Math question: emergency cash reserve

NEW -> Contingent Buyer Assistance Program
justbrowsing_IHB

justbrowsing_IHB

New member
I'm trying to figure out how much cash I'll need before even bothering to look for a house. To me, an emergency cash reserve means if lose my job, I will have enough money to pay all my bills until I find a new job. Until homes start appreciating, I think it's also reasonable to assume that if I can no longer pay my mortgage, I would go into foreclosure (in other words, selling my house would not bail me out).



From the <a href="http://www.irvinehousingblog.com/blog/comments/buyer-seeks-seller">blog today</a>, the hypothetical $1.5M house requires a $9K monthly cash outlay. The emergency cash reserves was 6 months, worth $60K.



So my dumb question: is 6 months of emergency cash supposed to cover your entire monthly expenditures, or is it your gross or net monthly take home pay? The math isn't working for me.



$1.2M mortgage = 3 x annual salary of $400K. Gross is ~$33K/month. Take home will vary based on tax skills, but let's say low end is ~$20K/month.



So, 6 x $9K = $54K on just the housing payments. Anyone making that much money's gotta eat.

6 x $33K = $200K

6 x $20K = $120K



Only way I can come up with $60K is to assume the take home salary is $10K, which is an annual salary closer to $200K.



So what would you use as 6 months of emergency cash? I think $120K would be a bare minimum. Plus if I were making $400K, I'd assume it would take far more than 6 months to find a comparable job.
 
The idea of a 6 month emergency fund would be to have the amount of money it would actually cost you to live for 6 months. 6 X your monthly expenses, not 6x your gross pay or net monthly pay. Presumably most months you blow lots of money on whiskey and cigars which you light with $100 bills, or something, and you could cut back on these expenses when you were out of work.
 
I've been thinking about this for two days.



If you run out, you didn't have enough. If you don't run out, it was too big. If you never need it, it's a waste. Got a crystal ball?



Seriously, if you have one at all you are way ahead of 95% of the sheeple.
 
You need access to the money and it needs relative stabiity. For me, I find the balance point in having approximately one month plus one rent/mortgage payment in cash/money markets linked with my draft account. The remaining emergency funds are pooled with the conservative portion of my stock investments. It's highly liquid and likely to only suffer a 30% decline or so. This provides the upside of keeping it invested and having the downside access. At risk is the fifth and sixth months.



Of course, if you need the fifth and sixth month, by the time you get there, you're likely to have discovered some pretty realistics ways of reducing your expenditures thereby stretching the four month pile.



The bigger concern, which has been covered elsewhere, is where to park the down payment fund? In the interim, the downpayment fund and the emergency fund are one and the same. At purchase, funds will be reallocated.
 
[quote author="no_vaseline" date=1244420096]I've been thinking about this for two days.



If you run out, you didn't have enough. If you don't run out, it was too big. If you never need it, it's a waste. Got a crystal ball?</blockquote>


You have just described all insurance.



Cash reserves are insurance, and like insurance, its primary benefit is peace-of-mind.



In addition to some amount of saving, the more important thing is to have positive cashflow. You can get away with low cash reserves as long as you are running a positive cashflow and replenishing your reserves. If you deplete your cash reserves <em>and </em>overextend yourself to the point you can no longer save money, then you have real problems.
 
Interestingly, I had to run through a similar calculation as I expect my income to completely disappear in a month or two. I was surprised at actually how little we will have to dip into cash reserves when I'm not working...



UI will give you $400 per month if you are withholding taxes. We will replace the nanny and weekly maid with preschool-based daycare (were doing this anyway) and that frees up another $1500 per month on an after-tax basis. Between that and UI, it covers around 70% of my take-home pay. Live a little cheaper each month while I'm not working and we only hit up cash reserves by around $1K each month.



I know we will really miss the $2K per month going into retirement and college savings later though...
 
what are you guys doing to protect your 6-12 month fund from inflation? Part of the fund (25%) should be in cash but the rest of it might be better placed somewhere very conservative where you can at least keep track with inflation.



We are in a serious hole of debt in this country at the national and personal level. The government is borrowing and printing money just to keep us alive on the operating table. If we don't see any legitimate economic activity which adds real value (not kool-aid) in this country we will be unable to continue borrowing the money at low rates. Without money to borrow and no real value add to generate tax dollars then they start printing it to make the interest payments on the debt. That just causes causes your cash to be worth less and less.... I guess the paranoid side of me wants part of it in ammo and gold! I'm not an economic Rhodes scholar so please school me if my worry of hyperinflation is unfounded.
 
For the short to medium term, I don't see inflation being a serious problem. Heck, we've had a bit of deflation, or close to it, due to the poor economy.
 
[quote author="thedude" date=1244516495]I guess the paranoid side of me wants part of it in ammo and gold! I'm not an economic Rhodes scholar so please school me if my worry of hyperinflation is unfounded.</blockquote>


Yes, your worry of hyperinflation, at least any time soon, is unfounded. 10% unemployment, at least in the short tem, tends to slow an economy down enough to counter the inflationary impacts of increased money supply...



If you believe in CPI, we've actually had 2-3% deflation over the past year or so. That isn't going to suddenly reverse course.
 
[quote author="IrvineRenter" date=1244431662][quote author="no_vaseline" date=1244420096]I've been thinking about this for two days.



If you run out, you didn't have enough. If you don't run out, it was too big. If you never need it, it's a waste. Got a crystal ball?</blockquote>


You have just described all insurance.



Cash reserves are insurance, and like insurance, its primary benefit is peace-of-mind.



In addition to some amount of saving, the more important thing is to have positive cashflow. You can get away with low cash reserves as long as you are running a positive cashflow and replenishing your reserves. If you deplete your cash reserves <em>and </em>overextend yourself to the point you can no longer save money, then you have real problems.</blockquote>


Yeah, for me it's an investment in being able to sleep at night. Inflation will eventually eat away at it, but someone famous once said

"I'm more interested in the return of my principal than the return on my principal". Plus the results of financial problems aren't cheap: Xanax, therapy, divorce, etc.
 
Suze Orman was on CNBC this morning. Mark Hanes asked her if she was giving different advice now compared to before. She said times had changed and so was the advice she was giving.



Formerly she was telling people to pay off thier credit cards and then work on a emergency cash reserve - but that was before the credit card companies were slashing limits and canceling cards.



Now she's telling clients to pay the minimum on thier cards untill they have <strong><em>eight months of expenses in cash</em></strong>.



I can't stand to listen to Suze for very long (she's more tiring than Dr. Laura IMO) but her advice is usually solid.
 
i'm less annoyed at suze orman than i am at the world which requires the existence of her job. 1% of the questions she answers are legitimate, complex dilemmas worthy of an expert opinion. the other 99% can be answered with, "No, because you don't have the money, stupid."
 
[quote author="acpme" date=1244603446]"No, because you don't have the money, stupid."</blockquote>


Right. Her advice is usually solid. And <span style="color: purple;"><span style="font-size: 16px;">DIRECT</span></span> which I appreciate.
 
[quote author="no_vaseline" date=1244605113][quote author="acpme" date=1244603446]"No, because you don't have the money, stupid."</blockquote>


Right. Her advice is usually solid. And <span style="color: purple;"><span style="font-size: 16px;">DIRECT</span></span> which I appreciate.</blockquote>


I think her advice is suspect on anything other than the adult three year olds calling mom to ask for permission to buy something they can't afford.



She is, IMHO, cripplingly risk adverse in regards to money.





That said, if like 90% of the population you are two missed paychecks away from missing your mortgage payment, her advice is probably spot on in the short term.
 
[quote author="No_Such_Reality" date=1244625118]That said, if like 90% of the population you are two missed paychecks away from missing your mortgage payment, her advice is probably spot on in the short term.</blockquote>


Have you ever listened to Dr. Laura? People are amazingly stupid. I mean it.



I've written here that I used to assume that people were smart until proven otherwise. My new base case assumption is that people are morons till they show otherwise. Now I'm occasionally surprised as opposed to before where I was almost always disappointed.



I think that's who Suze is targeting. By asking people to have eight months of cash reserves, maybe she's hopeful the sheeple will save 2 or 3. General advice for general public who are generally morons.
 
^ So true! I concur. I have noticed, though, that there seem to be two types. There are people who are not smart but recognize it. Then there are others who are dumb and blissfully unaware. That is the really scary kind. I do enjoy Suze's show. You always learn a thing or two plus it's entertaining. I'd like to think her callers do fall into the first group. (I'm not saying all of them are dumb because I don't think they all are. Some ask for very specific advice regarding more complicated matters.) I give them credit for at least seeking outside advice before acting. The others are too dumb to realize they may have a problem or could use help.
 
[quote author="no_vaseline" date=1244629046][quote author="No_Such_Reality" date=1244625118]That said, if like 90% of the population you are two missed paychecks away from missing your mortgage payment, her advice is probably spot on in the short term.</blockquote>


Have you ever listened to Dr. Laura? People are amazingly stupid. I mean it.



I've written here that I used to assume that people were smart until proven otherwise. My new base case assumption is that people are morons till they show otherwise. Now I'm occasionally surprised as opposed to before where I was almost always disappointed.



I think that's who Suze is targeting. By asking people to have eight months of cash reserves, maybe she's hopeful the sheeple will save 2 or 3. General advice for general public who are generally morons.</blockquote>


I made the same point in the discussion on the blog about bad photos and descriptions in listings. Your average person is pretty damned stupid, unfortuantly.
 
You must log in or register to reply here.
Back
Top