Tales from the Wallet: The Emergency Fund

Picture 22014 update: you may want to check out our latest discussion of emergency funds.

We noticed that our post on savings seemed to be a popular one, so we thought we’d start another discussion on money and investing. Today we’re wondering, dear readers, about your emergency funds: how did you calculate the amount, how do you store it, and how often do you reevaluate the amount and the storage situation?  (Pictured: Comme des Garcons Large Zip-Around Wallet, available at Saks.com for $325.)

A caveat, at the beginning: we are not experts in financial advice.

The emergency fund, though, is one of those basic topics that you read about.  If you’re in debt, they say, save for your emergency fund first, and then begin paying off debt.  If you’re not in debt, they say, save for your emergency fund — and keep it liquid — before you start investing in the market.  The emergency fund is supposed to be there as a a cushion in case you or your spouse lose your job, or if some other emergency comes up, such as medical needs or a car accident.

OK, so, fine — great.  But how much is it? Some say to figure out six months of living expenses — your mortgage or rent, your school loans, your basic food and living needs — and to bank that.  Others say to figure out what your salary is for six months (the higher of two, if there are two) and just save that amount.  (We’re guessing the after-tax amount?)  Which calculation do you use?  In the recession, have you tried to build up more than six months of living expenses?  (We have a few good friends who’ve been out of work for more than six months, so it isn’t the worst idea.)

Once you have it, where do you stash it? It should be fairly liquid, so the stock market isn’t the right place for it.  But do you go for a high-interest savings account?  Do you have them in rolling treasury bills?  Do you put them in a series of 6-month CDs, designed to give you access to some of your cash once every month or so?  We always used to have them in Schwab money market funds — which at one point had an interest rate as high as 7%, we believe — but it’s now gone down to a sub-one percent interest.  We’ve recently found a savings account (using the tools described in this recent NYT blog column) that had about 1.8% interest (through Capitol One), but that’s already down to 1.60%.  We suppose this raises another question:  How often do you reevaluate your savings vehicle?

Another option for the emergency fund is cash — we’ve heard tales of people burying up to $10K in cash in their backyard in order to have quick access to it should there be some catastrophe in which banks and so forth are not working — does anyone do that?

There are no right answers here, and we’re curious as much as you guys. What’s your take on the emergency fund?

(L-1)

Comments

  1. Another option for the emergency fund is cash — we’ve heard tales of people burying up to $10K in cash in their backyard in order to have quick access to it should there be some catastrophe in which banks and so forth are not working — does anyone do that?

    Oh man, I’d be terrified that the neighbor’s dog would dig it up. Or that someone would see me burying it and think I was hiding a dead body. :-)

    I just have an ING Direct account; I should probably think about more useful savings vehicles, but that one is so easy and hassle free.

  2. I keep about 12 months’ worth of expenses (which comes out to about 8 months’ after-tax salary) in an interest-bearing savings account. In theory, at least. Right now I have a lot more then that in 2 savings accounts because I am looking to buy a condo and have been saving up for ages for the 20% down.

    Anyway, I’ve thought about CDs now and then but the negligible increase in interest rate over the interest-bearing savings accounts hasn’t seemed worth the decrease in liquidity.

    What does everyone think about the idea of woman v man finances? I think I am the stereotypical woman, keeping too much in savings rather than making my money work for me (but I need it there to feel financially secure – am not married, no safety net). Otherwise, I just max out the 401(k), plus make after-tax deferrals to the 401(k) – so it is all invested in the same mutual funds. On the other hand, my guy friends have been encouraging me to invest my savings in the market now for some great earnings when the economy picks up, rather than put it into real estate (they say it results in too undiversified a portfolio).

    Thoughts?

    • My recommendation (as a former financial advisor) is to get a friend or relative you trust to recommend a financial advisor to you, and let (hopefully) her work with your personal finances. Sounds like you might not be setting up your retirement-tax situation in the best way, but I’m no longer licensed and certainly cannot give any recommendations. But professional help is worth it.

      • How does one go about finding a good & reliable financial advisor?
        I really would like to meet with someone — but am not sure how to go about it & to my knowledge no one I know uses one.

        My situation might (or might not) also be somewhat unique — I would really like a 1 time only consultation re: my student loans and whether it’s better to pay off about half of them now (a fairly big chunck) or invest in something else, as I work in the pub sector & may be able to take advantage of some student loan repayment plans from the fed govt but am unsure if it’s worth the commitment.

        I am not sure who to go to for something like that since most financial advisors would presumably not be too well versed with the ins & outs of student loan debts. Also, I am afraid that someone who really knows their stuff will not be willing to devote time to something this small (relatively speaking).

        Is there a Zagat’s equivalent for this kind of stuff?? Any suggestions? (and, please don’t say to ask the financial services office of my law school — they were no help at all!)

        • If you are eligible for USAA (you do not personally have to have been in the military – a parent or grandparent will do), I would start there. Very reasonably priced, and they are not fee-based, so their advice was unbiased.

          They recommended that my husband and I have more insurance than we did, but there was absolutely no pressure to buy USAA products. We just did because we already had auto and homeowners with USAA and had already found the prices to be better or comparable and the service to be extremely satisfactory.

          • I think you mean they are fee-only, not commission-based. A fee-only financial planner charges a flat fee or an hourly rate, established ahead of time. A commissioned-based advisor (like those at many, but not all the big brokerages) are making a commission off of whatever they sell you and may not direct you to the investments that are best for you. The National Association of Personal Financial Advisors (www.napfa.org) is a good resource for finding an advisor.

        • Look for a financial planner that is fee-based (that is, charges different fees for different levels of work, rather than someone who is commission-based). They are more likely to give you unbiased advice, and it’s a quite common marketing/networking tool for financial advisors to do one-time consultations (in hopes of developing their client base). Again, try to ask around for a recommendation.

          For people who want to invest in stocks but are turned off by the complexity (and who also want to diversify), ask your advisor about ETFs (exchange-traded funds). They are similar to mutual funds, but almost always with lower fees (and since nothing is guaranteed but the fees you pay, I think lower fees are important, especially in the long haul!).

          Interestingly enough, when we first married, we discovered that although I am in general more risk-averse than my husband, he is much more risk-averse when it comes to money than me (we’re both somewhere in the middle, but I was ready to just let the losses ride, and he wanted to sell immediately).

        • Anonymous :

          Do it the way you’d make any other big purchase or investment — get one-time consultations with several different advisors, evaluate their advice yourself, and determine which (if any) is best for you. Or just take the best of their ideas and just implement it yourself. Also it sounds like your decision might be able to be made by just running a spreadsheet and comparing the options.

    • Anonymous :

      Why don’t you consider your investments in mutual funds to be in “the market”? Mutual funds are just collections of stocks (or bonds, or both), and people generally think of stocks as “the market.” Or are you investing soley in bond funds?

  3. Does anyone other than me think the thought of saving 6 months worth of expenses seems impossibly difficult in light of owing $2200 a month in law school loan repayments?

    • No, which brings up an interesting question that I’d be curious to hear people’s takes on. Is it better to keep your loans on a fast repayment schedule and not have the full recommended emergency fund or is it better to extend repayment somewhat to save it up?

      • I think it depends. If you’ve got no kids or other people to support (and no mortgage), and your job is pretty secure (true really for most law firm jobs, even these days), I think you can do with only a small emergency fund. But otherwise, build up that fund. School debt is generally considered good debt — more flexible forbearance policies, etc, so as crushing as it may seem, it’s not the worst thing to have around for a while.

      • I think it depends on what your interest rate is. I’m still carrying some loans b/c my rate is only 3%. If your rate is 7% or so, pay them off.

    • @Anon Ouch, that is a depressing number. My sympathies

      I think its difficult but doable; as in slightly-frustrating-and-takes-forever-impossible versus really-really impossible. I think what is missing from the picture is how quickly youre expected to hit that savings point. Some people manage to save that inside a year, others of us its going to take (a lot) longer.

      If it helps, Ive been out of school for more than a year, and Ive only managed to get about 3 months worth. Id like a 6 month fund, but Im only half way there. Mine sits in a savings account, since its low enough that I might need it all at once suddenly, I need it to be available on sudden notice.

      • Anon – the position my friends and I take with loan debt is we would prefer to be more liquid when the economy is rocky. That said, most of us have consolidated at a low interest rate. I figure, if thinks get more stable with jobs/expenses or whatever, I can put the “extra” I sacked away in my emergency fund towards the loans if I feel comfortable doing that.

        And, the people at Sallie Mae (etc) will let you skip payments if there’s a catastrophe and you get a forbearance. Other creditors, not so much.

    • I felt the same way when I got out of school (and my loan payments weren’t quite as high as yours). It is tough. Just come up with a realistic budget and keep plugging away. That’s all you can do.

      It took me about 4-5 years to pay off about $110K in loans. I set up automatic transfers to savings for every payday. I’d also check my balances on every payday, and apply whatever was left in checking 1/2 to loans, 1/2 to savings. It was actually pretty satisfying to send out those extra loan checks, knowing it was going to be applied directly to principal. Bonuses helped – I used large chunks of them to reduce student loans. After about 5 years, I had $30K in savings and had paid off the student loans. It is doable, it just takes a while.

    • I don’t think it’s impossible, but you may want to be strategic about how you attack it.

      My personal plan coming out of school was this: make minimum payments til I had 3 months emergency fund saved up. At that point, I switched into high-debt-payoff mode.

      Last year, when the economy started to get shaky (and work announced upcoming layoffs), I paid minimums of the student loans and built the emerg. fund up to 5 or 6 months. Now that the job seems stable and we’re hiring instead of firing, I’ve switched from savings to debt-paydown mode once more. I’ll stay there until my variable-rate debt is paid off (interest rates have nowhere to go but up, after all!) and then re-evaluate.

  4. Delta Sierra :

    Find a good tax accountant, one who also acts as a financial advisor. Stick with them. They pay for themselves, sometimes even in the first year. The sooner in your working life you do this, the better your money matters will be. Trust me on this one.

  5. Anonymous :

    Is it OK to just have one big pool of fairly liquid money to serve lots of purposes (e.g., emergency fund, potential down payment, future wedding expenses), or should these things all be segregated? I don’t have an emergency fund per se, but do have lots of money set aside for anticipated future expenses…

    • Anonymous :

      I keep mine segregated. I have two savings accounts. One is for my emergency fund (not allowed to touch it unless the sky has fallen and I need money for shelter, food, utilities, etc.). The other is for “big ticket” things I’m saving for (travel, future down payment, etc.).

    • I keep mine segregated as well. Otherwise, I would find it too tempting or too easy to accidentally dip into the emergency fund.

      It’s not like a have a specific separate bank account for it, but within ING you can label different pools of money for different purposes, so I have one bucket for my emergency fund, one for vacations/travel, one for wedding, etc…

      • how do you do that ING thing? I have an ING direct account, but have never labelled it anything… and I don’t see an option for it on the website.

    • I actually do the same thing. I have started working for a salary only three months ago and have been spending huge amounts on building a professional wardrobe and setting up administrative papers (visas, insurance, etc..).
      Now I have an amountequivalent to 2 months salary in my banck account. This amount is actually groing and serves the following purposes:
      – Savings to furnish appartment (once dad will generously buy it!)
      – Savings for a car downpayment
      – Savings for my dental (I am wearing braces, and paying for them)
      – Savings for my lasik surgery (hopefully in February)
      – Emergency fund
      – Disposable income for urgent wardobe additions and upgrades.
      Whenever I save enough money to have a decent amount in each of these categories, I might start a savings account and keep my regular account for ongoing expenses.
      My target is to save enough to make at least 25% downpayment on anything I buy.
      Also I found out that you can negotiate your way into payments so I can pay an expensive Fridge over 6 months with no interest of I manage to give a decent downpayment. That’s why I want to save as much as I can in one single account rather than small amounts in different ones, because it gives you a better bank history and you look like a reliable person when you ask for a loan.

    • I keep two separate accounts, one for big purchases and travel, and one for emergency funds and (eventually) a down payment on a house or condo. It’s just too easy to dip into the emergency fund if it’s in the same account as funds that I’m willing to use. After all, it’s an emergency that tickets to Mexico are only $200 for the week, right?

  6. Husband and I are looking to save 8 months of living expenses as an emergency fund. We’ve seen too many friends laid off and scrambling that it’s worth the sacrifice. We’re also trying to max out our 401(k)s. I make the minimum payment on my student loans since I have pretty low interest rates right now. Everything else gets dumped into savings. We’re doing an online savings that I think has around 1.5% back right now. Not a great return but we want instant access to the money, if we need it.

    I never thought about keeping the actual physical cash on hand. We don’t have the proverbial backyard but that is a good thing to think about. Just hope we never get robbed.

    • I think it’s good to have SOME cash on hand, in a safe place at home — but not ALL your money in cash.

      Having lived in NY on 9-11, and abroad during a banking crisis, I think it’s always good to have a few hundred dollars in cash for an emergency (my strategy is to tuck away any $100 or $50 bill I get — this way I am not tempted to use the money for takeout or other trivial items).

  7. We keep an emergency fund in the form of a taxable savings account (held in securities, easily liquidated) and a savings account at ING. I think it is about 50K now, which is about 5-6 months’ worth of living expenses.

    I have never needed a financial advisor since my DH is in finance and handles our investments, but I have heard to go with the flat fee kind, and not the ones who will try to sell you products. Good luck!

    • Whoa, you’re counting $10k as a MONTH’s worth of living expenses? For how many people?

      • lots of people have $5000/month in mortgage payments — and that’s not even a million dollar 30 year mortgage. Factor in insurance, car payments, etc, and yep — $10,000 sounds about right.

        • Our mortgage is about 5K/month – we have a 700K mortgage. No loans, but 2 kids.

        • Co-sign: $660K mortgage (we put down $250K cash downpayment) so…. $4,300 mortgage all in (principal, taxes, insurance, etc)

  8. associate :

    re: paying off debt v. creating an emergency fund, I find Dave Ramsey’s advice helpful. He says (generally) create a $1k emergency fund, payoff debt, then create 3-6 month emergency fund. IMO no debt is “good debt”. Personally, I followed Dave’s plan and paid of 30k in high-interest student loans as fast as possible.

    Now I have a 3-month emergency fund (not 6 month b/c I’m young, single, and my parents will take be back if nothing else). I keep it in a savings account for liquidity.

    • Anonymous :

      Another Dave Ramsey fan here. He also says (generally) that if it will take you more than 2-3 years to pay off your debt entirely (even if you are being very aggressive about it), he advocates creating a slightly higher emergency fund first.

      • la peagoise :

        +1 dave ramsey. i’m debt free, but am trying to build up my emergency fund right now.

        for those of you who do have loans and other debt, i highly recommend dave ramsey. you may not need to go 100% dave all the time, but he does have excellent advice and his numbers speak for themselves. look at churches near you and see if anyone is offering financial peace university any time soon (if you’re in the nashville area, mine is). otherwise, his books, etc are fantastic.

        • Another Dave fan. I love the total money makeover. I would do a modified Dave plan. Get enough in your emergency fund that you aren’t charging a car repair on your Visa. Then pay off all debt using the “debt snowball” except for student loans and your house. (Unless someone is co-signed on an alternative student loan then you might want to do that as well). Then save 6 months worth. Then pay off the student loans.

          Just remember that you have to be out of work for 6 months before you qualify for disability. That is why you should have 6 months of living expenses saved.

          • Anonymous :

            Disability? I thought you had to be disabled to get disability payments.

    • Another Dave Ramsey fan, although everything he’s about is what my parents taught me, for which I am eternally grateful. We are debt-free except for a small balance on our mortgage. I can hear my mom saying “Pay yourself first” (meaning put aside your savings first). Don’t buy things (except for major things like a house, car, furniture) that you can’t pay for when you buy it.

      Pay off your credit cards every month. Here’s where I differ from Dave. I like being able to track purchases, so I put everything on a card (gas, groceries, etc.) and watch how much goes into each category every month when I get the statement. I like the extra purchase protections you get from a card and not having to carry a lot of cash around. I truly feel that using a card IS using cash, because for me it is. (Dave recommends putting cash into separate envelopes each month for various uses.)

      We have 6 months’ worth of savings and I’m lengthening it. I also keep a few hundred at home in case of an ice storm or other emergency when credit cards may not work.

  9. While it is possible to be out of work for 6 months, if you are laid off you should have unemployment to help with some of that. If you are a contractor or work for yourself or something, then you need more.

    I have mine split between an online savings account somewhere around 1.3% and vanguard money market (for the check writing convenience).

    It is probably about 10 months of minimal expenses, a bit less than six months take home pay. I just completed the goal last year, and I reevaluate yearly. It took me most of my first 2 years out of college to save up. I do not agree you should not invest until your efund is complete, but it should be a very high priority.

  10. Another vote for ING Direct- simple and easy to transfer money between accounts. I like how you can split your money into different categories, i.e. Emergency, Down Payment, etc.

  11. Anonymous :

    I consider our emergency fund to be about a 6 month emergency fund. However, in doing a quick calculation, I think it would only actually cover about 2 months worth of actual expenses. However, we are a two income family. We moved 2 years ago and were unable to sell at a reasonable price, so we kept the old house as a rental. I am comfortable that my renter, my husband, and I will not all lose our jobs at the same time. Also, we could cut down on daycare if one of us were to lose our job. We keep our emergency fund in a money market but were recently talking about buying some CDs. We also have a fair number of stocks and our rental house that we could sell if we really got into a jam.
    We do not have a financial planner and have no interest in getting one. I find it too difficult to find one that I trust, and I care more about my money than anyone else. For me, it is too important to put into someone else’s hands, and I would just double check them anyway. I have some friends and family who have financial planners. They seem happy enough with them, but I have yet to see one that does a better job than I do, and I don’t have to pay myself. Obviously, I would be a bad client too…control freak, who thinks I know everything!

  12. It seems to me that student loan payments should NOT be included in the emergency fund calculation. If you do get laid off, that is why lenders offer temporary hardship forbearance.

  13. Having an adequate emergency fund is only half the battle — how do you decide when to use it? It sounds so simple, but believe me when I say that if you have an emergency, you’ll wonder whether you really ought to be dipping into that account.

    For example, my fiance is currently unemployed. We have an emergency fund. I make enough money to pay all of the household expenses except for my fiance’s student loans. Is making minimum student debt payments an “emergency”? What if deferral is not an option and failure to make those payments will destroy credit? What if deferral is an option, but interest will continue to acrue at a higher rate than we’re making in the money market?

    It’s a lot more complicated than you’d think.

    • Just my two cents — but if this is your fiance, you need to be as concerned with his credit as you would be with your own. I think that if you can pay your living expenses, he should dip into the emergency fund to make the min. student loan payments.

      A forbearance should be your last resort. Hopefully, he can make the minimum payments, find a new job, and rebuild the emergency fund.

    • I agree with AIMS – something that will destroy your credit ought to be considered an emergency, at least when one of you is still working and there is no reason to think you will suddenly need that money imminently for true physical necessities like food and keeping the heat on. If your finances are joined to the extent that you maintain a joint emergency fund, I’d say pay the minimum payments out of that fund.

  14. North Shore :

    I do all our finances — paying bills, investing, taxes, everything. My husband has no interest in it. We have savings to cover 12 months of living expenses if both of us lost our jobs, and it’s mostly in money market funds and CDs right now. It’s higher than it should be, because we had been socking away more on the chance that I might lose my job a few years ago, but that didn’t happen. Then the market tanked, so I was glad it was still in the bank, and haven’t gotten around to investing it yet.

  15. poor law student :

    Unfortunately, my emergency fund is my credit card. Sad I know.

  16. divaliscious11 :

    I keep 2. One I have in an interest earning money market attached to my checking account for quick but minor emergencies (quickie auto repair etc…) and regular allocations for large periodic expenses e.g life insurance, car insurance etc…. there is about $1000 allocated for emergencies. The other account is in an online savings account. 6months used to be the max, but now I am working to get it higher, because as I get more senior, I am realizing that finding a job just takes longer, and I was advised that I should plan for one month for every year i’ve been practicing and then add 3 more, so I am doing some building there… Once I reach my onjective, I will probably stair step in cds to maximize the gain because that is a lot of cash to be sitting around barely generating any money….

  17. We have two accounts — a general savings account which is the cushion for daily stuff (car broke down, tree fell on fence, you name it). Then we have about 4 months’ worth of emergency living expenses in a CD. I chose a CD because it’s not as readily accessible and takes thought to dip into, but also has very little risk attached. I think the two accounts are key, because for me at least, it would be too easy to dip into emergency funds for non-emergency stuff (see tree falling example). I revisit the CD regularly and shop rates — my bank offers promotional CDs often enough so I’m usually above 2%. One of the offers was for a CD that allows you to access the money once without penalty during its term. 2% +/- is an awful rate but worth it to me for the liquidity/inconvenience balance.

    We should have 6 months socked away, but for now, are sticking to 4 months as a compromise while we pay down other debt. Since we both work for the gov’t, I figure our job security is pretty high.

    As for someone’s shock at $10k being monthly expenses, all I will say is this. Check out what a mortgage on a $750k house would run you per month. That’s a pretty average home price in many major cities. Then add in some childcare expenses (just to toss out a rough number, call it $1k/mo per kid). Then reassess said shock. :-)

    • I would think people who are buying $750K houses aren’t the young-newbies-living-in-the-city-trying-to-pay-off-student-loans-but-still-amass-an-emergency-fund that C’s question seems to be more targeted towards.

      • $750K doesnt even buy you a large 2 bdrm apartment in NYC anymore . . . not that I am in the market (sadly), but I am sure the question included everyone, including someone buying a Jr4 in Manhattan :)

      • I didn’t get the sense that C’s question was aimed at anyone in particular. Everyone needs an emergency fund, no matter what their lifestyle or income/expenses.

        • Agreed. In fact, this thread made me think about a sidebar question — is it ever wise to live within an inch of your means (assuming you have the option), or should you always aim to spend less than you can afford (again, assuming you can do so).

          Specifically, say, you’re considering buying something in today’s market but with student loans and mortgage, that means paying about all you can afford/month. Is it better to just hope for the best (assuming your job is relatively stable) to build equity OR better to sit tight, throw your money away on rent but have a reserve built in in monthly take home pay??

          • Honestly, I would choose to live under if possible. When we bought our house, we bought much less than we qualified for. That left me the freedom, 4 years later, to walk away from my big firm salary and not need to sell the house at the same time. It also let me go part-time the year before leaving the firm. If we had bought based on that full-time BigLaw salary, I would not have had the flexibility later on.

            If you are earning a salary that’s very high, think about whether this is what you’ll be making for years to come. E.g., if you change jobs, what will your salary look like? I knew that if/when I was done with the BigLaw thing, gov’t would be my next choice. So that’s the salary I kept in the back of my mind when making major long-term purchases.

            If your salary is “normal” (i.e., not BigLaw), then you’re not facing a potential decrease in the future so buying to the max is safer.

          • That’s a very good point. Salary is more in the “normal” range — trouble is that these times just feel so uncertain that even “steady” public sector work feels uncertain. Thanks for the advice though!

  18. Mine is about 3 months of living expenses, minus the cost of student loans (which I can always put into forebearance if needed). That’s a good bit higher than what Dave Ramsey recommends, but his $1000 “starter emergency fund” wouldn’t even cover 1 month of my NYC rent, so I just wasn’t comfortable with that. I keep it in an ING Direct account, which has ample liquidity.

    Personally, I think those who bury their cash in their backyard/under the mattress are barking mad. Have they heard of floods? Fires? You want your emergency fund to be intact if your housing is wiped out. On the other hand, heard of FDIC insurance? If the banking system were to go under, you’re not going to lose your stash. If you’re a super-paranoid type, keep a couple hundred in traveler’s cheques with your emergency supplies or something. Geesh.

  19. Erica Foley :

    I should say I have been out of school a long time, and we have a secure financial situation and three kids. So this probably is not relevant to the younger set… That said, we keep two emergency “funds”.

    The first fund was born entirely from living through 9/11 in New York. $3,000 in cash, plus gold/silver to cover six weeks of current living expenses. It’s all in a safe in our house and is really meant to cover an “EMERGENCY”. (Meanwhile, the metals have been by far the best investment we have made in the last ten years…)

    The second “fund” is in money markets and savings accounts at three separate institutions and is enough to cover six months of living expenses assuming we cut to the bone. Or about three months going more-or-less as we are. It’s spread among three places because if any one is placed in receivership, it can be 4-6 weeks or more before you can actually get to your money. And that’s clearly not an abstract worry anymore. (OTOH if 2 of the 3 go under, I suspect we’ll be living in a barter/Mad Max economy. So back to the first fund.)

  20. The emergency fund is one of the best ideas that I have yet to implement, unfortunately.

  21. great topic. We (just hubby + me, mid-priced city on east coast) have been focusing on saving this year just in case, and have $40K in our normal savings account in addition to maxing our contributions to IRA and saving a bit extra on the side in mutual funds, etc. If we did nothing but pay mortgage and student loan minimums, it would be 7-8 months’ worth. However, we have not been maxing our law school loans ($200K combined — we pay a bit extra each month on the higher-interest principal, and some are low interest gov’t). We’d love to pay them off before having kids (4-5 years, willing to stretch on the gov’t portion) but have gotten the runaround from the banks on the stable monthly payments to make that a reality (“we can’t guarantee that” blah blah blah). Anyone in a similar situation? Estimated numbers/month?

    • http://www.finaid.org/calculators/loanpayments.phtml

      Just enter the number of years you’d like to pay it off in as the loan term.

  22. I’m really young so this probably won’t apply to half the commenters, but when I got my first job I lived with my parents for nearly two years. No rent to pay meant I saved up a huge chunk of money that I don’t really touch. I’ve since moved out and I break even every month as far as expenses go, but it feels like a huge weight off my shoulders that I don’t have to think about. Once the economy picks up a little more I’ll beef up my 401K contribution (I already contribute 8-9%) and start making regular contributions to my savings.

  23. North Shore :

    Book recommendation — old but good. It’s called “How To Live Within Your Means and Still Finance Your Dreams,” by Robert Ortalda. It teaches you how to set up a budget, but he doesn’t call it a budget, he calls it “funding.” So you set up a fund for your next car, a fund for clothing, a fund for vacation, a fund for home improvement, etc., and put money into those funds every month. Since the book is from 1990, it’s paper spreadsheet-based, but adaptable to Excel or any computer money-tracking program. The fun part is you carry money over month to month, so say you put $200 a month in your clothing fund and you don’t shop for a few months, you now have $600 in that fund to spend, while still sticking to your personal finance plan, so you don’t have to feel guilty about those expensive shoes. The author doesn’t believe in random saving — you set aside money in these specific funds so that you can spend it later.

    • Try Mint.com for a similar feature – including carrying over month to month for different categories in your budget (e.g., Clothing)

      • Agree. I use QuickenOnline (which just purchased Mint.com) and I really like it.

      • newassociate :

        i swear by mint. fantastic. i especially love that it tracks my student loans too.

  24. Anon in Midwest :

    My husband and I have 2 school-age kids and he’s a stay-at-home dad, and we’ve got 12 months of my after-tax income in a ready access savings account at ING direct – great web access for free transfers from/to checking, and FDIC insured – but the rates aren’t as great as they were originally. But at this point I’m happy just having the money in a liquid, insured account that won’t lose the principal rather than investing it in the stock market.

  25. I keep about 6 months worth in EF, so I won’t have to take up my mother’s offer that I could always move home if I had to (love em, but I’ve been on my own for enough years now that moving back would be a painful adjustment). I don’t know how long it will last, but right now my local, small town bank (where I still bank even though I don’t live there) is offering 2.5% on regular savings accounts – substantially more than they’re offering on CD’s of any term, so my EF + down payment funds are there for the time being.

  26. conspiracy theorist :

    We currently keep a minimum $1,000 cash in our basement, we’d like to grow that to about $10,000 in cold hard $5, $10 and $20 dollar bills eventually.

    However, our “emergency” fund goes hand in hand with our other preparedness. We are working to put together a minimum of one year’s worth of food storage (we’re at about 3-4 months right now) at what’s classified as a “luxury” level (having creatures of comfort like maple syrup, favorite beverages, brownies, etc.; not just stuff that you can live on). We are working toward being prepared for anything. If I were to loose my job and we couldn’t find work, we could go without grocery shopping for months on end. Between our emergency cash and what we keep in our bank accounts, we could go pretty long without having to have an “income.”

    Admittedly, though, our way of preparing is a little unconventional.

  27. I have a few different levels. First, a savings account attached to checking for short-term unexpected issues (this also takes care of the minimum deposit requirement to get free checking and such) and as a cash flow cushion (when I bought my car, I had a separate account dedicated to savings for a car, but it took a few days to transfer the funds from that bank, so I borrowed from my savings for a few days to make sure the check didn’t bounce; sometimes the timing of payday means I need a few days’ float for my rent, etc.). The main emergency fund beyond this, in case of unemployment, etc. is currently only about 2 months’ expenses in a couple of CDs, with another 2 months or so that’s currently earmarked for vacations, future car purchase, and other things that could be put on hold if I were out of work (as long as I don’t lose my job right after spending that money). But I’m currently entitled to 4 months severance if I’m laid off, and I’m in one of the most generous states as far as unemployment goes, and I think my position is relatively secure for now. I’m working on beefing it up, but not at the expense of saving for a home downpayment and retirement. (I’m also very gradually adding to the savings account in anticipation of the large unexpected expenses that will likely hit me when I do own a home.) And, until I actual purchase a home, I do have those home savings as a third level of emergency fund if I had an extended period of unemployment.

  28. We have $5,000 in an ING Direct savings account, and an additional $5,000 in Series I savings bonds. If we never have to use the Series I bonds, they’ll be part of my son’s college fund. We also keep $500 in a bank savings account where our primary checking accounts are located (for “emergency emergencies”), and $500 as a “cushion” in our primary household checking account. I don’t believe in keeping large amounts of cash in your home, safe or no. I’ve known too many people who have gotten robbed once word got out they were keeping cash in their home. Some friends of ours were actually tied up and held at gunpoint, along with their two kids, so that the robbers could get to their cash – which amounted to all of $2,500. Not worth it, IMO.

    We do have about $10K in a Treasury note as well, but I look at that more as part of our investment portfolio than our “emergency” fund. Right now, we re-invest interest from the Treasury note back into Series I bonds when we get our scheduled “coupon payment” every six months. This is all very easily done through the government’s website at treasury.gov. You can set up automatic bond and Treasury purchases and manage everything online. I particularly like Series I bonds as an emergency-fund vehicle. You only have to wait 6 months before you can redeem them for face value + interest (whereas our T-note is a 10-year term), and you can stagger purchases so that there’s always an amount ready for redemption. There are tax advantages with them as well.

    We actually just got through my husband getting laid off – we didn’t end up tapping into our emergency fund at all, because between his severance and unemployment we were fine. (We live modestly and avoid debt of any kind as much as we can, which I highly recommend as an financial management strategy.) However, I was damn glad that money was there, in safe, stable accounts not subject to stock market performance. We both have retirement accounts as well as two investment accounts, but the values dropped over 60% after the financial meltdown (we were aggressively invested for growth). I do not think it is ever, EVER a good idea to put your emergency money into a market-dependent account. After the meltdown is when I bought our T-note and moved some more money into Series-I bonds. I figure that the way the government spends money, we’re not going to have any problem losing value in the notes and bonds the way we would in the stock market.

    That being said, with money we could afford to invest, I did buy several single-company stocks (including Bank of America) back in January and we’ve tripled our money so far. For all the younger investors out there – stocks are the one thing people DON’T buy when they go on sale. No one makes money buying high and selling low, but that’s exactly what a lot of people did in a panic during the financial meltdown. After you get your emergency fund and debt squared away and want to start investing, remember that market dips create great opportunity for small investors. Do your homework and buy judiciously (and diversify), but don’t be afraid of the market. It goes high and it goes low, but over the long-term it’s still a good bet, as long as you’re using money you can “let ride” through the ups and downs. And no, I’m not a broker or financial advisor, just someone who’s been able to make a nice piece of change for our family through stock investments.

    • One more thing. We have a house, our mortgage payment is $1,000 a month (yes, you read that right). We bought a $130,000 “fixer-upper opportunity,” put about $65,000 into it over five years, both from cash and from equity we pulled out. Refinanced in August at 4.5%, we owe $125,000 over 30 years. House is still valued at $225,000 even in the down economy. It’s a 2,400 square-foot home with a pool in a nice working-class neighborhood close to good schools. We’re in the southwest and $225K is the average home price for our area. Houses are a great investment IF you use the same logic as for stocks – buy low, buy undervalued, and be able to hold out for several years if the market takes a dump. People who buy houses where the mortgage payment consumes 60 percent of their take-home income are insane, IMO. If your mortgage payment is that much, you’re buying too much house. That’s exactly how a LOT of people ended up with no house and firebombed credit in the foreclosure crisis. We’ve lost the concept of the “starter home” – a modest home you put sweat equity into, then sell to “trade up.” A lot of people buy the trade-up house even though they’re making starter-home money.

      Real wealth is being able to sit down when a spouse gets laid off and say “we’ll be fine for at least six months, and that’s without touching most of our savings.” Or being able to decide one spouse doesn’t even need to work, or can start their own business to do what they really love vs. working for a jerk boss. Or not having to sweat it when a car needs new tires or a kid needs braces. Real wealth is freedom from worry, not fancy houses/cars/clothing/vacations. The flashy lifestyle is not worth it if every minute of every day has to be spent worrying about where the next dollar is coming from. That’s not living, that’s slavery. Don’t spend your life buying things you don’t need with money you don’t have to impress people you don’t really care about. (Yes, I stole that from someone. :)

      • That’s all very wonderful, and I congratulate you on being so prudent, but depending on where you live, the reality of a “starter home” varies significantly. I don’t think it’s all that insane to have a mortgage payment that consumes 60% of your income if you live in a city like NY, for example. The alternatives are, what, throwing away money on rent (not cheap around here) or moving cross country to the Southewest??

        • Ditto to AIMS. Our starter home in DC was a small 3BR townhouse in the outer ‘burbs. Bought it for $205k, sold it 4 years later for $350k. Our “trade-up” house is a lovely home which would cost 1/3 to 1/2 of what it did pretty much anywhere else in the country. It’s not fancy or flashy, it’s just freaking expensive because DC real estate is freaking expensive (just like NYC, Boston, New Jersey, LA, San Fran and other expensive places).

  29. well since i recently bought a house at 26, and single… i am not having as much money flowing around in savings. i had about 13K stocked away in my roth, which i was saving specifically for a house. well that’s obviously all gone. i have managed to keep about 2 months worth of salary in my ING but have since shut off my auto transfers into savings since i’m bogged down w/ furniture, new house, xmas, and you name it everything-else bills. and gearing up for my first mortgage payment (which is double what my rent was eeek).

    fortunately, i’m not panicking too much. to me an emergency fund ive always been told, should be 3months salary. so i have maybe a month and a half now… however since im a first time home buyer i will get the $8,000 credit. and i plan to throw a chunk of that into my regular savings (especially since i’m worried about a layoff early next year), and then a bit towards my mortgage, and a bit for renovations/house emergencies. i also will get more money back in taxes in general, and am getting my bonus in a couple weeks…as well as a stock payout in March of next year.

    so basically i know i have decent money coming to me. ..and plan to stock away as much as i can for a layoff situation. and then at least 2-3 grand for house emergencies since i’m now a homeowner. i also keep a fund for car stuff (registration, repairs). i am also going to put off any renovations until i pass what i call the “most likely time to get laid off” (it’s our slow time and we were hit hard last year in Feb :-/ )

    so i agree w/ many others that ING is a great one. when i first opened it fresh out of college in 2005, interest was 4.5%… remember those days?

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  32. I struggle with the EF concept as well, particularly how to plan for 8-12 months of expenses (which most everyone recommends in recent years). Do I make that calculation based on my current standard of living? I am single with no dependents, so if I lost my job it would be very easy for me to make cutbacks on everything except mortgage, utilities and insurance. Cancel the premium cable, cut back or completely stop eating out/shopping for new clothes/leisure travel, etc.

    If it came down to it, I could probably reduce my currently monthly expenses by half if the situation were dire. Also, even if prospects for a new job were good and I could reasonably expect to be working again soon – I would still halt nonessential spending if I were faced with unemployment. For now, I’m comfortable with a 6 month liquid emergency fund, but I may rethink it in the future.

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