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?

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  • 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).

    Like 1
  • 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.

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  • I have 6 months of net salary in an income replacement category. Whatever you're comfortable with. But I also have categories for all other known/unknown expenses.

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  • 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. 

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      • Superbone
      • YNAB convert since 2008
      • Superbone
      • 7 mths ago
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      Jax31 Nobody said it all has to be in cash.

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    • Superbone oh... 

      Didn’t they..? I feel like a schoolgirl now 😂. A fearfull one.

      Up till now I have taken that literal. As investments can be converted into  money, but being force to sell (at a low point) is never good. What non-cash resources should I think about?

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      • nolesrule
      • Stealing From the Future fix is an improvement but is incomplete....
      • nolesrule
      • 7 mths ago
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      Powder Blue Pony If you already have taxable investments, there are some easy ways to mitigate the risk of loss... hold more than you need.

      I limit the amount of cash I hold to 6 months take home pay plus a few other near term larger savings categories, and invest any amounts over that threshold that I have in cash at the beginning of the month. Currently my investment account holds 22% of the money not held in my investment budget category (yes, my investment account is in my budget). It will probably be higher after I adjust for Friday's losses and add new money on Monday.

      As long as that 22% stays below 50%, my budget is safe.

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      • jenmas
      • jenmas
      • 7 mths ago
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      Powder Blue Pony it's not for everyone. Let's say that a 6 month loss of income category for you would be $20K. If you were investing that, you would probably want to actually have $26K invested in case a layoff coincided with the market taking a nosedive.

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      • Jax31
      • Jax31
      • 7 mths ago
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      Superbone , it was a safe assumption based on the original post and based on the fact that most people don’t keep investments in on budget accounts to, nor has it ever been encourage to do so. 

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      • WordTenor
      • Can we agree that goals are dumb and immature? Sure.
      • WordTenor
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      Jax31 I suspect that this is one of those things that is its own litmus test. If you’re at a point that you’re worried about being too cash heavy if you have a six month income fund, you’re probably among those who can safely put your income replacement fund at greater risk. 

      For your average Joe, the advice to keep it liquid is solid advice.  And in any event, it’s not *bad* advice for anyone to keep it in cash. If someone keeps more money cash than might be optimal, they’re in the realm of “might not make quite as much money in investments” vs. “had an emergency and am now screwed for years.” 

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      • Superbone
      • YNAB convert since 2008
      • Superbone
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      Powder Blue Pony said:
      As investments can be converted into  money, but being force to sell (at a low point) is never good. What non-cash resources should I think about?

      That IS true. You want to have enough in cash that you are never forced to sell investments at losses. But it is a balance. You don't want too much cash where you're losing due to inflation unnecessarily. I wouldn't invest until you pass that threshold. 

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    • nolesrule aha, interesting....! For now I think keeping our investments off budget is more in line with the simplicity I’m so happy with at the moment. But it does broaden my horizon!

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    • jenmas IF it would coincide, having the $26K would make sure you had enough to live on, but only cash would prevent you from having to sell low, wouldn't it? I do want to prevent that.

      Because I really wonder how I will react emotionally to a market crash, I write “when the market crashes, for me selling is not an option” on the last page of each journal 😊. The dip in the spring was the first one for me. I didn’t find that stressfull. But how will I reactie with more money... hard to predict. 

      In real life, we would never unexpectedly both loose all our income at the same time (even in a worst case scenario there would be some notice, social company plans, even social benefiet. I know, we’re ever so privileged). Also we would bring our spending down first thing.

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      • nolesrule
      • Stealing From the Future fix is an improvement but is incomplete....
      • nolesrule
      • 7 mths ago
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      Powder Blue Pony My taxable investments (and even my cash) are part of my overall asset allocation. So if I sell in taxable, I can exchange an equal amount of fixed income to equities in my 401k and bam! .... I maintained my equities investments and reduced my fixed income (which actually would be rebalancing my asset allocation during a downturn).

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    • nolesrule aha. 

      Wow, there is a lot to know I didn’t learn in school! Some of it works differently here. I’m in the EU, Netherlands. We have compulsory pensions here. Like a 401k but no say in where the money is invested. And contributing isn’t a choice.  Only entrepreneurs get to arrange everything for themselves (choice feels like freedom of course, but on average employees are well off during retirement. More entrepreneurs get into financial trouble. ). As an employee, in addition to building this pension, I can invest a small amount tax protected for retirement. For me only a bit over €1000 a year. Not quite enough for your scheme 😊

      Even though I think the above prevents me from doing what you describe, I like learning about it. Lots of things do translate, even if slightly different. Thanks.

       

      PS: 🤔 maybe pensions differ from a 401k in a more fundamental way...? 

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      • Superbone
      • YNAB convert since 2008
      • Superbone
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      Powder Blue Pony In the US, our social security system is closer to what you describe. We are forced to pay into it  and the government is responsible for investing it and doling it out at retirement age. But it sounds like your pensions provide more income than our social security does. I sure hope so anyway since you’re limited to such a small amount of non-taxed additional retirement funds.

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    • Superbone Different dutch person here, but we have both social security and employment based pension. Social security is basically the same for everyone,  and works out to about 200E below minimum wage. The idea is that this should be enough to live on frugally for most people (obviously, individual mileage might vary). However, only about 1 in 20 households have to make do with social security alone, because of the mandatory employment pensions.

      For the vast majority of households, the combination of social security + pension (+ a paid off house, which is common here) is more than enough to live on comfortably, and in the Netherlands the retirees average a much higher net worth than almost all other age categories, and 4x higher than the population as a whole. 

      Taking my own situation as a real life example, if I stayed in my current job until retirement age, my projected net take-home pay would be about the same as my current net take-home pay. And I would have much lower cost of living, as I'm expecting to pay off my house in 15-20 years (and have another 30+ years to go until retirement age). So on the whole, we get a pretty good deal. Though who knows what will happen in 30 years. 

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      • nolesrule
      • Stealing From the Future fix is an improvement but is incomplete....
      • nolesrule
      • 7 mths ago
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      401ks (and 403b and SIMPLE IRA) are workplace defined contribution plans provided by the employer and often you do not get a choice in what investment options are available (though usually there's enough good options) nor whether the employer or the employee pays for the costs... and often the employers are ignorant to the fact they can shop around to get a better deal on costs so the plans can be expensive. We also have IRAs which allow a smaller maximum contribution but there are income phaseouts that determine whether you can contribute.

      But yeah, if you don't have the various options like I described my plan will not work for you.

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      • Superbone
      • YNAB convert since 2008
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      Blue Mermaid  Sounds like a pretty good deal! We have to be much more hands on to achieve a similar success here in the US. It sounds like our social security works out similarly to yours as far as being less than minimum wage.

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      • jenmas
      • jenmas
      • 7 mths ago
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      Powder Blue Pony 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.

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  • 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!

    Like 2
  • Superbone said:
    pass that threshold

     And that is never the result of only a simple calculation, but ultimately has to do with what risk you find acceptable, right?

    Like 1
  • Ivory Rain said:
    risk tolerance

     Of course, that was the word I was looking for 😊

    Like 1
  • 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!

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  • jenmas said:
    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:

    nolesrule said:
    I limit the amount of cash I hold to 6 months take home pay plus a few other near term larger savings categories, and invest any amounts over that threshold...
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      • jenmas
      • jenmas
      • 7 mths ago
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      Superbone yeah, I don't have the risk tolerance, so my investment account stays off budget and my Loss of Income category stays on budget.

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      • nolesrule
      • Stealing From the Future fix is an improvement but is incomplete....
      • nolesrule
      • 7 mths ago
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      Superbone and let's not forget that I was actually conservative. I spent 4 years building a taxable investment account outside the budget before I brought it into the budget using leftover money not needed by the budget. 1/3 of the money in the account is currently capital gains. Less than 1/4 of the money in the account is budgeted funds. So I've left myself a lot of wiggle room that I hope won't be needed.

      Only 20% of today's transfer was budget funds. The rest was from leftover cash.

      Like 1
  • 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.

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