I am about to start step 3 of dave ramsey s plan.
It is to have 3 to 6 monthes expenses in savings incase of emergency such as unemployment, etc. I wonder what your thoughts are on figuring out what your personal magic amount is. With the economy the way it is it seems like most fiancial advisors are pushing a 12 month cushion (atleast it seems that way to me).
I would love to have a 12 month cushion but on the other hand I would also like to be able to start putting money into, funding college for DS, paying off my house and the other steps.
I currently have a great job. I have a one year contract locked in.
The down side, one of my credit cards is trying to start charging me an annual fee so I will be canceling it. I used to feel that in an emergency I could always charge it and then pay it off in a few days etc when the funds where in hand, now I am not so sure. So I am second guessing myself. I also see a major household change on the horrizon and that causes me worry also.
How much do you have saved for Emergency and how did you come to that amount?
What do you think 3 mth, 6 mth, 12 mth expense?
October 16th, 2009 at 10:08 am
October 16th, 2009 at 10:32 am
October 16th, 2009 at 10:33 am
For now? I am at about 6 months basic living expenses, but prefer to get to 6 months "actual expenses." Once I hit that magic number, I will slowly grow it back up to a year. But I will contribute much more slowly at that point, focusing on other goals.
I would never have less than 3 months. I justify still putting money to other goals at "3 months' expenses" though, because I have a stable job/career, lots of credit (though that would be a desparate last resort), and our parents are always good for a low-interest loan. We just have lots of options.
Even with all that, I rather have a large emergency fund. To stand on my own 2 feet, and not borrow during a large emergency. My definition of emergency is lost job, inability to work, or house destroyed, etc., etc. Extreme emergency. Not that we wouldn't touch the money for other things, and replenish it. Why it dropped so low in the interim. I am also open to putting the second 6 months in bonds/stock.
As an aside, you can use a ROTH as an emergency fund. Not that it is a good idea for everyone. But you can put money in a cash ROTH, and pull it back out ANY TIME if you need it. IT's the "Earnings" that you can't touch for 5 years. I keep some of my emergency fund in a ROTH. I can still contribute 15% of my pay though, to the stocks/bonds in my ROTH. I just hit $15k cash in my taxable account (I have about $8k cash in my ROTH). I am thinking of focusing on my ROTH next year, but will put the portion over 15% into cash, in case of emergency. This way I kill 2 birds with one stone. If there is no emergency, I will eventually be able to invest my ROTH cash. & I haven't given up the tax advantage. It's hard for me to jusify locking up some of that cash in retirement, otherwise. IT works because I can put so much more away than I need to. Maybe not a good option if one ROTH Is your only retirement savings vehicle. I've got 2 ROTHS (married) and a work retirement plan. The second ROTH is great for emergency savings. I do keep the emergency part in cash.
October 16th, 2009 at 10:57 am
Looking at your other baby steps, I'm wondering if you can't start pursuing some of them while still adding to your EF? For instance, put your retirement back up to 15% next year, put $50 per month into an education fund, put however much you need to per month for your husband's "blow-it" fund, and put all other leftover money toward your EF. How much would you have left over for the EF if you were funding all three of those goals simultaneously?
October 16th, 2009 at 11:26 am
October 16th, 2009 at 11:54 am
I'd first start with what you feel comfortable with...you can adjust when and if necessary.
October 16th, 2009 at 01:21 pm
October 16th, 2009 at 01:31 pm
October 17th, 2009 at 06:54 am
If I wasn't going to school right now, I'd probably be comfortable with the amount of EF right now (of course my monthly expenses would be higher too most likely.) But I also would continue to add to it while working on other goals.
My personal thoughts - 6 month EF basic expenses (rent/mortgage, groceries, utilities) focus 100% on until met. Then focus 50% on continuing to build it up to 9 month level while focusing on other goals at the same time. At the 9 month level, 25% focus on EF, 75% on other goals. Once at the 12 month level, I would keep the interest in it + maybe an extra 5% a month to account for increased costs. (when I'm out of school and in a good paying job again, this is my plan.)
If you have debt, then I'd change it to focus 100% on a 3 month e-fund, then 50% focus on EF and 50% on debt till gone.
October 17th, 2009 at 01:26 pm
After the first thousand in EF, I went on to build EF at the same time as paying down CC & car payments. If I remember correctly any money I had for snowballing went 1/3 to EF and 2/3 to paydown. Only you can decide how stable your situation is.
October 17th, 2009 at 05:06 pm
Then work on going to 6mths WHILE working the other step!
Thanks for the advice!