Emergency funds: long term planning and fostering hope
August 22, 2018
One of my long-standing bastions of money irrationality has finally fallen! It’s been a long time coming and I’m very proud of making the progress, finding the emotional maturity and steadiness, needed to take it down.
This is the change in my money management that I alluded to a while ago.
I’m incredibly risk averse and conservative in my money management. This trait (habit?) goes waaaay back.
I was once a workaholic, wrapped up in building my career and scrutinizing every single move and communique like it might have hidden gold or a secret message for success because every penny mattered. Because I had to support a family even before crossing the threshold to adulthood, at age 17, any money that I earned went to paying down debt and building up a basic savings account instead of investing in a Roth IRA. I had to keep cash on hand at all times because there was always something going wrong: someone got sick, my trainwreck sibling had run up another utility bill, an endless stream of flat tires, dental emergency, or more dental issues.
Obviously, after many long, tough years of working and saving, I made it through that period. But also just as obviously, I bear the scars which translate to being even more risk averse. At this point in time, I’m highly concerned about the possibility of a recession in the next few years, as well as highly concerned about our job security. There’s always been a question mark over my job, but recently one has been hung over PiC’s job, and that brought all of my fears back to the fore.
For the past year, I’ve been unable to consider our cash-equivalents of CDs as cash and not investments because there are penalties for breaking them early. In my mind, cash has no penalties for spending it, other than opportunity cost. Breaking a CD was both opportunity cost and real cost in loss of earned interest. This loss aversion meant we ended up holding on to stupid amounts of real cash at a greater opportunity cost of 3-5%, even with the 1.65% APY, in order to have a year of emergency money on hand. I knew it was stupid, yet I couldn’t shake the notion that losing 6 months worth of interest was too high a price to willingly pay in case of job loss.
That was utterly irrational. I knew it, our own recent history shows it. Just last year, I had to break all our CDs to pay for unexpected renovations, and the world continued rotating on its axis. Did losing up to six months of interest make or break our financial stability? No, it did not. Buying the house sucked, but losing some interest on a few CDs was not earth-shattering.
Knowing this and accepting this are two wholly different things.
It wasn’t until my Life Advisor and I had one of those purely random freewheeling money topic conversations, discussing my decidedly irrational stance among many other things, I found myself in a new place. I felt ready to accept that risk mitigation can look different for us, even if we’re worried about losing a job in the near term.
What a heady sense of liberation!
There is a singular freedom to having let go of that part of my long ago self, in letting go of fears that were fueled by an understandably fraught past experience. From a whale’s weight of household debt, a single income for a family of four adults (a few of whom made terrible money decisions all the time), to the start of the Great Recession and a year long job hunt, I’m breathing deeply and letting it go.
Things are different now. We have two good incomes. We aren’t bare bones frugal, though sometimes it feels like we should be, but even without pinching pennies, we have aggressively saved and invested to form our financial foundation. We have one debt, the mortgage, and we’ve been aggressively paying that down.
We aren’t rich in the sense that nothing will shake us financially, we’re definitely not financially bulletproof. But it’s also ok for us to take more risks than I have been doing and not just rate chasing safe CDs.
I once gave myself permission to take a risk with my career taking a job that turned out to be perfect for our lives and really good for my health. Now I’m giving myself permission to invest more than cling onto cash, to be optimistic that over the long term, this will also be the right choice for our family. Instead of worrying about the worst case scenario as the most likely scenario, I’m going to plan for the average bad scenario and allow us to move forward.
I’ve deposited the cash into our brokerage and purchased a stack of index funds.
For the second time in my life, I’m embracing hope rather than fear or caution alongside common sense and letting that influence my decisions.
I’m pretty risk-averse, but I’m becoming (perhaps dangerously) more tolerant of risk as our stash creeps up. This comes up most often in work, where I started off being so scared of being unemployed and having no money that the stress ate away at me day and night. Now I have the opposite problem: expending emotional energy not to rage quit every other moment, knowing I don’t need to work right now.
Our emergency fund is in the 6-9 months of expenses range, plus we have a separate home repair fund we contribute to on a regular basis. On top of that, there’s a $10k buffer in our checking accounts. I can never tell whether we are too cash-heavy or not.
It feels dangerous, doesn’t it? But it shouldn’t. As we become more materially secure, it makes sense to believe in the present that we’re living in. It’s just hard to do when our experiences have been based in anxiety.
I did always wonder how much I’d have to have stashed to feel free to rage-quit and definitely not there yet.
It seems like you’re holding what I would define as a “safe amount” but that’s always going to vary from person to person.
I’ve given this some thought over the last few years, because for a long time, I thought I was risk-averse, but when I look at my life and the decisions I’ve made–both financial and personal–I think I’m actually calculated risk-embracing. What I mean is: I will take a risk, even a big one, if there’s a decent likelihood of success or the penalty for failure is tolerable. I’ll also take a risk if the potential rewards are high and I have a solid plan for what I’m going to do if it doesn’t work out.
I think that the “calculated” is the important part– being willing to put in the thought and do the research and not just go with a gut reaction on things. I don’t really like focusing on risk aversion/tolerance as labels, mainly because when you’re first learning, it’s easy to mislabel yourself. I’m not someone who takes wild risks or unconsidered risks… but I am someone who will take a risky-seeming leap if the risk/reward level seems right for me.
To answer your other question:
My emergency funds are usually pretty hefty, but are low at the moment because we bought a new house and are still working on selling the old one. Usually, I like to keep about 8 months of expenses/taxes in my checking account so that I don’t have to transfer money around to pay for things and also don’t have to stress if my work is low during a given month or two. (I’m a freelancer.) I also used to have a money market fund that was my if-life-crashes money–enough to keep life running for about 3.5 years with no income. I used that to pay the down payment on the new house, and am expecting to replenish it after the sale. Beyond that, I have retirement investments and non-retirement investments that could be liquidated over time if I had to.
I don’t feel great about my emergency fund situation at the moment and do passionately hope we get a buyer for the old house soon. Not having the if-life-crashes fund doesn’t affect my life in a material way, but it’s in the back of my mind a lot.
I like your calculated risk approach. I’ve not gotten the point where it feels like ANY penalty for failure is tolerable because I’ve had outsized penalties but I think that needs to be the next step in my growth.
I’m able to accept risk in investing because it’s more far removed from my day to day life and I bet that if I don’t find that next step before we rely on the investments for income, it’s going to make me pretty anxious.
Crossing my fingers that your house sells soon and easily!
I think it’s great that you’re growing.
We’re human and it’s hard to think logically. Personal experience and emotion color everything. We just have to deal with it the best we can. Cash is good, but CD is really safe too. I think you’re doing the right thing.
I somewhat embrace risk. Our cash fund is pretty high right now at about 9 months COL. That’s high for us. Usually, it’s much less.
It makes sense that you don’t need so much cash on hand since you have investment and the blog incomes coming in on top of Mrs RBF’s income. Also you’re working with a larger asset base than I am! 🙂
We have an emergency fund that covers about 9 months of expenses and we stash it in a high yield savings account. It doesn’t garner as much interest as a CD but at least it brings in a decent amount of it(currently 1.75%) and plus we can withdrawal from it without the worries of fees.
I also hold a portion of that e-fund entirely in cash so that I don’t have any hassle if and when we have an emergency. We can always cover most with a credit card first and then move the cash to cover the bill of course.
By nature risk-averse, but pushed by circumstances into having to learn to tolerate chronic risk. The fall of the Bush Economy and subsequent loss of my job at time when I’d signed on to helping my son buy a house that we
[OOOPS! one slip of the finger and you’re undone…]
Where were we: …economic crash, job loss, commitment to $235,000 loan, unemployability. When everything crashes down around your ears, you learn the world doesn’t end, after all.
Just now my investments provide plenty of backup funding. And I guess I just don’t really care anymore if some melodrama occurs now. If an emergency happens, I’ll handle it. Or I won’t. One way or the other, it won’t matter much. 😉
Going through that 2006-2010 period was a heck of a thing, wasn’t it?
Right now we have too much cash. My designated “emergency fund” is not that much as a percentage of our yearly spending. But, I also have a “house fund” big enough to cover the new roof we’ll eventually need plus more, and a “baby fund” that is enough to cover way more unpaid time off work than I could take. (Its almost enough to cover IVF because I was paranoid that fertility would be difficult.)
The plan is to hold tight and re-evaluate once I’m done with leave and we know if T gets tenure. If he doesn’t, we may move. I still probably should move some into CDs though.
How much time do you have until the roof will need replacing?
Feels like given the massive uncertainty I definitely felt pre-JB birth that cash is really a good idea to have. But I think there are great interest bearing one year CDs right now if you want to go that way.
We have 100K in 3 separate savings accounts. When we had less money we had far less and I chased returns more. But now I feel like we have the luxury to waste a little money just to be able to deal with several negative shocks all at once. It’s completely irrational even given normal levels of risk aversion since that’s much more than a year of expenses during a normal year. But I’d like to be able to buy a car with cash if mine dies in the middle of a kitchen remodel and our roof starts leaking and DH loses his job and etc.
A year of our living expenses translates into a LOT of cash, TBQH. But I’m guarding against the likelihood of one of us (or terrible scenario, BOTH of us) losing our jobs so that’s just how it’s gotta be.
And yes, part of me wants to be ready and able to replace a car if necessary because we already had to deal with that two years ago with that accident.
K and I are both extremely risk-averse, probably as a result of graduating college and then attending law school while memories of the 2008 recession were still fresh. (The recession was particularly hard on people who were in law school during or right after, biglaw was having boom times right before and they curtailed hiring so much and laid off so many junior attorneys that I think it permanently derailed many careers and plans for paying student loans.) Our really large student loan balances from law school didn’t help!
He keeps about a year’s expenses in cash, and I’ve always wanted to have as close to six months’ expenses as possible, and as I become able to save more, I think it’s likely that I’ll hoard more cash than that. I keep mine in a high-yield savings account, and probably don’t have a particular interest in exploring other places to put it in. We currently still maintain separate finances, I’m not sure how we would approach it if we wanted to combine.
Some how I’m emotionally risk averse but in reality really risk friendly! It’s only dawned on me lately what a risky financial place we’re in, rarely maintaining a savings for long even though I freelance. Having a baby has definitely put this in perspective, encouraging me to finally open the SEP I’ve been talking about for years. But “paying for” two maternity leaves in two years has been a huge challenge (and priority) that leaves us behind on other financial milestones (house, debt, etc).