Emergency fund absurdity

getmore4less

I look at from a cashflow perspective and split the concept into two.

Emergency fund.

Immediate or very near immediate access to funds to cover expenses that are not budgeted for or are unpredictable.
Main sources for this are ready cash and credit cards.

I can cover just about anything I can think of with those so that will do.

When saving regularly you have the cashflow from that to refill the cash and pay off the, you may also have access to funds that take a little longer or may lose a bit of investment power.
eg Premium bonds you can have the money in an account within a few days and can ask for money just after a draw. that could be a reasonable source to cover a few £k.

This emergency fund is just that to get through a short term cash flow blip could be an expense or just getting paid a little late.
It does not need to be that big and if you budget properly anticipating can get quite small.


Disaster fund

This is what most people think of a emergency fund, loss of income.
lots of variable on how big this needs to be but 6 months expenses if you think you can restore income relatively quickly may be enough(note expenses not income) longer if you think it will be harder.

This does not have to be immediate access and you have the emergency options to get through the first month.

there are 2 parts to the disaster, creating an income from assets and reducing expenses, for the latter you need to look at all the outgoings and what you can cut, some happen anyway less fuel not going to work, shop better as you have more time, cut contracts like TV and phones, have these ready to work on. eg. if on a rolling contract with 30days notice you don't need the same money available as if you had just signed up for 18month(so think when signing up if income stops tomorrow how do I pay for this).

Contracts are debts so think of them like that they don't go away because you lose your job.

Your sources to replace the income don't need to be instant access they can be things that get a better return and you can get too in a a month or more. things like staggering the renewal on fix interest can help. having to cash in some shares is not that big a deal that's what they are there for to cover the hard times.

I utilized an offset mortgage to carry quite a bit of disaster fund savings effectively the overpayments were recoverable without asking to cover costs should income fail.

Retirement

Long term planning for no earned income in a way your ultimate disaster fund, don't lock it all up in a pension wrappers have some that is more readily accessible in case that income dries up a bit earlier than expected even if it is only short term.

If things are very tight then a strategy that mean you can fall back on benefits because your "saving" don't count is an option.

Joe_Bloggs

For every £1 above £6000 it is assumed that means tested benefit claimants will receive £1 for every £250 per week. Hence this amount will be taken away from such benefits.

This treatment is no reason not to save for emergencies but more of an incentive to never rely on a state that can create such rules given the interest rate manipulation of the Bank Of England and other Central Banks.

J_B.

jdw2000

Telling your job where to stick it and then taking 6 months to find another job.

System

Joe - the UC taper almost seems like punishment. When you're trying to make the most of everything you can't overlooking the tax/benefit landscape. I'm not on UC yet but when I do I think I'll fall off the wagon anyway, I cant build up early retirement ISA confined to 6k by UC

System

I could add more to the sipp to overcome UC limits but it has enough for 57 anyway I think and Id rather retire earlier than that than be a millionaire

talexuser

MatthewAinsworth wrote: »

Talex- the wording "constantly reducing dividends" wouldn't actually be true if it's growing faster than you sell - you'd hold a decreasing number of units with an increasing value, and increasing dividend per unit

But I could understand POA might be supposed to be cautious. If not though what have you got to lose? Care home can pick up the tab

The first paragraph is nonsense in the event of a historical crash which takes several years to recover.

The second paragraph is an even bigger nonsense. Care home picks up the tab? What on earth does that mean? Obviously this is no longer a serious discussion.

Joe_Bloggs

Pensions are a complex area. A balance must be found for savings/investment within a pension wrapper and savings and investment within ISA wrappers. I would love to fold my P2P stuff in an ISA or a Sipp. The Sipp fees would consume all profit. The particular ISA wrapper does not exist.

J_B.
The art of employment is being paid for something that you love to do.

bowlhead99

MatthewAinsworth wrote: »

Linton - I don't overly rate diversity much more than tracking one index, to me that's enough to virtually guarantee never getting completely wiped out

Oh right, as long as your life savings are not *completely* wiped out just as you need them for some emergency such as being fired at work with no income and no redundancy money and no ability to open up a new 'line of credit' because the first question on the application is "how much do you earn a year" and the answer is "I'm unemployed".

And then the boiler breaks down and your baby has a major medical issue which you feel would be better sorted by private healthcare at £££ instead of waiting three months for NHS. And you thought it would be fine if your 'brumbrum' broke down because you are on a bus route to work, except you no longer work at that address so really you need to be on a bus route to the jobcentre and a bus route to all the other potential places that you could get job interviews and of course a bus route to the specialist care centre where your baby is staying.

So you buy a new banger for £500 which has MOT so it's road legal but you need to pay the tax on it and then the following week it needs a new clutch and brakes so is beyond economic repair, so you need a new car again.

Oh, but the fund never got 'completely wiped out' by the market. Unfortunately if the fund gets wiped out by 60% and then you spend the other 40% on your emergencies, then basically that's your life savings gone ; there are no investments remaining to ride the stockmarket recovery back up again.

and continuing to follow historical averages for small cap. I believe in compounding gains and that this offsets the risk of loss,

From FTSE's factsheet for the Global Small-Cap index updated to last Tuesday (end of Feb) you can see that the compound annualised return over the last three years was only 4.4%.

You can also see that the largest peak to trough drawdown over the ten years to that date was a loss of 62%

On those figures it wouldn't seem like the compounding gains over a few years between now and whenever you have an emergency/disaster requiring the cash, are *anywhere near* what might be lost in a down year or two. 4% gain, 4% gain, 4% gain, 35% loss, 35% loss is a perfectly plausible sequence of returns for a global smallcap index over the next half decade.

Hmm, you don't recognise those figures and think that the returns since you started investing are better than that, and the downturns not as bad? That is because the world index is in dollars and you are investing sterling, so you got a different (better) set of figures due to currency fluctuations which happened to go in the right direction for you as sterling weakened.

The 4% gains and 62% loss numbers are what a US investor would have experienced investing their dollars into an index where the majority of the holdings by value are US-based companies with dollar assets and revenue streams, where currency risks are reduced. The returns for investing mostly in their home currency over last 3 years were 4.4% annualised. For you, investing in something like Vanguard Global Small Cap Index, the gross returns were 16.1% annualised (and after fees, 15.7% annualised). So overlaying the underlying return of 4.4% with a massive currency swing which happened to be in your favour, you got almost 12% boost before fees. If the currency swing had gone the other way, you would have been losing high single figures per year and be down over 20% over the three year period.

Obviously losing more than 20% over three years isn't so bad (although it's clearly worse than putting money in a nationwide, first direct, m&s regular saver which gain more than 15% instead). But losing a mere 20-25% is not a worst case scenario, it is a broadly positive scenario where the underlying company values reached all-time highs. The 62% fall is the 'market crash' scenario you should be building into your plan when you decide to put all your money into a single asset class.

so I believe bonds have no place in any portfolio that isn't being drawn for several years - holding bonds is market timing in my book, a fair thing to have as you're drawing it but a wasted opportunity for growth before, but adding that potential role to an emergency fund makes it look a little more attractive. I don't worry about crashes as it's always recovered before
I won't bother with gold in that case, or property, as they are just unhelpful distractions.

If we are talking about - as per your thread title - an emergency fund and the sensibleness or absurdity of having one, then gambling all your money on one thing that might have the highest longterm growth and will hopefully 'recover from crashes' does not seem a suitable alternative to having an emergency fund, because if you spend the money at the bottom of a crash you will not be able to recover it.

Your idea that you should invest in one asset class for retirement because anything else will just hold it back, is probably because you don't understand portfolio or asset allocation theory and the benefits of a diversified and periodically rebalanced portfolio. It is fair to say that newbie investors do not always grasp all concepts immediately, and often make mistakes which they later regret with hindsight.

Still, when you tell your other half that all the family money is being invested in a single volatile asset class and that you have been told it is a bad idea and a rookie mistake by everyone on the internet, but you know in your heart it will be fine in the end... oh and the family doesn't need an emergency fund because it will never have an emergency when markets are down because if you look in the last few years markets are up, so compound growth will protect you, so it's fine... then perhaps she will believe you and not be appalled with your cavalier attitude to the family budget.

It will probably be a greater test of the relationship if you do actually lose your job and have a couple of emergencies with no significant pile of cash to cover them, and she thinks back to how you deliberately decided not to leave cash on hand because you were greedy and wanted to invest in shares instead.

I also believe that going for growth lowers you're employment dependency in the long term, lowering risk

It's true that in the long term, achieving growth means you can draw an income from the assets to cover the fact that employment is not an option because you're too old and all the kids 40 years younger are snapping up the jobs.

In the short and medium term going for growth (rather than guaranteed low risk assets) increases your employment dependency because you can't afford to stop working when all your assets are in something volatile and you have not 'banked' anything.

Just me - I invest more aggressively than insurance companies do, sure they would make a profit (like my mortgage does) but I would in theory still make a mark up (small caps)

They have the luxury of receiving customer money in premiums at the beginning of the year and knowing that on average less than all of it will be needed to be paid back to customers in claims at the end of the year and by that time there will be more customer premium money coming in. So, they have a virtually permanent pool of capital to invest for the long long term. They invest this in all kinds of financial opportunities over periods of decades.

Some of it will be high risk private equity, hedge and real estate funds and direct public and private investment opportunities including companies and properties. Some in smallcaps, some in largecaps, some in high yield bonds, some in investment grade bonds, some in government bonds, some in index-linked bonds, some domestic, some international, some in cash to pay the punters when the 'emergencies' happen and someone makes a claim.

If small caps were clearly the best choice for such multi-decade investing as they are doing, why don't they do that? Is it perhaps because they employ experienced and educated people who tell them it is a bad idea? I think so.

You have at least two advantages over them.

1) You don't need to employ anyone to tell you that focussing on a single asset class and ignoring an emergency fund before making your investments is foolish, as we'll give you that advice for free.

2) You have the ability to invest risk-free in regular saver accounts from a range of banks and building societies paying 5% (several percent over inflation and well above the 'market' risk-free rate) on well over a thousand pounds a month which is more than your disposable income.

You should do 2) until you have a decent amount of money built up. Your pension is separate as the tax advantages given your tax credit position make it a great return, but if you are putting a greater percentage of your income into a zero access investment such as a pension because of the tax breaks, than you might otherwise do without the tax breaks, then it is crucial to have a substantial cash pot before you do too much non-pension investment.

MatthewAinsworth wrote: »

But I could understand POA might be supposed to be cautious. If not though what have you got to lose? Care home can pick up the tab

Care home which is comfortable and provides excellent attentive care wants to charge £40k a year. What you have to lose is that if you can't pay, they can just decide to evict the person and make them go into a grotty cheaper home instead.

Of course, that's happening to the elderly parent, not to you. So, if the question is "what have you got to lose", perhaps not much, if you don't care about the wellbeing of your family and won't feel any guilt about mishandling their finances.

Reaper

I agree with the OP the emergency fund idea can be overdone. Investments can form part of your emergency fund provided they are liquid (not REITs, VCTs etc)

They are more a suggestion for those who like to get the biggest mortgage they possibly can, just about keep their heads above water paying the bills, then lose their job. Beats me why people take on that much debt but one of my friends did.

justme111

May be because many people have done well with that strategy on the back of housing boom on one side and relentless inflation on another as in 5 years time that mortgage payment would been far lighter due to it.
Anything can be overdone of course.