The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Tass on January 24, 2019, 09:48:37 AM
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I'm a PhD student hoping to graduate in 2020 (though 2021 is not impossible). I have an emergency fund of about $5k, a number I'm comfortable with as a grad student - very unlikely to lose my income, top-notch health insurance, a car cheap enough to replace with that amount of cash. $5k comfortably covers my expenses for 3 months and could be stretched to at least 5 with planning and cutbacks.
But this will not always be the case! I'm starting to think about the kind of E fund I will want when I leave the sheltered haven/prison of grad school. When I graduate I plan to leave California, so I would like to add a moving fund as well. And while most people are kept on by their labs until they line up a new position, we are planning for the worst here, and nobody knows what the job market will be like in 2 years - I would like to be prepared for a period of potential unemployment.
With all this in mind, how much would you suggest setting aside, and where would you store it? The time to plan ahead is now!
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You will find a million rules of thumb. I'll give you mine. One year of spending.
Here's how mine is stored....and I'm somewhat sneaky because my deepest level is also part of my investments.
1) Checking and savings accounts. Why? Because I can literally walk 300 yards from my office to the credit union and get cash money right now, if I want.
2) High Yield Savings Account. Why? Because higher interest. These are second level for me because it takes some time for this money to be actually available to me as cash money.
3) US Savings Bonds. Why? Because my (paper) bonds can be walked over to that same credit union and before I leave the teller, they are available for cash withdrawal. I use these as part of my bond allocation. The downside is, of course that you can't cash them at all for a year and then until 5 years, they'll deduct 3 months of interest. For me, I have some that are 20 years old and they extend my emergency fund into "ludicrous territory" as I have 7 years of spending in mostly iBonds.
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I graduated with a PhD in the sciences in May 2015 (aka was kept on until I got a job that started then). I had a few thousand dollars saved up at that point, which was good for being able to put first & last months rent + security deposit down at my new apartment before I got my money back from my previous apartment. Moving cost a few thousand dollars, but that was covered by my new company. The good thing about the transition/moving to a new job is that you will soon have a much higher income than you're used to, so I used that knowledge to feel comfortable floating about a month's worth of expenses on my credit cards until my first paycheck hit.
I don't have anything very helpful about the potential for unemployment - I would say maybe try to judge from your fellow students how long it takes them to get a job, especially the interval between defending and getting a job? It took me 18 months to job search, but things picked up substantially after I set a date for my defense. Then you can use that time frame's worth of expenses as a target for an emergency fund.
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Here's rule of thumb no. 999,999: Since I'm guessing you don't have a ton of extra income as a grad student and you are looking at a period of potential unemployment you should save up as much as you can. Even if your new employer gives a relo bonus, you'll still need extra cash for first, last, deposit, a new futon, all that stuff.
Once you get a job, your emergency fund should to go approximately zero and just start investing. The reason why everyone says you should have XX months in cash is because the market could drop, and that money wouldn't be available to you in an emergency. And that's true enough. But actual emergencies are rare by definition (moving is a planned expense that should be saved up for in cash equivalents). And significant stock market drops are rare as well, and when they do happen the market doesn't go to zero, it just goes down a certain percentage. It would suck if they both happened at the same time, but it wouldn't knock you out.
If you are at a state university, you are technically a state employee, so very likely you could open a line of credit at a state employees credit union and that could be tapped in an emergency. When you live the university the line of credit will remain open.
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Not a university student and not a state employee, nope. I do already have almost $20k of investments, but obviously I don't want to have to dip into that. Hence the emergency fund!
I also have a partner with a Real Job who I plan to move with, which will halve many of those costs, but we don't have combined finances at this point so it's important that I can cover my half independently.