Tales from the Wallet: Emergency Funds – How Much & Where

Your Emergency Fund: How Much, and Where? | CorporetteHow much do you keep in your emergency fund?  WHERE do you keep it?  How often do you re-evaluate it? We haven’t talked about emergency funds in a few years, so I thought we should revisit. (Pictured: Tory Burch Priscilla Wallet, was $250, now $175 (also available in fuchsia, as well as in a zippered pouch on sale for $66).)

The basics remain the same:  the suggestion I always see is to keep three to nine months of living expenses (mortgage, rent, loans, food, basic living needs), easily accessible in case you’re laid off, fired, quit, or are otherwise unable to work — or if you have some other huge unexpected expense, like if your car breaks down or you get in an accident and have bills to pay.

The choices, sadly, haven’t changed that much since we spoke about this last: in order to keep money accessible, you generally want a savings account, which means that it’s going to earn LOUSY interest.  There were times before the recession when a regular savings account could earn 4% and a money market fund somewhere like Schwab could earn as much as 7%, but those rates are pie-in-the-sky dreams today.  Mint has an easy way to look at what interest rates are being offered right now (just go to “Ways to Save” –> Savings) and the highest offered is .9%.  POINT NINE PERCENT, PEOPLE.  Although I have heard reports of local credit unions and the like offering higher interest rates, there are often hoops to jump through — high minimums to keep in the account, a certain number of monthly transactions, etc, etc.

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Just in case you’re curious: we have kept our emergency fund in a Capital One account (which originally was earning 1.8% back in 2009, and is now I think around .75%).  Mid last year I decided we had way too much cash in our emergency fund, and invested a third of it in the market; I put another third of it into another big online savings bank, Ally, which I find I LOVE. (And no, this is not a sponsored post.)  Ally has a decent interest rate (I think it’s .85% right now) but it’s ridiculously easy to open a million different little accounts and set up automatic transfers — we now have teeny accounts with monthly (sometimes weekly) contributions to big but irregular expenses, such as a vacation fund, my son’s music and gym classes, insurance payments, dental care, and more.  We currently have about 5-6 months between Ally, Capital One, and our regular bank (Chase), and honestly I feel like it’s still too much money — I keep thinking that in the event of an emergency we would drastically change our living circumstances to require less money, sell stocks or funds invested in the market, sell some of our possessions, or borrow money for a month or two from family.  (I keep thinking about a conversation I had with a friend where we talked hard numbers — our emergency fund was five times what hers was!  But she lives in a much lower cost of living area; our mortgage payment by itself is probably easily 3 or 4 times what they pay for their mortgage payment.)

Other savings vehicles I’ve taken a look at (and have been unimpressed, but maybe you’ll think differently):

  • credit unions offered through alumni connections (for me it’s Northwestern and Georgetown; for my husband it’s Tulane and NYU)
  • money market funds — I keep a small amount of cash in Schwab just to see if the interest rate ever perks up, since I don’t think that is part of Mint’s analysis — unfortunately it hasn’t, at least through Schwab.
  • laddered T-bills — someone told me about this years ago: the idea is to buy a series of 6-12 month T-bills, so every month one comes due.  In theory, the interest rate is higher than a savings account, and you have a fresh crop of money coming your way every month in case you need it — and if you don’t, you just reinvest it and wait until the next one comes due.  It’s a nice idea in theory, but let me also say this: I HATE TREASURY DIRECT, which is the only way to actually buy T-bills (or at least it was the last time I looked into it).  It is the least intuitive, most confusing online investment option I’ve found — I accidentally bought a few 30-year T-bills the last time I tried to invest (whoopsies).  From my understanding, the rates are still pretty low so I haven’t taken another look in a few years.
  • laddered CDs or bonds — I’ve also looked at these; the interest rates aren’t really better than a savings account until you get to the 3-year mark.  For my $.02, with that kind of time frame I’d rather have the money either in cash or in the market.
  • laddered municipal bonds — I’m putting this one in a separate category because it’s the only one I have yet to really investigate.  Supposedly municipal bonds offer a slightly higher rate; I think the reason we don’t own any is because the last time I tried to buy bonds (while doing some asset reallocation) I was using an old 401K I’d rolled over into an IRA and you can’t hold municipal bonds in a tax-advantaged account (or something like that).
  • cash — cold, hard, cash, hidden somewhere around the house.  I TRY to keep a small amount of cash on hand (like, less than $200 in a variety of bills) but I always end up dipping into it to pay the babysitter or cleaning lady.  In the event of the zombie apocalypse, just look for the chick trying to barter Mikimoto pearls for bottled water.

Readers, what do you do with your emergency fund?  How many months of living expenses do you keep in your fund — and where do you keep it?

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Comments

  1. Anonattorney :

    I think I posted this last week, but I have two different categories of emergency funds. One is the 6 months of living expenses account for true emergencies (job loss), which is currently around $40K. That is currently invested with Morgan Stanley. It’s in pretty low-risk investments, although it’s certainly riskier than cash (but it also made a nice chunk of change this last year . . . .)

    I also keep about $15K in my savings account to deal with unexpected, but likely, expenses, like car repair, leaky roof, etc. I add a small amount to savings every month on a regular basis, and if I deplete any of it, I work hard to bring it back to around $15K. I don’t do separate individual accounts for different types of emergencies, but I do separately save for specific expenses, like vacations and other large, planned purchases.

    I agree with Kat that if any true emergency happened, I would likely overhaul my lifestyle by selling my house and generally living much more frugally.

    • Anonattorney :

      Whoops, not with Morgan Stanley. It’s with a more local investment manager. It started as a small inheritance so I kept it in the account it came with and added a bit more over time.

    • Famouscait :

      My husband and I had to live off our emergency fund about 4 years ago, so I write this from experience. For short term emergencies, it can be possible to trim your monthly expenses (cut cable, Starbucks, eating out, etc.) enough to bridge the gap. But I caution anyone who thinks that moving or even selling a house is a reliable plan in the event of an emergency. I did that too and luckily it worked out for us… but we had to take the first offer we got on our home and only just broke even based on what we’d paid or it. Such a plan could easily take longer than your emergency fund would last. Or, depending on the type of emergency you face, moving or selling could be an unrealistic plan (if you are a single home owner and wind up in a coma, for example). I’d rather have the larger account Kat references than have to scramble in the middle of an emergency to move or sell my home.

      • Anonattorney :

        Yes, but as with anything, it depends on the house, the market, and the amount of equity you have. Certain locations will always sell, and if you have enough equity you can price it to sell quickly and still walk away with cash in your pocket.

    • I have an interest-bearing checking account through a credit union which pays higher interest than any money market, savings account, or CD on the first $10,000. I checked about 6 months ago and it is still well above any other savings vehicle. I basically keep $10,000 in it plus whatever I need to pay bills.

  2. Finance related TJ – Hi! I know there are some YNAB users on this site, and I would love to get your take on the system. Pros? Cons? Worth the money? I am looking for a system that will help me be more deliberate about my spending/saving habits, and YNAB seems pretty solid.

    • I’m in the midst of their 30 day trial. I like it as a budgeting software, as opposed to an accounting/money tracking software (like Quicken, which I’ve used for ages and will continue to use). I haven’t spent the money yet (still in the free trial), but I generally like what I see so far. They’ve got online classes to help you get set up, which can be a little tricky if you aren’t familiar with accounting type software. There is an app (Android/Apple) to help you track stuff on the go.

      If you are interested – do the trial. That’s the best way to see if it fits in with your day to day life.

    • Sydney Bristow :

      I’m one of the people here always raving about it. It really depends on your style. You have to input each transaction manually, which is important to me to keep me on track. You can set up recurring or scheduled transactions but you still need to approve them. It definitely takes time to get set up and figure out which the categories. As you input more transactions it becomes less work because it defaults to the category you last used for that store.

      I really love it and it was worth every penny (and then some) for me. I highly recommend getting and using the free trial and watching one of the intro webcasts. You’ll see whether it fits your style that way.

      • +1 to all of this. It’s absolutely worth the money and has really helped us gain control over our finances. If you’re weary and want to get the most out of your free trial, I recommend tracking all your expenses for a few months prior to get an idea of how much you should budget for each category.

    • I got the free trial and did not use it once. So, be honest with yourself: if you’re going to hate inputting every single transaction, it will probably not work for you. It looked like good software, though.

    • $6 off through this link: http://ynab.refr.cc/6ZTS7HG

    • I just started using the trial, too and I am liking it so far. I also like how it really is pushing you to just start FROM NOW, rather than going backwards and spending a million years figuring out what you’ve spent in the past before you start focusing on right now.

      It is a little tricky and is kind of the opposite of how i’ve budgeted in the past with Quicken, so it has taken some getting used to. And I do plan to do one of their online classes this weekend so I can get more comfortable with it. But it is already helping me feel like I know what i’m spending and where I should focus on cutting back and how to get money into the urgent places and away from the wasteful places.

      It really focuses on being *simple* tho, so if you really want to drill down to lots of specific categories or don’t like manually inputting your transactions it’s probably not for you. Altho, you can import transactions from bank account or credit card online systems, but that doesn’t really help you if you wait till the end of the month to get your transactions in.

  3. I have a similar approach, re: splitting between the job loss or similar emergency scenario versus things that are more likely to occur from time to time but a bit more unpredictable, like our recent emergency visit to the vet (all is ok now).

    I also agree with Kat on figuring out what your budget would really look like in an emergency first. An emergency fund seems much more realistic when you set your emergency budget first. In other words, if you were in an emergency situation, you may cut back on Starbucks, doggie daycare, buying new clothes, eating out – whatever makes sense for you. Adjust your budget for an emergency situation (but keep it livable). If you’re a dual income household, subtract the higher take home pay from the budget two (assuming higher earner was the one who lost a job). Dividing your savings by this revised number gives you a better sense of how many months you can stretch and makes an emergency fund goal of X months seem much more attainable (which means you may be more inspired to make it happen)

    • TravelMoreRoads – re your comment on dual income household, can you please expand on that? I think I see what you’re saying but can you talk more about that please?

      • Sure, for example, it’s unlikely (knock wood) that my husband and I would both be out of a job at the same time, so to make our base emergency budget, we looked at what we would cut back on in an emergency situation (e.g., eat out less) to come up with how much money per month we would need, then we subtracted the higher of our two salaries to get the net we would need. So just to pick random, easy numbers, let’s say you normally spend $6k/month but could get it down to $5k comfortably if you had to. Now let’s say one person brings home net $3k a month and the other brings home $4k but loses their job. Now you need to come up with $2k per month ($5k expenses – $3k remaining salary). So if you wanted 3 months of emergency savings, you would need $6k ($2k X 3 months), versus needing the full $6k of expenses times three months. Again, just our approach (CFP-advised us) when we got started and of course the idea is to have more, but the point is that really drilling down, based on your own situation and preferences, helps you get to at least a base emergency fund more easily. Hope that helps. :-)

  4. Math Chick :

    I’d also recommending not maxing out on the cost front: apartment or house, car, debt service. We just got word to expect 10-15% salary cuts coming out shortly (and my husband got a 1/3 cut last year). It’s not fun, but short of job loss, you can’t be maxing out and whether these storms (while better than a complete job loss, are still immensely painful). I try to round up payments on debt (mortgage, etc.) so that I can pare back to the minimum when the vultures are circling (2009 and, apparently, 2014).

  5. quality v. quantity :

    YES to Kat’s advice re: what an emergency budget is. There are so many different kinds of emergencies. If I were laid off, it would take me a month to ‘overhaul’ my budget, so there is that cost added in. But yet if we were working but had a medical emergency, etc, it could actually require so much more money than being laid off for 6 months.

    We have our emergency fund in 3 tiers – we keep 3 months expenses for our immediate emergency fund – if the car breaks down, large cost, etc.

    Then we keep about 6 additional months’ expenses in a special money market account with higher interest that it would take us 2 weeks to access.

    Then we keep an additional 6 months’ expenses in our investment (but non-retirement) account. If we found ourselves in a real bind, had slashed our budget, and still needed money, we could take the money out of that account and pay the CGtax that year – but we don’t remove money from that account without thinking looooong and haaaard about it.

    This is how we’ve best decided to manage having enough emergency money and not letting it waste.

    But more importantly, as someone who has been on both sides of the socioeconomic scale, I think having an emergency fund is MUCH more important for poverty/lower middle class individuals then upper class individuals. It is in those situations (at least it was for my parents) that having the ability to access $800 to fix the car was the difference between keeping and losing one’s job. Right now, it might take a penalty, but if we had a TRUE emergency, I could access, within 10 business days, a year’s salary.

    Does anyone ELSE have thoughts on the relationship between overall wealth and the amount/form of an emergency fund?

    • quality v. quantity :

      Haha – I’m not so sure about that last capitalization of ‘else’. I must be trying to channel my inner Ellen.

    • Math Chick :

      This reminds me of the Chris Rock rich v. wealthy routine. I may have money, but that’s 100% job-dependent. And if I lost this job, it would probably mean that my next job wouldn’t pay as much (probably less than 1/3 of what I make now). And it would take a while to find.

      Maybe if we came from money, our families could tide us over. I’m grateful that our families are comfortable and not a burden on us, but they bought and paid off their houses so long ago that my mortgage (3K) would be shocking to them (but it is par for the course and a bit low for where I live). Similarly, daycare costs (2K). I could sell the house, but if I were to lose my job, it would likely be in a scenario that created a buyer’s market (e.g., my neighbor got canned in 2009 and it took 1.5 years and 100K in price cuts to sell the house and I’m not sure that they didn’t have to bring cash to the closing table).

      So, I think if you live in Greenwich and you grew up there and so did your spouse, you can probably have a different emergency fund. I don’t think you can have too much cash.

    • Wildkitten :

      I also think that when we calculate “what’s the bare minimum we could live on if we lost our jobs” we forget about how expensive it is to find a new job. Sure you can go without coffee, and dry cleaning, and taxis, and daycare – but what about when you have coffee to network, and have to wear a suit, or an interview when it’s sleeting, or 3 job interviews and you can’t bring the kids? Being unemployed is cheap, but finding a new job can be very expensive.

      • Anonattorney :

        That’s a good point. You really need to treat networking like it’s (at bare minimum) a part-time job. That means you still need to do some basic grooming, keep your clothes clean and pressed, get places on time, etc. There may also be some dues for different licensing requirements, networking organizations, etc. that you would want to keep paying even if you lost your job. On that note — does the bar allow you a grace period if you lose your job, or do you have to keep paying bar dues come hell or high water?

        • Wildkitten :

          In my state I had to pay them if I wanted to hold myself out as someone licensed to practice law. Which I did, since I was looking for a job as a lawyer!

  6. Anyone have any advice on remaining calm when you do have to use the emergency fund? DH and I have 6 months takehome salary in savings right now and other than 401(k)/pension, that is our only savings and we’re gearing up for a custody battle that could easily eat half of it. We have a few things we could cut (netflix and go easier on the grocery shopping) but we don’t have a housecleaner, don’t eat out, don’t have gym memberships, etc. and I’m panicking about that money being gone, even though I know DH and I are in stable jobs where we are highly unlikely to be laid off, take a paycut, etc.

    • Senior Attorney :

      I’m there, too. Left my husband last spring and spent a bunch of money setting up the Bachelore*t*t*e Pad, am spending thousands on the ridiculously expensive divorce, and on top of it all I spent several thousand to bail my best friend out of jail just as it was all hitting the fan. It’s truly been the perfect storm. I’m hanging in there, but for somebody who is used to seeing the account balances go up every month, it’s pretty horrifying seeing them stay the same or go down even while the lifestyle has been cut way back.

      I am just trying to concentrate on how ridiculously thankful I am to have it when I need it.

      • I know a little of that feeling. When the DH and I decided to move, not too long ago, we knew we’d deplete the account that had our downpayment. Even though intellectually, I knew that would happen (unless the tooth fairy dropped tons of cash under our pillows), it was freaky to me to see that account balance plummet.

        Btw, you’re an awesome best friend.

      • Keep up the good advice on how you do it, Senior Attorney!

      • Senior Attorney :

        Aw, you ladies are so awesome! Thanks so much for the encouraging words! It really helps!!

    • I went through a divorce last year zeroed out my savings and forewent my roth contribution for the year. Was it what needed to be done to set myself up for a better, much happier future? Yes. Did it suck? Yes.

      I just kept telling myself that THIS is what I had been saving for and that everything will be so much better personally and financially once I am out the other side. I know it’s scary but I think that this is just one of those times you need to make the leap.

      I also put myself on a serious budget once everything had stabilized and am trying to build up my emergency fund aggressively. I just hit the three month savings mark and it is such a relief.

      You can do this.

      • Senior Attorney :

        Yep, you’re right. I stayed several years longer than I should have because I didn’t want to face the financial devastation, but oh, man. It is so worth it!

        Reminds me of the old joke:

        Q: Why is divorce so expensive?
        A: Because it’s worth it.

    • I was talking with my mom a while back about it seems that just as I get one months savings collected, something drains it (like spending almost $1k on my car inspection). It’s nerve-wracking, but I’ve figured out the outline of an emergency-emergency plan that might help if something big, like a job loss, were to happen.

      • AnonProfessional :

        +1 I seem to frequently have this discussion with my mom and significant other as well. Just when the emergency fund is starting to actually resemble a fund, something happens (new tires for the car, tax bill, etc.). It’s frustrating. But on the other hand, those little emergencies would be that much more painful if there wasn’t any money in the account…

        • Senior Attorney :

          Those aren’t emergencies. They are normal expenses that just don’t happen to occur monthly. I put money aside for those expenses in addition to my emergency fund. Things like tires and tax bills can be predicted and budgeted for, and if you’re not doing that then you’re not really saving up for real emergencies.

          • AnonProfessional :

            There’s no need to be condescending and judgmental. Not everyone that reads this blog has been at work for a long period of time . Some of us are just starting out. Yes, I realize some irregular expenses can be predicted and budgeted for although not all can be planned for (eg. tax circumstances change based on job switches and its not always easy to predict when you will need new tires or a car repair). I do set money aside outside of an emergency fund in what I call my “personal escrow account.” But the point both I (and I think Brittany) were trying to make is that sometimes it can be difficult to get an emergency savings built up and not due to a lack of effort or because of spendthrift habits.

          • +1 to AnonProfessional below. I’m still in the first 5 years of getting out of school, and working on paying off student loans, and living in general within my means. I’ve been putting a little aside and have both a 401k through work and an IRA that was part of an inheritance, but as far as available savings on hand, I’m still working on building those up. Yes, tires can be predicted, but repairs to a car that aren’t obvious to someone who has minimal knowledge of cars isn’t all that predictable.

          • Senior Attorney :

            Sorry. That did come off a little condescending and judgmental, which was not my intention. Glad to hear you’re putting money aside for those expenses.

            It it definitely hard when you’re trying to get up and running because the expenses come whether or not you’re quite ready. Glad to hear you’re on it! You’ll get there!

  7. Sydney Bristow :

    I’ve cut down my emergency fund a little bit to 3 months of average expenses. It’s in a TIAA-Cref online savings account earning less than 1%. My goal was 6 months of expenses but I’ve cut it down to aggressively pay down my student loans. My fund could go a little further because my fiancé technically can cover our living expenses so I’d just need to pay my loan payments but at least until we get married I’d try to avoid that.

    • Sydney Bristow :

      Oh I actually also have my Roth IRA. As I understand it, I can withdraw my contributions without penalty but I’d only do that as a last resort. Including that gets me to about 5 months of expenses.

  8. Equity's Darling :

    Excellent- I wish we had more wallet posts.

    I’ve heard a good rule of thumb is as many months expenses as the unemployment rate (.e.g if the unemployment rate is 9%, you should have 9 months expenses saved).

    I keep mine just in a savings account with ING Canada, which gives 1.4%? I tried to justify doing laddered GICs, but the rate isn’t any higher unless you’re looking at 3-5 year GICs, and even then, the highest rate is 2.4%, so I don’t know if it’s worth it?

    Does anyone have a huge emergency fund? I would love mine to be 12 months, but I know that’s probably excessive for a single lady with no mortgage and no dependents.

    • Sydney Bristow :

      I don’t think it’s excessive, particularly if your job is less stable or you are considering switching careers or starting your own business. If you don’t have someone you could rely on financially if you needed to then a year’s worth of savings sounds pretty good. It might be excessive right now if your income is stable and you owe a lot of debt. It has a lot to do with comfort levels though.

  9. I think its important to take into account how long some of those reductions in budget will take. For example we have a year long lease. Even if we wanted to we might not be able to get out of it to downsize our costs without paying a penalty. If we owned a house we would need to take into account how long it would take to sell it (and the associated costs) before we could reduce our housing budget.

    We are currently working towards having about 35-40K (approximately 6 months of living expenses using VERY generous calculations to give us a real buffer) in our emergency fund which we keep in an online savings bank.

  10. I keep calm by just calling my dad and askeing him to put money in my account. It realy is not hard. YAY!!!!

    As for the emergency fund, I ALWAYS keep $500 in my freezer inside a box of brocolii. No one eat’s brocolii, so that box has been siting there EMPTY execept for the $500 goeing back to my college day’s. Fortuneately, I do NOT have to acess it, so I keep it inside a GLAD BAG–otherwise it would get all wet and mushey. FOOEY!

    Frank saw my coat and he swear’s there is POOPIE in the fur of the coat, but NOT to worry, b/c when the animal (mink or raccoon was alive, it had to poop anyway). Frank told me his wife take’s her coat’s to the cleaner’s so I will have my house keeper do that on a weekend when I do NOT need to wear it. Right now, it is to cold NOT to wear the coat, poopie and all. DOUBEL FOOEY!

  11. Anonymous :

    To the poster who said that “organizing my office is part of my job”, thank you. . . it is resonating with me this week!

    • Organizationally Challenged :

      Me too!! I cleared out a lot of stuff over the weekend, and I tell myself that every day before I go home. Timesheet? Sucks but part of the job. Keeping my desk organized? Sucks but part of the job. So far it’s only taken a few minutes each day.

  12. Anon4This :

    Any idea what to do with your cash when you’ve more than maxed out your emergency fund?

    I have a little more than $30k saved in my emergency fund, which is much more than I need (I could probably drop it to $15k-$20k and still be more than covered). I have no student loan or credit card debt, and my retirement contributions are very healthy.

    My “very comfortable with risk” boyfriend is trying to convince me to start investing the extra money for short to mid-term goals (buying a house, a future wedding), especially because interest rates are so low right now. I know I should (I’m basically losing money with my current savings account right now, due to inflation + low interest rates). However, it’s kind of frightening – I like having that money right where I can see it and knowing that at least it won’t go down.

    Any suggestions for how to invest the extra money for my short term goals over the next 1-5 years?

    • Math Chick :

      Do you have any debt? The interest rate on your debt is the rate of return you get on every dollar you pay off (then, factor in your tax rate). I’d work on that. Debt > inflation rate > interest rates for truly extra money.

      Keep the cash you have!

      If you won’t need the money for 5-10 years, I’d put it in the market (but not for stuff you’d need sooner). If you have a large cash buffer, you can really minigate your need to sell assets in a choppy or declining market.

    • Index funds? I’ve been tracking my retirement money on Mint and it’s fun to watch it grow! (especially since you have such a healthy emergency fund)

    • I’m no expert, but I read several books on how to get started investing my extra money (that I wasn’t using for emergency fund, 401K, etc). One of the recommendations I came across most often was investing in index mutual funds, which I’ve now started doing through Schwab. There are no transaction fees, and I’m getting returns of ~6%, which is way better than what I was getting with savings account.

      Of course, this carries some risk as the funds follow the stock market, and maybe my risk comfort for short term isn’t what most people’s would be. Unfortunately, I think most people would say that funds earmarked for 1-5 years from now need to be in a regular savings account.

      • Baconpancakes :

        Which books would you recommend? I have the Gone Fishing Portfolio sitting on my shelf to read next, but I’m looking for more investment-for-dummies books.

        • I liked I Will Teach You to be Rich specifically.

          It has a dumb and misleading name, and his tone in the book can be… patronizing? However, it really got me interested in my longterm finances. He takes a keep-it-simple approach, and really debunks all of those get rich quick schemes, which resonated with me. I think I was able to buy it on my Kindle.

          It’s not only about investment, though. It’s also about good general financial life practices. I believe I saw the recommendation for the book from some other awesome r e t t e in these comments.

    • Blair Waldorf :

      For goals that short, think about a high-yield savings account, like Ally, Barclays, or Capital One. You can get .85 – .9% interest (which is better than the .01-.02% in regular savings accounts) and they are more liquid and less risky than index funds or CDs. There are no minimum balances or fees and you can have a ton of different accounts, like a down payment or wedding account.

      I too was risk averse when it came to index funds, and the savings account was a low-risk way to start learning about other investment vehicles. Also, think about just putting the minimum into an index fund so you can start learning what investing feels like but you don’t have your entire nest egg tied to the S&P.

    • I’d keep stuff in the 1-5 year range in cash. Yes, you won’t get awesome returns, but the money will be there when you need it. If having it be less accessible is something that is helpful for you, then choosing CDs with the right time range for your goals is a good way to make a wee bit more interest than most savings accounts while also tying up your money in something a little more difficult to take funds out of.

  13. I was trying to build up to 6 months of NYC living expenses but then realized that my gradPLUS loan interest was just crazy so I used my cash fund to pay off the loan over 2013 (inspired by “no more harvard debt” guy).

    I keep around $5k cash for emergencies for now plus $12500 in Roth that I can access in a true emergency since I am prioritizing the high interest loans right now.

    No dependents, no mortgage, living parents with a room for me if it came to it.

    • Anonymous :

      I’m glad you said it all I was thinking was 9 months of loan payments = 30k for me, there’s no way I’m sitting on that money instead of actually paying down the loans (if I could manage to both save that amount while paying NYC rent and making monthly loan payments). In a true emergency, those things are going on deferment, not get paid.

  14. This is embarrassing to admit, but we have basically zero emergency fund. We do have more than six months’ expenses in a CD, but we’re about to use that for a down payment. Our actually emergency plan would be to borrow money from my parents. But I have a very secure job (academic) and we could relatively easily live off of just my salary, so I’m comfortable with the situation. Also, my parents would be happy to help and could do so without really noticing it.

    For where to store your fund, though, I vote CDs all the way. Even if not laddered, the penalty for early withdrawal is usually only loss of some part of the interest. In a real emergency, you can get to it quickly, but in the meantime at least it is matching inflation.

    • Senior Attorney :

      If you are planning on buying a home, you will need cash on hand after closing for the expenses that will inevitably come up for repairs or upgrades that you will need/want to do. Ideally you’d have 10% of the value of the house on hand after closing. But in any event it’s a very bad idea to put every penny of your cash on hand into the down payment and be left with nothing.

      Ask me how I know this! ;)

      • ditto 100%. We put everything we had into our house, and 3 months later I lost my job. My husband can cover our bare minimum expenses (including mortgage) with just his salary, but I was freaking out. I luckily found a new job just as my severance ran out.

        I will vouch for the fact that cutting your spending drastically when a real emergency comes up is totally possible- my “normal” credit card bill is around $1500; the month I had no job it was $300. I just… didn’t buy anything that wasn’t food or healthcare.

  15. Clementine :

    Right now, our emergency fund is kind of in a weird place… We just bought a house and while we had planned for closing costs, down payment, etc., I was really blindsided by just how much we would need in ‘start up costs’. (ie- repairs that had to be made IMMEDIATELY, all those trips to home depot, a new washer/dryer, etc.)

    Because of that, right now we have 3 months’ living expenses saved rather than my normal 6. It’s in a money market account managed by the same financial advisor who does our retirement accounts. I also keep 5k in a savings account that earns very little, but I can transfer from at any time. I like this because it means that if I need to, I can have access to these funds immediately and not wait for my FA to be in the office and get the transaction initiated.

    To give a little perspective, late 20’s, husband is 2 years out of school (prior military), no kids and we both have very stable jobs and pretty significant disability insurance. At this point in our lives, we could very realistically live off of either his salary alone or my salary plus a retail job or small draw from savings. I don’t worry about one of us getting laid off, but what I do worry about is one of us getting disabled to the point where we could no longer reach our current income levels- hence the disability insurance(s) we both purchase through our employers.

    I grew up in a family where we had enough to eat but barely scraped by. Many of my spending and saving habits- and my neverending worries about spending money- come from there.

  16. We have about 40k (generous six months of expenses) in two places — one month split between checking and online savings account (both serve as a nice buffer for truly immediate $$ needs), and then the remaining five months in laddered CDs from Ally Bank. I share Kat’s love for Ally — we use their 11-month no-penalty CDs (i.e., you don’t have to pay to break them early), and have been rewarded with 2x .25% loyalty rates now that we’ve had them for a while. So we’re making almost 1.5% on them, which is about as best you can do in this market for liquid funds.

    • We have about $35k, with the first $10k in a savings account and the remainder in an easy to access mutual fund. There is usually $10-20k more floating around in various checking and savings accounts (such as the vacation and furniture funds, and the buffer in checking for monthly and irregular expenses (like tires mentioned above)). I just couldn’t justify keeping all of our emergency fund in an account that earned less than 1% interest while I feel very secure in my job for the next few years.

      What’s going to be hard is resisting the urge as I get closer and closer to paying off my loans to just take some of that cash and make the final payment a few months early – then I’d have $1,000 a month to quickly replenish the fund. We’ll see when the time comes.

      Thanks for the info on the Ally CDs – we opened up some Ally accounts this summer and are liking them so far.

  17. just Karen :

    My husband and I have about $30k in an emergency fund, and I am comfortable with that figure (our mortgage is $1600 a month, no credit card debt, his student loans are $150 a month and mine are paid off). I would like to seek the hive’s collective wisdom on an idea I had for this year – my car needed to be replaced, and we were able to do so without taking out a loan, but the result is that we really don’t have money to put into retirement this year aside from what my employer puts in for me. We would qualify for Roth IRA contributions this year, and it is my understanding that you can pull the principal without penalty if you really needed to. My thought was to put $10k of our emergency fund into the Roths (5 each) this year and work to rebuild our emergency fund knowing that we would have access to the Roth money if we really got desperate. Is there anything I am not thinking about that makes this a terrible idea?

    • I’m the anon above that counts her Roth as part of her current emergency money. If you actually needed it, and the market happened to be in a downturn, there is the risk that the value could be less than what you put in.

      E.g. My 2006 contribution dipped in the 2008 meltdown and is only now more than what I put in. However, since I didn’t really need it during this period, it wasn’t a big deal.

      • just Karen :

        That is a good point. One thing that I have been thinking about that might be me being paranoid, but certainly pointed in favor of pushing the money to Roth, is trying to make more of our assets exempt in case of true disaster necessitating bankruptcy.

        • Same Anon– Oh, I totally think it’s a good idea based on what you wrote (I mean, I do it!) I wish I could still contribute to a Roth, but for me to do it now involves something with the back door Roth and conversions, etc so I’m focusing on what I need to do now (take care of those student loans).

      • The Roth is a tax designation but you can invest in whatever fund type you want. There is no reason you can’t have your Roth be 100% Treasury bonds as a safe investment if it doubles as your emergency fund.

    • quality v. quantity :

      No – I think this is a really good idea, actually. Kind of the same thing – if there is a true “emergency” we can access money but with a penalty – so we’d only do it for an emergency. Much better to contribute into retirement.

      Being as you have $20K left in the emergency fund, you should be fine doing this. It’s what I’d do if I were in your shoes.

  18. TO Lawyer :

    I have 2 savings accounts (none of which are getting much interest to be honest – I think one is getting 1% ?)

    I considered the one that was easier to access to be emergency money but I dipped into it because of some higher than expected expenses over the last year. I am trying to save more and replenish what I took out.

    I just keep my savings in cash in different accounts – to be perfectly honest, I don’t really understand other secure options and would prefer to keep this money fairly liquid. I will probably start to figure out other options once I have a little more socked away.

    I love these posts but I feel like our savings vehicles are always slightly different in Canada so I should probably do some research on more Canadian-centric books/info

    • Anonymous :

      Would love tips on any Canadian-centric books/blogs/etc

      • Anonymous :

        For blogs I follow the Canadian Couch Potato, Where Does All My Money Go, Retire Happy and Give Me Back My Five Bucks.

        Sometimes they each annoy me, but on balance, are all right.

  19. This is timely. I am actually terrible at this. I have a small “random” emergency fund with my regular bank, and I have a much larger account that in theory is down payment money for when we buy a place but it’s just sitting there earning next to nothing. Last year I planned to transfer it to at least a higher interest account like Capital One but I haven’t even managed to do that. Meanwhile, I do have student loans and maybe I should just pay off some of those instead, but they feel manageable on a month to month basis and I worry about touching the money. I really need to get on top of all this stuff because I really could be doing better with all this. If anyone has a book recommendation for something that doesn’t just yell at you about not buying lattes and tell you to live like Dave Ramsey, I’d appreciate it.

    • Have you read “I Will Teach You to Be Rich”? I thought it was a pretty good, accessible overview of personal finance for one who doesn’t know a lot about the subject. There’s no yelling about lattes. :)

      • Sydney Bristow :

        I second this recommendation. Also check out Your Money or Your Life. It’s helpful for putting money in perspective overall.

        • Thanks, ladies! Adding to my book cue. So many of these books seem to be for a niche market or for people who have serious management problems. I have always been fiscally responsible, just super timid and unproductive when it comes to investing. This looks like a good place to start.

  20. wolverine :

    Speaking of emergency situations, my husband just lost his job. My salary is enough to cover our expenses month to month but leaves very little room for savings. After reading this thread I am wondering if we should make drastic changes to our lifestyle right away. E.g. move out of our downtown but high priced rental. Pros – we save money. Cons – we just moved here from another city so moving out will come with pretty high costs of moving + penalty to break lease. Another example, we have a nanny who we pay fair market value but with taxes and everything, it is still a big chunk of my paycheck. If we get rid of her, we save money. But then it means my husband will have no time to search for a job. We are looking into daycare which costs less but there is a wait list. Not much has changed in our lifestyle since my husband lost his job and I am worried hat we are in denial. But also worried that making these changes will cost us a lot of money in the short term. Advice?

    • just Karen :

      First, I am sorry that you are dealing with this! I think that the answer to your questions depends in large part on your husband’s job prospects – the field he is in, educational and professional background, etc… all would factor in to how long a job search he is likely to have (I know there is a fair amount of luck as well). As long as you are not going through your already existing savings, I wouldn’t make massive changes with upfront costs unless you are confident the job search will be a very long one.

    • saltylady :

      I think if you’re covering expenses, I would trim everywhere else and keep the nanny for now. Then reassess in a couple months if he hasn’t found anything. I’d stay in the rental rather than pay a penalty, then move at the end of the year if nothing has changed.

    • Anonymous :

      A good apartment and nanny can be hard to find. I wouldn’t make changes on those right away. If your husband does find work relatively quickly, then he can start right away because childcare is in place. You wouldn’t want to be stuck for childcare if he gets work before your child get into the daycare. I would go cheap in other areas first (store brand diapers, second hand clothes for baby) because those things are easier to upgrade again vs. bigger changes.

  21. saltylady :

    Our “emergency fund” is really just our Vanguard account. In that, we have a money market fund with about $30-40K, and then more than that in various stock and bond mutual funds. I just differentiate this from our regular checking account where our paychecks are deposited and that we pay bills out of. I don’t totally leave the emergency fund alone though. I try to put money in it every month, and I write big checks out of it, like property tax and for the new sofas.

    This is all separate from the 401K accounts, 529 educational savings, etc. I guess you can technically tap that if you need to with a penalty, but that would be last resort. We could sell our house easily for a massive mid-six figure profit (bought at the right time in the right place). So that gives us some peace of mind.

  22. My “emergency fund” is really just my non-retirement investments (mutual and index funds). I keep almost nothing in cash anymore, except for a few specific things. I put everything on my credit card anyway, so if I had something so large that I couldn’t pay it off with my paycheck (or was no longer getting a paycheck) I would sell some investments. If I lost my job and the market stayed flat, I could continue living my life pretty much the same for a couple of years (and probably another year if I was willing to take money out of my Roth IRA), but if I lost my job and the market completely tanked, as a (very!) last resort I could always move in my parents. I have the yearly deductible for my medical insurance saved in my HSA (although even that felt like too much cash and I just moved most of it to a TD Ameritrade account a few weeks ago).

    However, I am single, I have no kids, I rent in a month-to-month rent controlled apartment, have no debt, and I don’t need to worry about my parents’ financial situation. But this is what works for me.

    • I really love when Kat does the wallet posts and while I find everyone’s comments really eye-opening, they’re also a little depressing to me. I try to make myself feel better by remembering that many of you are further along in your careers than I (and I’m also not a lawyer). However, I had a few early-20s years during which I definitely could have used some better money habits.

      I think I audibly gasped the first time I saw someone post a $700K salary.

      Anyone else?

      • Topanga, sorry; that wasn’t supposed to be a reply to your post, but a new one!

        • No problem:-) I also love the wallet posts. People in my real life don’t generally share their personal financial details and I love hearing about what everyone does with their money.

      • I feel you! Except I am a lawyer (albeit at a nonprofit) and probably a bit older. SIGH.

      • SoCalTraffic :

        This! I’m a couple years out from college (B.A.) and making about 38K while living in a high cost – of – living area. I was thrilled when I finally built up $1000 for my emergency fund. What’s great about wallet posts is learning what CAN be possible – be it saving x amount in different funds or joint / separate checking for couples.

        • SoCalTraffic – I was at a similar earnings level before I went for my MBA. The thing I did post-BS and pre-MBA to really ramp up savings? Part-time tutoring and teaching. My day job was reliable about letting me out the door around 5 or 5:30, so I’d be free to teach a class 2x/week or meet with a student for private tutoring around 6 or 6:30. It was great because it didn’t really interfere with my social life to tutor twice a week from 6:30-8pm. 100% of my tutoring income went into savings.

          For you – the upside of living in a high COL area is that you probably live reasonably close to rich people who will pay for premium services.

  23. Anonymous :

    Sorry Kat but both of your statements about municipal bonds are just wrong.

    You can hold muni bonds in a tax-advantaged account, it just doesn’t make any sense to because the interest is already non taxable. Put those in your regular accounts.

    Also, the stated muni bond return is LOWER because it’s a tax-free return. If you compare the post-tax return of a taxable investment, it may be higher or lower than the muni bond rate (often depending on your marginal tax rate).

    • Agreeing with Anonymous.

      Also I’d like to add, if you are going to buy muni bonds, check out your state tax laws. In California, only interest from California muni bonds is tax free. I see a lot of 1099s where the broker just bought random muni bonds, so it’s not saving California income tax, which can be quite high if you make a lot.

    • Stephanie Plum :

      There can be lot of risk attached to muni bonds. Not for the novice investor and not, IMO, for anyone who is not maxing out other tax advantaged: 401(k), traditional IRAs if deductible, Roth IRAs (which anyone can contribute to regardless of income – google “back door Roth”) and iBonds, which I don’t think Kat mentioned. iBonds through the US Treasury (go to Treasury Direct) can be a great emergency fund proxy once you get past the initial 12 month holding period. Also, Roth contributions can be taken out anytime penalty free as long as you don’t touch the earnings.

  24. I am so impressed with you ladies! I aspire to be like you some day. For those of us still trying to figure things out, I’ll post our emergency fund situation.

    Status: Married, early 30s, expecting bebe #1, no loans, with a small house, looking to move in the next 12-18 months into our 10-15 year house.

    Emergency funds: $15K in savings, which is our 6-month “runway” before we would have to dip into short-term savings/retirement accounts. We have an additional $3-5K in checking for car repairs, etc. I also sock away $500 per month into our “house” account for insurance, property taxes and home repairs during the year, with the expectation that it goes to zero each December 31.

    We also have additional savings for short-term goals that are taking priority over building a more robust emergency fund – “baby” fund (for out-of-pocket medical expenses and getting all the baby stuff we need) and the “new house” downpayment fund.

    I appreciate these wallet posts, to see how people find their own balances between saving/spending wisely.

    • Intrigued :

      I love these wallet posts too since IRL people don’t talk about money. I’m in my early 30s and married and a lawyer and expecting our first child. We bought our house at the bottom of the market (I think?) in august 2012. We don’t have a separate emergency fund but we do have about $10k contributed to a Roth IRA and at the moment we are both working. My husband left his job last spring and didn’t get another one until the fall. That ate up our emergency savings which we had in a local credit Union. Thank goodness he found a better job than he had before because we wanted to start trying for a child in the fall. I have numerous spreadsheets for our finances…. One for if one of us was laid off tomorrow, one if I don’t return after maternity leave, and if we both keep working, etc. These take us up through the date our house is paid off, which is when we hope to retire. I update our spreadsheets weekly … and was doing that daily when husband was out of work as a means of self assurance.

  25. TimRiggins :

    A couple of months ago, I finished saving up 6 months of (fairly generous) expenses. I’m continuing to add cash to that account – I was told to add 2% of your gross income to emergency savings, presumably to keep up with inflation. I also keep targeted savings accounts, mostly for big expenses that happen once or twice a year (gifts, car insurance, vacation, etc.).

    I have all my savings in a Capital One account, so the interest is pretty lousy. In the event of an emergency, I could pull my Roth IRA contributions out without penalty, so I’m considering investing at least part of what is now in my emergency fund (maybe a third of it) in an index fund to get a little more return.

  26. Related question – where do you all keep your non-401K, non-IRA retirement savings? Maxing out both isn’t actually enough (IMO) for the length and lifestyle of retirement I expect to have .

    (I expect to have to retire by age 65 due to losing my ability to work; everyone in my family starts suffering from dementia in their 60s. They also live well into their 90s, so I’m expecting 30+ years of retirement with high health care expenses for most of that time.)

    • I have both a Vanguard and a Fidelity account.

    • I Do Not Like the Cone of Shame :

      I have a 401K at work, plus an IRA and a non-IRA (just a regular account) sitting at Fidelity. I fund my 401K first, then my IRA, and in recent years trying to do 10K a year additional intended for retirement. This account is all mutual funds.

      Like you, I did some math and figured out I would be short even if I max out my 401K and IRA every year – that I need to supplement it with another 5-10K per year.

  27. Anonymous :

    I’ve noticed a lot of commenters use many accounts and I’m curious about what the benefits are. We have a checking account where we keep enough to pay our monthly bills with a sizable cushion. We also have our house down payment fund in an index fund, and we transfer money there from our checking account periodically. We also have a 529 for the kids and our retirement accounts. I see comments in which people mention having significantly more accounts for various types of expenses, and I’d be interested in hearing why people use lots of different accounts.

    • Senior Attorney :

      I’ve talked about this before, but I save money in different online savings accounts (I use Ally) for all those regular but non-monthly expenses I was talking about upthread. Back when I was married and living in a house, the accounts included the following:

      Car repairs/maintenance
      Home maintenance/repair
      Vacation
      Job Expenses
      Clothing (his and hers)
      Hobbies (his and hers)
      Child-related expenses
      Gifts and Holidays
      Charitable Donations
      Theatre Subscriptions
      Summer Activities
      Job Expenses
      Tech Stuff
      Property Taxes

      And so on. These days I’m separated and my categories include things like “moving expenses” and “legal expenses.” Every month I contribute 1/12 of the expected annual expenditure in every category to the appropriate account. When I have an expenditure in one of those categories, I transfer the money from the savings account to checking and pay the bill.

      The reason I have multiple accounts is that there are limits on the number of monthly withdrawals you can make from any one savings account, and if I don’t break up my categories into separate accounts I bump up against that limit pretty quickly.

      That’s the short version. Hopefully it’s reasonably clear. Ask away if you have any questions.

      • Senior Attorney :

        Oh, and in a true emergency such as job loss or marital separation, non-necessary accounts like “vacation” or “Hollywood Bowl box seats” can be diverted to things like “putting food on the table” or “divorce lawyer fees.” So in a way these accounts act as a supplement to the emergency fund.

  28. We have three major buckets of non-401(k) money.

    1. Renovation/large expenses (currently at 20 months expenses) – This is what we would have used during my husband’s 2-year unemployment if needed. In reality, we just delayed the home improvement projects and sat on the cash. We will be starting to drain this soon to actually do some improvements, but this is the first money that would actually be used. In general we are saving for things in the 1-3 year window, so there is always something there.
    2. Cash (four months of expenses) – Not to be touched unless there is a real emergency and the first bucket was gone.
    3. Roth (pre-tax) IRA accounts – We could withdraw principle (probably another 12 months of expenses) if needed.

    There is also the possibility of taking a 401(k) loan, but we would probably downsize the house first to not jeopardize retirement.

  29. Echoing the above sentiments, I don’t know how balance the need for an emergency fund with the desire to pay off my student loans. Spouse and I have about $34k in savings, plus about $50k in retirement accounts and $7k in the market (index funds). We both contribute 9% of our pay to retirement accounts. I have about $40k in loans left @ 6%, and am set to pay them off in 27 months at a rate of $1750/mo. Should I move $20k from savings toward the loans? Our mortgage is about $2k/mo and our other expenses are modest. But spouse and I are both fed gov employees, so I’m risk adverse in this political climate…

    • i admit i know NOTHING about finances/investment, etc, but if you are feds, I would hoard that cash like a prepper hoards canned goods. Seriously. The interest on your student loans is so low, and it is not considered ‘bad’ debt. I would be completely insane obsessed with saving up as much cash as possible till you have enough to cover 9 months of expenses if you BOTH lost your jobs at the same time. I know a shutdown that lasts 9 months is not going to happen, but you could both be incomeless at the same time, so I would worry WAY more about having cash you can get to than paying off your loans right now. Sorry about Ellen caps, but SERIOUSLY. Don’t dip into your savings, just don’t.

    • Depends on whether or not you’ve consolidated your loans. If they’re not consolidated and there is one loan you could wipe out entirely, and thereby bring down your monthly minimum, then do so. The psychological win of marking one loan as PAID IN FULL is incredible and will help keep you motivated.

  30. I Do Not Like the Cone of Shame :

    One thing that gave me peace of mind is to maintain a spreadsheet of my monthly budget if I was laid off. Big expenses like property tax, car insurance, etc are annualized and then divided up by month (but in reality, it will all depend on the timing of your unemployement vs. when those bills are due).

    I have been laid off, and it worked for me to have a scaled down budget for a certain amount of time (say the first 6 months), and then if your unemployment is longer then you go into Defcon 1 and cut down further.

    I have my emergency savings squirrelled away in different locations. My theory is I won’t need all of it immediately:

    (1) a chunk sitting in my savings account (same bank as my checking account). That’s so I can access it immediately if needed. I learned the hard way last month that transferring funds from one bank to another takes days.

    (2) a CD ladder at Ally bank, 4 separate CDs (initially opened up as a 1yr, 2 yr, 3 yr, 4 yr). As the newest one matures, you roll it over into a new 4 year CD and get the higher interest rate. If you have to close your account early, you only lose, I think 2 months worth of interest. Plus, I got the kind of CDs you can raise your rate in the future (if interest rates go up)

    (3) For true long term emergencies, I have some mutual funds sitting at Fidelity (non-IRA). This is really intended to be for retirement, but I could use it now if I had to.

    (4) Medical – my work now offers a HSA insurance plan, and I have been aggressively building that up. This carries over year to year, and if you leave your employer. I look at it as paying pretax now for future medical payments – whether laid off, or when I get older. I don’t think you can use it for monthly insurance premiums, but I heard you can use it for COBRA.

  31. We have a small emergency fund, a few months total expenses. I am comfortable with that, and don’t plan to save much more for the specific goal of emergency savings. We live below our means with recurring expenses and could pay the bills on either one of our incomes, if necessary. We put more than enough toward retirement, and would rather enjoy our “extra” money now instead of pinching pennies. We have run the numbers and it would take a very unlikely scenario for us to run into significant financial problems (knock on wood!).

  32. Very timely post. I’ve been thinking about savings/investment often recently as I’m going to be starting a new job (non-lawyer) with significant increase in income in about 6 months. Ashamed to say, my DH has been more focused on increasing our savings than I have the past few years. As of now, we have 50K in a Vanguard money market account, plus 15K in CDs that we could access with penalty if necessary. We really need to start doing something with a bit more return than the money market account. How much of the 50K should we keep in the money market vs. invest, given that we’re going to be having moving expenses coming up (selling current house likely 100K profit, buying in a slightly more expensive city)?

  33. My spouse and I aim to keep 20k in cash, 40k in laddered CDs, and 40k in a short term bond fund. For us this would be close to a year of “cut back” expenses minus the day care and other stuff we’d not need if laid off simultaneously. That might not be a crazy far fetched scenario in our situation because we work in the same company and department; probably less of a concern for 2-wage households with salaries from different places.

    Re: tying up cash in longer term CDs for better interest rates: ally bank has multi-year CDs with good yields where the worst penalty for early withdrawal is loss of 6 mos interest; not bad for money you are really not planning to need anyway.

  34. newlawyer :

    Does anyone have advice for those of usthat are just beginning to build up our emergency fund? The thought of saving up 30k is daunting. Right now I am saving $1,000 a month (which I thought was decent?) but at this rate it will take me 3 years to get there! With a $150k of student loan debt, its hard to imagine putting aside that much money to just sit there while I have a pile of debt at 7.9% interest rate just growing and growing..

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