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Emergency fund - how much?

post #1 of 8
Thread Starter 

I know if you are in debt all the advisors reccomend having atleast 1K in savings as an emergency fund.

Suze orman (not sure about the other guys) advises atleast 8-12m of salary in liquid savings.

 

I've found myself in just the last 2 years or so able to put money aside. Prior to then if I managed to even put 5 bucks in savings something would break that would cost double that (or more!)

 

What I'm curious about however is that i've been putting a large chunk of my paycheck into savings the last few years, and with my recent job change and pay increase its getting close to half.

 

My monthly bills are pretty low, I have the usual utils, mortgage, and car payments right now, and no debt.

My largest expense for awhile (actually all the above combined were lower at one point!) has been daycare. it's gone down with my youngest starting school this year, but it's still a pretty big expense (700/mth)

 

Obviously if I lost my job etc, my living expenses are around half of what I make, and if I lost job I wouldn't need fulltime daycare like I do now.

 

So what would you consider a large enough buffer at that point? half my yearly salary? 8m of actual salary? 8-12m of projected expenses if I were to become unemployed?

I'm curious...

post #2 of 8

I have certain expenses now, that I wouldn't have if/when  I become unemployed (i.e. daycare, health insurance would go down (perhaps to medicare), but I wouldn't go stark with the budget either, I would want some fun money.  So my "transitional year" fund is funded based on those reduced expenses, yet money to travel/have fun - as little change in our current lifestyle.

 

For you, whatever your base expenses are x the amount of months you think you need/want it. (Once you save for 8, may as well save for a year, why not) Once its complete, where will that $$ go, or will you just continue to fund it? (at this stage it all becomes cash savings, the more in there the better)


Edited by SunRise - 11/2/12 at 12:21pm
post #3 of 8
Thread Starter 

well, I have 50% of my yearly salary right now, and i'm estimating to have close to 100% of my current yearly by 1/2014

However, since I can realistically live on half or less than salary, that means I have *at least* a full year (without accounting for child support or unemployment) and probably more if I actually lived fugally.

 

Ehhh.....right now 3/4ths of my liquid are in an investment account with my bank, a "slow earner" and very little risk according to the guy who set it up, and it only takes a day or two before I can have access to the cash if needed.

 

I'm planning on stockpiling....keep rolling anything above a set ammt (right now 2 months salary, realistically 4+ months of expenses) into the investment portfolio dealy.

 

I'm just wondering when I can sigh in relief that i've got enough "extra"....since i'm far more used to having too little!

post #4 of 8
OK so I'm living off my emergency fund right now... and I would definitely say the more, the better!! It's dwindling quickly, especially because our necessary expenses have changed (we need to spend more money on food due to the economy, more on medical due to arising health issues, etc.)

So... I'd kind of stagger the savings, perhaps something like this:

100% extra money goes to the EF until you have 6mos expenses
save 75% of the extra until you have 1yr expenses
50% extra until you have 1yr plus $ for major financial emergencies (need a new roof etc.)
and then save about 25% of your extra money from that point forward.

It doesn't have to be exactly those percentages or those numbers, I'm kind of just making them up as I type just to give an idea of what I mean.

So if you have a full year of living expenses saved up (and don't have any reason to expect to need to use it in the next year or two, i.e. no impending layoffs or 100-year old furnace)... then I think you can relax and only contribute a portion of your extra money to your EF. You can keep building the EF indefinitely, but the more you have in there, the less I think you need to contribute each month. You could start spreading any extra income between the EF, a vacation/luxury fund, college fund, etc.
post #5 of 8

It would also depend on how likely you think it is that you can get another job easily if you were to lose yours. Some specialties get snapped up quickly, even in this economy, some would require a long job hunt and possibly relocation. If you're, say, a registered nurse in an underserved area, you probably wouldn't need to worry about it taking 8 months to find a job. 

 

I think I am shooting for 3 months worth of expenses right now. Both of us are in relatively stable jobs, and if he lost his I could step up my hours since I'm only part-time right now (though if I lost mine, we'd have to scramble). We could also tap our retirement fund. And the odds of both of us being out of work at once are pretty low, so 3 months worth of expenses would really last us longer than that if the other person was still working. Maybe someday we'll go for more in savings, but I also want to pay off some of our insane amount of debt.  

post #6 of 8

Is all your extra money going to your emergency fund or is it divided up between retirement, emergency, home maintenance etc.? Is your goal first to pad the EF, then work on something next?  If thats the case I would follow cruncy mommys numbers ...  put a lesser percentage towards EF, and max the retirement funds, put some aside for spending money (vacation? new car?)

post #7 of 8

We have multiple "savings":

 

Checking account = $500-$1000 minimum balance

~ used and replenished every calendar year

~ padding for those once a year or random expenses (such as auto insurance, homeowners insurance, registration, property taxes, etc)

~ I budget for all expenses for the year and average them across every month, so the money is there and waiting. The minimum balance is to account for timing. (It stays there year after year.) This started because our car registrations are due in January and February.

~ technically, we keep $300-500 in our checking account at all times and $500 in a basic savings account linked to that checking account (credit union)

-------> no fees to automatically/instantly (no thought required) cover any expenses that our checking account cannot cover; an old-fashioned "overdraft" account; the savings account provides complimentary life insurance for the primary account holder; each additional member of our family has the basic savings account with the minimum dollar amount for this feature to kick in ($100)

 

Short-term savings = 3.2% of gross income contributed monthly = 3.4% of total savings as of 10/11/12

~ used within each calendar year with some rollover from one year to the next

~ home improvement one year alternating with a family vacation the next year

~ if we want or need to do both in the same year, then we plan small/low-cost (we planned and did a low-cost family vacation back in the Spring; we planned and have yet to do a moderate home improvement project, so the account is actually higher than usual for the time of year...it is usually ~1% of total savings or less by now)

~ we currently use ING for this account because it is takes a bit of thought to transfer funds for use in our checking account at our credit union, yet we can use an ATM card for cash on vacation with no fees

 

Mid-term savings = 6.3% of gross income contributed monthly = 28% of total savings as of 10/11/12

~ timeframe is greater than one year and before or during retirement

~ unemployment (aka "emergency fund"; total is nearly 15 months of basic expenses, but that's not really our point anymore)

~ or car (we pay part in cash from this account and finance part for credit purposes and pay that monthly amount from our regular expenses; our cars are 2004 and 2006 models and will be good for several more years each)

~ or supplemental retirement (we are/were limited in official retirement/tax-advantaged savings, but are hopeful that will change soon)

~ or college (we are on track to have our mortgage - only debt - paid off by the time college rolls around and use that monthly dollar amount to assist.... the first payments and such will likely be due before then, though, so these savings will handle timing issues)

~ or any other large dollar amount situation (for example, DH was offered a partnership in his company recently and we were able to buy into the LLC with these funds)

~ the current asset allocation (below) is different than usual, but the majority (barely) is the safe/insured and relatively liquid funds -- I need to rebalance the mix in the coming months.

-------------->online savings account that is federally insured, but takes several days to access =  51% of this category of savings

-------------->mutual funds = 22% of this category of savings (fairly liquid -- takes about a week and costs a little bit for one brokerage; free and shorter timeframe for another brokerage, but other issues aren't as favorable)

-------------->LLC = 19% of this category of savings (not liquid at all -- only available under specific conditions, retirement or unemployment being the most common and neither is likely for the next 20+ years)

-------------->stocks = 5% of this category of savings (fairly liquid, but hate to sell without a profit -- takes about a week and costs a little bit)

-------------->non-insured money market market + bonds = remainder (the money market is simply a vehicle to purchasing mutual funds at a specific brokerage; it's free and pretty liquid; the bonds are boring/steady and I like more risk, so this is the smallest part of our portfolio that will slowly increase as the time nears to use this category of savings)

~ we use a variety of accounts for these funds, but slowly nearly everything is falling into one bank's hands -- I'm not real happy about that and will be investigating other options in the coming months.

 

Long-term savings = 10.6% of gross income contributed monthly = 68.6% of total savings as of 10/11/12

~ retirement funds

~ both of us have been saving for retirement since our 20s (although much smaller amounts back then) and it grows, it really does!

~ even at these percentages and length of time saving, etc., these funds would only last us ~36 months (3 years!) in basic expenses - retired (which would work out to roughly the same standard of living when all the pluses and minuses were finished....such as no mortgage or commuting expenses and only one car; versus under an unemployment scenario still having a mortgage and two cars while cutting many other expenses down to bare bones temporarily)

~ social security for both of us would add to the coffers, as would any potential inheritances from our parents and my grandparents -- none of which we are counting on, though...

~ my retirement funds are with two brokerages and DH's retirement is with the same brokerage as my main accounts

 

All this may sound soooo incredibly complicated and it is, for a beginner. We're not beginners anymore.

 

STEP 1:

I/We started by keeping a higher and higher minimum balance in a checking (and/or linked savings that is truly free for overdraft protection) account for smoothing out the bumps of living paycheck to paycheck. It takes discipline. DH and I are both college graduates (I put myself through college and DH's parents paid his way), but our approaches to finances are different. I am far more disciplined about savings. He made a LOT more money than I did when we met and yet I had a much higher savings balance (hell, he didn't even HAVE a savings account! LOL). Reduce expenses and raise income and exercise savings discipline ("pay yourself first" NOT transfer the "extra" at the end of the month; COMPLETELY different mindset, even if the dollar amount is identical!!!) until you no longer live paycheck to paycheck (not directed at the OP, obviously). Saving money AND paying off debt at the same time is worth it; they serve different purposes that are all necessary. I don't recommend a 50/50 split for that, but it is important to save even while paying off debt. The exact split really depends on many factors.

 

STEP 2:

Then, we both contributed to our company 401k programs at the best "match" rate (slowly working up to it at each opportunity, which were limited back then to certain times a year). Personally, I offset every raise with most of the new income going into my 401k, but I was already living modestly. DH had to reduce expenses (aka frivolous spending) and increase his contributions by a little bit at every opportunity. If you have a 401k through your employer, I hope you are contributing to it with every paycheck. If you do not have that opportunity, then I highly recommend opening and contributing monthly to an IRA (or Roth IRA). Slowly work up to maxing out the possible contribution level.

 

STEPS BEYOND:

Only then did we work on building a true savings plan (short-term and mid-term in my terms above). Honestly, the economic conditions created a carefree attitude about "emergency funds"...that term wasn't really used when I was in college (business degree with concentrations in marketing and finance). My short-term and mid-term terminology are old school and partially made-up by yours truly. LOL In any case, they were one and the same (and called "the house fund" meaning our down payment) until we owned a house. I always considered the $1000 minimum balance in our checking/savings overdraft set-up to be our short-term savings (or "emergency funds") before we were homeowners. That dollar amount doesn't cut it for homeowners, though. And, the dreaded DOUBLE unemployment occurred just over a year after becoming homeowners and 8 months after becoming parents. Thankfully, by this time we did have a real savings account and were okay financially despite both being out of work for 6 months each, overlapping about 4-5 months. All the stars aligned for us and we were able to make do with what we had and began building back up as soon as we were both employed again, even though DH took a HUGE pay cut. My pay actually rose, but I was only working part-time so it was less influential.

 

I hope all this helps someone out there. I've worked with MANY people and their finances (professionally and personally). In my experiences, one's attitude or mindset about finance matters FAR MORE than the actual dollars and cents.

 

To the OP:

The bottom-line to my advice is to diversify your savings. Take the time to divide it up. Use tax savings to your advantage and use liquidity to your advantage. Everyone needs some liquid assets, but not everything needs to be liquid (easily obtained in cash). Less liquidity equals other benefits, such as long-term usage, tax savings, higher interest/earnings, etc. Increasing risk is okay, too, just go slow and learn along the way. Learning can be book learning (visit your library) or online researching or talking to a professional or listening to successful friends and family and asking questions (or all of the above). Best wishes!

post #8 of 8
Thread Starter 

Right now I have around 15k(ish) in my 401k from my previous employer. Evidently they changed matching which I didn't know....so it grew quite a bit then stalled (it was about 3-4k 5yrs ago when my ex and I seperated, but didn't grow nearly as fast even though I didn't change my contributions)

 

I don't know what my current 401k here is at, but I put in the best # to make use of matching. I will probably roll the two together soon, when I get around to it :)

I also have a real and actual pension plan here (aghast!) but I doubt i'll stick around that long. We'll see!

 

I roll anything above my check into savings everytime I get paid.

I put in my childsupport, and anything "extra" into savings.

I up my auto contributions to savings everytime I get a raise/finances change. Like If i paid off my car (only carrying a note to improve credit ratings right now) I'd automatically put that much more into savings.

Right now between auto transfer and CS (whopping 500!) I'm putting away 2K ish a month.

Since I went from 2 paychecks a month to being paid every 2 weeks, i'm also putting entire "extra" paycheck into savings, adding an additional 5K(+/-) a year into savings.

Not sure whats going to happen this year and next with salary increase and tax return, but last year my prop taxes were around 3K and my return was around 4K. I paid prop taxes in dec then filed income ASAP and put net $$ into savings.

 

I do NOT have the savings buffer on my checking acct because I WANT my debit to stop working if there isn't any money. I loathe the fact they would charge me 20 bucks for a 4 dollar cup of coffee, and with all the travel and work expense I was doing.....sometimes I'd blow through 3-4K in a day with tickets and hotels etc. Sometimes I just needed the reminder to login and xfer money. I didn't want to rack up 100 bucks in fees tho.

 

I don't have seperate savings funds right now tho. I am rolling over most of my surplus into my "investment" acct through my bank. which I can liquify in a few days if needed.

I was retaining around 10K in my savings wanting to make sure I had a ready accessable buffer (esp with all the travel I had been doing) but I am thinking now I could easily drop that number.

 

I was actually turned down for a orange checking acct a few years ago due to bad credit. lame! lol.

 

my investment/savings accts are my home repair/misc/whatever buffers I guess. Unless something goes horribly awry with my home I won't be putting money into it. my ex is still 50% owner until we sell it....and we lived there jointly for 3 years (18m if you take into acct the 50% ownership thing) and i've been there alone for 5yrs....but I didn't like the house and i'm not improving the home to HIS advantage. peh!

 

The only thing I can think of using the money on is maybe someday in the future renting my current home (since we are underwater, and rental on my home should be 4-600 more than I pay in mort and tax) and buying another. I think my credit is going to have to take a serious upswing and I need a lot more in savings since I prefer vintage homes and it's likely that a new home AND current home would require a certain ammt of repair.

 

I am wondering if I ought not have multiple accounts, or different savings....dunno.

I did make about a 3-5% profit on my investment acct in like 6m. it's been fluctuating all over the place, but long as it's above my initial investment and not going DOWN, thats all I care about :)

plus it's better than cruddy savings acct interest.

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