What to do with Emergency Fund

[greekislandgirl]

Our EF should get us through about 4-5 months without income. Right now it's in the equivalent of a checking account, and gets no interest. I think I want to keep around $2000 in there but the rest of it, I was thinking maybe I need to put it to work. Actually my father suggested it - I'm not really against leaving it there.

He suggested that I invest it but not reinvest the dividends, so I get a little extra every few months, and can get it relatively easily.

I thought a CD might be better, because this is ALL WE HAVE, and if the stock market goes down at the moment that I need that money, there's no backup plan. But CD rates are pretty cruddy now. I don't want to tie it up for 5 years. Maybe a year or 18 months. Is it even worth it?

I don't have access to an interest-bearing savings account.

Also, none of that money is FDIC insured because my "bank" isn't a real bank and they only assure against fraud.

Any advice? My dad keeps emailing me asking me when I'm going to "put my money to work instead of letting it just sit there losing on inflation."

[Ceashels]

Its called an emergency fund because that is what it is for... emergencies. You need access to it without worrying about penalties or costs. It isn't an investment fund.

If you and your husband feel a 6 month EF is sufficient, then put a cap on how much you want in your EF and start investing any extra AFTER that goal is reached. That will keep you with a hefty EF, and make your dad less bothersome about your finances.

From the DR FAQ webpage:

What is an emergency fund?
An emergency fund is a rainy day fund, an umbrella. It is for those unexpected events in life: a job loss, an unexpected pregnancy, a car transmission going out, and so on. This is not an investment or a Bahamas fund! Before attacking Baby Step 2—the debt snowball—save $1,000 as a baby emergency fund. A fully funded emergency fund is 3–6 months of your personal expenses set aside in a savings or money market account. Build this up in Baby Step 3.


What’s the difference between saving and investing?
Saving
Saving stabilizes your money. Save money you plan to use for something within the next five years. Money you plan to use in the near future doesn’t need to be subjected to risk; it needs to be safe. That way, it’s still there when you want it, regardless of how the stock markets are performing that day.

For instance, if you are saving for a car, use a money market account with a mutual fund company. Don't put money into a mutual fund unless you're going to leave it alone for at least five years. Your savings is not an investment.

Investing
Dave’s first investing principle is not to mess with investing until you’ve completed your first three Baby Steps. Then you are ready to invest 15% of your income. The second major principle is to never invest in anything you don’t understand. Don’t invest in something because your brother-in-law says, “You gotta do this!” Talk to your adviser, do your research and know the facts.

If I recall correctly, you posted in another thread about potentially getting off the island. I would consider that to be a use for some of the EF unless you have another fund set up for moving expenses.

Personally, I wouldn't tie up your EF. In this global economy, too many things can happen. You can discuss it with your husband about setting a cap on the EF and lay out a plan for your money and let your Dad know that you and your husband have a plan in action.

I hope that helps.
Cea

[Lady_V]

As you know, life is a LOT different in the US than in Greece -- as of right now, we aren't facing the whole "is my money going to change" situation.

To me, an emergency fund is for an emergencies... hardly something you can plan to happen 18-60 months later because your money is tied up.

With things as shaky as they are, I would be very leary about putting it in a cd. Your money won't be working for you if something was to happen and you NEED that money and you can't get to it.

If you wanted to put something in, I would do the minimum amount for the minimum time... I may have done the math wrong, but using $1000 at 2% for 5 YEARS is only $104 in interest...

I hope others can shed more light and you and your DH make the best decisions for your situation.


ETA- Ya, what Ceashells said

[Libby]

No offense GI Girl - but its YOUR (You and DH's) money not your dad's. While he's trying to *help* you make more money with your money (in his opinion)...its not up to him how you choose to save/spend it. Take his advice with a grain of salt b/c should an emergency happen, will he be the one backing you up financially?

Go with what you know and feel comfortable with. I also agree with having the money somewhere where you can access it with ease if needed.

[greekislandgirl]

Its called an emergency fund because that is what it is for... emergencies. You need access to it without worrying about penalties or costs. It isn't an investment fund.

If you and your husband feel a 6 month EF is sufficient, then put a cap on how much you want in your EF and start investing any extra AFTER that goal is reached. That will keep you with a hefty EF, and make your dad less bothersome about your finances.

I used to think that nothing was sufficient, in other words, I would always try to make the EF ever larger, but I've found that we've been throwing money at it for 72 weeks now and never taken a penny out, and it's lost value due to inflation. So that's kind of where this is coming from. Of course we have had emergencies in that time, we've just covered them from our sinking funds and other savings funds we've been running (Car Repair Fund, Utilities Overage Fund, etc). Now I'm really not sure.

I'm not a DR follower, although I do use the EF concept. But I am not trying to get rid of debt as fast as possible for a variety of reasons (one of which is the currency issue).

If I recall correctly, you posted in another thread about potentially getting off the island. I would consider that to be a use for some of the EF unless you have another fund set up for moving expenses.

We got off the island in July! We still live in Greece. We moved and furnished our new apartment but we did it all with money from our Moving Fund, so we still haven't had a reason to touch the EF. We had NOTHING - not even a dinner plate, because we had lived in furnished places prior, so we spent a huge amount of money on the move/furnishing (around €4,500) but it was all from money we had been putting aside for that purpose.

Personally, I wouldn't tie up your EF. In this global economy, too many things can happen. You can discuss it with your husband about setting a cap on the EF and lay out a plan for your money and let your Dad know that you and your husband have a plan in action.

I hope that helps.
Cea

Thanks Cea. The reason I haven't tied it up yet is exactly this that you say : the economy is TERRIBLE and I have no crystal ball. But my dad is very experienced and has made (and lost) a lot of money in the market, so I had to ask in case I'm missing something. I realized, when I thought about it, that I wasn't clear on what others here at FV "did" with the money in the EF - checking account, interest bearing savings account, short-term CD, etc.

My bank is an investment firm rather than a traditional bank and I need to keep it that way because it's the only bank-like institution that provides the specific services that I NEED as an American living abroad without charging anything for them - I bring this up because even though the money is being handled by an investment firm and I have investments with them, the money is in something that functions like a checking account.

[greekislandgirl]

As you know, life is a LOT different in the US than in Greece -- as of right now, we aren't facing the whole "is my money going to change" situation.

To me, an emergency fund is for an emergencies... hardly something you can plan to happen 18-60 months later because your money is tied up.

With things as shaky as they are, I would be very leary about putting it in a cd. Your money won't be working for you if something was to happen and you NEED that money and you can't get to it.

If you wanted to put something in, I would do the minimum amount for the minimum time... I may have done the math wrong, but using $1000 at 2% for 5 YEARS is only $104 in interest...

I hope others can shed more light and you and your DH make the best decisions for your situation.


ETA- Ya, what Ceashells said

Thanks Lady_V! This again is kind of how I have been thinking all along. Good to know that I wasn't crazy! Sometimes my dad can be a bit overbearing and make you feel like OF COURSE you're wrong... hehe. So when he said "What the heck are you doing with all your money just SITTING there???" I felt like an idiot. I actually blushed LOL.

[greekislandgirl]

No offense GI Girl - but its YOUR (You and DH's) money not your dad's. While he's trying to *help* you make more money with your money (in his opinion)...its not up to him how you choose to save/spend it. Take his advice with a grain of salt b/c should an emergency happen, will he be the one backing you up financially?

Go with what you know and feel comfortable with. I also agree with having the money somewhere where you can access it with ease if needed.

Hehe no offense taken - my dad is one of those "strong personalities" if you know what I mean! And you are SO right about him backing me up financially - he would LOVE to if I needed it but he's been retired since 1998 and it's not like he has the luxury to wire me a few grand every time I get myself in trouble. (I may have abused that "privilege" in college...).

I think you all have made me feel more confident in my initial plan which was that my EF should be someplace that I can count on it.

Something I only slightly hinted at in the OP but I might as well bring it up: I actually have two checking accounts in the US. I only withdraw money from the investment bank one, rather than from the regular bank one, because the regular bank charges $10 to withdraw money from an ATM here, and they also have a steep fee if your balance falls under a minimum. So I just leave it there. It's tied electronically (one-way) to my investment bank account, so that if I want to put money from the regular bank account into the investment bank account, I can do so electronically with a lag-time of about 3-4 business days. It only works in that direction, not the other way. The reason I maintain the regular bank account, which is annoying for its fees and minimums, is because it's FDIC insured and I have a 10 year relationship with them.

My dad also thinks I'm nuts to maintain an account just for FDIC insurance. But my other account isn't insured. How do you all feel about FDIC insurance? Do you feel it's necessary or do you think it's not a big deal? I obviously have crumbs in there compared to the $100,000 maximum, so it's not an issue of spreading it around to stay under the maximum. It's just that investment firms aren't FDIC insured (at least mine isn't). Dad thinks I should ditch the bank, consolidate my money in one account, shift the "excess" (LOL) into what he considers safe investments (think ConEdison), and deposit the dividends. The kind of investments he's suggesting sell quickly. I wouldn't be stuck waiting for a buyer.

I've lost money in the market before (in 2000, I invested my Roth contribution in a technology mutual fund... it would have been funny if it weren't so sad) so I'm conservative. Anyway, that's just a little more info.

And remember, we're talking small potatoes here. Not a lot of money. But all we have.

[Libby]

If what you're doing right now works for you and makes you feel financially comfortable (FDIC coverage) does it really hurt to leave things as they are?

[greekislandgirl]

If what you're doing right now works for you and makes you feel financially comfortable (FDIC coverage) does it really hurt to leave things as they are?

No - I'm not paying any fees now, and I have access to all the money. But in the sense that the amount is staying the same and inflation is driving its value down, that's about it.

[Anna43]

I agree and EF is just that. Losing to inflation is not fun but its probably a better choice for an EF than an investment subject to big losses. I think that is especially true given the current political/economic situation in Greece. I like FDIC insured accounts but with the US government broke it doesn't have the ability to cover the failure of many banks all at once or even just one large super bank so the protection is mostly to keep people "feeling" save and not panicking and making a run on banks.

[greekislandgirl]

I hear you Anna. We have an FDIC system in the European Union as well, and they are always reassuring us how well funded it is and how we have nothing to worry about. The insurance is even more generous than in the US (€100,000 for bank accounts and €30,000 for investment accounts). But if a bunch of banks went down, they'd either kick Greece out of the EU to avoid having to pay us all off, or they'd just not have enough money to pay everybody.

But there's always the chance that one institution goes down... that's happened in the past and I do think the FDIC is a good idea for that reason. I like the protection. It seems like there are so few protections these days.

[MTS04]

Living abroad brings it's own challenges, eh?

FDIC insurance is a good thing. I'll tell you a little story of RISDIC and Joe Mollicone. RISDIC was the Rhode island Share and Deposit Insurance Corp. In 1990 Mollicone (a bank head honcho) stole $13 mil and headed for parts unknown. Doing this, put RISDIC in a tailspin and quickly into recievership. So, in 1991 Gov. Bruce Sundlun ordered all RISDIC insured banks to close. Which put a lot of people in dire straights because they could not access their money. One of those people was me, thankfully it was ONLY all of my savings for tuition.
Well, DEPCO came in and helped depositors get to some of their funds. Well, it was a very long time before depositors saw their money, which they thought was safe.
What am I saying? Put your money where you feel it is safest and don't keep all your eggs in one basket. If I had done differently, I would have gone to the college of my choice and concentrated on my studies rather than working 2-3 jobs during college and going to a state school, because it's all that I could afford. Not that it's a bad thing, that incident made me a stronger person and much more wise about my money.

[peanut]

We have an EF about the size of yours and have it sitting in a savings account. It can be pulled out whenever we need it, but gets a higher rate of return (that does not keep up with inflation) than a chequeing account. We've been talking about topping it up...just in case. We base its contents on living expenses, not income. In this economic climate we want maximum liquidity.

I think you have to do what you feel comfortable with. I would never have money anywhere it was not FDIC insured, but that's me. DH and I deal with 3 separate banks because of that. And not because we have that much money. We just like them to know we have the ability to 'shop around' for products, and will do so.

[zakity]

We have our EF in a savings account. It isn't a normal savings account because you have to keep in so much money and we get a little higher interest rate. After a certain amount, I want to start laddering it in cd's. But, we have never been able to get it to that certain amount.

[peanut]

Zakity, thanks for reminding me...ours is in a high interest savings account.