Emergency Savings

[Armitage]

Inspired by the various savings & unemployment threads.

It's commonly heard that you should have liquid savings equivalent to 3 to 6 months worth of living expenses. What do you have?

For the purpose of the poll, don't consider savings that would incur a penalty to access, such as retirement accounts, long term CDs, etc.

 

[xospec1alk]

i have enough for about 2 months of rent, + 2 car payments and 2 months of insurance.

 

[kranky]

More than 12 months, but it took many years to get to that point. When I got a house, my immediate goal was to get 3-6 months emergency savings put away (down payment drained our savings).

When putting together our plan after getting a house, we did it like this:

- Put away 6 months expenses (including house payment), in liquid savings.
- Got 30-year level term life insurance. By the time the 30 years was up, we should have sufficient investments to avoid the need for it. Term is very cheap when you are young and healthy. If you wait until you can't afford to be without it, it costs a lot more.
- Got disability insurance with a 6-month waiting period. It's expensive, but the cost drops dramatically if you lengthen the waiting period. Since we had 6 months already covered in savings, we got a great policy with low cost.

Our strategy was to insure for disasters, not the survivable bumps in the road. That lowered the cost of insurance significantly. That's why we have $2500 deductible on our auto and home insurance.

Now that the emergencies were covered, we started saving for the long-term using the 401k. We scrimped to put that first 6% of salary away, but after a while we never missed it. Looking back now, that was the smartest thing we ever did - to start EARLY!

 

[Armitage]

Originally posted by: kranky
More than 12 months, but it took many years to get to that point. When I got a house, my immediate goal was to get 3-6 months emergency savings put away (down payment drained our savings).

When putting together our plan after getting a house, we did it like this:

- Put away 6 months expenses (including house payment), in liquid savings.
- Got 30-year level term life insurance. By the time the 30 years was up, we should have sufficient investments to avoid the need for it. Term is very cheap when you are young and healthy. If you wait until you can't afford to be without it, it costs a lot more.
- Got disability insurance with a 6-month waiting period. It's expensive, but the cost drops dramatically if you lengthen the waiting period. Since we had 6 months already covered in savings, we got a great policy with low cost.

Our strategy was to insure for disasters, not the survivable bumps in the road. That lowered the cost of insurance significantly. That's why we have $2500 deductible on our auto and home insurance.

Now that the emergencies were covered, we started saving for the long-term using the 401k. We scrimped to put that first 6% of salary away, but after a while we never missed it. Looking back now, that was the smartest thing we ever did - to start EARLY!

That's a good point on the various insurance - now that my finances have recovered a bit I need to up my deductibles and absorb the "bumps" as you put it, out of savings instead of insurance.

I do have short term disability though in addition to the long term disability (starts at 6 months) - as a single parent I don't have quite the safety net as you might as a couple. It's only about $5/week through my job.

I've got about 8 months of expenses as liquid assets - that will drop a bit as I finish the addition on my home. Then I have to start paying down my HELOC

 

[Ryan]

I have about 6 months worth of cash in Savings to survive on, in the event of an emergency.

 

[zanieladie]

I think the recommendation (I read it a while back in some financial magazine) is 6 months.

 

[dullard]

I purposely write my last check of the month to bring my total cash to <$100. Then I'm paid on the first of the month (often before this last check even clears).

This last check goes to my mortgage principal. So, technically, I have 0 months of savings. But by doing this, I'm saving many thousands of dollars over you who have several months of savings.

I wouldn't call me living paycheck to paycheck though. If I have trouble, I'd just not pay this extra $1000 towards my mortgage. $1000 will go a long ways towards an emergency. My HELOC would last me years. Plus, my empty CCs would last me at least 2-3 years of expenses. Thus, I'm not worried about emergency expenses.

I have no where to vote in your first poll.

 

[Descartes]

No way in hell would I put 6 months of expenses in a low-yield savings account. That's a lot of money that could be put to much better use. I have plenty of other accounts that I could liquidate if absolutely necessary, and that takes a day at the most.

 

[ponyo]

More than 12 months. My next short term goal is to be completely debt free in 2 years or less.

 

[tfinch2]

Originally posted by: dullard
I purposely write my last check of the month to bring my total cash to <$100. Then I'm paid on the first of the month (often before this last check even clears).

This last check goes to my mortgage principal. So, technically, I have 0 months of savings. But by doing this, I'm saving many thousands of dollars over you who have several months of savings.

I wouldn't call me living paycheck to paycheck though. If I have trouble, I'd just not pay this extra $1000 towards my mortgage. $1000 will go a long ways towards an emergency. My HELOC would last me years. Plus, my empty CCs would last me at least 2-3 years of expenses. Thus, I'm not worried about emergency expenses.

I have no where to vote in your first poll.

What if your mortgage loan rate is lower than what current savings accounts interest rate is?

 

[Armitage]

Originally posted by: Descartes
No way in hell would I put 6 months of expenses in a low-yield savings account. That's a lot of money that could be put to much better use. I have plenty of other accounts that I could liquidate if absolutely necessary, and that takes a day at the most.

I never suggested low yield savings accounts - most of mine isn't. Just not tied up in assets that would be hard to liquidate on short notice like real estate, business interests, etc. You probably should have a good portion of it in investments that aren't terribly volatile as well - it'd suck if your own personal crisis hit at the same time that the market crashes.

 

[dullard]

Originally posted by: tfinch2
What if your mortgage loan rate is lower than what current savings accounts interest rate is?

Then obviously, I'd switch my tactics. Interest rates will need to go up another 1% for me to do that though. A divorce forced me to refinance my 4 3/4% mortgage to something much higher .

 

[Armitage]

Originally posted by: tfinch2

Originally posted by: dullard
I purposely write my last check of the month to bring my total cash to <$100. Then I'm paid on the first of the month (often before this last check even clears).

This last check goes to my mortgage principal. So, technically, I have 0 months of savings. But by doing this, I'm saving many thousands of dollars over you who have several months of savings.

I wouldn't call me living paycheck to paycheck though. If I have trouble, I'd just not pay this extra $1000 towards my mortgage. $1000 will go a long ways towards an emergency. My HELOC would last me years. Plus, my empty CCs would last me at least 2-3 years of expenses. Thus, I'm not worried about emergency expenses.

I have no where to vote in your first poll.

What if your mortgage loan rate is lower than what current savings accounts interest rate is?

Does that include taxes on savings interest & tax breaks on mortgage interest?

 

[tfinch2]

Originally posted by: dullard

Originally posted by: tfinch2
What if your mortgage loan rate is lower than what current savings accounts interest rate is?

Then obviously, I'd switch my tactics. Interest rates will need to go up another 1% for me to do that though. A divorce forced me to refinance my 4 3/4% mortgage to something much higher .

That sucks! :beer:

 

[dullard]

Originally posted by: tfinch2
That sucks! :beer:

Why are divorces expensive? Because they are well worth the money.

 

[tfinch2]

Originally posted by: Armitage

Originally posted by: tfinch2

Originally posted by: dullard
I purposely write my last check of the month to bring my total cash to <$100. Then I'm paid on the first of the month (often before this last check even clears).

This last check goes to my mortgage principal. So, technically, I have 0 months of savings. But by doing this, I'm saving many thousands of dollars over you who have several months of savings.

I wouldn't call me living paycheck to paycheck though. If I have trouble, I'd just not pay this extra $1000 towards my mortgage. $1000 will go a long ways towards an emergency. My HELOC would last me years. Plus, my empty CCs would last me at least 2-3 years of expenses. Thus, I'm not worried about emergency expenses.

I have no where to vote in your first poll.

What if your mortgage loan rate is lower than what current savings accounts interest rate is?

Does that include taxes on savings interest & tax breaks on mortgage interest?

I just convinced my parents to stop making extra payments on the mortgage and invest it something else instead. Their current mortgage interest rate is 3.75%, and they itemize their deductions.

 

[kranky]

Originally posted by: Descartes
No way in hell would I put 6 months of expenses in a low-yield savings account. That's a lot of money that could be put to much better use. I have plenty of other accounts that I could liquidate if absolutely necessary, and that takes a day at the most.

Because you have plenty of other accounts you could liquidate in a day, you don't need 6 months of expenses in a savings account.

The point I wanted to make is that people should address that need before they buy new toys, put an expensive vacation on their credit card, etc. People need a safety net.

I had an employee who had a live-in gf and they shared the rent. Not a month after we hired him right out of school, he bought a new 4x4 truck - loaded. A few months go by, the gf decides to move out. He can't afford the whole rent plus the truck payment, so he decides to trade in the truck for something cheaper. Then he finds out he's $6000 upside down on the truck (unsurprisingly).

So he couldn't afford to keep the truck, and he couldn't afford to trade it in. No savings, he ran right out as soon as he got a job, figured out how much of a payment he could afford, and you can be sure that truck salesman worked him for all of it.

It took him a couple years to dig out of that hole, all because he had nothing to tide him over a rough spot.

 

[dullard]

Originally posted by: kranky

Originally posted by: Descartes
No way in hell would I put 6 months of expenses in a low-yield savings account. That's a lot of money that could be put to much better use. I have plenty of other accounts that I could liquidate if absolutely necessary, and that takes a day at the most.

Because you have plenty of other accounts you could liquidate in a day, you don't need 6 months of expenses in a savings account.

The point I wanted to make is that people should address that need before they buy new toys, put an expensive vacation on their credit card, etc. People need a safety net.

You both are correct. People need to buy less of the frivolous things and build a safety net. But, the idea of a 6-12 month safety net in savings is antiquated. There are many other forms of safety nets available now that weren't available 5-10 years ago. People like me can live with no savings and yet be fully prepared for an emergency. It is a win/win situation for me.

 

[ponyo]

Originally posted by: dullard

Originally posted by: kranky

Originally posted by: Descartes
No way in hell would I put 6 months of expenses in a low-yield savings account. That's a lot of money that could be put to much better use. I have plenty of other accounts that I could liquidate if absolutely necessary, and that takes a day at the most.

Because you have plenty of other accounts you could liquidate in a day, you don't need 6 months of expenses in a savings account.

The point I wanted to make is that people should address that need before they buy new toys, put an expensive vacation on their credit card, etc. People need a safety net.

You both are correct. People need to buy less of the frivolous things and build a safety net. But, the idea of a 6-12 month safety net in savings is antiquated. There are many other forms of safety nets available now that weren't available 5-10 years ago. People like me can live with no savings and yet be fully prepared for an emergency. It is a win/win situation for me.

For some like me it's peace of mind. I work as a contractor so nothing is guaranteed. I could lose all my accounts tomorrow and it could be awhile before I find replacements. I try to minimize this by diversifying my accounts but one never knows. Having years worth of savings helps me sleep at night so that's all that matters. Once I'm completely debt free I won't have to keep as large of a savings.

 

[altonb1]

I >>should<< save more into savings, but I'm tryig to get as much of my debt lowered, 1st. With a mortgage, 2 car payments, etc...all on my salary only, saving is pretty difficult.