Personal Finance

How big should one's rainy day fund be for mid/late 20 yr old?

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  • Aug 6th, 2009 3:16 pm
Deal Addict
Feb 9, 2005
4172 posts
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Jucius Maximus wrote: I think only if you are relying on a HELOC might this be a workable plan. Though HELOC often have a higher interest rate than a regular mortgage anyway, which would result in slower elimination of debts.
Even if HELOC has a higer interest rate than mortgage, most of the time you will NOT be drawing from your emergency fund/HELOC, and when you are, it likely won't be the entire amount at once, plus the duration of the emergency had better be shorter than the duration of non-emergency periods. Over your lifetime the HELOC approach will almost certainly result in a faster elimination of debts.
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Jul 8, 2009
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Galois wrote: You should currently have roughly have $5000.00

Next year $10000.00

The year after that $15000.00

T F S A
That's my strategy!
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Dec 22, 2005
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Ottawa
angel_wing0 wrote: nah..5k per year is not enough imo. I believe around 20-30k in an emergency fee
what kind of emergency are you anticipating if you need 20K-30K in cash?

if i lose my job (which i feel is almost as secure as working for the government) i will get a hefty severance package. there's also EI to rely on in addition to my investments which i would liquidate if i need access to that capital.

rainy day funds are a financial planning misnomer. if it makes you sleep better at night, fine - but your cash can be better served reducing your debt or growing quicker than the rates given in a savings account.

agreed, this is personal preference but you'll come out ahead in the long run by having your money work for you instead of wasting away in an ING account. i can't count the number of RFD threads i see with people asking for debt help, and they are deep in CC debt while at the same time are sitting on a pile of cash in a savings account?! that doesn't make any sense!
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Mar 23, 2004
47726 posts
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Markham
monty613 wrote: i can't count the number of RFD threads i see with people asking for debt help, and they are deep in CC debt while at the same time are sitting on a pile of cash in a savings account?! that doesn't make any sense!
I dont believe they represent the majority of the ppl here, because yes it doesnt make sense indeed. Most of us here will not fall into cc debt in the first place anwyay :D
Deal Fanatic
Feb 17, 2007
6412 posts
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Mort Réal, QC
Yes of course if you have credit card debt you have other issues to fix before even considering a rainy day fund. It's part of the process. When you finally realize that CC debt is a bad thing, and you start organizing a plan to better manage your money, then a rainy day fund needs to be a part of that plan.

BTW rainy isn't necessarely just a job loss (in which case, yes, EI and other benefits *COULD* kick in - if avaiable) but it could be an illness, funeral, etc that you hadn't planned. Accidents usually aren't planned (look up the definition of accident if you like). True, people don't "like" to think about those possibilities, but that's exactly why you can sleep tighter at night knowing you're ready for those rainy days.
Yes, there's insurance, but then again insurance is so expensive you're probably better off managing that risk yourself. And, even if you do have insurance, they usually take MONTHS before you'll see the first cheque. And faith always seems to throw the only think you didn't think of insuring yourself for at you.

Anyway, rainy day as a much larger meaning than just loosing your job.
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Aug 10, 2005
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monty613 wrote: none. don't waste your money sitting uninvested waiting for that "rainy day". it's perplexing when i see people that have debt outstanding but insist on maintaining a savings account full of cash.

best solution - get a line of credit. if any emergency comes up, use that to finance it.
I mostly agree, although I think it's a good idea to save at least a few thousand dollars if possible. Paying off debts should be the number 1 priority and in the long run, it will mean that your net worth will be higher than if you waited longer to pay it off.

Banks can reduce or eliminate any type of loan so relying on a LOC can be risky.
Deal Expert
Aug 2, 2001
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angel_wing0 wrote: nah..5k per year is not enough imo. I believe around 20-30k in an emergency fee, and that will take at elast a few years to accumulate in a tfsa unless u are earning money like crazy in a brokerrage tfsa account.
To each his own, what works for one may or may not work for another.

That being said, I personally feel your plan is completely unreasonable. Saving $20,000-$30,000 in an emergency fund (Which basically means a fixed investment, and earns near inflation) is ridiculous for 99% of the people here. You should really evaluate realistic scenarios around a potential emergency.

Everyone is claiming to "always be prepared for the worst", however we all have bigger problems to worry about if the banks take away all our credit like some posters hint it. Because of this, I feel a LOC (a HELOC is better) is a great emergency fund, because if it's a personal emergency it will be there. If your emergency is part of a global emergency, then you have bigger things to worry about.
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Nov 18, 2008
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If you have debt, then I think saving money on the side and not paying it off is a terrible idea. I see people who carry thousands in credit card debt at 20% while holding a few thousand in their bank account is a really bad idea as you could be saving hundreds every month by paying off that credit card debt and just readvancing when you *actually* need it. Even if their only source of credit is high interest credit cards, there's still benefit to paying off as much as possible and just taking out what they need again. The emergency fund becomes a very expensive and unnecessary insurance policy for these kinds of people.

If you have a mortgage, it doesn't make sense to let amounts like 30K rot in a "savings" account, when you're paying rates of 3-5% on your mortgage, especially when you consider how much interest you save over a few years by paying off principal early. You'd be much better off building more equity and then getting a HELOC as your emergency fund.

Personally, I keep 20% of my portfolio in cash because of my risk tolerance, and it is indirectly my emergency fund.
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Mar 23, 2004
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TrevorK wrote: To each his own, what works for one may or may not work for another.

That being said, I personally feel your plan is completely unreasonable. Saving $20,000-$30,000 in an emergency fund (Which basically means a fixed investment, and earns near inflation) is ridiculous for 99% of the people here. You should really evaluate realistic scenarios around a potential emergency.
Hey i agree, but something happened to me once which require around that range of money urgnetly, which is the reason why i will be keeping that amount just in case something happens again.
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Jun 21, 2005
4231 posts
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tng11 wrote: If you have debt, then I think saving money on the side and not paying it off is a terrible idea. I see people who carry thousands in credit card debt at 20% while holding a few thousand in their bank account is a really bad idea as you could be saving hundreds every month by paying off that credit card debt and just readvancing when you *actually* need it. Even if their only source of credit is high interest credit cards, there's still benefit to paying off as much as possible and just taking out what they need again. The emergency fund becomes a very expensive and unnecessary insurance policy for these kinds of people.
I've seen a study on 20/20 [or a show similar in nature] where it showed why people kept a cash balance even though they carried various, and sometimes, maximum credit card debt. Apparently they 'feel' more secure with the cash - as if it was a security blanket. And they know that they should pay off their CC debt, but don't see the urgency in it. I can understand why they don't see the urgency in paying off their debts, because even the CC companies don't emit any sense of urgency for them to do so. I guess not everyone is good with money...
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Jr. Member
Feb 3, 2009
127 posts
Actually I wanted to ask the same question.....

I will have about 35k cash 1 year after graduate, should I I keep more as rainy day fund or pay off student loan first(about 6% interest) or use that as down payment to buy condo/house(which will be partially rented to other people to make monthly payments easier)?
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Feb 17, 2007
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Mort Réal, QC
Well, the thread has reached 3 pages long now, so I would figure it would be a good start for you to read what was already mentioned.
You'll notice this is a very personal decision and all we can do is provide general knowledge and personal opinions about the topic.
Deal Addict
May 30, 2006
1749 posts
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Gold bars under your mattress is the only real thing of value in a true emergency and even that could be questioned. A protected farm in your back yard or a huge stock pile of food and water in your basement might be the only thing you can rely on in the worst of times. Let's forget about that for now ... because most people don't plan for that kind of crisis.

I agree with most posters that say a SECURED line of credit against your house is almost as good as cash in the bank. Cash in the bank isn't nearly as good as cash in your hand either ... but again we're ignoring catastrophic scenarios here. Here's my plan for emergencies:

1) Line of credit that is tied to my house (not a HELOC so my interest rate isn't higher for that convenience) ... it is set at prime. The current value of this is almost as much as 1 year worth of wages for me.

2) If I lose my job/income or have a severe financial emergency I can also stop payment on my mortgage for a long time because of loads of prepayments and double up payments that I have made. I have confirmed with my bank that this is possible until such a point as my payments catch up and all my prepayments and extra payments are nullified.

3) I have RRSPs that can be liquidated. If I lose my job this would be high on the priority list because the first 10,000 would be tax free in a 0-income year and after that it would be taxed at the lowest marginal rate ... not going to do any better than that in retirement.

4) I do have a little bit of money is chequing and savings accounts but the main reason for that is because it is a buffer for my bills or it is allocated to a large expense that I am expecting to have to pay soon and can't be bothered to move it around all the time and track it.

On top of that there is unemployment, hopefully severance pay, family & friends, food banks, and other sources of help available. With all of those safety blankets, barring an actual nation-wide or global catastrophe, I am more than covered.

I also keep a little food/water in the basement and some cold hard cash just to be on the safe side though :D
Deal Addict
May 30, 2006
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TrevorK wrote: To each his own, what works for one may or may not work for another.

That being said, I personally feel your plan is completely unreasonable. Saving $20,000-$30,000 in an emergency fund (Which basically means a fixed investment, and earns near inflation) is ridiculous for 99% of the people here. You should really evaluate realistic scenarios around a potential emergency.

Everyone is claiming to "always be prepared for the worst", however we all have bigger problems to worry about if the banks take away all our credit like some posters hint it. Because of this, I feel a LOC (a HELOC is better) is a great emergency fund, because if it's a personal emergency it will be there. If your emergency is part of a global emergency, then you have bigger things to worry about.
To go along with my post above ... I believe that this is worth reiterating.
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Feb 9, 2005
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sjweyman wrote: 1) Line of credit that is tied to my house (not a HELOC so my interest rate isn't higher for that convenience) ... it is set at prime. The current value of this is almost as much as 1 year worth of wages for me.
Not sure what you mean by this because a LOC tied to your house is a HELOC. I'm guessing what you really mean is not an "All-In-One" type account.
Sr. Member
Dec 22, 2005
751 posts
5 upvotes
Dundas
The problem with HELOCs is what if the emergency involves your house. Here in hamilton, we had some people with flood damage. Most insurance companies won't cover flooding only sewer backups. So now a lot of these people have damage to their houses and have to pay out of pocket. If the damage is severe enough the bank could pull the HELOC since the value of the house has severely dropped.

Or if not a flood, what about arson. It could take a long time for insurance to pay if your house was destroyed b/c of arson. Of course your HELOC would be gone since there is no house.

Of course, these are extreme circumstances but they do happen. I personally believe in having some cash for rainy days.
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May 30, 2006
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AllWheelDrift wrote: Not sure what you mean by this because a LOC tied to your house is a HELOC. I'm guessing what you really mean is not an "All-In-One" type account.
You're right, my mistake. Confused it with those accounts where your chequing account is tied to your HELOC/mortgage. They were a big thing here on RFD for a while. Mine is indeed a HELOC.
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May 30, 2006
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Krox wrote: The problem with HELOCs is what if the emergency involves your house. Here in hamilton, we had some people with flood damage. Most insurance companies won't cover flooding only sewer backups. So now a lot of these people have damage to their houses and have to pay out of pocket. If the damage is severe enough the bank could pull the HELOC since the value of the house has severely dropped.

Or if not a flood, what about arson. It could take a long time for insurance to pay if your house was destroyed b/c of arson. Of course your HELOC would be gone since there is no house.

Of course, these are extreme circumstances but they do happen. I personally believe in having some cash for rainy days.
Good points for sure. Most people aren't going to have enough money lying around to replace their entire house anyway though because otherwise they most likely wouldn't have a mortgage.

Sometimes you're just screwed no matter what you do.
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Feb 6, 2008
664 posts
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This is how I would look at LOC vs Emergency Fund:

Cost of LOC = LOC interest * expected value of emergency duration

Cost of Emergency Fund = (returns on the fund - current mortgage interest on the fund) * 100%

When you set up the Emergency fund, you are losing money on the opportunity cost that could be used to pay down the principal. Basically, you are paying mortgage interest on the Emergency fund regardless if you use it or not. The only way to offset it is to get more returns on the emergency fund than the mortgage interest.

Given the low mortgage interest rates today, you could end up making more returns with your fund and use it in a lumpsum prepayment later. However, you should probably invest it in something fairly liquid, otherwise theres also the risk of lost capital in liquidation.
Deal Expert
May 30, 2005
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Richmond Hill
poop_on_you wrote: This is how I would look at LOC vs Emergency Fund:

Cost of LOC = LOC interest * expected value of emergency duration

Cost of Emergency Fund = (returns on the fund - current mortgage interest on the fund) * 100%

When you set up the Emergency fund, you are losing money on the opportunity cost that could be used to pay down the principal. Basically, you are paying mortgage interest on the Emergency fund regardless if you use it or not. The only way to offset it is to get more returns on the emergency fund than the mortgage interest.

Given the low mortgage interest rates today, you could end up making more returns with your fund and use it in a lumpsum prepayment later. However, you should probably invest it in something fairly liquid, otherwise theres also the risk of lost capital in liquidation.
But if you already have a set payment amount for your mortgage, paying more will net you a penalty fee - not exactly the smartest thing ever. If you can save more than your monthly mortgage payment, why not save it up?
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