How many months do have (or want) in your emergency fund?

[discombob1]

I have been using mint.com which I love, thanks forum! It allows you to set goals, one of which is an emergency fund. Dave Ramsey doesn't specify how many months, other financial experts recommend 3-6, and Suze Orman recommends 8 months.

How many months do you all have either now or as a goal? My next goal is to pay off my student loans which will take awhile, then retirement. I do have a small 401K, enough to get my company match. But what's a good emergency rule of thumb?

[iswmle]

Great thread, Discombob! I think sometimes after BK we get so caught up in repairing our CREDIT that we forget something that is arguably more important... SAVING. I am currently working on my emergency fund, and my projected date is next year (at least that is what Mint says). I am being very aggressive about building this fund, and my expected amount is 3 months worth, which to me is a significant chunk.

I have it in the Amex savings that we have discussed before, but am wondering if it would be worth my while to move the funds to something that could possibly yield higher interest once I am done building... like a money market or something along those lines. I have done just a little bit of looking, though, and it appears that the 1.15 % is one of the more generous offers out there.

[HHM]

It's a tough call. I don't think there is any "objective" number of months. I think it goes to risk. If you were laid off tomorrow, how many months would it realistically take you to regain employment? Also, keep in mind, emergency funds are not necessarily designed to support your current spending level at 100%, an inherent assumption is that if you were in an emergency, you would cut back. (although, in my view, you should be living "near" emergency mode all the time).

Also. the emergency funds is not X number of months of equivalent income, it is X number of months of expenses. So, if you are earning $7000 per month, but only spending $5,000 per month, your emergency fund would be 5-8 months times $5,000, not $7,000.

As for where to keep it, the recommendations are that the funds be held in secure, liquid investments.

At the end of the day, the emergency fund is how you replace your dependence on credit. So, if the furnace in your home blows-up, your emergency fund is how you replace it.

I'd say at least 4 months worth of expenses, 8 is a bit aggressive, but not a bad goal. Just realize, in my above example, an 8 month emergency fund would be $40,000, whereas a 4 month fund would be $20,000. If you were starting from 0, it would likely take 3-4 years to get a $40,000 emergency fund. Dave Ramsey's approach is more along the lines of, having cash on hand to deal with unanticipated expenses, so, I think his rule of thumb is more along the lines of $10k-20K (depending on your income level).

[ValleYum]

If you have parents or children out of state, make sure to include in your 'emergency planning' the funds for an emergency plane ticket.

Only 3 days after our discharge, I had to buy one (American Airlines accepts PayPal!!) when my son was hurt in an ATV accident. Luckily, we had taken the advice of others in this forum and had been building our emergency fund and could handle this unexpected expense.

Now we are in process of rebuilding it.

[debee]

I read one of Elizabeth Warren's books several years ago and liked her advice about having the necessities budgeted at 50%. That way if you lose your job, or if your spouse loses a job, you can still meet all your basic needs on the other spouse's income and/or unemployment.

[Logan]

I have been using mint.com which I love, thanks forum! It allows you to set goals, one of which is an emergency fund. Dave Ramsey doesn't specify how many months, other financial experts recommend 3-6, and Suze Orman recommends 8 months.

How many months do you all have either now or as a goal? My next goal is to pay off my student loans which will take awhile, then retirement. I do have a small 401K, enough to get my company match. But what's a good emergency rule of thumb?

The amount in your emergency fund should be whatever you feel is enough in case of a job loss etc. I would also consider increasing your 401K over paying down your student loans since there is a time/value of money thing going on there. You could always borrow from your 401k in an emergency but once you pay into your student loan then you can't get the money back.
I'm just throwing ideas out there for you--there is no right or wrong answer, it's whatever fits your situation.
Examples of what I did.
Over the last 2 years I maxed out my 401K and ROTH IRA instead of paying down loans and it also ate into my emergency fund. My gains in both my 401K and ROTH are 30%+ so the car loan I had at 4% and the emergency fund that was sitting in a savings making nothing were put to use towards retirement. In case of an emergency I have options of borrowing from my 401K if it came to that but my wife would work more if I lost my job and we would make it at least a year if I didn't work before we'd have to borrow from my 401K even with a small emergency fund.
At 43 I believe the most important thing you can do is save for retirement. If you put in the max you can afford into retirement now it will continue to grow until your retirement for many years. If you wait to save you will have a much smaller nest egg.
One last thing--it is important to find help with managing your 401K. I pay a guy $5 a month to advise me and we lost 15% when the market tanked a few years back and have gone up around 50% since the turnaround.

In the end, do what's most comfortable for you......

Logan

[HHM]

The amount in your emergency fund should be whatever you feel is enough in case of a job loss etc. I would also consider increasing your 401K over paying down your student loans since there is a time/value of money thing going on there. You could always borrow from your 401k in an emergency but once you pay into your student loan then you can't get the money back.
I'm just throwing ideas out there for you--there is no right or wrong answer, it's whatever fits your situation.

In most cases, I don't agree. First, fundamental rule number one, never borrow from or liquidate a 401(k)...doing so is why most people filing BK now have NOTHING. Also, the idea that you lose time value of money by paying down debt (student loans or any other type of debt) almost never bares out when you run the numbers. I get what you are saying, but the lost opportunity from the money going to pay the debt over the life of the debt and the interest paid always seems to be more than if you saved the money. As such, you are almost always better off paying down the debt as quickly as possible. That doesn't mean don't save at all, but you save the minimum needed and put the rest toward debt. Because long term, once the debt is paid off, you have that much more disposable income and you have not wasted money on debt interest. It really just depends on the individual circumstances. But debt is debt, and any money paid toward debt is largely wasted. I use a rule of thumb of 5 years. develop a plan that would make you debt free in 5 years or less (not including the mortgage, mortgages often take 10-12 years). If you could get out of debt in 5 years with minimal savings (minimal being 5-10% of gross income), then do the plan. if no matter what you did, you couldn't pay off the debt 5 years, even with zero savings, then it is time to look at other options (down sizing, settlement, BK etc).

[discombob1]

Hmm, lots the think about. OK, I am single, no kids, nobody else's income to fall back on. I am a social worker so I don't make a ton and don't live extravagantly. I rent and have been here long enough I am on a month to month. So, I have enough in savings to cover 5 months of expenses without much cut back... which of course I would. I've been there before.

I only contribute 3% to my 401K to max my employer's match. I am 35, so while I am starting late I do have time. My student loans are fixed at 2.75%. I have my emergency fund in a savings account at 1.15% which is the best I can find. So adding more money to savings once my emergency fund is funded will cost me more than paying down my loans. Plus... I'm realizing I hate debt. It annoys me every time I see it

I am also saving separately for a new (used) car which I will need in about two years. I plan on buying that with cash. But I see what Logan is getting at too.

Lots to think about!

[HHM]

Hmm, lots the think about. OK, I am single, no kids, nobody else's income to fall back on. I am a social worker so I don't make a ton and don't live extravagantly. I rent and have been here long enough I am on a month to month. So, I have enough in savings to cover 5 months of expenses without much cut back... which of course I would. I've been there before.

I only contribute 3% to my 401K to max my employer's match. I am 35, so while I am starting late I do have time. My student loans are fixed at 2.75%. I have my emergency fund in a savings account at 1.15% which is the best I can find. So adding more money to savings once my emergency fund is funded will cost me more than paying down my loans. Plus... I'm realizing I hate debt. It annoys me every time I see it

I am also saving separately for a new (used) car which I will need in about two years. I plan on buying that with cash. But I see what Logan is getting at too.

Lots to think about!

How much in student loan debt are we talking about?

I would say you are good where you are at. Put as much as possible toward your student loans, but leave everything else alone. You have a fully funded emergency fund, so no need to add to it. You are at least matching on your 401(k). The car savings, okay, how much are we talking about though?

[Logan]

The amount in your emergency fund should be whatever you feel is enough in case of a job loss etc. I would also consider increasing your 401K over paying down your student loans since there is a time/value of money thing going on there. You could always borrow from your 401k in an emergency but once you pay into your student loan then you can't get the money back.
I'm just throwing ideas out there for you--there is no right or wrong answer, it's whatever fits your situation.

In most cases, I don't agree. First, fundamental rule number one, never borrow from or liquidate a 401(k)...doing so is why most people filing BK now have NOTHING. Also, the idea that you lose time value of money by paying down debt (student loans or any other type of debt) almost never bares out when you run the numbers. I get what you are saying, but the lost opportunity from the money going to pay the debt over the life of the debt and the interest paid always seems to be more than if you saved the money. As such, you are almost always better off paying down the debt as quickly as possible. That doesn't mean don't save at all, but you save the minimum needed and put the rest toward debt. Because long term, once the debt is paid off, you have that much more disposable income and you have not wasted money on debt interest. It really just depends on the individual circumstances. But debt is debt, and any money paid toward debt is largely wasted. I use a rule of thumb of 5 years. develop a plan that would make you debt free in 5 years or less (not including the mortgage, mortgages often take 10-12 years). If you could get out of debt in 5 years with minimal savings (minimal being 5-10% of gross income), then do the plan. if no matter what you did, you couldn't pay off the debt 5 years, even with zero savings, then it is time to look at other options (down sizing, settlement, BK etc).

Last year instead of paying down debt I maxed out my 401K which was up 34%in 2010, up 11% the 1st quarter of 2011 and up a good amount in April. My debt cost me 4% and is tax deductible and that money I contributed to my 401K would have been taxed at 25%.

As for a 401K loan, that is a personal decision. Having been laid off 3 times and have worked for a few other companies that went out of business on me I have the confidence that I can find income quickly if I were to lose my job. My job is also secure and if something was to change I'd have some pretty good notice. If the market turns downward I will move my 401K funds into a savings account, borrow against it and pay off my loans then I would be paying interest to myself rather than a lender.

My retirement has grown at a feverish pace and I'm very happy I did not pay down my debt.

Logan

[discombob1]

How much in student loan debt are we talking about?

I would say you are good where you are at. Put as much as possible toward your student loans, but leave everything else alone. You have a fully funded emergency fund, so no need to add to it. You are at least matching on your 401(k). The car savings, okay, how much are we talking about though?

I have 35K left in student loans. The car fund I should clarify... I do side work for under the table cash. It's unpredictable and sort of comes in waves, therefore I don't budget it. That's the car fund. I figure when I need a new car I can get a reliable used car for 8-10K. Logan, I really do get where you are coming from on the retirement but it sounds like your situation is different than mine. I am glad for you though!

[Logan]

Hmm, lots the think about. OK, I am single, no kids, nobody else's income to fall back on. I am a social worker so I don't make a ton and don't live extravagantly. I rent and have been here long enough I am on a month to month. So, I have enough in savings to cover 5 months of expenses without much cut back... which of course I would. I've been there before.

I only contribute 3% to my 401K to max my employer's match. I am 35, so while I am starting late I do have time. My student loans are fixed at 2.75%. I have my emergency fund in a savings account at 1.15% which is the best I can find. So adding more money to savings once my emergency fund is funded will cost me more than paying down my loans. Plus... I'm realizing I hate debt. It annoys me every time I see it

I am also saving separately for a new (used) car which I will need in about two years. I plan on buying that with cash. But I see what Logan is getting at too.

Lots to think about!

2.75% is very good and a tax deduction so it's actually lower. I would contribute more to your 401K rather than pay your loan down faster. Remember, your gains in retirement are compounded over time.
By all means do what is comfortable to you and just use us for ideas.

Logan

[discombob1]

Logan how active are you in your 401K portfolio? And if you had to choose one to contribute to (over and above employer match) would you choose 401K or Roth?

[HHM]

401(k) is funded with pre tax dollars, so that is generally the better one to fund first depending on your tax bracket. Roth IRA's are funded with after tax dollars. But depending on where you have your Roth IRA, you have far more investment options, you can day trade in your Roth IRA if you wanted. The 401(k)'s are generally extremely limited in what you may invest, usually a short menu of mutual funds. Since most people are in a higher tax bracket now than what they will be in when they retire, it is better to fund the 401(k) to save taxes now. But that doesn't mean you ignore a Roth IRA. But you can only invest up to $5,000 per year in a Roth.

[iswmle]

My student loans are fixed at 2.75%. I have my emergency fund in a savings account at 1.15% which is the best I can find.

I was just talking to my mom about this today. She has always been financially savvy and keeps on top of those sorts of things. She said for keeping things liquid that is basically as good as it gets nowadays... still hoping for the upswing in the economy.

She's been selling copper and silver on the side and has been turning quite a profit. Apparently that is where the money is at these days. She has also always invested in gold... I remember a few years back when gold was lower, and she stuck with it. Now she's probably at a point where she can light a cigar with a $100 bill, but in her mind she is always broke.

... I'm realizing I hate debt. It annoys me every time I see it

I am realizing that as well. You know on Mint how on the bottom it shows your cash vs your credit debt? Right now this is how I am looking... please don't laugh at my pitiful cash worth :



And it irritates me!! I've already sent checks out. :P