I’m doing a bit of financial house keeping and would love to get your thoughts on the right amount of cash to keep in an emergency fund. Don’t worry, I know not to take financial advice from strangers on the internet. I’m just trying to get a sense of what people consider reasonable. I’m not looking for an amount here – more in terms of months of living expenses. I’ve heard various experts suggest as little as 1 month and as much as 1 year’s worth of living expenses in cash (which seems excessive to me).
Depends on one’s age in my opinion. I’d recommend a minimum of 6 months. If you are older and/or have a job/salary that will be more difficult to replicate, a year wouldn’t be a bad idea. I’d err on the side of more not less.
I keep six months, but I also have over six months of accrued sick leave, so we would have a solid income stream even I were completely incapacitated for an extended period. I don’t think you need a year in cash, but I would keep that much in reasonably liquid investments. If you guessed that I’m not a risk taker, you’d be correct.
I agree that much depends on your stage of life and how quickly you would likely be able to replace lost salary in the event if a job load (eg get re-employed).
Our S has several months salary/living expenses readily available. This was useful when they had federal shutdown which delayed his paycheck.
We have generally had a few months living expenses put aside for “just in case.” Sometimes you have multiple appliances due and car trouble plus dental bill all in a short time period, even if there is no job loss.
The more stable your job and the younger and more re-employable you are at comparable salary, the fewer months of living expenses you may need. 6-12 months is comfortable, imho.
I think it depends on how vulnerable you feel. If you’ve been at a job forever and don’t see it changing I could see why you’d want less. My husband and I own our own business and it’s our only source of income, so we do much more.
I would encourage that you work up to 12 months of living expenses. If you don’t want it to be too easy to get to, instead of a savings account you could set up a ladder of CDs with each month’s amount in a 12 month CD set to roll over at the beginning of that month.
We didn’t have a formal emergency fund, just money in an account that was only in my name from my mother’s estate. It came in handy when Happydad’s breadwinner job was lost in a massive company reorganization (also halfway through Happykid’s junior year of college). His job hunt lasted 13 months almost to the day, and then as a federal job took four more before his actual start date. We learned from that experience. We live on his income, mine all goes to savings. We are almost back to where we were before that job loss.
Michelle Singletary who writes for the Washington Post, advises having separate Emergency and Life Happens savings. The Emergency money (aiming for 12 months of living expenses) is for job loss or other huge life crisis. The Life Happens money (I have about 4k for that) is for those things that we don’t always see coming, but are likely to be around the bend sooner or later such as new tires, major car repair, shockingly expensive dental work, broken cell phone, lost eyeglasses, etc. The Emergency money doesn’t have to be touched if your car needs a new transmission, and the Life Happens money gets spent down instead, and then re-stocked. For more reading on her strategies https://www.washingtonpost.com/people/michelle-singletary/?utm_term=.aa0f46160b12
What pots of savings do you have right now? Do you have a separate account for major home repairs, a new car, vacations? Have you taken a look at your current net worth? You might have all the money you need already, but just without formal categories attached - like we did before that job loss
Emergency fund should cover living expenses for the length of time it would take to find a new suitable job during an economic or industry downturn. If your job is becoming obsolete, add retraining time and expenses to become qualified for a new job.
Of course, if your savings and investment plan is on track, you will eventually reach the point of joining the capitalist class (i.e. able to retire and live comfortably on your investment income/gains, accounting for the possibility of market downturns), at which point your total savings and investments will effectively be an emergency fund that will financially support you as long as you live (but then it will no longer be a financial emergency if you lose your job and cannot find another one).
DH worked in a 100% commission job when the industry completely tanked. He went 3 years without income.
We worked to save 3 years living expenses using that experience to guide us. But that’s probably way more than the average person would need. I think 12 months is a good number for most.
Remember that the most likely time to lose a job is when the industry has a downturn. That is the situation that one must plan the size of the emergency fund for.
In simple cash (checking, savings) we generally have about 4 months. But we have investments (in non-retirement accounts) that if needed we could get into and that would cover us for over a year. But these are assuming we both lost our jobs at the same time.
I think there is security in both of us working. If my husband lost his job, I could work more, if I lost my job we’d probably wouldn’t need to dig into savings that much — and when college tuition is done next year, we’d probably be fine.
As with many other things, the answer is “it depends.” Both my husband and I have very secure jobs, so we never stressed about an emergency fund. (We do live beneath our means, and we saved a lot for college, which could have been shifted to emergency if necessary).if you’re in a volatile industry where layoffs are common, I would suggest a larger emergency fund.
Man, you all are rich. We have our in-laws living in the same town and they are our “just in case.” Other than that, credit cards and around $1k. We do not intend to leave much unspent when we die.
H had a pretty stable job and I have have a lot of skills that are underutilized that could he parlayed into compensation. We live below our means and have always had savings we could have tapped if necessary. We also try to keep some extra in our checking for oops, life happens events.
As the need arose, I was able to get jobs that paid what we needed to help meet college and other expenses before being able to be semi-retired once the kids college-related expenses were all fully paid. We always tried to live rimarily ln H’s income and now his pension.
For those with less than 6 months in an emergency fund, do you view that as something you are comfortable with or would you ideally like more? I guess what I am asking is do you have less out of choice or circumstance?
Hi all. Great information. Thanks! I don’t have 12 months in cash, but could if I turned certain investments into cash. Thats what I’m wondering about. On the one hand, cash doesn’t grow, but on the other hand, anything that could be classified as an “investment” is likely to tank just as everyone is losing their jobs.
@Magnetron : I think that’s pretty normal, de[ending on where you are in life. When I was starting out, my father was my “just in case” and I’m definitely my kid’s. <:-P
A lot of investments can be liquidated easily. I think whether you hold it in actual cash or cash equivalents (savings accoutns, t-bills, CDs, etc.) depends on your tolerance for risk.
