Where to save money and how much?

[Scio5]

Hi! How do different people approach "emergency savings"/"goal savings" vs. long-term retirement savings? Previously I was very cavalier and thought that my high-limit credit card plus a good-sized taxable investment portfolio (currently 100% VTSAX) was fine to cover unexpected emergencies. I'd leave a few thousand in my checking account for expenses and put everything else into the market. The COVID downturn has me wondering if I should reconsider.

I'm thinking of writing up a full case study, but thought this might be more bite-sized questions: Since the pandemic I've put about $10,000 in a savings account that earns 3% (the 3% interest only applies to the first $10k or I'd park more money here). In the case of job loss and I went into maximum frugality mode, this could cover almost 6 months of expenses so this seems reasonable. However, two potentially expensive things on the horizon are a wedding reception (I eloped during the pandemic, yay! but would like a party for family later when it's safe to congregate) and buying a house with my new husband (currently renting).

Q1: Should I open a new separate online high yield (I'm seeing 1.7-1.5% for some online banks) savings account for these shorter-term (1-3 years) expenses separate from my "emergency" savings? Or use the money from my 3% account and replenish from paychecks/my taxable account? My "reception" would probably be something like catered food in a park, so I'm picturing a few thousand for that. Our housing market right now would put us in the $180kish range.

Bonus Q2: Husband qualifies for a VA loan with 0% down and no PMI - with current rates, should we even set aside a downpayment and instead put that money into other savings/investment vehicles? (Obviously owning a house has lots of other expenses so we'd still need a good emergency buffer).

[MudPuppy]

I think this is going to be really specific to your spending and what your reasonably possible boogeymen will be. Together, my spouse and I gross around 100k per year. We I try to keep about 10k in checking because we have three dogs that could have big bills at any point. The rest of our emergency fund, another 10k, is more of a safety net fund. I keep that in a betterment account with an 85% bonds and 15% stocks allocation.

[Sibley]

Probably everyone you ask will have a different approach to emergency funds and saving for specific things. It comes down to preference based on your circumstances. Some people prefer one bank account, some prefer multiple. Right now, I have 2 savings accounts. One is linked to the checking account in case I fail at math and need to cover something (Chase), the other is more the long term savings (Ally). I have just kept a mental separation going, but am considering changing that approach going forward, for EF vs everything else savings.

As for the rest of it, I would suggest a case study.

[Ecky]

My wife and I were holding around $12,000 in a 3% checking account at our local credit union. Together we gross just under 100k as well. She was laid off with a return date, I had my hours cut enough to receive underemployment, and due to government handouts we have a larger income than we typically would in the short-term. That said, we went extremely conservative with our spending and doubled our liquid cash, holding around 25k in our 3% checking account.

As for advice, I'm thinking we may see some elevated inflation in the future. During those periods, cash loses value, and so do debts. Safe investments (all else being equal) are a nice thing to have. We're aiming for 1 year liquid.

Nobody knows just how bad the economic hit will be, but for some more personal advice, this would be basically my last choice of "opportune times" to throw an expensive party. Buying a house in an area that doesn't appear to have a largely inflated real estate market *might* be a very keen move, with rates as low as they are.

[Catica]

My wife and I were holding around $12,000 in a 3% checking account at our local credit union. Together we gross just under 100k as well. She was laid off with a return date, I had my hours cut enough to receive underemployment, and due to government handouts we have a larger income than we typically would in the short-term. That said, we went extremely conservative with our spending and doubled our liquid cash, holding around 25k in our 3% checking account.

As for advice, I'm thinking we may see some elevated inflation in the future. During those periods, cash loses value, and so do debts. Safe investments (all else being equal) are a nice thing to have. We're aiming for 1 year liquid.

Nobody knows just how bad the economic hit will be, but for some more personal advice, this would be basically my last choice of "opportune times" to throw an expensive party. Buying a house in an area that doesn't appear to have a largely inflated real estate market *might* be a very keen move, with rates as low as they are.

What's the name of your credit union?

[Ecky]

What's the name of your credit union?

Vermont Federal. I just checked their rates, looks like for new accounts they're only offering 1.5% right now.

[LightStache]

I need $62K for a 6-mo reserve, which includes business expenses. Of that $42K is in a taxable brokerage invested in short duration US government bond ETFs, while the rest is spread throughout a handful of checking accounts as a buffer.

For short term savings goals, I put those in short term corporate bond funds (slightly higher yield/risk than treasuries) with maturity that corresponds to my expected expenditure. That way, the closer it gets to the expense, the lower the volatility.

Once I'm done funding my real estate investments in five years, I will actually start investing my growing taxable funds, incl. EF, in a blend of equities and bonds. Let's say you need an EF of $25K and have a taxable portfolio of $250K -- I see no need to hold that $25K in cash or equivalents and lose out on long term gains.

Aside from your EF, you should save separately for short term non-emergency expenditures. I think either low duration bonds, CDs, or HY savings is fine for that, but it should be treated separately from your EF.

With regards to a VA loan, there is a new funding fee structure as of Jan 1, so check that out. I'm a subsequent borrower (i.e. already used some entitlement) so plan to put down 5% to get a substantially lower funding fee on my next purchase.

[Laura33]

The way I think of things is this:

1.  How much do I need to cover an emergency?  That is priority number one.

2.  How much do I need to put away to be FI on my desired timeline?  That comes second.

3.  Everything else.

Fundamentally, a house and a reception and all that are lifestyle choices.  And everyone has to make their own decision about how much they want to spend on today's fun and comfort vs. how soon they want to quit their job or how much they will need in retirement to support the lifestyle they want.

Sounds like you have realized that perhaps your risk tolerance wasn't as high as you thought it was.  That is a good thing to learn.  So add a little more to your EF -- note that you already have a good EF, so you don't need to drop all savings to build it up; keep your retirement savings on course and use your extra money to build the EF to where you want it to be.  Once you have done that, go ahead and put that extra money toward a party or house expenses or whatever.