How to balance rainy day savings vs investments?

[Regulatorr]

My wife and I are new college grads as of last summer and have been on the FI train for about 6 months (we are thankful that we discovered FIRE right after college!). Besides the difficulties juggling the start up costs of moving to a new place and starting a life the main issue that we have been struggling with is where to keep all of our money. I am currently maxing my 401k and a Roth, but my wife's employer dose not offer these things yet, so we have a little extra cash to put into vanguard every month.

My question is, what money do you count towards the common ~50% savings rate. For example, we are using YNAB to track all of our expenses and according to YNABs tracking we are saving 50+% of our income (not including retirement accounts) but I don't believe this number because it also counts the "saving up for something" categories as savings for that month. Besides our investment category that gets shuffled into vanguard, we have a master savings category that covers things like a vacation fund, car repairs, home maintenance (we just purchased a home as well), this years medical deductible ect...

It seems really difficult to me to actually PUT 50+% of your money into investments, since there are so many little rainy day things that we are perpetually "saving for". Another example is, we just purchased a home and the inspector said that we should expect to put a new roof on in 3-5 years. So we started a YNAB category for the roof and add $200 a month to it. In 2.5 years we will have the 6k needed for the roof, but then its just sitting there doing nothing for us. Should we invest this money? Im hesitant because I've heard its not good to invest money that you might need in the short term in case of a market downturn. Are we being too conservative? What is everyone else's approach?

tlldr; How does everyone balance their rainy day savings and how much money you have on hand vs what money to invest?

[MDM]

Don't worry about saving relative to income: it is saving relative to spending that is important.  E.g., see http://forum.mrmoneymustache.com/welcome-to-the-forum/how-do-you-calculate-your-savings-rate-32699/

Also see: http://forum.mrmoneymustache.com/ask-a-mustachian/how-do-you-manage-cash-flow-if-you-don%27t-use-a-budget/

Modifying a phrase from the OP: don't "invest money that you might [will] need in the short term in case of a market downturn."  It's good to have a generic "emergency" fund, and you'll hear anywhere from 3 to 9 months worth of expenses for that (and even some outliers shorter and longer), but you don't need to squirrel away contingencies for every possibility.

You could post a case study if you want more specific advice.

But most of all: congratulations for thinking about all this at all, given where you are in life.  This bodes well for both of you!

[Regulatorr]

Thanks for the response. I read through those threads but a lot of people here seem to only spend money on their monthly expenses (bills and food) and then invest the rest. The strategy Ive been taking is create categories for expenses that I know I will spend in the next 1-24 months and put it in a savings account. I'm wondering if this is a bad approach since (see my roof budget example) my savings account is potentially building up a lot of cash, and we already have a 5 month liquid emergency fund. Would it be better to remove some of my savings categories and go all in on investing and simply take money out when I need it?...

[forummm]

You can max a Roth for your wife too. That's not related to employers at all.

We invest the same day we get paid--401ks and taxable investments. We contribute to our IRAs early each year. If we had a big expense come up, we would just slowdown the taxable investments. We keep about $3k on hand in checking accounts and that's it. We also have credit cards we could use, we could sell some of the taxable investments, temporarily cut our 401k contributions (and make them up quickly later), etc. Our incomes are pretty stable.

[MDM]

The strategy Ive been taking is create categories for expenses that I know I will spend in the next 1-24 months and put it in a savings account.

Nothing wrong with this, assuming the spending itself is worth doing.

I'm wondering if this is a bad approach since (see my roof budget example) my savings account is potentially building up a lot of cash, and we already have a 5 month liquid emergency fund.

If you need to spend it soon, keeping it in cash is appropriate.  At least keep the cash in something like GE Capital that pays you 1.05% (or you may be able to find better rates).  You might be able to shave some off the e-fund, but that's relatively minor.

Would it be better to remove some of my savings categories and go all in on investing and simply take money out when I need it?...

Sure...if the market keeps going up. ;)

[norabird]

I think your method is great.  Some small emergencies can be covered on cedit so do keep that in mind, but for a roof, saving up the cash seems sensible. It's okay if you're under 50%, just keep trying to be sensible in what you spend and maybe the percentage will edge up anyway!

[AJ]

My question is, what money do you count towards the common ~50% savings rate. For example, we are using YNAB to track all of our expenses and according to YNABs tracking we are saving 50+% of our income (not including retirement accounts) but I don't believe this number because it also counts the "saving up for something" categories as savings for that month. Besides our investment category that gets shuffled into vanguard, we have a master savings category that covers things like a vacation fund, car repairs, home maintenance (we just purchased a home as well), this years medical deductible ect...

I would count the retirement savings in the 50% but not the "Save to Spend" categories. I use YNAB as well, and I keep my investments as Off-Budget accounts. I have a category called "Investments" that I use to label transfers from my Budget accounts to my off-budget investment accounts. That is the value I use when calculating my savings rate - savings within the budget are really just delayed spending.

If your "Save to Spend" categories start to have a lot of money in them, I would create an on-budget investment account to hold them. Mine aren't that large, so I just use a savings account. If they were any more than a month or two of income I would probably move it to on-budget index funds. YMMV based on your own risk tolerance.