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My husband and I have a *slight* disagreement on how much to set aside for emergency funds as well as where to "park" these monies.

He: Thinks six months' expenses is overkill. "We can always use our home equity line of credit in an emergency (no balance currently). Six month's expenses is a lot of money that could otherwise be invested for a better return in stocks."

I: Think six months' expenses is a lot to park, as well, and believe perhaps three months' would be enough for us. (We have no debt besides our mortgage and could get by on one income if either of us were to suddenly lose our job.) BUT...I think the money should go into a money market account, NOT stocks.

Proposed compromise: We are leaning toward socking away about three months' expenses in a tax-sheltered money market account (Vanguard has one for PA residents), and relying on the equity line of credit (with low interest) to cover any emergency expenses above and beyond that sum.

What do you experienced Fools think? How much do we really need to set aside? Three or six months? Or..??? Is it OK to rely on a low-interest line of credit as part of an emergency strategy?

Looking forward to your replies,
Jen
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>>>My husband and I have a *slight* disagreement on how much to set aside
for emergency funds as well as where to "park" these monies.
He: Thinks six months' expenses is overkill. "We can always use our home
equity line of credit in an emergency (no balance currently). Six
month's expenses is a lot of money that could otherwise be invested for
a better return in stocks."
I: Think six months' expenses is a lot to park, as well, and believe
perhaps three months' would be enough for us. (We have no debt besides
our mortgage and could get by on one income if either of us were to
suddenly lose our job.) BUT...I think the money should go into a money
market account, NOT stocks.
Proposed compromise: We are leaning toward socking away about three
months' expenses in a tax-sheltered money market account (Vanguard has
one for PA residents), and relying on the equity line of credit (with
low interest) to cover any emergency expenses above and beyond that sum.
What do you experienced Fools think? How much do we really need to set
aside? Three or six months? Or..??? Is it OK to rely on a low-interest
line of credit as part of an emergency strategy?<<<

How about six months in the emergency fund and put 3 months in Vanguard account and 3 months in stocks. That way if anything happens you have 3 months to get out of the stock, and if you can not do so without taking a loss, use the low interest LOC.

LOL..TiggerToo
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What do you experienced Fools think? How much do we really need to set aside? Three or six months? Or..??? Is it OK to rely on a low-interest line of credit as part of an emergency strategy?

Hi, Jen!

Deciding on exactly how much should be in an emergency fund really becomes a personal comfort decision. Some people want very large amounts, while others are content having smaller sums.

If you and your husband are really at odds, why not compromise between the 3 and 6 month amounts, and see what happens with say, 4 1/2 months? Maybe that would work for you.

As far as where to put it, many Fools have said they are comfortable having at least some of the money in a money market where the funds can be accessed at a moment's notice. Others like funds as you suggest, but of course there is some lag time until you have the money in your hand.

For me, I'm not comfortable thinking of equity loans as emergency funds. To me, loans are more like disaster funds--there when there's no other choice. I think lines of credit sort of go against the concept of emergency funds, as they can easily put you deeper into debt.

Just my thoughts,

Tony
...but I still am...

Off2Aruba
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Just my .02 but maybe you each have a different idea of an emergency and might want to start the discussion there. Are you both in the same industry ? (What's the likelihood of both of you losing your jons at the same time?) Is replacing a roof the biggest emergency you can think of ? What about a catostrophic illness or a chronically ill child ? Once you do this and go through the what if scenarios, you may have a better idea of emergency needs. For some people replacing a car is an emergency if they are only willing to buy with cash. A personal example, if I lose my job it would be a small problem but if my husband lost his, it would literally be twice as bad. One other note, if you woould worry a lot if you only had 3 months money, that's also a very valid issue to discuss. All money issues aren't rational(see all the postings on small change and ways to save money)but that doesn't mean the concern isn't valid.
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I always have this knee-jerk reaction against home equity loans, so use that bias when you read this reply as it may mean take this with a large grain of salt. If you really need to use your emergency fund, how would you pay back the home equity loan? For instance, if you lost your job and needed to pay all your living expenses, would taking out a home equity loan do anything other than put you closer to disaster? How would you then pay it back? If you can't pay it back, where do you live? In general, I won't use my home as collateral on anything other than the home itself because my risk tolerance has me worrying too much about where I would live. And I keep emergency funds liquid in a money market, because if I really needed them, I don't know what the market will be doing and how much I could really get for my stocks.

But I'm conservative around those types of things and you may be willing to take more risk.
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We are leaning toward socking away about three months' expenses in a tax-sheltered money market account (Vanguard has one for PA residents)

This point was lost on me until I reread the post. I take it that you are in a high income bracket. I take it you are getting a better after tax yield in this than an ordinary fund?

You both seem in agreement that six month's worth is too much. Perhaps the three is appropriate in your situation. (I really can't comment on the amount because a lot depends on how much you can reduce your expenses during a true emergency.)

Another option for emergency reserves is a margin loan against your stocks. However, I would not borrow more than 20% of the equity in your account.

Good Luck,

Mike
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"My husband and I have a *slight* disagreement on how much to set aside
for emergency funds as well as where to "park" these monies."

Your rational sounded ok to me (three months). I would not put emergency funds into the stock market, but if all you need is three months in a MM I guess the balance is in the market.

The question is why do you have an emergency fund. A major reason is to provide for necessary living expenses when your regular source of funds (say job) has been interrupted. Normaly, borrowing at this time is not possible but since you already have the line of credit you can borrow. Also a margin account at a broker will let you borrow. In short the better you can weather the lost of your income stream (a job) the less liquid cash you need. If the emergency fund is going to cover a quarterly or yearly real estate tax bill or a vacation then the fund should be larger and you should not borrow for these "emergencies"
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6 months is the conventional wisdom for what that is always worth. I believe the emergency fund should be the household expenses over the period of time it would take you to find a new job. But certainly, the expenses can be typical expenses or necessary expenses. The latter is always far more. Further, if you are quite secure in your job you can probably go with less of a cushion.

Historically, there has never been a bad time to buy stocks. Never rush to buy them and never use any money you might ever need.

I would definitely put the first 3 months of any fund into a money market account at a well secured instituition. Beyond that you could certainly put funds above 3 months in expenses in a 3 month CD. Or a short term bond fund (the stb fund is much more liquid). Investing the emergency fund in any stock or long term bond product is just fooling yourself.

If you feel you need to "be in the market" and are secure in your jobs then maybe you should put 3 months away and start an automatic withdrawal for $100-$300 a month into that account. Don't stop the auto withdrawal until you get to 6 months or whatever point you think appropriate.

Patrick

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But certainly, the expenses can be typical expenses or necessary expenses. The latter is always far more.

Well, not always. My typical expenses always exceed my necessary expenses:)

Historically, there has never been a bad time to buy stocks. Never rush to buy them and never use any money you might ever need.

Let me add a personal opinion here. I never use money for investing that I may need in the near future. If I only invested money that I would never need, I would never invest. I imagine that I might need the money that I'm investing now in retirement.

Mike
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Here's a heretical thought.

Inevitably, you'll accumulate stocks and funds you're considering selling, but aren't really sure. You're supposed (sp) to sell it, but rarely are we that unemotional. Instead, consider this as **part** of your emergency fund (and not your portfolio). If you need some money, sell the stock. (Sell the stock at tax time anyway to pay Uncle Sam.)


Washu! ^O^
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I don't think that's completely heretical, but you have to be careful with this strategy.

You can't hold on to the stock for too long. If it's reached your target price (and presumably the sell point), the last thing you want is for that to become part of an "emergency" fund, only have the stock drop 10% right before the emergency.

If it's part of your emergency fund, maybe it's not so bad. At least its liquid if unstable. If push came to shove, I could get $5,000 for my coin collection (sorry burglars, most of it is in a safe outside of my home) given a $7,000 book value, but that's not really something I want to rely on unless it was the difference between, say, keeping a roof on my head and foreclosure.

Perhaps you may want to sell securities a little bit before your target but you've still made a gain or have fallen only a small amounts from their recent high. These would be candidates for selling, but not a stock that tanks 10% after you "considered" selling it unless the fundamentals of the stock have deteriorated enough that it should fall more than that based on its value.

Tim
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