What emergencies could justify a highly liquid emergency fund?
"I suppose this could really depend on the part of the world you're in, but there are still many instances of ""emergencies"" that need ""cash"". You have to decide how much cash is the right amount, but I still recommend having $1,000 or so in liquid cash. It can really make a huge difference. Let me give a few examples.  Bad weather. I live in Florida and after a hurricane if you want gas, food, or water, you're going to need cash. ATM networks are the last to get repaired. Same for internet. Cell services are not at the top of the list. You could be 4-5 days without access to your accounts. If you need anything in that time frame it's cash or the Red Cross. Children. As a foster parent we keep some cash on hand because as kids come in to our care we want to get them in school right away. How are they going to eat? You can't give them your plastic, you haven't had time to setup ""lunch accounts"" or the like. Cash always works. Along those same lines are bus tickets, clothes, supplies and what not. Not everywhere will take an ATM card, and if your money is tied up in a stock then what are you supposed to do for 3 days? Tell your new kid that he can't eat? Big Emergency problems. Like your car breaks down on the interstate. Sure it can get towed to the dealership, and yes they will add the tow to your bill, and sure you have a few days to pay it (while your car gets fixed), but how are you going to get around? Not all taxis take plastic around here.  Almost none of the busses take plastic even though they are supposed to. Lost Wallet or ID theft. Lose your wallet, good luck getting into your bank accounts. It can take weeks to establish your ID after you lose it in some cases. You want your ID, but you need your birth certificate. You have to GO to the state of birth and request it. Oh but wait, to travel you need an ID. No problem send away for it, but wait, you need to send them money to mail it. To bad all your money is tied up.  Running or Evacuating - So you need to evacuate for some reason. No big deal. But all your money is in a place you can't get to it. How do you put gas in your car. Lets stick with it and say you get to ""cash out"" an account of some kind. Guess what, they're not going to mail it to some random address. Now you're stuck fighting support centers to get them to understand that you need your funds delivered to New York even though you live in Florida.  In short, you don't need $100,000 in liquid funds, but there are a few cases that you need something liquid. You also make a lot of assumptions. For example, not every one will have health insurance, or a heath problem that is covered by their insurance. Some serious home repairs are ""down payment"" upfront. Car problems like an accident that means you need a rental can totally be up front. Especially if credit cards can't be used." "You are not wrong - just about anything can be charged and paid off in 30 days with a sale of non-liquid investments.  So there are not any emergencies I can think of that require completely liquid funds (cash). For me, the risks are more behavioral than financial: I'm not saying it's a ridiculous, stupid idea, and these are all ""what-if""s that can be countered with discipline and wise decisions, but having an emergency fund in cash certainly makes all of this simpler and reduces risk. If you have investments that you would have no hesitation liquidating to cover an emergency, then you can make it work.  For most people, the choice is either paying cash, or charging it without having investment funds to pay it off, and they're back in the cycle of paying minimum payments for months and drowning in debt." Weather events and aging infrastructure.  Cash will buy gasoline, food and water when there is no power or telephone connectivity to process ATMs and credit cards. What sort of emergency requires payment up front for which 2-3 days processing of a stock sale would pose a problem? In my case, the sudden and unexpected death of my wife. Back in 2011, my wife was struck and killed in a traffic incident. I had to immediately (not in 2 - 3 days) cover 50% of the entire costs of the funeral. The balance was due shortly after, though I now forget if the balance was due in 7 days or in 30. I suspect the latter. The life insurance paid out in approximately 4 months for this simple case. Even if your mortgage is insured, you still have to pay the entire balance, along with living expenses, until the paperwork is resolved. And, again in simple cases, assume this will take months rather than days or weeks. My point is, the funeral is only one of the expenses you'll have to cover in such a situation, though generally you'll have sufficient lead time for the other expenses, where your investments would likely be sufficiently liquid. Yes, a credit card would (and did) help in this situation, but if you have no credit card (as your question poses), you need ready access to thousands of dollars to cover this sort of eventuality. My bank told me that many people in such a situation have to take out an emergency loan the very day their spouse dies. Let me assure you this would be... emotionally difficult. Funerals vary widely in price. The Motley Fool indicates the median cost of a funeral with a vault was $8,343 in 2014. Crematory fees, a headstone, flowers, food, obituaries, all add to this cost. My total cost was closer to three times the median, though some of the expenses (headstone, primarily) came later. I'm sure I could have gone for a cheaper funeral, though it's hard to make rational economic decisions at that sort of time. I don't recall the exact amount I had to put down, but it was somewhere around $6000 - $8000. (No need to leave a comment expressing condolences; thanks, but I've already had plenty and now my goal is to help share knowledge. :) ) I tend to agree that the need for liquidity is overplayed in this day and age.  We live in a world of electronic transfers that take only a couple days at most.  With my brokerage account I can go from stock to gas in my tank via debit card in about 3 days. We're a long way away from the days when it took weeks, phone calls, and physical checks in the mail to go from stock to cash in your hand.  We've also moved a long way away from limited credit/debit card acceptance.  It was not long ago that my mechanic didn't accept credit cards.  Locksmiths didn't carry a square reader on their iPhone 10 years ago.   However, don't expect debt to always be available.  Many many many people with strong income and stellar credit histories had their credit/HELOC limits slashed from 2008-2010 while banks pared back risk.  A cash position of a size that makes sense gives you a high level of short term control; you aren't reliant on someone else's money. Liquidity isn't the main issue with emergency funds.  The main issue is psychological.  Build a foundation rather than overly optimistically chasing yield. "If you engage in any kind of dangerous activity, the training courses will often state that an accident is not the result of a simple error.  Examples of this include SCUBA and motorcycle training.  Properly maintained equipment and training will mitigate many emergencies.  Recently my dive buddy was 60' down, and ran out of air due to a tank O ring failure.  She did not panic, and all of the dive team rallied to get her to the surface without anyone getting hurt, or even coming close to it. Financial tragedies are similar.  In some cases, a single event triggers an avalanche of events that leads to tragedy.  For example, hard economic times may lead to an employer doing 5% pay cuts across the board.  However, they also cut bonuses and other ancillary pay items.  This leads to a real cut of 20-25% of income.  Leading a true cash flow emergency.  As such cutbacks are needed, and this might put a strain on an already shaky relationship, this leads to that relationship ending, requiring more cash.  Perhaps a car dies in this process or some household item needs repairing.  Sure one can borrow money, but this tends to exasperate the avalanche rather than solve it.    Having a low debt and a liquid emergency fund stops the avalanche in its tracks. In the case cited above issues would have been solved if the person lived off of 50% of their income rather than the way most people live (paycheck-to-paycheck).  Also if there were savings for the car repair then that becomes a pain, but not a true stress. Think of a liquid emergency fund as ""properly maintained equipment"".  It allows you to build a financial life on a solid foundation.   In my own case, I attempted to live and invest without an emergency fund.  It just did not work.  I often had to liquidate investments at in opportune times, and could never really hold onto money.  With the foundation of an emergency fund, one can build a prosperous life for one's self. You are welcome to try it your way, but if you fall, hopefully you will remember this answer and build your foundation first." Emergency funds are defined in terms of months of tightened-belt living -- that's according to the usual gurus such as Suze Orman, Dave Ramsey etc.   They aren't for short-term emergencies like a blown transmission.  Use other money for those.  Why?  People with bad financial habits have short-term emergencies all the time, and that emergency fund doesn't have a chance of lasting.  This is just their financial habits manifesting.  Here's what an emergency fund is for.    Scenario: big economic bubble bursts.  Stock market drops 50%.  Credit dries up.  This happened in 2007 by the way.  The dominoes start falling boom, boom, boom: I'm exaggerating a bit here, but a lot of people lived at least half this stuff in 2007-11.  Nothing starts those dominoes falling like lack of cash at a key moment.  That's what an emergency fund is all about - keeping things tight-normal for long enough to get back on your feet.  If you want to keep your emergency fund in something risky -- keep a lot more of it! Having a highly liquid emergency fund can lubricate the wheels for disaster recovery.  For example, several years ago I returned from a vacation to discover that, during my absence, a plumbing fixture had broken and my house was flooded. Since we had sufficient liquidity to cover the cost of the repairs in our emergency fund, the insurance company was much easier to deal with, and the relationships between the contractor, bank, and insurance company were much smoother. The bank was able to approve the insurance in minutes versus days. Ironically, we didn't actually have to touch our emergency fund precisely because we had it. Clarification - I make it a point to have no debt. First of all, a person that relies on their ability to tap a line of credit to cover an emergency isn't generally the kind of person that has investments they can cash out to cover the debt. That being said, my personal reasons for having a liquid emergency fund revolve around bank errors and identify theft. I used to work for a company that made bank software. Errors are a common occurrence. You'd be surprised how many transactions are still input by human hands despite our computerized world. All it takes is one typo to wipe out your ability to swipe plastic for a few days. This has actually happened to me. My utility company sent me a bill for $240 and wound up taking $2400 by accident, overdrawing my account and sending me into a fee spiral. They fixed their mistake... several days later. The snowball of fees from other transactions that bounced took another two months to correct. In the meantime, I also had my mortgage payment due. In the US, you can't pay your mortgage with credit, and for those who rent, many landlords won't let you pay with credit either. I have also seen this scenario play out twice with other people I've known who've had their ID stolen. Yes, the bank will cover the fraud after a lengthy process. But the disruption causes fees and overdrafts to quickly snowball out of control. I have a separate savings account at a different bank for this kind of thing, and I have a few hundred dollars cash in my house at all times. Having a liquid emergency fund allows you to quickly stabilize the situation and gives you walking around money for those times where the banking system becomes your enemy for a time. This might vary from other answers but I generally prefer to use debt before touching an emergency fund.  But one of the reasons I have an emergency fund is to that I can make sure I can cover any debt payments.  Essentially, this give you leverage.  You might start off with a small emergency such as needing a new refrigerator.  If you pull the cash out of the fund to pay this off immediately, you've depleted your account and if something major comes along, you might be short.  By using debt, you can often cover the costs with cash-flow and leave your risk buffer in place. Often, retailers will offer really sweet financing deals.  0% for 12 months or whatever.  Often, though, if you don't pay it off in time, they can be costly.  I'm not sure if this is legal (in the US) anymore but if it wasn't fully paid off in time, you'd be retroactively charged interest on the whole amount.  But if you have an emergency fund, you pretty much guarantee that won't happen.  The only time it will is if something else happens that requires the emergency fund to be cashed in.  But if things are that dire, the debt is unsecured.  You're credit may suffer but they can't come after your assets. It's not an either-or situation.  You give yourself options by having the cash available.  It allows you to take advantage of opportunities that might be too risky otherwise.  Ultimately what you want to be able to weather the storm in a situation where you have, say, a mortgage on a house that is underwater, the stock market is down, and you have no income.  In that situation, you don't want to liquidate your stock when it's down and you (probably) don't want to lose your home equity in a foreclosure. I recently drove past Winslow, Arizona and knocked out the fuel pump in my truck. It cost $500 to repair, and the tow would have been another several hundred if I hadn't had a Good Samaritan's club card, since it was the weekend. 2-3 days would not be acceptable in this sort of scenario. And that was just the fuel pump! "Visa card expired while on the other side of the world.  Visa from other bank declined for suspected fraud.  ""You should have told us you were going to a country that has lots of fraud.""  Nearest ATM, twelve kilometers." While there have been plenty of good answers I would like to suggest turning it on it's head--the problem is one of perception. Other than in terms of cash-type emergency funds (my general policy is to have enough cash to get home, however far from there I might be) I consider available credit + assets that can be liquidated reasonably quickly to count as emergency fund money. Since no one else mentioned it, there are sometimes amazing deals that require being the first person to take advantage of them. I'm not talking about black Friday sales, I'm talking about the woman who decided to sell the Porsche (she had bought for her cheating husband) for $1000. You might not run into those types of deals often, but having liquid investments will allow you to take advantage of them instead of kicking yourself. I just bought some real estate with some of my emergency fund that needed several months before I could properly finance it due to some legal issues with the deed that needed to go through court because there was a deceased person on the title. I will make far more on the deal when it's done than I ever could have made with that money invested in the market.
You're off to a great start. Here are the steps I would take: 1.) Pay off any high-interest debt. 2.) Keep six to twelve months in a highly liquid emergency fund. If the banks aren't safe, also consider having one or two months of cash or cash-equivalents on the premises. 3.) Rent a larger apartment, if possible, until you've saved more. The cost of the land and construction will consume a very large portion of your net worth. Given the historical political instability in that region, mentioned by the previous comments,  I would hesitate to put such a large percentage of your wealth in to real estate.  4.) Get a brokerage account that's insured and well known. If you're willing to take the five percent hit to move assets offshore, then consider Vanguard. I'm not sure if they'll give you an account but they're generally acknowledged as an amazing broker in the US with low fees and amazing funds. Five percent (12,500) is worth it in my opinion. As you accumulate more wealth, you can stop moving cash overseas and keep a larger mix domestically.  5.) Invest in your business and yourself even more.  As far as finding new investment opportunities, I would go through the list of all the typical major asset classes and consider the pros and cons: fixed-income, stocks, currencies, real estate / REITs, own a small business, commodities etc., "First - Welcome to Money.SE. You gave a lot of detail, and it's tough to parse out the single question. Actually, you have multiple issues. $1300 is what you need to pay the tax? In the 25% bracket plus 10% penalty, you have a 65% net amount. $1300/.65 = Exactly $2000. You withdraw $2000, have them (the IRA holder) withhold $700 in federal tax, and you're done.  All that said, don't do it. Nathan's answer - payment plan with IRS - is the way to go.  You've shared with us a important issue. Your budget is running too tight. We have a post here, ""the correct order of investing"" which provides a great guideline that applies to most visitors. You are missing the part that requires a decent sized emergency fund. In your case, calling it that, may be a misnomer, as the tax bill isn't an unexpected emergency, but something that should have been foreseeable. We have had a number of posts here that advocate the paid in full house. And I always respond that the emergency fund comes first. With $70K of income, you should have $35K or so of liquidity, money readily available. Tax due in April shouldn't be causing you this grief. Please read that post I linked and others here to help you with the budgeting issue.  Last - You are in an enviable position, A half million dollars, no mortgage, mid 40s. Easily doing better than most. So, please forgive the soapbox tone of the above, it was just my ""see, that's what I'm talking about"" moment from my tenure here." "One can generalize on Traditional vs Roth flavors of accounts, I suggest Roth for 15% money and going pretax to avoid 25% tax.  If the student loan is much over 4%, it may make sense to put it right after emergency fund.  For emergency fund priority - I'm assuming EF really requires 2 phases, the $2500 broken transmission/root canal bill, and the lose your job, or need a new roof level bills. I'm in favor of doing what let's you sleep well. I'm also quick to point out that if you owe $2500 at 18%, yet have $2500 in your emergency fund, you're really throwing away $450 in interest each year. There's an ongoing debate of ""credit card as emergency fund."" No, I don't claim that your cards should be considered an emergency fund, per se, but I would prioritize knocking off the 18% debt as a high priority. Once that crazy interest debt is gone, fund the ER, and find a balance for savings and the next level ER, the 6-9mo of expenses one. One can choose to fund a Roth IRA, but keep the asset out of retirement calculations. It's simply an emergency account returning tax free interest, and if never used, it eventually is retirement money. A Roth permits withdrawal of deposited funds with no tax or penalty, just tracking it each year. This actually rubs some people the wrong way as it sounds like tapping your retirement account for emergencies. For my purpose, it's a tax free emergency fund. Not retirement, unless and until you are saving so much in the 401(k) you need more tax favored retirement money. I wrote an article some time ago, the Roth Emergency Fund which went into a bit more detail.  Last - keep in mind, this is my opinion. I can intelligently argue my case, but at some point, it's up to the individual to do what feels right. Paying 18% debt off a bit slower, say 4 years instead of 3, in favor of funding the matched 401(k), to me, you run the numbers, watch the 401(k) balance grow by 2X your pretax deposits, and see that in year 3, your retirement account is jump-started and far, far more than your remaining 18% cards. Those who feel the opposite and wish to be debt free first are going to do what they want. And the truth is, if this lets you sleep better at night, I'm in favor of it." justkt's answer lays out the opportunity costs aspect of your question pretty well.  But if I were in your position, extra payments on principal for a home I wasn't planning to retire in isn't the way I'd invest the money.  Housing prices are awful (hence the great deal on what you just bought), and given the number of foreclosures outstanding and the existing uncertainty over the legality of some of them, they're likely to remain awful for years.  Depending on the size of your monthly mortgage payment, if you've got that much free cash after expenses each month, I'd consider the following options instead: You could go with a non-qualified (no tax-deferral benefit) account for the cash emergency fund so you could put any amount above and beyond 3-6 months of living expenses into stocks, index funds, mutual funds, etc. All of these options have the advantage of being more likely to provide a positive return in the 5-7 year time frame.  The cash emergency fund option has the additional advantage of being more liquid than housing--regardless of the current economic environment. "While I certainly agree with the principle of paying down debt, there is some value in having a healthy cash cushion.  If an emergency expense were to come up, and your credit has been cut-off or reduced to the point where you have no excess credit, then having real cash on hand is critical. I would perform the following thought-experiment:  What if my available credit had been cut off?  How much would I need in cash to survive for 1 month, 3 months, 5 months, etc.?  Consider what time period you'd be comfortable with, and set that amount as your minimum desired cash on hand. While it may seem extreme to not have access to credit at all, during the credit crisis many banks and lenders ""tightened"" their lending: reducing credit limits, closing lines of credit, calling loans, raising rates, etc. Suze Orman recommends cash savings equivalent to 8 months living expenses. That doesn't mean 8 months salary, but 8 months of what it would take to live on.  At one point, in the midst of the economic crisis, I thought that made sense. The Simple Dollar blog considers Suze's recommendation and the idea of emergency fund vs. debt repayment.  Worth reading: Is Suze Right? Do Emergency Funds Now Trump Debt Repayment?." "I'm going to answer your questions out of order. Emergency fund: Depending on how conservative you are and how much insurance you have, you may want anywhere from 3-12 months of your expenses on hand. I like to keep 6 months worth liquid in a ""high-yield"" savings account. For your current expenses that would be $24k, but when this transaction completes, you will have a mortgage payment (which usually includes home-owners insurance and property taxes in addition to your other expenses) so a conservative guess might be an additional $3k/month, or a total of $42k for six months of expenses. So $40-$100k for an emergency fund depending on how conservative you are personally. Down payment: You should pay no less than 20% down ($150k) on a loan that size, particularly since you can afford it. My own philosophy is to pay as much as I can and pay the loan off as soon as possible, but there are valid reasons not to do that. If you can get a higher rate of return from that money invested elsewhere you may wish to keep a mortgage longer and invest the other money elsewhere. Mortgage term: A 15-year loan will generally get you the best interest rate available. If you paid $400k down, financing $350k at a 3.5% rate, your payment would be about $2500 on a 15-year loan. That doesn't include property taxes and home-owners insurance, but without knowing precisely where you live, I have no idea whether those would keep you inside the $3000 of additional monthly home expenses I mentioned above when discussing the emergency fund. That's how I would divide it up. I'd also pay more than the $2500 toward the mortgage if I could afford to, though I've always made that decision on a monthly basis when drawing up the budget for the next month." "First, don't save anything in a tax sheltered vehicle. You will be paying so little tax that there will be essentially no benefit to making the contributions, and you'll pay tax when they come out. Tax free compounding for 40 years is terrific, but start that after you're earning more than a stipend. Second, most people recommend having a month's expenses readily available for emergencies. For you, that would be $1500. If you put $100 a month aside, it will take over a year to have your emergency fund. It's easy to argue that you should pick a higher pace, so as to have your emergency money in place sooner. However, the ""emergencies"" usually cited are things like home repair, car repair, needing to replace your car, and so on. Since you are renting your home and don't have a car, these emergencies aren't going to happen to you. Ask yourself, if your home was destroyed, and you had to replace all your clothes and possessions (including furniture), how much would you need? (Keep in mind any insurance you have.) The only emergency expense I can't guess about is health costs, because I live in Canada. I would be tempted to tell you to get a credit card with a $2000 limit and consider that your emergency fund, just because grad student living is so tight to the bone (been there, and 25 years ago I had $1200 a month, so it must be harder for you now.) If you do manage to save up $1500, and you've really been pinching to do that (walking instead of taking the bus, staying on campus hungry instead of popping out to buy food) let up on yourself when you hit the target. Delaying your graduation by a few months because you're not mentally sharp due to hunger or tiredness will be a far bigger economic hit than not having saved $200 a month for 2 or 3 years. The former is 3-6 months of your new salary, the latter 5-7K. You know what you're likely to earn when you graduate, right?" "There are exactly zero experts in the field of Personal Finance that would advise having an ""emergency fund"" (liquid assets available to meet sudden obligations like illness, car accident, AC breaks, etc.) that is sub $1,000.   If you have less than $1k in liquid assets you either A. must live at home with your parents, B. very broke or C. being very irresponsible. I think an emergency fund of $10k is really the sweet spot. I can't imagine anyone reasonable funding the shit out of their 401k, IRA, etc. and having less than $1k cash."