If you’d like to see the entry I wrote, you can see it at http://blogs.rbc.com/rbcp2p/20.....nds_1.html

Cheers,
Nick
RBCp2p

KC: Actually my wife is MUCH more financially aggressive than I am. The traditional role reversal goes a lot further than that believe it or not! Also, I lived through a job loss in the past and you should make sure you indeed can and will be able to quickly cut expenses in the event of such a loss. For example, we use a credit card for all possible expenditures and pay it off each month. We are essentially paying for last month’s expenses out of this month’s cash flow. If you lose your job this month, you could end up having to pay last month’s (presumably normal/higher) expenses on the reduced income. I HIGHLY recommend that you base at least the first jobless month’s expenses on your normal spend level, not a cut-back emergency level.

Emily: I will post shortly on my own blog (www.huntinghappiness.com) some intimate financial details which may help to change your mind. We are very fortunate in our financial situation. Our current cash on hand is over $100K. I actually haven’t tallied up available credit on cards but it is at least $90K, plus probably another $100K of tappable home equity covering two properties. I think the point I’m trying to make is that $100K+ cash has a real return of 0%. Using it to pay down the mortgage is pretty much a guaranteed 4-6% real rate. Investing in another rental is higher risk but substantially higher potential reward. We would still have available credit cards to cover several years worth of expenses, and that is assuming we both lost our jobs. Now on the flip side there is something very comforting about knowing either one of us could walk out tomorrow and go for a long time before incurring any debt.

I have 2 months of current expenses in cash – but if one or both of us loses our source of income we will cut our current expenses down – so that 2 months will last at least 2.5-3 months. In the mean time we would be able to withdraw any money needed from stocks (although the timing of the sale might not be ideal) to supplement our income.

However the only reason I’m willing to be this risky with an emergency fund is that our jobs and income are very secure and we have sizeable savings above our emergency fund. I would not recommend anything but a money market or savings account for emergency funds involving people who have unstable incomes or don’t have job security (self-employed, contractors, etc). Those folks need to be quite conservative with their emergency fund and keep it very liquid.

To SomeGuy above – I can certainly realize your desire to put some of that emergency fund money to work, especially with interest rates so low. But take a look at your entire financial picture and talk to your wife about it. She needs to be comfortable with that move and women tend to be more conservative – they like a nest egg in the bank. But you both need to agree to it and it needs to be part of the bigger overall financial picture.

Nickel, do you have any reassessment of the best way to “store” the emergency fund? With many money market rates down to around 3%, one is barely holding steady with inflation (ie, the real interest rate is 0%). Ours is still in a MM account but I am tempted to get more creative. One option is to dump the cash into one of our mortgages (primary residence, rental #1, or perhaps start rental #2) and then open a HELOC. Or simply dump the cash into the market and open a HELOC based off the existing equity. Obviously HELOC rates are variable and aren’t great but that would only matter in the event of a serious financial emergency. Otherwise the 4-6% interest costs avoided would outweigh the 3% the MM yields.