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Emergency Funds Part I: Stupid history
By Mr. Stupid | April 14, 2008
Lynnae recently pointed out the tremendous benefits of an emergency fund. When big, unexpected bills come along, there’s no scramble to put together the cash. There’s no need to reach out to friends and family, or reach for the credit card. No need to apply for a HELOC. There is a huge, and I mean HUGE, psychological benefit to having an emergency fund.
But having an emergency fund has a dark side. An insidious side that eats away at the benefits. I’ll explain those in Part 2 of this blog entry. But for Part A, a little history of the Stupid emergency fund, and a little insight into how I define an emergency fund.
History of Mr. Stupid’s emergency fund
When Mrs. Stupid and I built our house in 1999, we basically spent all of our savings. I had carefully planned for all the expenses, but then just as carefully, I tucked them up into little balls and threw our plans out the window, as bills for cabinet upgrades, AC ducts, sprinkler systems, and all manner of household items came rolling in. Building a house was more expensive than we had anticipated, so by the time we moved in, we were left with close to zero in liquid assets.
During the first couple of years, before our first child came along, we slowly rebuilt our emergency fund. We were making more than ever, but also spending more than ever, too. You wouldn’t believe some of the shit I bought during that time period.
Also during that period, my company’s stock price had hit rock bottom because of the dot-com bust. It was then that I started aggressively adding to my ESPP. Eventually, the share price rebounded to a sensible level, and I was making about 500% on my money. I would divert about $2,000 of my salary into the ESPP, and at the end of 6 months, it would be worth $10,000.
As with all gravy trains, this one ended. The ESPP shares repriced, but the damage to my emergency fund was undone. I had built up some substantial assets to play with. I set the target size of my emergency fund at $25,000, and have rarely dipped below that since. $25,000 should be enough to live off of for 6 months without any lifestyle changes.
Currently, my emergency fund is $28,605. It’s invested in a money market fund earning a sweet 1.63%. I suppose I could do laddered CDs or something to squeeze another point out of it.
Types of emergency funds
There are three types of emergency funds:
- Primary emergency fund — Strictly speaking, an emergency fund is what cash or cash equivalents you have direct, immediate access to. It is meant to be available in, well, cases of emergencies.
- Extended emergency fund — This is my money market cash plus the additional resources like loan markers, Roth IRAs, and education IRA monies.
- Loan markers — These are loans I have blogged about before. One loan in particular, I don’t think I can ever get back, unless I have an emergency.
- Liquid assets — This includes all stocks, ETFs, and mutual funds that I could sell without incurring penalties.
- Kidnapping fund — This is the money I would be able to put together if I had to pay kidnappers. This includes all assets I have access to… 401Ks, 403Bs, Roth IRAs, 529s, credit card cash advances, whatever it takes. It also includes most of my digits. If a kidnapper wants my thumb, then he can go Pope of Greenwich Village on it. The thumb for my family. Easy trade.
In Part B, I am going to talk about the downsides to having a large primary emergency fund.
Topics: peace of mind |
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April 14th, 2008 at 12:04 pm
Thanks for the mention! I can’t wait to read part B!