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Tuesday, May 01, 2007

On emergency funds, and our allocations

Several personal finance bloggers, such as Lazy Man and Sun, have been blogging about emergency funds lately. Lazy Man basically runs without an emergency fund, preferring to use a HELOC; his argument for this unconventional strategy is that he doesn't want to hurt his returns by having a largish pool of cash earning lowish interest.

I'm a bit older than many PF bloggers, and have come to realize that the desired size of one's emergency fund can actually change over time. I ran with a small fund when I was young (obviously, I didn't have much savings yet, and could live very cheaply). Later, after more responsibilities, I increased the fund to its present - rather large - level of 1 year of living expenses assuming zero income. I'm now considering reducing it since our investments now generate nearly enough income by themselves to cover our living expenses, so our e-fund would actually cover several years of expenses. We'll still keep a larger e-fund than some, since we carry maximum deductibles on insurance and use insurance purely for wealth preservation as opposed to cash-flow preservation, but it probably _is_ too big at the moment.

Our e-fund is in two parking places. The short-term piece in a credit union savings account that pays as much interest as the internet banks and has a nearby branch. The bulk of it is in I-bonds, which are nearly mature and which pay 4.22% at the moment, but have paid up to 6.5% at various times, and aren't subject to state tax.

If your investments don't cover your living expenses, and for most people this is the case, developing a "cash-flow positive" small business can be the answer. Especially with the Internet today. Setting aside emergency funds require time...starting the business venture requires action.
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