Emergency Fund - How much is too much?

[mh1361]

Hi!

I'll be getting married in a few months and am trying to figure out how much cash to keep in an emergency fund. I've read 3-6 months of expenses, but that seems high. We'll both be 23 with steady jobs and renting an apartment. We have one old car, so I'll be keeping some money aside in case that needs to be replaced. All extra money will be thrown at student loans for the next couple years. Average monthly expenses are about 2.5k, which includes the minimum payments on our loans. Thoughts?

[GlassStash]

The amount in an EF is a subjective decision. Personally, if my wife and I had two very secure jobs we would have around 3 months. We're conservative by nature and do not want to feel extreme financial stress in a calamitous situation. If there is any chance of job loss or spike in expenses, adjust upward accordingly.

[arebelspy]

Whatever makes you comfortable.  If, in an emergency, you could cut back and be okay, if you can live on only one of your income if one person was laid off, if your jobs are fairly steady, if you have no dependents, etc. etc... I think that's a situation where you may be fine with less.

I'd probably keep around 5k in your situation, and use springy debt (e.g. Have credit card limits that can float you for a month in case of a car repair, contribute to a Roth instead of towards student loans for awhile, knowing you can access that in an emergency, etc.)

It's all personal comfort level and what lets you sleep at night.

www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/

[Joel]

My checking account earns 1.5% interest on the first 10k in my account and 0.25% on anything above that. As a result, I like to keep at least 10k in my checking account, up to about 20k. Anything else gets pushed into vanguard index funds at my current asset allocation.

[payitoff]

My checking account earns 1.5% interest on the first 10k in my account and 0.25% on anything above that. As a result, I like to keep at least 10k in my checking account, up to about 20k. Anything else gets pushed into vanguard index funds at my current asset allocation.

Which bank is this?

[Joel]

I currently used Sacramento credit union, but umpqua bank and tri counties bank also offer similar checking accounts that require 12-15 pos transactions, direct deposit, paperless statements, etc. those three banks are in Northern California, but I would assume many smaller regional banks and credit unions offer similar options throughout the US.

[nottoolatetostart]

I currently used Sacramento credit union, but umpqua bank and tri counties bank also offer similar checking accounts that require 12-15 pos transactions, direct deposit, paperless statements, etc. those three banks are in Northern California, but I would assume many smaller regional banks and credit unions offer similar options throughout the US.

Check out Kasasa checking on Google. There is a network of banks that likely exist within a few states of where you are. I have Kasasa accounts at different banks. One pays me 3.05% on the first 20K with the same requirements as Joel posted (10 pos transactions, at least 1 direct deposit, get paperless statements). They reimburse for ATM fees too and no other minimums. Love the account. I have another Kasasa account at another bank that earns me another 2.85% on balances up to $10K. Right now, we are really only doing the 20K, but it is easy to get to 10 pos transactions and usually I charge low value things (I use CC rewards for higher ticket items).

To answer OP question, for your situation, you may not need much cash. It just depends on what makes you sleep well at night. Our biggest concern isn't job loss, but rather the furnace going out or deductibles on insurance.

[Mortgage Free Mike]

I'll agree, it's whatever makes you comfortable. For me, that's 6 months.

With the low interest rates on savings accounts, consider maxing out a ROTH IRA once you reach a level where you're comfortable.

You can use your ROTH IRA as a secondary emergency fund.

A lot of people don't realize it, but you can take out your ROTH IRA contributions (not earnings) and not face a penalty.

[Adam Zapple]

We used to keep a 6 month emergency fund but did not like the money sitting in a savings account earning near zero interest.  We now keep a 3 month emergency fund in cash and the ROTH as a backup as others have mentioned.

[mh1361]

Check out Kasasa checking on Google. There is a network of banks that likely exist within a few states of where you are. I have Kasasa accounts at different banks. One pays me 3.05% on the first 20K with the same requirements as Joel posted (10 pos transactions, at least 1 direct deposit, get paperless statements). They reimburse for ATM fees too and no other minimums. Love the account. I have another Kasasa account at another bank that earns me another 2.85% on balances up to $10K. Right now, we are really only doing the 20K, but it is easy to get to 10 pos transactions and usually I charge low value things (I use CC rewards for higher ticket items).

Ok, so allow me to be stupid for a minute. I looked at a Kasasa account closest to me, that pays 2.75% for the first 10,000 and 0.75% for everything after that. So if I put 18,000 in there, after one month, that will be 10,000 x 1.0275 = 10275 and 8,000 x 1.0075 = 8060 for a total of 18335. Seems too good to be true for a checking account. As long as I can set up direct deposit, make it a joint account, and deposit checks with an app, I'll definitely sign up for it. The bank is 60 miles from me, but I don't think I'll ever have to physically go there. Am I understanding this right?

[Joel]

Mh1361 - those are annual interest rates. You would have to divide those numbers by 12 to get a monthly estimate.

[arebelspy]

Mh1361 - those are annual interest rates. You would have to divide those numbers by 12 to get a monthly estimate.

This.  One month after your 18,000 deposit, you'll have about 18,027.92

[mh1361]

Good thing I prefaced with, let me be stupid! Even still, that's better than the "High Yield Savings Account" I currently have. As long as it meets the other conveniences as my current account, I'll be switching.

[Dicey]

I'd probably keep around 5k in your situation, and use springy debt..

www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/

Wow! Thanks, ARS. I was sure I'd read every single post, but I missed this one completely. I keep way too much money in checking and regular bank savings account. I built it up slowly and got used to seeing a big number in the (linked) accounts. I knew I had to change it, but didn't know what to do. Thanks for the link. Time to slay that dragon.

[soccerluvof4]

I agree with Arebelspy and the others its really with what your comfortable with and I know for me having learned alot about savings drag etc.. Having about 15- 20k liquid but still earning something I am comfortable with now. I use to think be in all cash other than my trading account but lost alot of money that way. Have as much of it working for you as possible but don't lose sleep at night.

[arebelspy]

I'd probably keep around 5k in your situation, and use springy debt..

www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/

Wow! Thanks, ARS. I was sure I'd read every single post, but I missed this one completely. I keep way too much money in checking and regular bank savings account. I built it up slowly and got used to seeing a big number in the (linked) accounts. I knew I had to change it, but didn't know what to do. Thanks for the link. Time to slay that dragon.

That was one of the first ones, so you may have read it and forgotten - been almost 3 years since it was published.

Man, MMM's been around awhile!