Also you are only allowed to buy 10K of I bonds a year – up to 5K through treasurydirect.gov and up to 5K in paper bonds from a local bond.

Another alterenative is TIPS. Again, I suggest you read all the information on treasurydirect.gov and make an informed decision.

This post opened up a very intense discussion between my co-workers. One friend brought forth a point that made the group really think – we are all trying to become “debt free” and not rely on credit – even in emergencies. However, the federal government has done just that – used the China Credit Card as an “emergency fund” to provide stimulus to calm the fears of Americans and make them spend more to boost the economy. The sad fact is that this debt will be around forever and will not be paid off in our lifetimes – sort of like leavin your personal credit card debt to your children (something all of us would never want to happen). This conversation went off in many directions with some people getting very emotional. Many of us do put aside as much as possible and try to be “debt free” while still raising smart children with college education. Why is it that we do not stand or such fiscal irresponsibility within our own homes, but we stand at the sidelines when the government does it?
I know you spoke previously of entering politics – please keep this in mind when and if you run for office.
Have a great day!!!!

I can’t even get the stupid mortgage refi’d to an *investment* loan. The banks and credit unions don’t care about *any* of the facts. They take a look at the area code (much like Amex has done), and figure we are deadbeats waiting to happen, because, hey, isn’t everybody in Florida in foreclosure? HELOC’s are pretty much out of the question for anyone in the Sunshine State, and if you want a mortgage to buy a condo, well….good luck to you, Sir, cause you’re gonna need it. IF you can get them to give you one, they’ll probably require that you put 75% down, and that’s if they are feeling generous.

(As for the poster with the 5 figure medical bill/use the retirement fund question…..DON’T DO IT! Work out a payment plan with the hospital, declare bankruptcy if you must, but don’t bleed your retirement savings and don’t put it up against your home equity if you have some. Check with a bankruptcy lawyer to explore your options before you make a single move. Yes, BK sucks, but it’s not like you got there by being a shopaholic. Best of luck to you!)

In am emergency you check – immediate risk of further danger then life/limb/health then shelter, food and water. In an emergency, I’d first use my credit card (paid back at end of month – then probably not used again for the reasons that Trent points out), cash and check because those items are the easiest to get at any given moment. Depending on how much further the emergency continues to affect me; I’d continue onto my emergency fund (I have 18 months living costs) then laddered CDs (I used to receive child support and this amount immediately went into CDs — various maturing times) and savings bonds. After CDs I’d hunkering into my portfolio — yes times are bad to sell, but in an emergency that’s not your concern. Your concern is to get the most that you can AT THAT MOMENT. As a last resort, I’d cash out the retirement money. All during this time, I’d be assessing what can I do about this emergency and how long is could possibly and probably lost — am I likely to need to go this far? Is this liable to affect me for several months or several years? How does this affect my long term goals? I’d ask for help (hey – no pride here, I’m a single mom). I have friends and family: Can I trade some work for money? Can I ask for help babysitting while I take a 2nd job? Can I request rides to the medical office or job interviews? Can I move in and sell my house (that’s hypothetical, I don’t own a house)? Can you give me advice on making the best of my situation as it stand right now? Can you suggest someone who can help? What can I sell of my belongings? What can I give up that costs money? I’d be asking myself these questions not just once, but constantly until I could sleep comfortably at night.

Develop the discipline to save up cash and leave it alone. Your perceived lost interest will be made up for with restful, peaceful nights of sleep.

Then, if you have to sell the house, you sell at a loss and are still liable.

The bottom line is that an emergency fund needs to be “cash” — where “cash” is defined as a readily available supply of money. If it’s in a money market account, high-yield savings, part of a CD ladder (and you can live with the early withdrawal penalties), these likely all count. I wouldn’t recommend hiding it under your mattress. But anything that involves the term “credit” — be it credit card, HELOC, etc — is not cash and should not be considered part of an emergency fund.

The danger of using a HELOC (Home Equity Line Of Credit) is that it’s SECURED debt.

Let’s say you have the really bad medical situation described by Kitty (#26). If her friend had a job loss after putting all those medical expenses on a credit card, she might have declared bankruptcy. In a bankruptcy, unsecured debts, such as credit cards, can be discharged. Secured debts cannot. If the friend borrowed money from a HELOC to pay the medical bills, she would still owe that money after bankruptcy.

That’s also one reason why it’s a TERRIBLE idea to cash in retirement savings to pay debts (@Jen #11). In a bankruptcy, creditors cannot go after your retirement accounts (IRA, 401(k), etc.). Other problems with tapping taxable retirement accounts include having to pay taxes and 10% penalty on the amount withdrawn. And of course, once the money is removed from the retirement account, you can’t put it back in (there’s a very small exception for members of US military Reserve and National Guard who are called up for active duty, but it’s very limited).

If you have a Roth IRA (or non-deductible contributions to a traditional IRA), you can withdraw your contributions (not the earnings) at any time without taxes or penalty. That should be considered a last resort for truly desperate situations (e.g. you can’t even get the medical treatment without paying up front, and you have no other options for payment).

In my opinion, HELOCs (if used at all) should be reserved for home-related emergency expenses, such as the emergency new furnace.

- I fully agree with that one. I ladder out my monthly expenses in CDs. Pretty easy to roll them over as they mature.

Just a little addition.. I would rather have a HELOC than a credit card for an emergency, you have more time to pay it off, the interest rate is lower since it is a secured LOC, and the interest is dedudctible. You still don’t want to use it, but if you HAVE TO, I think that’s the way to go.. Thoughts?

Not only is Amex cutting credit lines, they are doing so based on group risk, not individual risk. There was an article in the Wall Street Journal about Amex holders who had their credit lines slashed, even though they were never late and used the cards extensively. Amex said the lines were slashed because these cardholders shopped in the same discount stores (Walmart) and lived in the same zipcodes as people with lousy credit.

Yesterday it was announced that Amex is offering $300 to some cardholders to pay off their accounts and close them out. The cardholders offered this deal have to pay off/close out their accounts by March 31, and then Amex will send them a $300 gift card. Supposedly Amex is targeting people whom they consider to be risky creditors.

I wasn’t comparing gambling and credit card use per se. I was making the observation that credit card companies and casino companies both stay in business based on people either losing money at the tables or paying fees and interest. If everyone paid off their credit card every month and everyone always won at the tables, these businesses would not make the piles of money that they do.

And I would completely disagree about your personal choice. Making the decision to carry a balance or overspend is as much as a decision to walk into a casino or buy a lotto ticket. The casino route is just likely to use up your money more quickly :)

I paid off my cards YEARS ago. The only reason I keep one is that I travel for business occasionally and it makes it much easier to keep personal and business accounts separate.

And back to the original post, credit cards are most likely NOT an effective emergency strategy.

And to speak to your point regarding medical/legal bills — yes, of course, we can’t prepare for every possible emergency. However, the point of the emergency fund is that you should be able to cover critical car repairs, home repair, unexpected travel (for example, a funeral — NOT a wedding :) ), furnace repairs, etc. Also remember that Christmas and birthdays are not emergencies, either :)

1) Clear your credit cards and have them ready for “real” emegencies. Be sure they are used ONLY for real necessities . . .

2) Get disability insurance, if you can’t work and there is no emergency fund– you are screwed. After the emergency fund is built, you can reduce the coverage or eliminate it . . .

Cash is king!

Medical and legal bills are obvious examples, but I imagine there are others.

Yes, one needs to have savings, and I’d say in this economy it should be a whole lot more than 6 months. Most of the programmers and software engineers who lost their jobs in 2001 took a whole lot more than 6 months to find a new job. Right now people in many sectors are losing jobs and very few complanies are hiring. At least in some areas. So as much as I’d love everyone to invest most of their money in the market so that my stocks go up, I think “safe” savings are important.

I prefer to talk in terms of “savings” rather than “emergency fund” because as NYC reader (comment #21) said – it doesn’t have to be all in cash. You can have an interest-bearing checking or saving accounts for the first couple of month and several CDs with different maturity dates, for example.

” Sure some people pay them off every month, but there are some people who also make money gambling.”
I don’t think it’s a good comparison. Overspending with credit cards is a matter of choice, and, consequently, barring life-and-death emergencies, carrying a balance is a matter of personal choice. With gambling, you have no control over the outcome at all. People who win gambling occasionally simply get lucky. People who use cards but pay their balances in full are simply responsible and have common sense (which I realize is far from common).

We have split our “e-fund” into 2 pools: $2500 cash in an online savings account and $3500 in a CD ladder. We have our 4 CDs staggered so that one is maturing every 3 months. We have found that there is no risk to the CD ladder for at least 2 reasons: (1) we cannot forsee when an emergency will happen and (2) it is ONLY AN INTEREST PENALTY that we would pay when redeeming a CD early. This first point means that an emergency could happen in month 1, month 2, or even month 3 of our CD rotation. An emergency could strike in the exact month that one of our CDs is maturing anyway. We will always have a 1/3 chance that will be the case with a 3 month stagger on our maturity dates; this is low enough risk for us! My second point earlier means that if we did have to cash in other CDs before maturity, we would only have to pay an interest penalty on the money. This is also low-enough risk for us because the interest penalty is money that we would not have had anyway, if we had left the money in a savings account. I argue very favorably for the benefits of incorporating FDIC-insured CD ladders into your emergency fund. Did I mention FDIC insured?

People see financial investing as either pessimists or optimists: the pessimists see only money that they are losing because they “could have had more” somewhere else, the optimists see the money that they “wouldn’t have had anyway” if they had stayed where they were. I am a financial optimist.