. My wife and I decided to "go big" and go with a steel roof. We plan on staying in the home for life (50+) years, and we like the idea of never replacing it again.

That was 1 month ago.

This morning, her car died. 2000 Intrepid, coolant in the oil. Done.

The emergency fund is being called into active duty. We'll be able to pay for the new vehicle in cash. No need for credit, no need to worry about if our investments are up or down, no hassle of accessing funds.


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## MoneyGal (Apr 24, 2009)

Re: "Overinsurance" - Moshe Milevsky's book Your Money Milestones has a whole chapter on this. Here's a review which touches on the topic briefly:

http://www.usatoday.com/money/books/reviews/2010-03-10-your-money-milestones-review_N.htm


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## indexxx (Oct 31, 2011)

the-royal-mail said:


> How far ahead will you be when you are in a period of prolonged unemployment, have no EI and the bank takes away your credit? How will you eat? Credit cards? How will you make the payments?


It's happened to me when I've ben unemployed for several months. After my small cushion runs out (the $1,000 or so I state that I keep in cash), I live on my line of credit, knowing that eventually I'll start working again and pay it back. I view it exactly the same as not sweating the markets when they drop, as I know they'll recover. How do I make the payments? I'll simply take the minimum off my credit card to make the LOC interest payment, then use the LOC to pay the credit card. Easy, and I never carry more than 5.75% interest charges. So again, I could borrow say $1,500/ month for four months and pay very little interest while my investments keep compounding uninterrupted. We live in Vancouver so have chosen to rent instead of buying, keeping our capital liquid, our monthly expenses down drastically, (freeing up funds for investing) and not paying for some greedy real estate speculator's retirement as opposed to our own.

I appreciate that this strategy would not work or would scare the bejesus out of most people who own homes and have children- but my wife and I have no kids so far and we rent. She does keep a bit more cash in her bank, as she prefers to have it. and if something major did occur, I can sell off something, and use the gains.


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## Plugging Along (Jan 3, 2011)

The whole idea of e-funds is really about risk and risk mitigation. I do alot risk analysis in my work and teach it too, so I tend to treat this the same.

The general steps to risk management are the following:

1) Identify all your possible perceived risk with out judgement. I always get the same ones, plus some really wacky ones, but really for many people they are the same, lost of job, breaking of car, divorce, nucluer war, power outgage, blah blah...

2) Determine the probability and impact. This is where each of us has our own filters. The impact of one losing their job and having no income is a lot less for the student living at home, vs the sole income earning with a family, debt, mortgage to pay. The probability also varies depending on our own circumstances. If you are in a stable government job, it's different than being a consultant. 

3) Pick those with the highest impact and probability and figure out how you will mitigate. Then those with the highest impact, and then highest probability, forget the low impact and low probabilities. This is where people differ in what is high and low again. 

4) Develop mitigation strategies, and identify secondary risks. This could be an efund, borrow from LOC, family, reducing expenses, etc. Each one has a cost whether hidden or direct. Most people forget the secondary risks that come from the first mitagtion.

5) Identify risk triggers and monitor risks.

Here's where I find people tend to have problems:
1) They forget to identify risks
2) The really under estimate the impact or the probability of a risk
3) They ignore what risks they really should be mitigating because they think they can do better doing something else. 
4) They have the wrong mitigation strategy, or haven't thought about secondary risks.


This is just my random thoughts.


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## Plugging Along (Jan 3, 2011)

Here's the biggest problem I see with the lack of e funds or really small efunds. 

I do believe someone should have liquid (cash) at least 1 month or 2 full paychecks (actually more, but this is the min) of expenses on hand. Really, the probability of having to use that is really quite high. The chances of ANY (not all) of the following happening: delay in pay, bank error, work error, change of work pay schedule, budgetting error, additional not planned for expense (car repair, house repair), change of job, lose of job (it takes more than 2 weeks to get your ei from the day you are laid off), medical work, etc, the list is endless, much more if you add spouses and children in the mix. The list of things that could delay a paycheck or two, or could unexpectedly require an extra expenditure are limitless. If someone is budgetting so close, that they have to borrow in times like this minor emergencies, they are in big trouble is a major hits. It won't be one month that you're under water for, but serveral. You will be paying off the money you owe, plus the interest. At my work, they changed the pay cycles last year, so everything was coming 2 weeks later. I was amazed at the number of people that took out loans for the year to cover it off. 

The one little emergency isn't going to sink someone, it's what happens next. They are in debt let's say for one paycheck, so let's say $1000 (I'm being conservative). Then it takes the person 5 months to pay it off (not including interest), so $200 more each month they have to pay, then, another little emergency happens within the 5 months. There goes another $1000, however, they still have the first emergency to deal with, another 6 months because of interest to pay off. Now the person is vulnerable for 11 months, etc. It can get to the point that they are buried very slowly, and this was just for a little $1000 expense or lost of pay. 

Then there are those who say they will cash in their investments. However, it is quite possible that you take a lost on your investments to cash in. How many of us what to cash in on a lost right away. People say, I know it will go back up, and they hang on to their investment, and now are paying interest. The gains they had are wiped out.

Keep in mind that alot of events (risk triggers) are not independant from each other. My spouse lost his job due to the economy, which directly correalated to how our investments were doing. Often, people miss these correlations, and misjudge the realities of their risk plan and how much control they truly have. 

Here's my real life example:

I went on Mat Leave, which we did plan for me to leave for 1 year. We saved extra to offset my leave.

A month after our child was born, my spouse was laid off. He got a bare minimum severance. He is usually in very high demand for his industry, and prior to this would get calls almost weekly for job offers. We thought that everything would be fine, and he would be working quickly, within a month (which was the usual). However, due to the economy, it took much longer.

EI for the two of us was only about 20% of our normal pay. 

Due to the economy, my organization, which I was considered almost untouchable was reorganzition. All my senior management, and my supporters were being replaced. The company abolished severance (which I would have been my cushions as I was almost entitled to 1 years pay). They replaced it with working notice, so no more cushion.

We had a lot of our funds tied up in the stock market, which could easily float us for years. However, it had dropped by just over 50%, I knew it was going to go back up, and didn't want to cash it in.

I had credit, but honestly, moving money around between credit cards and LOCs, just didn't make sense as we didn't know how long we would need to fund this for (it could have been a year easily). I also learned that when things are bad and unstable, the last thing we wanted to do was add more unstability through debt. Also, with the cracked down in credit, I was starting to get letters, that some of the companies wanted to reduce my limits. I have a PERFECT credit rating with a score of over 840. 


So what happened:

We had still a fairly large emergency fund. We cut all expenses. My spouse couldn't find a job here after 6month, he had to go to another country. I returned to work as planned after a year. This was all because we had a good float to keep us going. 

If we didn't have an e-fund, I am pretty sure the stress would have destroyed my spouse and I and the results would have been very different.

I would have had go back to work much earlier. I may have not weathered out the layoffs, which I did. We would have had more disruptions in the activities for our family (such as school, childcare, etc). It would have taken us much longer to recover, as not only would we be not saving (we had stopped all RRSP contributions), we would first would have paid off the borrowed money. We also would have possibly had to cash in some of our investments as a lost, instead of waiting for them to recover as have. 

Overall, in my case, we definately are much further ahead because we had a liquid e-fund. I just see so many people get into debt because of an emergency and no efund or float, and then they wonder what happened, or don't realize that they could have done something about it. 

Do I think 3, 6, 9, 12, or more months? That's where it really depends, but I do think everyone should have some sort of float. Don't get me wrong, I actually in high risk investments, and have a very high risk tolerance. I just mitigate more.


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## Maybe Later (Feb 19, 2011)

I like the comments about risk mitigation. On a long drive, my wife and I tried to come up with all the realistic situations (OK, zombie apocalypse came up too) that would negatively affect our long term financial situation. The top three were my death, a disability that would affect my ability to work in my current profession and an injury or disability that my wife would incur that would impact her ability to work or require a substantial cost to manage.

FWIW, we did consider job losses. We can manage on my income alone for extended periods just by cutting savings. Short of doing anything immoral or illegal, I'm not losing my job. Hopefully I can manage that.

So clearly, for us, insurance is more important than it might be for others where job loss is #1. We are still working on the disability insurance needs. It isn't inexpensive, but I won't begrudge the premiums as lost investment opportunity.

All that said, we have no emergency fund _per se_. We do have uninvested cash, but it isn't earmarked for any one thing We've contributed more than a year's living costs to our mortgage, education and retirement savings. It meets our long term needs and goals better than a large emergency fund _right now_. As the situation changes, whether it is our plan, goals, interest rates, whatever, we can adjust. I bristle when advice is given without consideration of the individual's situation.


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## Plugging Along (Jan 3, 2011)

It really does depend on individual circumstances. However, I do think that any one should have at least enough to float them for at least two pay checks.

It's actually one of those things I probe for as a landlord now. I figure if they don't have at least a little bit in bank, thes a good hance they will bounce a check on me.


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## MrMatt (Dec 21, 2011)

My emergency fund is basically funds for when the rest of my budget and planning falls short for unexpected reasons. I also have a slush fund to to help smooth things out and take advantage of opportunities.

The emergency fund should only be used when it is a serious issue. If I'm short on food, or a repair that would be unsafe, or result in substantial further cost if delayed.

The slush fund can be used for anything to smooth it out, if I was plannign to buy a new TV in a few months and there is a good sale, the slush fund loans me the money for a few months. I would never use the emergency fund for a new TV.


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## Financial Cents (Jul 22, 2010)

We use our EF for the what ifs in life and for true emergencies, not for a new TV, like MrMatt said.


Our comfort is to have an EF of about $10,000. We hope to have that saved within the next year.


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## Gandharva (Jul 14, 2010)

I am struggling between the question of cash vs credit for emergency funds. Here's my situation:

* A bit more than 12 months of expenses saved in cash (and not adding any more)
* Recently began putting all excess cash towards the mortgage, goal is to pay off completely in ~3 or 4 years, $103k remaining 
* Mortgage will renew on April 1st with open variable @ 3.8% (was fixed at 5.65%!)
* HELOC credit is available, I just need to convert my unsecured LOC into my Scotia STEP as a secured LOC (can do this easily online)
* All consumer debt is paid off in full each month and generally have a great positive cash flow

By doing this I am essentially mimicing an all-in-one style of account such as Manulife One or National AIO, with the effect of cancelling out thousands of dollars in mortgage interest (and I realize the interest in calculated differently, but same overall effect).

Now, my question: My cash savings is about equal to one of my mortgage accounts (I have two, from the days of "long vs short") at ~$43k. Do I pay off this account and use the HELOC as an emergency fund? I've read all the arguments both for and against EF in cash vs credit and I'm on the fence about it but probably err on the side of cash. But I wonder, for people who have a Manulife or NB-AIO account, isn't this the same as relying on a HELOC for emergencies? There are some very good arguments about why cash is better than credit in an emergency, but isn't this exactly what people with all-in-one style accounts are doing (using credit)?

Longer term I need to buy a bigger condo, this is why I am trying to do rapid mortgage paydown; to get equity to use as a down payment since prices in Toronto for even a modest 2+1 condo are astronomical. If I use my cash EF towards the mortgage I can move a lot sooner.

Thoughts anyone?


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## the-royal-mail (Dec 11, 2009)

I think the best way to answer that is to have you think about your priorities. I am very impressed that you have 12 months of expenses saved in cash. This is very difficult for most people to achieve. But for someone who is as involved in RE as you are, this cash is even more important. No, I think it's a terrible idea to rely on credit to bail you out. We are all in a lot of trouble these days for this very thing. Everyone is in debt to the max and the cause for this was credit and mismanagement. The inability to say no and to prioritize what really matters. Now in your case you have the ability to manage money but the whole purpose of a tiered savings plan is to protect yourself from the unexpected things that happen in life. You will be wiping out your ability to do that if you spend all your cash on more mortgage and housing. Emergencies are about immediacy and credit may not be available to you on that basis. By using your cash you are also increasing your risks and costs by putting yourself in debt to service whatever loans you need to keep paying your bills.

The point of an efund is not to "pay off" things, it is to protect from adversity. It probably took you a lot of time to save up that cash. I would strongly recommend you not spend it unless you have a real emergency. If you want to save for paying off your mortgage or whatever, start a 4th tier of savings specifically for that.


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## Gandharva (Jul 14, 2010)

the-royal-mail said:


> I think the best way to answer that is to have you think about your priorities. I am very impressed that you have 12 months of expenses saved in cash. This is very difficult for most people to achieve. But for someone who is as involved in RE as you are, this cash is even more important. No, I think it's a terrible idea to rely on credit to bail you out. We are all in a lot of trouble these days for this very thing. Everyone is in debt to the max and the cause for this was credit and mismanagement. The inability to say no and to prioritize what really matters. Now in your case you have the ability to manage money but the whole purpose of a tiered savings plan is to protect yourself from the unexpected things that happen in life. You will be wiping out your ability to do that if you spend all your cash on more mortgage and housing. Emergencies are about immediacy and credit may not be available to you on that basis. By using your cash you are also increasing your risks and costs by putting yourself in debt to service whatever loans you need to keep paying your bills.
> 
> The point of an efund is not to "pay off" things, it is to protect from adversity. It probably took you a lot of time to save up that cash. I would strongly recommend you not spend it unless you have a real emergency. If you want to save for paying off your mortgage or whatever, start a 4th tier of savings specifically for that.


Agreed, but I was just trying to compare with the all-in-one style of banking. It seems to follow that people with an all-in-one (like Manulife One) are forgoing the idea of a cash EF (though I guess nothing is stopping them from having a savings account outside of thier AIO, but seems to defeat the purpose IMO). So by this logic, all-in-one accounts are inherently a bad idea from the point of an EF, yet many people are operating this way. ....So yeah, I guess it does come down to priorities and comfort level with risk. It just bugs me that there doesn't seem to be any one right anwser! 

As for me, I'm putting all excess income to the mortgage in the form of prepayments. If I have an expense I stop the prepayments temporarily to pay the consumer debt, all without touching my EF. Thankfully right now I'm living far enough below my means that I have a decent margin to do this with, about $2500/mo between my wife and I. No kids either, that definitely helps. In the end I'm just being impatient I think, waiting to finally get out of this 1-bedroom box, heh.


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## the-royal-mail (Dec 11, 2009)

Yes, any plan which doesn't include a self-saved cash rainy day fund is inherently flawed IMO. I understand how you feel but try to use this as a learning experience and perhaps consider a 4th tier of savings as I mentioned. You're already doing it by way of your extra scheduled prepayments actually. Good job.

I'm doing this very thing right now in fact. I'm almost done saving for my 3 tiers and as soon as I'm done (God willing all goes well) I will immediately start saving for an eventual house or car down payment in a 4th tier. I may eventually not buy the house, in which case I've got more cash than I need, and this provides options. In my own case I want that to be my new car fund or my investment fund, not sure yet. Lots can happen in that time.


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## MrMatt (Dec 21, 2011)

Plugging Along said:


> The whole idea of e-funds is really about risk and risk mitigation.


I like that one. It really is self-insuring.


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## brad (May 22, 2009)

Plugging Along said:


> 2) The really under estimate the impact or the probability of a risk


This is the part that interests me. I think I can estimate the impact of a risk without too much difficulty, but how do I assess its probability? We can assign probabilities to things based on their past occurrence or the rate at which they occur to others in our situation, but how in practical terms do we gain access to that information? How can I determine how likely it is that I might lose my job? How do I determine how likely my car is to break down next week and require $5,000 in repairs?

I think for most of us, trying to estimate these probabilities is the barrier that leads us to either 1) throw up our hands and abandon the idea of an emergency fund, 2) amass an emergency fund that is either far too small or far too large to accommodate the range of likely emergencies that may befall us.

Instead, many people who have emergency funds set a target figure that may or may not have any relation to their actual needs, but which sounds "comfortable" to them -- whether it's enough to replace two paycheques or enough to meet all their expenses for one year.


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## MoneyGal (Apr 24, 2009)

This is a great discussion. 

The issue with risk mitigation is that you must estimate both the _likelihood that an event will occur_, and the _expected impact on your overall financial picture_. 

Let's take jobs for an example: I don't think that it is that difficult to get estimates of the probability of layoff in any given sector. You can think about whether your employment is "bond-like" (stable sector, few layoffs, quick re-employability in the event of a layoff) or more "stock-like." There's lots of data available on the economic outlook for various sectors of the economy, and you can gauge the extent to which your particular employment is affected by or tied to those outlooks. 

And then you can estimate the impact of job loss on your personal financial situation. Are you living paycheque to paycheque -- would the loss of one or two paycheques negatively impact you? Would you be able to resume employment (in your field or another) relatively quickly? And how exposed is your overall financial situation to the economic sector where you have most of your human capital invested? (If you're a banker, for example, you might want to diversify away from bank stocks; move to more fixed income and sectors which are not highly correlated to banking.)

There are lots of events that have a very high probability of occuring and have a financial impact, but it doesn't mean that you need to protect yourself against them. Think extended warranties on consumer products. As for your car breaking down, in my own case - I drive a 13-year-old car. The probability of it breaking down and requiring $xxx in repairs is relatively high. I protect myself against that risk in many ways: I drive only very infrequently. I keep the car in good running condition and we do most of the maintenance ourselves. And if it required more repairs than it is worth, I'd go and get another beater car with cash on hand. (I didn't pay more than $5000 to acquire it in the first place.)

If an event has a low probabilty of occuring but has a big negative financial impact, you should insure against it - either on your own, or by transerring the risk to a solvent insurer. Think life insurance, when you're young. If the event has a low probability of occuring but only a modest financial impact (job loss for me falls in this category), you can retain the risk and protect against it by diversifying, establishing a robust emergency fund, etc. High risk but low impact - just forget about insuring it at all. Keep those small risks intact.


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## brad (May 22, 2009)

Thanks Moneygal -- this is all very sound advice. I think it helps to break it down into manageable, discrete tasks to avoid the decision paralysis that can result from the impression that estimating all this stuff with any useful degree of accuracy is a big, overwhelming project similar to preparing six or seven tax returns.


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## Plugging Along (Jan 3, 2011)

I think I should just get MG to teach my class. She probably does some versions already. 



brad said:


> This is the part that interests me. I think I can estimate the impact of a risk without too much difficulty, but how do I assess its probability? We can assign probabilities to things based on their past occurrence or the rate at which they occur to others in our situation, but how in practical terms do we gain access to that information? How can I determine how likely it is that I might lose my job? How do I determine how likely my car is to break down next week and require $5,000 in repairs?
> 
> I think for most of us, trying to estimate these probabilities is the barrier that leads us to either 1) throw up our hands and abandon the idea of an emergency fund, 2) amass an emergency fund that is either far too small or far too large to accommodate the range of likely emergencies that may befall us.
> 
> Instead, many people who have emergency funds set a target figure that may or may not have any relation to their actual needs, but which sounds "comfortable" to them -- whether it's enough to replace two paycheques or enough to meet all their expenses for one year.



The thing with analysing risk is that not many people do it right the first time, and many forget that it changes and needs to be monitored. As you said, people get overwhelmed, which is why the general guidelines work well for most people. However, I tend to take a look at my efund aka reserves and see what's happening in my overall big financial picture. 

There's a few ways to assess probability or likelihood. One can try to get really complex and detailed, which tends to happen with Type A personalities and detailed people (anyone on here)? You can run simulation programs, algorithms, Monte Carlo analysis, etc, but to me for person risk that’s way too much effort, takes a lot of time, and needs a lot of expertise. I tend to just go by a simple matrix. When I teach it, I tell people to go 2X2. Some try to go more, but it’s not that necessary.
For probability or likelihood, I take a look at it in terms of low or high chances of it happening. A lot of it is gut feel, and changes as conditions change. You gain access on the information through gut feeling, and little internet research, asking others, etc. For your job, you look at the conditions. Look at the company, the general health of the company, history of layoffs and reorganizations, how they treat their people, how hard is it for them to let people go, where your position is, and how you have weathered through in the past, etc. Generally, one knows if they are in stable company or not. Through a lot of questions, I could probably guess weather the probability of you getting laid off is high or low. For vehicles, you take a look at the age and the reliability. Certain cars run a lot better and last a lot longer. My car is 13 years old too, I take it for regular maintenance with a mechanic that I trust (he’s family), and he often predicts what things I have to be aware that are major that will come up. I have assess the probability of a break down is on the lower high side because I had put in major work last year on the car. Same thing with housing repairs. Do you know how old the furnace, water heater, roof, any major is? What’s the condition? 
Not every thing will give you a likelihood or probability, but you can get a pretty good idea in terms of generalities. One may not know that exactly what will be an income disruption, but based on history they know there’s a pretty high chance. How many people do you hear saying, ‘Something new is always coming up…. ‘ To me, I say poor risk assessment. If a person is finding that ‘Something’ (we don’t know what, is always coming up every couple of months, then really shouldn’t they just add in an efund for an average amount for every couple of months?
I don’t claim that everyone should have the same amount for an efund. I do think everyone should assess their personal scenerios and determine what their fund should be, and it should be at a bare minimum a couple of paychecks.


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## Four Pillars (Apr 5, 2009)

I'm just not sure how realistic it is for most people to evaluate the probability of an extended layoff.

Most industries are cyclical with varying degrees - someone who works in a booming industry can be forgiven for thinking they are immune from layoff because they can easily get another job.

The problem is that as good as things are in boom times, when they go south - not only are you more likely to get laid off, it's far more likely that there aren't other jobs around.

Then the question remains - is it just your industry that is slumping or is the entire economy tanking? This could determine the odds of finding work in a different industry.

Even governments seem to be cutting back a bit (or pretending to).


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## Guigz (Oct 28, 2010)

Gandharva said:


> Now, my question: My cash savings is about equal to one of my mortgage accounts (I have two, from the days of "long vs short") at ~$43k. Do I pay off this account and use the HELOC as an emergency fund?


You are paying about 1,600$ per year (in after tax dollars) for the priviledge of having 43K$ sit in your bank account. Only you can determine if you are getting your money's worth.

My personal advice would be to make a large prepayment (i.e., 33K$) to that portion and then focus on eliminating it first. That way, you conserve a large emergency fund and you will be freeing up some more cashflow shortly.


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## Sampson (Apr 3, 2009)

Up thread, I was wondering when this would turn into a probability-impact matrix discussion - sure enough.


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## donald (Apr 18, 2011)

I struggle with regards to the emergency fund(mainly because i'm self-employed,6 yrs in business so still hard to tell my revenue range after the dust settles but starting to "feel" what's normal annual projections)& coupled with the fact i take two lump sums*dividend*& *bonus* and make those draws work year round.I'm also a renter rightnow(looking to get back in the housing market)Struggling with what my intial down payment is going to be when i do re enter.Sitting with a full yr salary roughly*75k*in a hisa.....way to much liquid for me personally(won't)figure it out till i re enter.Generally speaking i think 6-12 mths of take home pay would be the sweet spot if one can secure that.This questions is so wide open.Is a yr salary to much?what would one put down on a 300k house?that is my deliema(the threahold just past cmhc)TRICKY the emergency fund.


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## MrMatt (Dec 21, 2011)

Gandharva said:


> I am struggling between the question of cash vs credit for emergency funds. Here's my situation:
> 
> * A bit more than 12 months of expenses saved in cash (and not adding any more)
> * Recently began putting all excess cash towards the mortgage, goal is to pay off completely in ~3 or 4 years, $103k remaining
> ...


Why not go closed variable?
Be sure to get good prepayment privledges, or choose a short amortization.


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## Guigz (Oct 28, 2010)

With a term between 3 or 4 years, you might be better of with a fixed rate. Between 2.79% and 2.99% should be possible for a 3 year or 4 year term.


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## Gandharva (Jul 14, 2010)

Guigz said:


> You are paying about 1,600$ per year (in after tax dollars) for the priviledge of having 43K$ sit in your bank account. Only you can determine if you are getting your money's worth.
> 
> My personal advice would be to make a large prepayment (i.e., 33K$) to that portion and then focus on eliminating it first. That way, you conserve a large emergency fund and you will be freeing up some more cashflow shortly.


Yes, a good compromise worth considering.


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## Gandharva (Jul 14, 2010)

MrMatt said:


> Why not go closed variable?
> Be sure to get good prepayment privledges, or choose a short amortization.


I chose open variable specifically for the unlimited prepayments as I'm trying to do a rapid paydown with all monthly excess cash. I'm just debating whether to use any or all of my emergency fund towards it. I'm leaning towards holding on to the full EF because of contract issues at work looming at the end of 2013 which could threaten my job. Decisions decisions.


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## MoneyGal (Apr 24, 2009)

Well, for what it's worth, when you have a lower mortgage payment (or none at all!) your requirement for monthly income drops, often significantly. (Another variable which I think is under-discussed in these discussions...why should I have a generic "one year of salary" in cash when I don't need one year of salary to live for one year?)


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## the-royal-mail (Dec 11, 2009)

It's a valid point but paying extra $ on a mortgage doesn't immediately translate to a lower payment. You could clean out your efund today and still not be up for mortgage renewal for 2 years, but lose your job tomorrow. Next month and for the next 2 years you still need to make those same payments while you're jobless. Having blown your entire efund into the mortgage money pit will end up being a bad idea.

I don't think I ever suggested you should save one year of salary. My opinion is that everyone should save 6-12 months' typical *living expenses* in cash tier 1. So whatever your average cost is for the previous 12 months, say it's $2500/mo, then you should strive for that amount x6-12. IMO of course. 

Mortgage payment is but one element of monthly living expenses.


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## DanFo (Apr 9, 2011)

Just had to have my roof re-done, The winds lately were not too kind... any other time of the year i might have dipped into the e-fund but I just got my tax refund which just about covered the whole thing. Either way I had no worries or stress of how to pay for it since I knew I had more than enough cash on hand to cover it. I keep my e-fund in a savings account @ roughly 10K when it gets high i just drop some into my rrsp or onto the mortgage.


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