Emergency Fund..how much$ ?

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bustednutz

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It seems that so many rules to abide by regarding emergency funds are being tossed out, same with theories on debt reduction.
I want to clear up all of my debt, yet have some kind of emergency fund stashed as well.
Dave Ramsey says to have a $1000 Emergency fund while paying off all your debt.
Others state to have 12 months worth of monthly bills saved up. Some say 6 months.

It gets confusing. So as I've been pondering this topic, I've simply been saving as much as possible every month while paying the minimum balance on my cards till I decide how to approach this.

Just looking for thoughts and advice, or stories of what you did in a similar situation.
Thanks.
 
I think, like most things, you need to think it through ourself. Do you have a stable job and good credit? Perhaps you need less cash on hand. Do you have a job that might go away tomorrow? Then more cash on hand makes sense. I don't think any rule of thumb will work for everyone.

Twelve months seems extreme to me to have in a liquid account for 'emergencies'. But that thought is pretty tied to my personal situation!

robert
 
It all depends on what stage you are. Dave Ramsey states to save $1,000 for your Emergency Fund first THEN start the Debt snowball which is paying off your bills starting with the smallest debt and working your way to the largest debt. The theory is that as humans we need "successes" to stay on course for change. After you have your debt paid off, then you need to save 6 - 12 months for monthly bills. Once you've done that, then you start saving for College, house, investing, donating, etc...
 
I would pay off the CC's first if you owe money on them and then never carry a balance on them again. Paying 19% or 29% interest is not saving you money at all. Until you have that paid off, the space on your CC is going to have to do for an emergency fund IMHO.
 
Originally Posted By: dtownfb
It all depends on what stage you are. Dave Ramsey states to save $1,000 for your Emergency Fund first THEN start the Debt snowball which is paying off your bills starting with the smallest debt and working your way to the largest debt. The theory is that as humans we need "successes" to stay on course for change. After you have your debt paid off, then you need to save 6 - 12 months for monthly bills. Once you've done that, then you start saving for College, house, investing, donating, etc...


What he said.
 
3 Pieces of Advice.
Dave Ramsey, Dave Ramsey, and oh yeah, Dave Ramsey.

If you haven't taken or been to Financial Peace University then you need to go! Take your Wife, or your Friends, or both. I went with my wife, and although we still have knockdown drag out fights, it isn't about money. It will get you on the same page.

The Baby Steps, that I have on my desk. This is just the tip of the iceberg, but I read them every day.

1. Save $1000
2. Debt Snowball. (This is where I am too. All that is left is my Student Loans)
3. Fully Funded Emergency Fund. (6 months of all expenses)
4. 15% of income into Pre-Tax Retirement Plans - Mutual Funds and Roth IRA's
5. Save For College
6. Pay off the House Early
7. BUILD WEALTH AND GIVE
 
Yikes!

Well firstly it's hard to give such general advice without a fuller picture which apart from an understanding of all income, expenses, assets and liabilities (with interest rates being paid) would also include an assessment of risk of losing income and how long it would take to get another job.

It sounds though like you're worried that something might happen.

This is my suggestion, which is based on the fact that I think that debt for most people is the thing that is stopping them from making something of their hard work.

1) Credit card debt is the worst. You're talking about saving $1000 by paying only the minimum on credit cards. This is a really inefficient way of doing it. You should find the interest rate you are paying on all your cards and pay the maximum you can to the one with the highest interest rate and so on.
2) While you start that process, look for some way of consolidating all your credit card debt, say to a balance transfer offer that has 0% interest. Once you make the transfer, carrying a balance is costing you nothing, meaning you can pay the minimum and build your savings at no cost except the initial balance transfer fee.
3) You should consider getting some sort of unemployment insurance while you do this, if you are worried enough.
4) Stop spending money. Look at everything you do and ask yourself if you can avoid doing it until your credit card debt has gone. The return you get on any dollars that you use to pay off credit card debt is a return that Mitt Romney would be proud of.
5) Do this for a few years and invest your money wisely. A couple of years ago, municipal bonds were cheap and paying 5% tax free interest. If you had managed to save $20,000, you would get $1,000 a year from them.
 
I would say #4 is the first step. Stop spending money and start tracking what you do spend. Maybe reverse that. Track it and then you know where it's going and if you need it.

Tracking your spending is a great way to suddenly get perspective. If you learn you are spendign 1/3rd of your income on eating out, then you can make changes.

Sometimes you can make changes, sometimes the solution is another or a different job to help dig out of the hole. But you first have to stop digging and figure out the size of the hole.

Stop spending is one of the very first steps if not THE first step to tackling a debt issue.

Originally Posted By: rjacket
Yikes!

Well firstly it's hard to give such general advice without a fuller picture which apart from an understanding of all income, expenses, assets and liabilities (with interest rates being paid) would also include an assessment of risk of losing income and how long it would take to get another job.

It sounds though like you're worried that something might happen.

This is my suggestion, which is based on the fact that I think that debt for most people is the thing that is stopping them from making something of their hard work.

1) Credit card debt is the worst. You're talking about saving $1000 by paying only the minimum on credit cards. This is a really inefficient way of doing it. You should find the interest rate you are paying on all your cards and pay the maximum you can to the one with the highest interest rate and so on.
2) While you start that process, look for some way of consolidating all your credit card debt, say to a balance transfer offer that has 0% interest. Once you make the transfer, carrying a balance is costing you nothing, meaning you can pay the minimum and build your savings at no cost except the initial balance transfer fee.
3) You should consider getting some sort of unemployment insurance while you do this, if you are worried enough.
4) Stop spending money. Look at everything you do and ask yourself if you can avoid doing it until your credit card debt has gone. The return you get on any dollars that you use to pay off credit card debt is a return that Mitt Romney would be proud of.
5) Do this for a few years and invest your money wisely. A couple of years ago, municipal bonds were cheap and paying 5% tax free interest. If you had managed to save $20,000, you would get $1,000 a year from them.
 
Pay off the credit cards first, highest interest rate first. You can always use credit in an emergency...if you put $1000 in an emergency fund and still have credit cards, you are paying credit card interest on that $1000.

For the original question it depends on your situation; 6 months used to be sufficient, but in today's tough job market it might take longer to get a job so a couple more months isn't a bad idea.
 
Originally Posted By: LT4 Vette
Adults should have a minimum of 6 months of their gross salary saved in CA$H in the bank as their emergency fund.


Why? Assume that I am an adult and make $72,000 a year, so we're talking $36,000 in cash. What situation might come up where I would need access to $36,000 immediately (opposed to the five to seven working days it would take to pull out of an typical investment account)?

Not trying to be a ****, I'm generally curious. I don't keep anywhere near that in my savings account. Maybe I'm making a mistake.

robert
 
Originally Posted By: robertcope
Originally Posted By: LT4 Vette
Adults should have a minimum of 6 months of their gross salary saved in CA$H in the bank as their emergency fund.


Why? Assume that I am an adult and make $72,000 a year, so we're talking $36,000 in cash. What situation might come up where I would need access to $36,000 immediately (opposed to the five to seven working days it would take to pull out of an typical investment account)?

Not trying to be a ****, I'm generally curious. I don't keep anywhere near that in my savings account. Maybe I'm making a mistake.

robert


Because most people make ~40k or less on average in the US in a year.
If you loose a job in todays economoy with a mortgage,health insurance, kids and other bills 20k can get spent pretty quickly while searching for another job. Better safe than sorry. But I'd also have that in some type of lower risk investments since a savings accounts isnt worth a darn anymore.
 
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robertcope,

No reason to keep it in actual cash. I think that advice stems from most folks not having liquid assets other than cash. If you can get it out in a couple weeks, no problems.

OP,

We have a year's worth of expenses saved. I defined that as a rolling 12-month average. Obviously, we would/should/could cut spending if income is lost so in reality it would/should/could last longer.

I disagree with Dave for my situation in paying off the lowest credit card debts first. I would cut out the highest interest rates first. The incentive I need is the amount of money saving acting like a rational human being vs. peeing it in the wind. Some folks, evidently the majority based on what Dave recommends & assuming he did the proper research, need the goal checklist of finalizing something.

I wish you the best. Keep working hard.
 
Originally Posted By: robertcope
Originally Posted By: LT4 Vette
Adults should have a minimum of 6 months of their gross salary saved in CA$H in the bank as their emergency fund.


Why? Assume that I am an adult and make $72,000 a year, so we're talking $36,000 in cash. What situation might come up where I would need access to $36,000 immediately (opposed to the five to seven working days it would take to pull out of an typical investment account)?

Not trying to be a ****, I'm generally curious. I don't keep anywhere near that in my savings account. Maybe I'm making a mistake.

robert



I agree. Let's say you make decent wages ($100K+ combined) and you have relatively small or no mortgage just standard expenses. I think it would be whacky to $50K in the bank not working for you. I'm not saying don't have much much more at any given moment in cash in investment accounts as investment choice during down markets - it just seems like too much just sitting. As you say, you can get the dough in a few days, what's the rush? Zombies?? Snowmageddon??? If the SHTF, good luck with the bank anyway.
 
I can see the benefit of both strategies.

Mathematically, it makes sense to pay the most on the highest interest debt.

However, the other side of that coin is if you are trying to create new habits and behaviors, it may take some successes in the form of paid off debts to reinforce the new habits.

Therefore, if you are easily discouraged, or need to see results from your efforts, do the debt snowball as it will provide important positive feedback to help cement the new behaviors.

If you don't need that sort of reinforcement, then you can pay things off highest interest rate to lowest.

Both will result in becoming debt free, but only if followed until the debts are actually paid off.

The best plan is one you can stick to and will help motivate new habits and behaviors.

EDITED TO ADD: Ditto with the $1000 emergency fund. I believe Dave Ramsey has you do that not because it will pay your debt off faster. I believe the purpose is to teach you to save and prepare for unexpected expenses AND not rely on credit to help out in a crisis. You develop the habit of using that emergency fund, and not your credit card.

So it's more about changing behavior than it is about saving the most money.
 
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You could consider having "a plan" for surviving six months. If you're 20-something that plan could be moving back in with mom and dad.

good habits should start out of school. 6 months saved is ludicrous, although you should be saving "for a house" particularly if you have six months of employment before starting paying student loans for example.

I would try to save one month's salary every year until you're 30 and have the 6 months saved.

If expenses > income, eating out, cable tv, and special trips to the store (wasting gas) should go first. Go food shopping on the way home from work; sure, you're tired, you'll buy less. (use a list.)
 
Having 10s of thousands of dollars sitting in an account earning, what, maybe 1% at most with today's rates, is very bad money management.

I can see having a couple thousand at most for an emergency fund where you could get the money instantly, but how hard is it to get money out of investment accounts? Especially if you manage them yourself online, it doesn't take that long.
 
First things first...

When I consider emergency funding, I think back to last June, waking up on the Sunday morning of a 3 day weekend, just having been burgled, having no cash, no cards (no ID either).

What saved us was a well stocked pantry, and $50-$60 of Woolworths $5 cards the the better half won at Bingo.

A workmate was burgled in a motel while on holidays, and couldn't buy fuel for his return trip.

And without ID, accessing even you own cash in a bank account is pretty well impossible.

Seeing how our local economy crashed on a weekend without CC/EFTPOS when the system went down, you need to have a couple days to a week of cash hidden somewhere that you can call on when the lines are down, or crime strikes.
 
Originally Posted By: dtownfb
It all depends on what stage you are. Dave Ramsey states to save $1,000 for your Emergency Fund first THEN start the Debt snowball which is paying off your bills starting with the smallest debt and working your way to the largest debt. The theory is that as humans we need "successes" to stay on course for change. After you have your debt paid off, then you need to save 6 - 12 months for monthly bills. Once you've done that, then you start saving for College, house, investing, donating, etc...



^^^^^^^^THIS^^^^^^^^^ is on the money
smile.gif
 
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