One of the truest things I have ever heard; however a little cash is a handy thing. Furthermore if you need something NOW, just paying for a solution is usually fastest.

Prepare yourself by thinking about all the angles and worst case scenario directions to take for you and your family.

If your house is gone, you must find secured shelter eventually, so keep all emergency emergency supplies in a backpack per person by your bed. Keep other shelter readt emergency supplies in a safe location, preferably away from unneeded possesions/obstacles.

If you haven’t emergency supplies yet, then you need to Prepare for the Worst Today! But only for extreme-mobile-case what you need items that fit in a backpack first. You can then gradually think/decide finding more emergency supplies for your emergency shelter.

And then decide upon your Emegency Funds. Money won’t save you in a tsunami, earthquake, hurricane fallout, nuclear fallout, or when the grocery stores/emergency stores are raided.

But it will come in handy if you lose your meaningless job!

But my next layer of funds is in an intermediate-term muni bond fund. It has much more than what I keep in the local bank but it is slightly less accessible (I have checkwriting privileges and can transfer money to my bank’s checking account which takes a day or two). However, it generates tax-free dividends each month (slightly less than 4% annually) although its value fluctuates a bit (but not a lot). I rarely have to tap into this account.

Then I have stock mutual funds and an IRA which are less readily accessible and whose value fluctuates more. I leave those alone, very rarely accessing the former and never accessing (yet) the latter.

The idea of putting a big blob of money into some account which generates very little or zero interest is abhorrent to me. I understand others do not feel that way but I can tolerate the relatively small risk with an intermediate-term muni bond fund while getting a decent, tax-free dividend each month.

Like Mr. Buffett says, you breath your entire life, but you only need 10 minutes of your head under water to die. If you are not leveraged, etc, then this is not much of a deal. But don’t chase a few percentage gain for the possibility of losing everything.

I went a bit with a small emergency fund and the rest in high quality stocks. When the economy went down, my job loss risk increased, my salary went down (commission) and the value of my stocks went way down. I wasn’t hedged at all, stuck not being able to cash out and worried. I ended up ok, but it was a year of nervousness. In that situation a bigger emergency fund would have eased my mind.

If your living an “active” financial life, you own the vehicle, and incur no obligation to be reactive to anything save normal upkeep and fuel and taxes and insurance, of which you will hopefully have built into your monthly budget, and through financial independance, your monthly cash flow will automatically cope with those expenses.

For the burned out transmission that may come, you pull that from your emergency fund, as you were wise in your budgeting, thinking the worst that could happen, and your cash flow, from not being Reactive/Obligated to payments on the car has allowed you to build up the repair cost.

Active Financial Life
vs
Reactive Financial Life

This applies across the board in personal finances.

I realize now, I have done this simply b/c I have been mindlessly following the echo chamber of the personal finance bloggers and so called experts. It makes no sense for me to have so much money in cash simply in case an emergency comes. If such an emergency comes, I can just as easily sell my stocks.

Also–re Philip Brewer above–in the real Katrina area (New Orleans area–New Orleans itself was, of course, another story), cash was without value for a while–there was no gas to buy, no stores were open, phones didn’t work. The Red Cross showed up within a few days with food and ice.

If you left the area–as we did for a few days–if you were without cash, hotels were paid for and food stamps were handed out, no questions asked. We did not avail ourselves, but many did.

I think that’s probably true. My wife and I have very different salaries. We’re pretty frugal, but we choose to regularly spend more than the lesser salary– we just don’t want to sacrifice that much.

Because we regularly spend more than the lesser salary, we’re way beyond 6 months in the emergency fund, and can scale back our expenses with sacrifice if needed (i.e. we’re not tied into any mortgage, lease, or loan that requires us to make large monthly payments).

That’s true, *IF* spouse A losing their job, and spouse B losing their job, are independent events without a confounding factor. I know a few couples that can and do spend less than the smaller salary between them; all of them are pairs of engineers that work in the same industry, or even at the same company. It’s highly likely that if one loses their job, the other will too.

I’d venture that the filter of “couples that spend less than their least salary” introduces a selection bias towards couples that both earn healthy salaries and have similar personalities, e.g. career-focused introverts that met their partners in college classes or at their job, and hence share the same systemic risk w.r.t salary.

IMO this was the critical oversight in giving mortgage backed securities high credit ratings. All those borrowers were selected according to the same criteria, their home values are set in the same housing market, and their incomes come from the same job market. Bundling those mortgages did not provide a diversification benefit against default.

That said, my emergency fund consists of only $500 in my savings account (for Sam’s short emergency fund) plus maybe $50 in cash (ones, mostly) at home (for Phillip’s cash-required emergencies, which I usually use for making exact change when going out to eat or tipping maids at a hotel).

But then I also have a car-repair fund, a next-car fund, a home-repair fund, and a medical fund to cover those kinds of emergencies. And I have a very stable government job, so I have no unemployment fund, though my Roth IRA could be used for that (you can withdraw your contributions, but not your earnings, tax- and fee-free).

The most likely bad emergency that could happen to me is to get so sick of my job that I really, really want to quit it before my retirement funds are big enough. So I’d like about 50 years of expenses for my extended emergency fund.

Also, part of the common advice is to build this 6 month fund by setting a small amount of money aside each month– say 10% of your monthly pay. The problem with this method is that it takes years to accumulate the emergency fund. I think many people will find it hard to be motivated by a plan that, if followed properly for 4-5 years, provides only 6 months of security. It seems like this would require even more discipline than transitioning to a more “extreme” budget and saving a much higher percentage of income. If you save “only” 50%, for example, you will accumulate an emergency fund very quickly. The experience of success in financial planning has been very motivating for me, and I expect others feel the same way.

When Dave Ramsey recommends keeping as little as $1000, he’s speaking of a SEF. It’s cash on hand to cover the little bumps that everyone experiences- car repairs, a trip to the dentist, etc. This money should be in your local bank. I keep an extra $1500 in my checking account to be my SEF.

When Suzy Orman recommends 18 months expenses, she’s referring to an EEF. This is for job loss or major illness. The EEF can double as an early retirement fund and should be invested rather than parked in you checking account.

There are some emergencies that can be solved better with cash than with any other resource–and shares in an ETF are not cash.

I think the key factor in determining the size of emergency fund you need is your “minimum monthly expenses,” which is how much money you’re obliged to spend in an average month.

If your cost of living is very, very low–let’s say your minimum monthly expenses average $500 a month–then your emergency fund can be quite small as well–just $3000, if you go with a 6-month emergency fund.