Friday, May 22, 2009

Should You Keep Adding To A Fully Funded EF?

I know I said I was going to write about the insane accounting system I use to keep track of my multitude of savings accounts. But I went out last night with one of my vendors and I'm a bit hung over. Nothing like starting a 3-day weekend with an Excedrin headache and an upset stomach!

Anyhow, I digress.

Yesterday, I had an interesting conversation with the vendor. The vendor said he came into some sort of windfall that allowed him to fully fund a year's worth of expenses into his EF. He said something to the effect of, "Assuming I don't touch it, I won't have to worry about adding to it ever again!"

I countered, "Actually, you probably should continue adding to it since you'd probably want your EF to keep up with inflation."

The vendor looked at me as if I'd just farted.



I asked, "How much interest is your EF getting in whatever account it's in?"

Vendor: "I'm not sure."

Shtinky: "Well, my online savings accounts are getting anywhere between 1.5% to 3.05%. Let's just say your annual expenses are $50,000 and interest rate you're getting is 2%. And let's say the historical inflation rate is 4% per annum."

Vendor: "So what?"

Shtinky: "Adjusted for inflation, in 18 years, you'll need $100,000 to cover your annual expenses, assuming your expenses remain constant. But since you're only getting 2% APY on your EF, you'll probably be short by about $13,000 or so."

The vendor waved off my hypothesis. He indicated that he expects his expenses to decrease in 18 years, so adding to his EF is unnecessary. (Not sure how he expects his expenses to decrease, since his kids will be college age by then.) He also felt that the additional money that I suggest he keep adding to keep up with inflation would be better invested elsewhere.

What do you think folks? If you had a fully funded EF, do you intend to keep adding to it?

Anyhow, have a great Memorial Day weekend!

13 comments:

Zazzu said...

You're exactly right for all the reasons you listed. That vendor sounds like a fool.

And, let's not forget the old, true saying "Little kids, little problems. Bigger kids, bigger problems." Anyone who thinks that raising kids gets cheaper as they grow is living in la-la land.

Perhaps that guy will wake up when your advice sinks in. Or, maybe enough people will repeat what you said that he'll feel he MUST listen?

Good question, btw!

Jennifer said...

Is he already debt free? Or are there several debts he'll have paid off by then, maybe a mortgage, that would significantly decrease his cost of living?

Ms. MoneyChat said...

at least once annually i evaluate my EF to ensure it'll still cover the amount of time designated (approx 6 - 9 months depending on the expenses i consider necessary). if my expenses have changed such that my EF amount is short, i'll make a deposit. otherwise i don't touch it.

paranoidasteroid said...

I mean, the EF shouldn't be a set number because your living expenses should change. I'm beefing my EF savings up right now because Chad and I will be living on just my salary, but once he's working againI'll be able to put that money into a CD or something. If we buy a house and monthly expenses go up, so does our EF. If we have kids, it goes up because there are more people to support.

By the way, I giggled at the vendor looking at you like you farted. Because I'm a 12-year-old boy, apparently.

Moving on up! said...

Haha! You made me laugh. I would probably begin to invest in long term savings once fully funded, but as Ms. Money Chat says, I would re-evaluate it each year to make sure I don't need more.

Berry Girl said...

It is a good argument. Iwould probably continue to add money but not aggressively since the money can be invested elsewhere

Bouncing Back said...

I keep chucking money into my E fund because emergencies do come up and I do need the money!

roots said...

you are absolutely right, i have experienced similar case as you too! The vendor is trying to misleading people with complicated numbers.

jpkittie said...

in a perfect world, you are totally right!!!! But to see his side too - he probably is just happy to have an EF at all and any amount in there is just a-0kay with him! haha. I know that if I had a full year in an EF, then I would feel pretty confident as well!! (I am still working on the $1k baby!)

Jolie said...

If I had a fully funded EF and if my mortgage and debts were paid off I would consider to adding to or creating a planned spending household account for things such as home repair, replacing appliances/furniture etc. Those things can really bite you in the butt if you don't have something set aside for those.

graduatedlearning said...

I still have an automatic transfer into savings twice a month to keep it out of my checking account. I figure it's a good place to keep money. And if you aren't sure where else to invest any extra money, it's a good place to store the money while you figure out if there are any better places to put it. And if he's got any debts right now, paying them down would increase his "returns" through lower (or no) debt payments.

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