066 | The Emergency Fund…Is it a Bad Idea? | Big ERN The Reveal

8 thoughts on “066 | The Emergency Fund…Is it a Bad Idea? | Big ERN The Reveal”

1. Incredible episode!

   Two questions:

   1) Karsten/Big ERN, you said you were selling your condo, renting for a while, then planning to purchase home in a lower cost of living location in the future. Are you planning to pay the tax on the gains from the sale of your house and did you consider a 1031 exchange into a rental property investment in the meantime to avoid that tax?

   2) Related to the discussion on emergency funds, I wondered what your advice would be about the best place to store savings that will be used for the down payment on a house. Cash is one option, money market, bonds, or a bond-heavy bond/equity portfolio. Since the savings will be used in the next 1-2 years the upside of compounding is minimal but the downside risk of a correction seems significant. Your thoughts?

   Thank you!

   Mr. MEFL

   • Thanks, Mr. MEFL!
     1) We realized a capital gain of just under $500k, which is tax-free for a married couple filing jointly. So, no need for a 1031 exchange.
     2) That’s a tricky question and depends on your personal situation. If you know you need the money and you have zero flexibility about the specific amount at a specific time, no matter what, then using a CD or money market account might be all you can do. But if you’re more flexible, I list a few reasons and options for using more risky investment options in a home down payment fund: https://earlyretirementnow.com/2016/06/15/how-to-invest-a-house-down-payment-fund/

2. Love your podcast. I did feel the Episode 47 with Kristy and Bryce from Millennial Revolution fell short of your standards in editorial rigor and intellectual honesty. I’m glad it’s being corrected here in this episode.

3. I’ve found this rent vs buy calculator to be very complete, maybe Brad can use it for his own case scenario
   https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

4. It was refreshing to hear an FI guest who actually acknowledged that “I’ll just go back to work” isn’t necessarily easy. I hear it said so blithely on so many FI podcasts.
   I’m in my early 50’s in a professional field. I was laid off a couple years ago and took a roughly six month breather. All my interviewers wanted to know why I was out of the market for so long. Many employers consider that skills suffer with only a few month break. If I tried to go back after 5 years, there is no way I could pick up from where I left off, if I could get back in at all.
   Many FI’ers aren’t old enough to realize how things change as one approaches 50 and beyond.

5. Great podcast that I very much enjoyed. I am in a profession that is extremely difficult to go back to once you are out more than 12 months. Good actionable advice. Congratulations on your retirement!

   Regarding the emergency fund, Ramsey is right, most Americans need at least $1K in an emergency fund for unforeseen circumstances such as car repairs, medical bills, emergency travel, home repairs, etc that are in that $500-$1000 range. For folks who are living paycheck to paycheck an emergency fund can be the difference in having to take out a (gasp) payday loan or borrow from a credit card, or worse, not being able to cover the expense at all.

   Many of us following Choose FI are well into pursuit of FI, and I totally agree with you that we just don’t need that much cash lying around to the tune of 6-9 months worth of expenses. If I lost my job (not likely but it could happen) I could liquidate enough of my portfolio to carry me through if I couldn’t get another job right away.

6. Hi Jonathan, really liked this podcast. People don’t really appreciate the value of an emergency fund unless something happens and then find themselves needing it.

7. I purchased an emergency fund’s worth of VTSAX once I was about 80% through this episode. Thanks for the information guys!