How to conceptualize "3- to 6-months' savings"
Hey community! I'm curious about how folks budget that proverbial "three to six months' expenses" we're all encouraged to have saved up. Are there different schools of thought about what savings count? Do most people see it as a separate category, which can potentially have (tens of) thousands of dollars in it when full?
Background: My partner and I are a month ahead with our budget (i.e. February is funded with January's income, March will be funded with February's). Our average monthly spending is currently about $4000, including extra debt payments. We're prioritizing paying off debt, but we do have $8000 or so in various medium- and long-term savings categories, some of which we contribute to monthly.
If we needed to, we could fund at least two months of Bare Essentials spending with money from those savings categories. Does that count as having two months' expenses saved, or is it considered double dipping because most of those dollars are set aside for jobs other than income replacement?
I have a budget category called Loss of Income with 5 figures in it that will cover me for 6-8 months depending on how frugal I am.
Ivory Rain said:
Does that count as having two months' expenses saved, or is it considered double dipping because most of those dollars are set aside for jobs other than income replacement?
Yes it is double dipping because you are assigning two jobs to the same dollar(s).
Agree with jenmas ; a specific loss of income category here too. Next to a next car-, mortgage-, home maintanace- etc etc category.
What number I should base a loss of income category on bugged me for a while; the amount we budget monthly is a little above what I used when setting up the category, and not the same every single month... For now I decided to not worry too much; >5.5 month should do the trick.
I don’t do the traditional three to six months. We have an EF that is solely for job loss, but it is nowhere near three to six months because we have substantial sinking funds that could be used, we budget a month ahead, and we have taxable investments we could raid.
We would be too cash heavy if we did an additional six months for job loss.
Thanks for the responses, everyone! One of my goals is to have $4000ish in a "One Month's Expenses" category by the summer. I'll keep on keepin' on with that plan, then when our debt is paid off I'll go for filling "Another Month" and so on.
Plenty of time for me to figure out our risk tolerance for the cash vs. investment question!
My wife and have been focusing on paying off debt as well. We have been following Dave Ramseys 7 baby steps and are in step 2. What we noticed is if we had a category named emergency fund often times we would cover overspending in a different category with the emergency fund. So what we switched to was moving our emergency fund to a ally money market account that gets a decent interest rate and we moved the account to an off budget tracking account. It has really helped us from dipping into the emergency fund until we actually have an emergency. I do know that this method will not reflect the age of money correct because it is off budget. What we have found is we care about being a month ahead in the budget, and having an off budget emergency fund with 3-6 months of expenses once we get to Dave Ramseys baby step 3. Hopefully we will be there by the end of 2022. Those dang student loans and auto loans are killing us!
the reason why I say you want to have $26K is so that if your selling coincides with a market drop, the $26K may be down to $20K by the time you go to sell.
If you are forced to sell at a loss, then you are probably being too aggressive. I'd make sure I have enough cash reserves to cover most emergencies before I'd invest. But yeah, it all comes down to risk tolerance. I do something like nolesrule:
Hi Ivory Rain,
Emergency Funds for us mean dedicated money in savings just for that purpose. Not invested, not CDs, cash that can be pulled today. This is what gives us the confidence to make investments and focus our financial efforts elsewhere. We also do not include unemployment benefits toward this - those are extra and not part of our plan.
I think ultimately the interpretation of 3-6months and what it includes is subjective. What we typically do is we first fund 3-6 months worth of critical (rice and beans, uncomfortable but livable) funds. This means cancelling subscriptions and maybe even taking the bus instead of driving. Over time we build that up to be a more FULL version of our expenses to include typical behavior MINUS fun/spending money. More typical groceries, some basic entertainment and high value convenience items.
In both cases all contributions toward savings and investments would cease if we're burning through an emergency fund.
How secure do you want to feel? What amount makes you feel that way? If you have kids and a small, fixed income, it's going to be more. If you're dual-income without kids or debts then you might feel fine with less. Whatever amount will keep you feeling safe, get you through a moderate period of unemployment and allow you to prevent collateral financial loss from occurring (cars repossessed, having to drop out of school, etc.) is what I'd aim for.