Emergency fund questions from brand new investor...

This question has come up a couple times the last few days and it's confused me....

Here is my situation:

I live on 50% of my take home pay meaning I have 50% (this includes after some luxuries and entertainment and some disposable splurging)

I have 0 debt. No credit card debts, no car loan, no school debts.

I do have a $20 000 line of credit that is at 9% interest If I wanted. I have $8000 in available credit card credit that is 19.5% and a grace period of 19 days. My balance owing on both the credit account and the credit cards is $0.00

I have no kids no mortgage and rent and utilities are little less than 20% of my take home pay.

I am 30 years of age so lets say retirement at 60 and home ownership at 35.

I am in Canada so health insurance is not as big as of a concern as it is in the USA. We are covered for major illnesses and emergencies up here, as least medical bill wise.

Now I have about 10 months living expenses saved in high interest savings accounts. but since I am living on 50% of my income, this emergency fund grows equally with my expenses.

Should I take ALL of my emergency fund and invest it and rely on my credit as insurance for what it's and rebuild the emergency fund? I can use as my investments as the emergency fund of sorts, as long I didn't pick losers.

With my current savings rate of 50% (which I don't see changing for another year or more, knock on wood) I should be able to pay off debt quickly should an emergency arise. Am I saving too much money in emergency funds? With my income and expense status, my age, and retirement far off am I being too conservative in keeping savings? I just started investing a few months ago with a financial planner but I only give him about 40% of my monthly savings. I still have 60% of my monthly savings to do my own investing.

One other thing I do not have parents or other family members to help me out if something happens. I'd be on my own if a financial emergency came up.

I have no idea what to do with this emergency fund, how high or low to keep it. It's earning 4.10% interest yearly, taxable at approx 30%. At what point do you stop contributing to an emergency fund and jump into investing towards your goals? I have researched a number of mutual funds and think I have a possible portfolio I would like to work on. I have decided my risk tolerance so I think I know what I can lose without crying...

Sincerely New Investor.... :)

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Afterwards Hilarity Ensued
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My suggestion is 2 months expenses in cash accounts.

How much would a house cost, and what would expected downpayment be? The house down payment might be wise to have in cash as well- being that this purchase is 5 years away.

I think 2 months expenses at minimum in cash is expected... as the average comment from most responses you will get. Some might suggest 6 months expenses in cash. A few others might suggest no cash-invest it all.

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Reply to
jIM

I agree with jIM, except I'd lean closer to 5 months to a year in cash/laddered CDs/money markets. View this money as kind of a surge tank for managing your financial affairs. I think one sleeps better when one knows one can readily buy some shares of xyz mutual fund should the market correct; or can easily pay for a major car repair; can always pay the monthly bills without having to juggle and wait for the next paycheck; etc.

The thought of paying for these emergencies with a credit card, and possibly having to pay the exorbitant interest credit card companies charge, is abhorrent to me. Even that

9% interest line of credit is unattractive. Four percent or so (albeit taxed at 30% in your case, you say) is IMO a perfectly good return for a conservative portion of one's portfolio today.

Ultimately, you have to identify your risk tolerance. I won't condemn anyone for relying on their credit card for their emergency fund. It's simply not what would let me sleep at night. Besides, since I own stock positions in a few banks, those who do pay monthly interest on their credit card bills are paying for my ski lift tickets.

Your presentation of your financial situation was perfect, BTW. Good to note that you are in Canada and so personal health costs simply are not the huge concern, financially, that it is in the U.S.

Reply to
Elle

I will keep some emergency cash in high-yield saving account. As a compensation, I ususally won't by fixed income (e.g bond) in my investment portfolio, i.e. I treat the saving account as the fixed income party of my strategy.

Reply to
My interest

The deciding factor here is how long before you want to buy that house. Investing means a long time horizon, at least 5 years. If you are looking to buy this house within 5 years, then I would rename your emergency fund to be your house downpayment fund. If the house is more than 5 years out, then invest it all, and use your earning power as your emergency fund. After all, that 50% of your salary each month that you have available is larger than the emergency fund that most people actually have.

-john-

Reply to
John A. Weeks III

Instead of dividing your assets into "emergency fund" and "investing towards goals", you might think of implementing a layered approach of assets you can tap in increasing desperation. E.g., in addition to cash and some long-term investments in equities, I have a chunk of money in a muni bond fund I could tap into in an emergency -- at some risk of losing a little money -- if my cash reserves aren't enough. Hopefully that will never happen, but in the meantime, that chunk of money also serves as part of my long-term asset allocation and retirement planning strategy. For some people, a home equity line of credit could also serve as that kind of intermediate asset; it's not something you ever really *want* to tap into, but it's something you could use in a true "emergency".

Frankly, it also sounds like you're already doing the most important thing for planning for a financial "emergency" -- living modestly and staying out of debt. :-)

-Sandra

Reply to
Sandra Loosemore

Maybe bring the home ownership forward ... that [30%] on your savings interest could be 5% on the equity in the home. Assuming you'll have some sort of mortgage (maybe not) I don't think morgage rates will be going down in future (5 years)? And you'll use that RSP towards that

1st home (I assume)? If it was me, I'd do the math on buying sooner vs later.

And you know what ... if you're up for it, a boarder or two really pays big dividends.

Reply to
bowgus

I'm Canadian, but live in the US. I'm going to advise balance. You have alot in ER fund, but if you were ever to lose your job or get sick (aka unable to work since health costs are not an issue in Canada), then that could be eaten up quickly.

Since you want to buy a house (even if it's 5 years from now), you'd be wise to start saving for the DP now. I don't know what province you're in, but housing costs vary considerably. If you're in places like Calgary, Vancouver or Toronto, housing costs are through the roof. However, places like Winterpeg and other smaller cities, you can still get a house reasonably priced.

The reason I suggest you start saving for your house DP now is that when you take out a mortgage in Canada, unless you have 25% DP, then the loan would be subject to CMHC (Canadian Mortgage Housing Commission) insurance and that would be on top of your mortgage payment. It would be a good idea for you to have at least a 25% DP to avoid this cost over and above the mortgage.

As for putting ER's on your credit card, I wouldn't do that unless you have no ER funds. I wouldn't touch your ER fund unless it's a true ER. You have enough income left over after expenses where you can save for a house and do some decent investing without touching your savings.

As an alternative, if you have RRSP's, you can borrow from them for your house downpayment as long as you're a first time buyer. The catch is you must pay them back within 15 years, but the loan from your RRSP's is not taxed and you are not penalized like you would be if you cashed out your RRSP's. However, considering your solid financial situation, I don't think you'd have to do that. It is a good way to borrow from yourself, but the downside is you lose the growth of those investments.

Reply to
sparksals

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