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"Slush Fund"/Emergency Fund

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LitigatorChick

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My hubby and I have recently switched banks, and we were assessing our investments, mortgage, basically everything financial yesterday. Our investments are in good shape (we make regular contributions and large lump sums, so more than enough there), our mortgage is WAY too small for our income (remedy, I''m getting a bigger house next year), so all in all, a great financial picture. My DH and I each work full time and make very good professional incomes (I am a lawyer, he is an engineer).

Here''s the question. I asked my banker about how much she thought we should have in a "slush" fund or emergency fund. She said nothing - that money would not make good interest, we should invest it, and if an emergency arose, use our line of credit. DH agreed.

I just don''t feel comfortable with that. I have always kept about $20,000 kicking around in a money market fund, in addition to about $15,000 in my chequing account. I have never had to draw on the "slush" fund, whether for vacations, bling, or anything - our income is always enough to cover these relatively significant purchases.

So what do you think? Am I being paranoid and therefore not making the best use of some cash? Or should I push back on this issue?
 

lyra

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Well, as someone who had reason to actually need and use an emergency fund, it''s almost never enough. We ended up using everything we had, investments, credit, RRSP''s. Our situation was extreme. Three job losses in 5 years. Total time without any income at all was about 18 months. So there was no way to prepare for that. We made it through the first 2 okay, but the third one basically wiped us out and we had very little options. In hindsight, if we''d rented out the house we were forced to sell, we''d be great right now, but like I said, when you''re staring down a barrel, you don''t always have choices.

Anyway, if I were you, I''d definitely want a cash fund too. I''d also make sure you both have severance packages in place. DH has just negotiated his, 5 years into employment with his company. We need to have it, as his field is so volatile. Better to err on the side of having too much than too little. You just never know.
 

cara

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Uh, if she means use your line of credit and pay anyone interest, no. If she means use your line of credit as it will take a few days to get your $ out of a non-local bank or moneymarket, then maybe.

You should leave enough cash in your checking to not have fees or worry about bounced checks. Then you should have an emergency fund of 3-6 mo of actual living expenses for your household. Doesn''t have to be in cash under the mattress, but should be a liquid enough form that you can get it out in the time scale it might be necessary to use it and woln''t cause too much pain to get it out (ie. emptying an IRA and paying penalties).

How to determine where in the 3-6 mo range to save? Partly it is a function of what you CAN put aside - starting small is better than not starting. Then look at how precarious your position is. ie. a young professional couple with no kids renting, where either salary could cover the rent and most expenses for a while if the other lost their job, maybe only 3 mo is needed. a single mom w/ a house loan, job in a volitile industry, less safety net if she lost her job should aim more for 6 mo emergency reserve, but of course it is very hard to set that aside.

I personally would want to have enough money set aside to pay off a house note and live for 6 mo if either of us lost our jobs. Which means not quite having 6 mo of living expenses - more like 4-5 mo. But if you face a really bad situation - like 18 mo of unemployment over 5 years - what can you do. The emergency fund may at least give you breathing room to figure out how to deal.
 

LitigatorChick

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I keep enough in the chequing account to more than avoid bouncing anything - about $10 - $15K. So no issue there. Basically, I am always about 1 -2 months ahead in the chequing account, so there is kind of a "built in" emergency fund there, if you know what I mean.

Her analysis was why take $20,000, and put it in a money market that makes diddly. If you need the cash, borrow on our line, which is at about 4.25%. I can do better than 4.25 by investing the money.

I don''t know!!!!
 

Independent Gal

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I''d go half and half. I''d DEFINITELY keep SOME slush. But maybe you have too much? I dunno. I could live for a year on what you''ve got easily, but we probably have different lifestyles. (WAAAH! I want your lifestyle!) But you can get a high interest savings account that makes more than a money-market account.

Personally, we have what we need for 4 months in case of emergency. I keep almost no slush in my chequing account though. It''s all in the high interest savings acct (I use ING).
 

October2008bride

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Date: 5/27/2008 9:15:38 AM
Author:LitigatorChick
My hubby and I have recently switched banks, and we were assessing our investments, mortgage, basically everything financial yesterday. Our investments are in good shape (we make regular contributions and large lump sums, so more than enough there), our mortgage is WAY too small for our income (remedy, I''m getting a bigger house next year), so all in all, a great financial picture. My DH and I each work full time and make very good professional incomes (I am a lawyer, he is an engineer).

Here''s the question. I asked my banker about how much she thought we should have in a ''slush'' fund or emergency fund. She said nothing - that money would not make good interest, we should invest it, and if an emergency arose, use our line of credit. DH agreed.

I just don''t feel comfortable with that. I have always kept about $20,000 kicking around in a money market fund, in addition to about $15,000 in my chequing account. I have never had to draw on the ''slush'' fund, whether for vacations, bling, or anything - our income is always enough to cover these relatively significant purchases.

So what do you think? Am I being paranoid and therefore not making the best use of some cash? Or should I push back on this issue?
So I called my financial advisor FI to ask him the question. He definitely had the standard 3-6 month line - that you should be prepared to cover 3-6 months in case of an emergency.

I asked him about the whole investment/line of credit thing - the one argument he had in favour of the line of credit is that from a tax persepective, it would likely be cheaper to use the line of credit for a short period than it would be to collapse one of your investments to take that money out. Obviously, it depends on the length of the period without income, the amount of money needed etc.

His bottom line was that you should do what you are comfortable with. If you were asking to stash ALL of your money in a money market fund or a chequing account - he''d try to give you information about how you can accrue interest by investing most of it - but considering you have great investments/low mortgage etc, then you should do what you are comfortable with!! Your advisor shouldn''t push you to do anything you don''t want to do.

HTH!
 

laine

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Date: 5/27/2008 11:41:17 AM
Author: Independent Gal
I''d go half and half. I''d DEFINITELY keep SOME slush. But maybe you have too much? I dunno. I could live for a year on what you''ve got easily, but we probably have different lifestyles. (WAAAH! I want your lifestyle!) But you can get a high interest savings account that makes more than a money-market account.


Personally, we have what we need for 4 months in case of emergency. I keep almost no slush in my chequing account though. It''s all in the high interest savings acct (I use ING).
Yup, what she said
 

neatfreak

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Date: 5/27/2008 12:58:25 PM
Author: laine
Date: 5/27/2008 11:41:17 AM

Author: Independent Gal

I''d go half and half. I''d DEFINITELY keep SOME slush. But maybe you have too much? I dunno. I could live for a year on what you''ve got easily, but we probably have different lifestyles. (WAAAH! I want your lifestyle!) But you can get a high interest savings account that makes more than a money-market account.



Personally, we have what we need for 4 months in case of emergency. I keep almost no slush in my chequing account though. It''s all in the high interest savings acct (I use ING).

Yup, what she said
I agree with Indy too. We keep very little in our checking proper and most of our "emergency" $ in our ING account (again, high yield for a savings). Then everything else for us right now is in a money market account, which we CAN access at any point, it just takes a few days to get to. I think using a line of credit until you can get your other $ is fine, but I wouldn''t use it for longer than a few days ya know?
 

LitigatorChick

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From a "risk" perspective, we are pretty low. We have dual income, so that relieves some risk. As a lawyer, I figure I have very good employability. I have experience in a lot of practice areas and work for a huge national firm. I am pretty darn secure in my employment.

Hubby is a tad less secure, working in oil and gas. It is boom time now, but it could always go bust.

We have one kidlet, so that increases the burden.

I am not really worried about job loss. I guess it is a worry about those unexpected big costs, but truly, I can''t even imagine a situation where I would need $20,000 ASAP. So my hubby says what are you worried about.
 

movie zombie

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well, i''d be worrying about the economy for one........and i''m a paranoid as is my hubby: we have more than $20K available as a slush fund. if we need to get our hands on the cash its there no quesitons or paperwork involved. we''ve got other $ tied up in interest accountsCD''s, etc. and i will admit our slush fund isn''t earning alot of interest but it satisfies the paranoid in the both of us. i view the stock market as gambling and we''re doing that as well.

movie zombie
 

LitigatorChick

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Our economic situation is different. In Canada, and in particular, Alberta, things are very good and the outlook is equally good.
 

saltymuffin

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Date: 5/27/2008 9:15:38 AM
Author:LitigatorChick
our mortgage is WAY too small for our income (remedy, I''m getting a bigger house next year),
Are you joking about this??

Quite honestly, I don''t like the sound of the advice you are getting from your new bank. It sounds like a lot of the advice is what is the most profitable for the bank, and not necessarily in your best interest. Big mortgage, means high interest payments - to the bank. Relying on a line of credit as an emergency fund means interest payments - to the bank. . .

I am no financial advisor, so maybe everything I am saying is garbage "financially", but I don''t see how paying interest is saving you money.

In your situation I would do the following:

1. Stop writing cheques and get that 15k out of your chequing account where it is earning nothing!

2. Immediately open an ING or other high interest savings account. Most of the big Canadian banks now offer them themselves, so you can likely get one with your bank (which I find convenient, as you can do instant online transfers). ING Canada is now offering 3%.

3. Place the bulk of your 15k that is sitting in your chequing account into the high interest account.

4. Pay for everything you can on a credit card, and transfer the money over from the high interest at the end of the month to pay it off in FULL (don''t get into cc debt!). Get yourself a great reward cc and you''ll earn cash back of frequent traveller points. If you are completely unable to handle a cc, maybe reconsider this, but with the right attitude a cc is a great tool for saving money.

5. If you feel that the 15k wouldn''t last you 3-6 months if needed to cover the basics like mortgage, utilities, groceries etc, then bump up the amount in your high interest account a bit. At least it will be earning some interest. If a real emergency comes, the last thing you need is to be worrying about the cost of borrowing money from a LOC to pay the mortgage.

6. Reconsider the new house. You live in Calgary, correct? The future looks bright, but house prices are not going to sustain the growth they have gone through the last few years. As someone who moved out of Calgary to be mortgage free elsewhere, I am biased, but I would sit tight where you are for now. If you can afford to pay more, then up your mortgage payments, and get the house paid off. Stop paying the banks so much money.
 

LitigatorChick

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Date: 5/27/2008 2:54:00 PM
Author: saltymuffin

Date: 5/27/2008 9:15:38 AM
Author:LitigatorChick
our mortgage is WAY too small for our income (remedy, I''m getting a bigger house next year),
Are you joking about this?? Not really - I live in a house worth about what we make in 1 year. I want a bigger house - it would improve my standard of living, and I can definately afford it. We have upped our mortgage payments substantially again, and just put another $15,000 on the mortgage. In short, I want to improve my current life, I can afford it, and it makes sense. This wasn''t the banker''s advise, but my own.

Quite honestly, I don''t like the sound of the advice you are getting from your new bank. It sounds like a lot of the advice is what is the most profitable for the bank, and not necessarily in your best interest. Big mortgage, means high interest payments - to the bank. Relying on a line of credit as an emergency fund means interest payments - to the bank. . .

I am no financial advisor, so maybe everything I am saying is garbage ''financially'', but I don''t see how paying interest is saving you money. The point is that rather than have money sitting in a money market fund earning 3 percent, I should invest it and make a higher amount. If I need money in an emergency, I can borrow at 4% on my homeowner''s line.

In your situation I would do the following:

1. Stop writing cheques and get that 15k out of your chequing account where it is earning nothing! 15K in my chequing is the least of my worries!!! It used to be $50K!!!

2. Immediately open an ING or other high interest savings account. Most of the big Canadian banks now offer them themselves, so you can likely get one with your bank (which I find convenient, as you can do instant online transfers). ING Canada is now offering 3%. I prefer a money market or other similarly liquid investment.

3. Place the bulk of your 15k that is sitting in your chequing account into the high interest account.

4. Pay for everything you can on a credit card, and transfer the money over from the high interest at the end of the month to pay it off in FULL (don''t get into cc debt!). Get yourself a great reward cc and you''ll earn cash back of frequent traveller points. If you are completely unable to handle a cc, maybe reconsider this, but with the right attitude a cc is a great tool for saving money. We use credit cards to pay for most purchases. I never ever carry a balance (never have).

5. If you feel that the 15k wouldn''t last you 3-6 months if needed to cover the basics like mortgage, utilities, groceries etc, then bump up the amount in your high interest account a bit. At least it will be earning some interest. If a real emergency comes, the last thing you need is to be worrying about the cost of borrowing money from a LOC to pay the mortgage.

6. Reconsider the new house. You live in Calgary, correct? The future looks bright, but house prices are not going to sustain the growth they have gone through the last few years. As someone who moved out of Calgary to be mortgage free elsewhere, I am biased, but I would sit tight where you are for now. If you can afford to pay more, then up your mortgage payments, and get the house paid off. Stop paying the banks so much money. Really, I don''t want you to worry about this aspect. We bought our home 5 years ago in Calgary, before the boom in the housing market here. My house has over doubled in value. My mortgage is about what my husband earns in 1 year, and I make over double that!!
See above.

On the emergency fund, when people talk about 3-6 months, we are just now talking about essentials? So no investing (obviously), no saving (obviously), but what about my nanny (maybe)?
 

robbie3982

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Date: 5/27/2008 3:42:52 PM
Author: LitigatorChick
See above.

On the emergency fund, when people talk about 3-6 months, we are just now talking about essentials? So no investing (obviously), no saving (obviously), but what about my nanny (maybe)?
I would consider the Nanny to be essential. What if the emergency was an accident that caused you or hubby to be unable to work and also unable to take care of your little one?
 

LitigatorChick

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Hi Robbie - the thing is that I have disability insurance for that one, so I would be covered on the income perspective.

I''m still confused on this whole emergency fund thing!!!!
 

robbie3982

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Date: 5/27/2008 3:55:20 PM
Author: LitigatorChick
Hi Robbie - the thing is that I have disability insurance for that one, so I would be covered on the income perspective.

I''m still confused on this whole emergency fund thing!!!!
Does your disability cover 100% of your salary or are you saying that the percent it does cover would be enough since you guys are living below your means? Personally, I''d rather have a little extra than not enough.
 

LitigatorChick

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Date: 5/27/2008 4:04:05 PM
Author: robbie3982

Date: 5/27/2008 3:55:20 PM
Author: LitigatorChick
Hi Robbie - the thing is that I have disability insurance for that one, so I would be covered on the income perspective.

I''m still confused on this whole emergency fund thing!!!!
Does your disability cover 100% of your salary or are you saying that the percent it does cover would be enough since you guys are living below your means? Personally, I''d rather have a little extra than not enough.
The latter.
 

canuk-gal

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Date: 5/27/2008 3:55:20 PM
Author: LitigatorChick
Hi Robbie - the thing is that I have disability insurance for that one, so I would be covered on the income perspective.

I''m still confused on this whole emergency fund thing!!!!
HI:

It is a secret code meaning you should buy more jewellery with discretionary income
....JK of course......

cheers--Sharon
 

saltymuffin

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Sorry if I overstepped what you were looking for in the way of advice - I have recently had a similar conversation with a rather clueless friend who had a "run-in" with a crooked banker. I think my attitude from that tortureous experience might have influenced what I said to you.

I had thought it was the banker that stated that you were "spending too little" on your mortgage. And they had some sort of percentage to determine what you "should" be spending on your mortgage. It sounded like they were saying a bigger mortgage would be a "wise financial move". Obviously no mortgage is the best one - and a great safety net.

If your mortgage is paid off, if you were ever in a bind, you would have very little in the way of monthly expenses, and wouldn''t need much in the way of a slush fund.

How much to have depends on the individual. I make sure I have enough to "just get by" in the case of a job loss. I don''t expect to be spending as much as I do now if I am out of work. But you might want to continue to live your current lifestyle. If that is the case, tuck away whatever will make you comfortable. Do whatever feels right for you, don''t take what any advisor says too seriously, it is only advice.
 

NewEnglandLady

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I agree that 3 - 6 mo. of your normal spending should be kept in an easily-accessible emergency fund. We have a system where we keep 6 months of what we live on in an emergency account, then when it grows to about 12 months, we move it. We live on less than half of what we bring in, so we move the money every few months.

If we had a mortgage or any other type of debt, though, we would probably put more towards that and leave less in liquid accounts. It''s hard to justify having money sitting around in a low-interest account when your debt is gaining interest, which will be even more true when you have a larger mortgage next year. Maybe 3 months would be good until the mortgage is paid off? I don''t know...
 

ljmorgan

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Hi LitigatorChick -- I''m definitely in favor of you having a good emergency fund. People make the argument that you won''t make huge returns from letting the cash sit there, and that from an "investment" perspective it''s not great -- but having cash in the case of a loss of income, a huge transition, medical fallout -- is priceless. It''s an investment in your security, and if you put the money in an account with enough interest to keep up with or beat inflation, you''re golden. Talk some sense into your hubby and do what feels right -- good luck!
 

Miranda

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I like lotsa money in an emergency fund. It has to be easy to get to as well. I know it can be argued to borrow from an equity line if need be because it does pencil out at a lower rate, but, I just can''t wrap my pea brain around it! It''s still borrowing. I''m a little paranoid about savings because we are a one income family with three growing (read - expensive) children. I''d consider only keeping enough cash needed for monthly expenses in the checking account, though. Not earning interest is just flushing shoe
money down the toilet!!!
 

Dancing Fire

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LitigatorChick
i would say 8-10 months of emergency cash fund. butttt hey....why do you care?
sounds like you have money coming out of the WAHZOO!!!
 

LitigatorChick

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Thanks everyone. Hubby is still opposed to the idea of the slush fund at all, stating that there has never ever been a situation where we need to use it. As mentioned above, our income and standard of living is such that we run with a significant surplus each month (yes, Canuk, I agree with more bling!!!), so we can pay for significant vacations and purchases without diving into any savings or other fund. Basically, he sees that we have enough "wiggle room" in the ordinary operating account.

I just don''t feel comfortable. I like to have some accessible cash on hand - it makes me feel better. The problem is convincing hubby. I just can''t come up with a good argument to counter his that we have never had to use it, it is unlikely that we will, and we have access to cheap money if and when the need arose.

HELP!!!
 

LitigatorChick

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I was thinking about the emotions behind this issue for us, and I thought this might help. My hubby I think really feels guilty about the money we make. In his family, his dad was a teacher in a small town and his mom stayed at home. So a comfortable modest income and a modest lifestyle. Now, when his parents come, they make comments about our cars, my shoes, etc. I think he almost wants to "budget" or limit himself in a way. Does that make sense????

On the other hand, my family''s income was better than his, but I have lived on a very modest budget (in university, I lived off $400 a month - my rent was covered, but I still had utilities, groceries, everything else in that!!!). I have lived that life, it was hard, and I never want to go back to wondering if the cheque will clear. Thus, I get a feeling of comfort from having the extra cash.

Wow, who knew that money issues turned all touchy feely?

Anyway, still looking for some help on this one.
 

canuk-gal

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HI:

The advice from your new banker iis but one person''s opinion. That''s all. There is nothing in your "disclosed" history that would signal the "need" for a large slush fund--especially if it is at odds with your past successful money management and/or value system. My own thinking lends toward paying off your biggest asset (home) ASAP. We did, but payed the $$ to end it very early. Once this is done, you can think of about buying a retirement/leisure property--that is what I would do with discretionary income.

cheers--Sharon
 

LitigatorChick

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Canuk, are you saying that you don''t think we need the emergency fund???
 

canuk-gal

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Date: 5/28/2008 9:08:14 AM
Author: LitigatorChick
Canuk, are you saying that you don''t think we need the emergency fund???
HI:

The slush fund would seem to be a duplication of your already exisitng checking account. I missing sometihg here?

cheers--Sharon
 

LitigatorChick

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I guess it would just be more than the existing chequing account. Maybe I am now simply getting to a question of quantum? Do most people keep very little in their chequing account?
 

NewEnglandLady

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Litigator, you have your own checking account, right? Why not just stash 2-3 months salary or something in there so that you feel covered if something were to pop up, that way you would feel like you have a safety net and hubby wouldn''t feel like your joint funds are tied up in a no or low-interest account.

And I understand hubby wanting to live on a budget even if one isn''t really needed--I don''t think DH and I know how to live without a budget, haha. Financially there is always something to save for--a house (no mortgage), the unborn childrens'' college accounts, retirement...we break it down to quarterly savings goals so we''re always on the same page. Maybe your hubby has a different savings roadmap in mind? Sounds like you guys discuss finances often, but maybe just have different plans for the money.
 
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