Author Topic: Emergency Savings  (Read 1097 times)

jtoomey

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Emergency Savings
« on: May 14, 2018, 10:53:50 AM »
Hey all! What percent of income do you recommend keeping in a savings account? I currently have an Ally Online Savings (1.6%) with about 50% of my annual salary in it (pre-tax). Is this too much? Too little?

Any feedback would be appreciated.

Thanks!

Dollar Slice

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Re: Emergency Savings
« Reply #1 on: May 14, 2018, 10:56:29 AM »
I think most people here would say income doesn't factor into it, but rather spending. For an extreme example - if you make $300k a year and spend $30k a year, you don't need $150k in savings.

6-12 months' worth of spending is pretty common for an emergency fund.

jlcnuke

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Re: Emergency Savings
« Reply #2 on: May 14, 2018, 10:57:12 AM »
Hey all! What percent of income do you recommend keeping in a savings account? I currently have an Ally Online Savings (1.6%) with about 50% of my annual salary in it (pre-tax). Is this too much? Too little?

Any feedback would be appreciated.

Thanks!

I recommend 3-12 months worth of expenses (or the largest deductible you have on your insurance, whichever is greater), regardless of your income.  The number of months depends upon how secure you feel your employment is and would be in a time like 2008. Gov't employee etc probably 3 months, work in a luxury field position that would likely have significant layoffs in a down economy then 12 might be more appropriate.

Bracken_Joy

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Re: Emergency Savings
« Reply #3 on: May 14, 2018, 10:59:46 AM »
I think most people here would say income doesn't factor into it, but rather spending. For an extreme example - if you make $300k a year and spend $30k a year, you don't need $150k in savings.

6-12 months' worth of spending is pretty common for an emergency fund.

Yep, what she said.

How much you keep is super dependent on your life circumstances, too. Are you a sole earner supporting a large family in an older home you own that may need major repairs who has a chronic disease and enjoys extreme sports and doesn't have disability insurance? You better have a pretty fucking big emergency fund. If you're a DINK in a rented apartment who doesn't own a car or even have a pet, there's a lot fewer emergencies that could pop up, frankly. You just need to take inventory of your life, and get a sense of how likely what scenarios are to occur.

haflander

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Re: Emergency Savings
« Reply #4 on: May 14, 2018, 11:14:18 AM »
Mainly PTF but I'll throw in my #s also. I'm building a stache of 3 months' gross earnings (17,500), which also equals at least 6 months' expenses. I also have a high yield savings account currently at 1.6%. I originally arrived at this # because the longest I have ever been unemployed is 2 months. I've changed jobs a few times over the past few years (classic millennial jobhoppery). However, I was never actually looking for a job each of the times I left, they all just came to me. I mention that because your EF # should be related to your industry and prospects of easily finding a job if the worst was to happen by being fired or laid off.

AZDude

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Re: Emergency Savings
« Reply #5 on: May 14, 2018, 11:20:27 AM »
I would put 1 month's worth of spending in a savings account, put the other 5 months+ in a ROTH-IRA, where it can earn interest tax free. That initial deposit can be withdrawn tax-free(not any earnings, just the contribution). Chances are you will not need the money, so no sense letting it sit there earning 1.6%.

robartsd

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Re: Emergency Savings
« Reply #6 on: May 14, 2018, 11:38:41 AM »
I would put 1 month's worth of spending in a savings account, put the other 5 months+ in a ROTH-IRA, where it can earn interest tax free. That initial deposit can be withdrawn tax-free(not any earnings, just the contribution). Chances are you will not need the money, so no sense letting it sit there earning 1.6%.
I agree that being more flexible in your thinking about where to put an EF after you get one month in your savings account is a good idea. In the past, a CD ladder was a good way to build a multi-month EF, but CD rates aren't really worth it right now. I would avoid investing EF in any asset that would risk loss of principal (you can find banks that offer Roth IRA Savings accounts, you're not limited to investment accounts). Putting some of your EF in a Roth IRA can be a good strategy if you don't have enough income to build your EF and max out your tax advantaged accounts. If income increases later and you are able to build up your EF outside tax advantaged accounts, you can rollover to a Roth IRA at the investment firm of your choice to get more tax free growth.

phred

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Re: Emergency Savings
« Reply #7 on: May 14, 2018, 11:41:37 AM »
It depends where you are in life.  Just out of college save to have two months in the emergency fund.  More established with house, spouse and kids increase it to six months or more.  Getting ready to retire -- build it up to three years

WalkaboutStache

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Re: Emergency Savings
« Reply #8 on: May 14, 2018, 06:01:22 PM »
I would put 1 month's worth of spending in a savings account, put the other 5 months+ in a ROTH-IRA, where it can earn interest tax free. That initial deposit can be withdrawn tax-free(not any earnings, just the contribution). Chances are you will not need the money, so no sense letting it sit there earning 1.6%.

I wholeheartedly agree.  Investments are liquid and can be accessed in very short order (2-3 days).  Credit cards can cover the gap while stock sales settle.  I keep barely a month in cash (last month I finished with about USD 300 in the account when the salary hit again).

If you want to get technical, see:

https://earlyretirementnow.com/2016/07/27/emergency-fund-bad-idea-one-chart/