How big should my emergency savings account be?
March 2, 2016 9:33 PM Subscribe
I currently make 3.5*X dollars per month, save 2X, live on X and pay about X/2 in taxes every month. My car and health insurance deductibles are both roughly X. I also have 4.5*X dollars worth of accrued vacation payable upon separation with the employer. In terms of X, how much should I have in liquid emergency savings?
JudgementFilter disclaimers: I have never accrued a cent in credit card interest, my student loans are small and cheap, I fund both a 403b and a 457b to their legal maximums, and usually also fill out the Roth. I do not have a mortgage or own a house. I carry comprehensive car insurance, long term disability insurance, life insurance, health insurance. Since you will second guess the motivation: this question is about rightsizing my emergency fund, to free it up to either fund more IRA, or to enjoy life with.
Now back to the question: how much liquid cash should I set aside? The general advice is 6 months of living expenses, so 6X. And I have about 7.5X. If you throw in the vacation accrual, I have 12X. And if you add in the Roth, well, it's a lot more.
But I'm curious how that should be affected by things like access to credit, Roth IRA contributions, and vacation accrual. The most detailed thing I ran across was a breakdown into three functions: common minor emergencies, rare major expenses and job loss. And presumably you hold money as insurance against all of these risks.
In general, I estimate about 0.5X as the value at risk for minor emergencies. Car repairs, parents needing to borrow money, etc. For these, I have plenty of savings. And I have a Roth IRA that I can pull contributions out of without penalty (and earnings, for qualified medical emergencies). But I also have plenty of (paid in full monthly) credit cards, and normal job earnings such that I often just put them on the credit card. Emergency savings doesn't even get touched by these, they just have downstream effects on how much surplus paycheck is rolled over to savings a month later.
For major events, I really haven't had many. But these are rare, so it makes sense to be pessimistic. I'm not entirely sure how health insurance works, but I think I have an annual out of pocket maximum of basically X. And I have an unspent HSA balance of X. The car insurance deductible is also roughly X. Everything else I own can be replaced for 3X, but I could get by with only 2X of it for a while. And presumably these rare emergencies wouldn't all trigger together. So maybe only 2X?
For job loss, I have over a month's worth of salary payable on any kind of exit from my job, as stated in union contract and employer policy. It carries over annually, so I feel no danger of losing it. Remaining to cover for six months job loss would be 1.5X.
Combine that all up, and it seems like I can go from 7.5X to 4X. But man, that Roth kinda makes that kinda pointless. And like, my overall investment projection has me at 'can retire' money in less than a decade. I can't even take the 403b money for another decade after that point without penalty. I suppose my question essentially boils down to: can I use these non-savings accounts forms of emergency cash to supplement and reduce the six months in savings rule, and only hold perhaps 1 or two months of expenses in savings for liquidity?
JudgementFilter disclaimers: I have never accrued a cent in credit card interest, my student loans are small and cheap, I fund both a 403b and a 457b to their legal maximums, and usually also fill out the Roth. I do not have a mortgage or own a house. I carry comprehensive car insurance, long term disability insurance, life insurance, health insurance. Since you will second guess the motivation: this question is about rightsizing my emergency fund, to free it up to either fund more IRA, or to enjoy life with.
Now back to the question: how much liquid cash should I set aside? The general advice is 6 months of living expenses, so 6X. And I have about 7.5X. If you throw in the vacation accrual, I have 12X. And if you add in the Roth, well, it's a lot more.
But I'm curious how that should be affected by things like access to credit, Roth IRA contributions, and vacation accrual. The most detailed thing I ran across was a breakdown into three functions: common minor emergencies, rare major expenses and job loss. And presumably you hold money as insurance against all of these risks.
In general, I estimate about 0.5X as the value at risk for minor emergencies. Car repairs, parents needing to borrow money, etc. For these, I have plenty of savings. And I have a Roth IRA that I can pull contributions out of without penalty (and earnings, for qualified medical emergencies). But I also have plenty of (paid in full monthly) credit cards, and normal job earnings such that I often just put them on the credit card. Emergency savings doesn't even get touched by these, they just have downstream effects on how much surplus paycheck is rolled over to savings a month later.
For major events, I really haven't had many. But these are rare, so it makes sense to be pessimistic. I'm not entirely sure how health insurance works, but I think I have an annual out of pocket maximum of basically X. And I have an unspent HSA balance of X. The car insurance deductible is also roughly X. Everything else I own can be replaced for 3X, but I could get by with only 2X of it for a while. And presumably these rare emergencies wouldn't all trigger together. So maybe only 2X?
For job loss, I have over a month's worth of salary payable on any kind of exit from my job, as stated in union contract and employer policy. It carries over annually, so I feel no danger of losing it. Remaining to cover for six months job loss would be 1.5X.
Combine that all up, and it seems like I can go from 7.5X to 4X. But man, that Roth kinda makes that kinda pointless. And like, my overall investment projection has me at 'can retire' money in less than a decade. I can't even take the 403b money for another decade after that point without penalty. I suppose my question essentially boils down to: can I use these non-savings accounts forms of emergency cash to supplement and reduce the six months in savings rule, and only hold perhaps 1 or two months of expenses in savings for liquidity?
From the sounds of things, you must have investment accounts of many times X. In this case, moving from 7.5X to 4X or even 1X isn't going to do diddly squat to your investments in the long run. As a worked example, let's say you have about 8 years of savings, i.e. 200X today, keep saving 2X per month and get a 5% return. After 15 years, you have 934X. Now let's say you move 5X from your emergency fund into your investments today, so you start at 205X. After 15 years, you'll have 944X; 1.11% more money.
My financial situation is not unlike yours, and I remember the time I got the call from my landlord that a pipe had burst in my apartment and was in the process of destroying all my possessions. While I was scrambling to move things to higher ground, one of the things I remember doing was calling my mother to have her transfer a bunch of money from my emergency fund account into my regular bank account (they are at different banks). It was really reassuring to know that all of the immediate financial needs (not just all my belongings, but now I had no food and kitchen stuff and had to get takeout, I had to miss work unexpectedly, so on and so on) were taken care of so I could concentrate on all the other shit that was going wrong. (I would also not be so sure your major events wouldn't all trigger together - consider a serious car accident which could require both your car and health insurance deductibles on the spot).
That peace of mind, to me, would be worth having 1.11% less money at retirement.
posted by Homeboy Trouble at 10:01 PM on March 2, 2016 [1 favorite]
My financial situation is not unlike yours, and I remember the time I got the call from my landlord that a pipe had burst in my apartment and was in the process of destroying all my possessions. While I was scrambling to move things to higher ground, one of the things I remember doing was calling my mother to have her transfer a bunch of money from my emergency fund account into my regular bank account (they are at different banks). It was really reassuring to know that all of the immediate financial needs (not just all my belongings, but now I had no food and kitchen stuff and had to get takeout, I had to miss work unexpectedly, so on and so on) were taken care of so I could concentrate on all the other shit that was going wrong. (I would also not be so sure your major events wouldn't all trigger together - consider a serious car accident which could require both your car and health insurance deductibles on the spot).
That peace of mind, to me, would be worth having 1.11% less money at retirement.
posted by Homeboy Trouble at 10:01 PM on March 2, 2016 [1 favorite]
Best answer: When you say that you live on X plus pay .5X in taxes I think you are missing out the part of your paycheck that going to car and health insurance (each another X) which are necessities that you will need to continue to pay for if you lose your job. So, to maintain your current expenses you would need about 3.5X per month (assuming income tax is coming out before your take-home and the .5x tax is something you would still have to pay).
So I think if one months salary is 6x, you would need another 15x to cover your expenses for six months. So you aren't as far ahead as you think.
That said, you keep two layers of financial protection. The first is very liquid cash equivalent like a money market fund. This might be 3X - enough to provide quick cash for any emergency.
The next layer I would put into some more conservative mutual funds - like some of the bond funds that earn a bit more and help balance your portfolio but which could be sold and transferred into your money market fund (and then spent) within a few days. This can also be the foundation of funds that you will want to cover the first decade of your retirement until you can withdraw from the IRA.
posted by metahawk at 10:48 PM on March 2, 2016 [2 favorites]
So I think if one months salary is 6x, you would need another 15x to cover your expenses for six months. So you aren't as far ahead as you think.
That said, you keep two layers of financial protection. The first is very liquid cash equivalent like a money market fund. This might be 3X - enough to provide quick cash for any emergency.
The next layer I would put into some more conservative mutual funds - like some of the bond funds that earn a bit more and help balance your portfolio but which could be sold and transferred into your money market fund (and then spent) within a few days. This can also be the foundation of funds that you will want to cover the first decade of your retirement until you can withdraw from the IRA.
posted by metahawk at 10:48 PM on March 2, 2016 [2 favorites]
I have never had anyone give me an example of an emergency that:
a) would require a massive amount of cash (more than my monthly salary) that can't be paid with a credit card
b) can't wait for the one or two days it takes me to liquidate some assets
It's early 2009, the recession is hitting hard and you lose your job and not coincidentally, the stock market is down 50%. Maybe you also get a health incident that requires that you fork out a $6000 deductible. Can you pay your rent/mortgage and car payment and utilities and home insurance and health insurance with a credit card? What's the limit on your credit card? You certainly aren't going to be able to raise the limit or get another card without a job. Can you live for 6 months on that credit limit? Are the assets you are liquidating stocks or bonds? Your stocks are down 50% and your bonds 10%.
Not everyone needs a lot of cash, but you need to qualify your backup plan.
posted by JackFlash at 11:30 PM on March 2, 2016 [7 favorites]
a) would require a massive amount of cash (more than my monthly salary) that can't be paid with a credit card
b) can't wait for the one or two days it takes me to liquidate some assets
It's early 2009, the recession is hitting hard and you lose your job and not coincidentally, the stock market is down 50%. Maybe you also get a health incident that requires that you fork out a $6000 deductible. Can you pay your rent/mortgage and car payment and utilities and home insurance and health insurance with a credit card? What's the limit on your credit card? You certainly aren't going to be able to raise the limit or get another card without a job. Can you live for 6 months on that credit limit? Are the assets you are liquidating stocks or bonds? Your stocks are down 50% and your bonds 10%.
Not everyone needs a lot of cash, but you need to qualify your backup plan.
posted by JackFlash at 11:30 PM on March 2, 2016 [7 favorites]
Response by poster: After 15 years, you'll have 944X; 1.11% more money.
You've made an eloquent case for not investing, but the argument is less sound if I instead choose to splurge an X on household purchases =)
assuming income tax is coming out before your take-home and the .5x tax is something you would still have to pay).
If I have no job, I have no taxable income. And therefore no taxes owed. No property taxes or sales tax. Just threw in a complete accounting in a naive attempt to stop the second guessing of things.
When you say that you live on X plus pay .5X in taxes I think you are missing out the part of your paycheck that going to car and health insurance (each another X)
It's true, I hadn't factored in COBRA premiums. Car insurance premiums though, is less than .5X annually, and already factored in. Certainly not X a month. FWIW, I think when I tried poking around healthcare.gov, the plans were all surprisingly cheap compared to my employer plan, which narrowly avoided the Cadillac tax this year.
This can also be the foundation of funds that you will want to cover the first decade of your retirement until you can withdraw from the IRA.
The Roth IRA already has that feature. And the 457b is an even more magical bucket that can only be pulled from after leaving the employer regardless of age; it's merely a "deferred compensation" plan. If I lost a job tomorrow, I could tap that bucket for (taxable) income.
Maybe you also get a health incident that requires that you fork out a $6000 deductible.
Then my plan would qualify for an HSA again, and I'd fund that up to the annual deductible at least.
You certainly aren't going to be able to raise the limit or get another card without a job. Can you live for 6 months on that credit limit? Are the assets you are liquidating stocks or bonds? Your stocks are down 50% and your bonds 10%.
Surprisingly, yes, I have enough available credit to probably live for a year on credit cards. Assuming they don't lower their limits during said crisis. It's an exceedingly bad plan though. The lesson I learned in 2009 was that US treasuries jump up in a crisis. Sure, it's only 2 percent return when yields are low, but it beats the alternative. These days I target a stable 70-30 portfolio and would liquidate bonds that would be overvalued in said crisis.
posted by pwnguin at 12:19 AM on March 3, 2016
You've made an eloquent case for not investing, but the argument is less sound if I instead choose to splurge an X on household purchases =)
assuming income tax is coming out before your take-home and the .5x tax is something you would still have to pay).
If I have no job, I have no taxable income. And therefore no taxes owed. No property taxes or sales tax. Just threw in a complete accounting in a naive attempt to stop the second guessing of things.
When you say that you live on X plus pay .5X in taxes I think you are missing out the part of your paycheck that going to car and health insurance (each another X)
It's true, I hadn't factored in COBRA premiums. Car insurance premiums though, is less than .5X annually, and already factored in. Certainly not X a month. FWIW, I think when I tried poking around healthcare.gov, the plans were all surprisingly cheap compared to my employer plan, which narrowly avoided the Cadillac tax this year.
This can also be the foundation of funds that you will want to cover the first decade of your retirement until you can withdraw from the IRA.
The Roth IRA already has that feature. And the 457b is an even more magical bucket that can only be pulled from after leaving the employer regardless of age; it's merely a "deferred compensation" plan. If I lost a job tomorrow, I could tap that bucket for (taxable) income.
Maybe you also get a health incident that requires that you fork out a $6000 deductible.
Then my plan would qualify for an HSA again, and I'd fund that up to the annual deductible at least.
You certainly aren't going to be able to raise the limit or get another card without a job. Can you live for 6 months on that credit limit? Are the assets you are liquidating stocks or bonds? Your stocks are down 50% and your bonds 10%.
Surprisingly, yes, I have enough available credit to probably live for a year on credit cards. Assuming they don't lower their limits during said crisis. It's an exceedingly bad plan though. The lesson I learned in 2009 was that US treasuries jump up in a crisis. Sure, it's only 2 percent return when yields are low, but it beats the alternative. These days I target a stable 70-30 portfolio and would liquidate bonds that would be overvalued in said crisis.
posted by pwnguin at 12:19 AM on March 3, 2016
Re: the Roth as emergency fund idea, you're probably aware of this but just wanted to point out that that is a pretty controversial idea. The linked page has a bunch of financial advisors with their commentary or why they think it's OK or not.
As for your main question here, it looks like you'd really like to find a mathematical equation for the optimal emergency fund (maybe it's just all those X's scaring me!), but there's no way to do that, because the optimal emergency fund depends on your risk tolerance and how fiscally responsible you are. More risk tolerance, less emergency fund needed. I think it's safe to say you seem fiscally responsible, but if there was any question about that I would strongly question having your Roth be your main source of funds, since I agree with the financial advisors that pulling money from retirement savings is generally a bad habit.
posted by treehorn+bunny at 1:05 AM on March 3, 2016 [2 favorites]
As for your main question here, it looks like you'd really like to find a mathematical equation for the optimal emergency fund (maybe it's just all those X's scaring me!), but there's no way to do that, because the optimal emergency fund depends on your risk tolerance and how fiscally responsible you are. More risk tolerance, less emergency fund needed. I think it's safe to say you seem fiscally responsible, but if there was any question about that I would strongly question having your Roth be your main source of funds, since I agree with the financial advisors that pulling money from retirement savings is generally a bad habit.
posted by treehorn+bunny at 1:05 AM on March 3, 2016 [2 favorites]
Best answer: i personally have about 4X in my current account and 24X in inflation-linked accounts that i can access at short notice (3-6 months). i guess i am pretty risk-averse. but then there have been years when those accounts were also my best investments :/ - you can consider low-risk investments part of a balanced portfolio and not "just" emergency funds.
posted by andrewcooke at 4:48 AM on March 3, 2016
posted by andrewcooke at 4:48 AM on March 3, 2016
You are thinking a lot about demand for money, but you really need to think more about supply of money, i.e., if you became unemployed, how long would it take you to find a new job; if you became disabled, how much lower would your take-home from public and private disability income be compared to your take-home now?
posted by MattD at 4:57 AM on March 3, 2016 [1 favorite]
posted by MattD at 4:57 AM on March 3, 2016 [1 favorite]
Also, if you are a homeowner, one great source of liquidity is establishing an unused home equity line. The interest rates are generally very low and the repayment terms are quite generous. You don't want to wholly rely on one because of course they can be canceled under certain circumstances, but they can also spare you the need to keep an inefficiently large amount of cash around.
posted by MattD at 4:59 AM on March 3, 2016
posted by MattD at 4:59 AM on March 3, 2016
Best answer: You can never have too much money.
I'd keep 6X liquid in a savings account, or in Laddered CDs, exclusively for job loss. You can cash in a CD for every month you're out of work to cover your typical monthly expenses.
I'd continue to rent. There's no real monetary reason to buy a home. Our home cost us more than our renting an apartment. A lot of people will disagree, but I think James Altucher states an eloquent case.
I'd build up a second savings account for unexpected expenses. Hefty car repairs, etc. I might save up to buy my next car with cash. My sister does that. I'm envious. I'd put those funds in something liquid, but not too liquid. An investment account would work. I have an individual investment account with Fidelity. I can buy into my stock portfolio regularly, and it grows with the market (or not as the case may be.) If I need to withdraw from it, I can have cash in my bank in about 5 days. It's not super-liquid, but it's not all tied up.
Credit is a good tool to have for sudden emergencies. You can put whatever it is on credit, and then liquidate an investment vehicle to pay the bill off in full when the bill comes the following month.
Were I you, once I had a cushion where I felt that I could say "fuck you" if I needed to, I'd think about spending .5X every month on something fancy that would make me happy. Why not? Money is just a way to get shiny, sparkly things that make you happy after all. Invest the surplus, and keep that nest egg growing.
posted by Ruthless Bunny at 5:37 AM on March 3, 2016
I'd keep 6X liquid in a savings account, or in Laddered CDs, exclusively for job loss. You can cash in a CD for every month you're out of work to cover your typical monthly expenses.
I'd continue to rent. There's no real monetary reason to buy a home. Our home cost us more than our renting an apartment. A lot of people will disagree, but I think James Altucher states an eloquent case.
I'd build up a second savings account for unexpected expenses. Hefty car repairs, etc. I might save up to buy my next car with cash. My sister does that. I'm envious. I'd put those funds in something liquid, but not too liquid. An investment account would work. I have an individual investment account with Fidelity. I can buy into my stock portfolio regularly, and it grows with the market (or not as the case may be.) If I need to withdraw from it, I can have cash in my bank in about 5 days. It's not super-liquid, but it's not all tied up.
Credit is a good tool to have for sudden emergencies. You can put whatever it is on credit, and then liquidate an investment vehicle to pay the bill off in full when the bill comes the following month.
Were I you, once I had a cushion where I felt that I could say "fuck you" if I needed to, I'd think about spending .5X every month on something fancy that would make me happy. Why not? Money is just a way to get shiny, sparkly things that make you happy after all. Invest the surplus, and keep that nest egg growing.
posted by Ruthless Bunny at 5:37 AM on March 3, 2016
And presumably these rare emergencies wouldn't all trigger together.
I have seen this happen more than a few times (and there are plenty of old AskMe questions on this, as well). Think of a car crash that results in a long hospital stay and then you lose your job while facing a long period of physical recuperation, say. Bad events can stack and can make it harder to bounce back, and that figures into this kind of planning at some level.
I've never figured my own situation out in terms of X, but I try to keep enough liquid cash on hand to cover a few months of expenses plus a bit more -- in other words, enough to keep things afloat long enough to sell the house and have enough cash left to pay for a move across the country, or to cover the maximum yearly health care costs for both of us at once. A bigger or more long-term emergency would come from less liquid savings, but that would be a situation where paying penalties or whatever would be worth it.
So I'd think of it in terms of shorter term things like job loss or immediate medical emergencies, versus long term situations like a health condition that limits your ability to work or suddenly having to care for a sick family member. I don't know how to solve for X given your numbers, but dividing the problem into two parts might help you find an answer that works for your personal risk assessment.
posted by Dip Flash at 5:41 AM on March 3, 2016 [2 favorites]
I have seen this happen more than a few times (and there are plenty of old AskMe questions on this, as well). Think of a car crash that results in a long hospital stay and then you lose your job while facing a long period of physical recuperation, say. Bad events can stack and can make it harder to bounce back, and that figures into this kind of planning at some level.
I've never figured my own situation out in terms of X, but I try to keep enough liquid cash on hand to cover a few months of expenses plus a bit more -- in other words, enough to keep things afloat long enough to sell the house and have enough cash left to pay for a move across the country, or to cover the maximum yearly health care costs for both of us at once. A bigger or more long-term emergency would come from less liquid savings, but that would be a situation where paying penalties or whatever would be worth it.
So I'd think of it in terms of shorter term things like job loss or immediate medical emergencies, versus long term situations like a health condition that limits your ability to work or suddenly having to care for a sick family member. I don't know how to solve for X given your numbers, but dividing the problem into two parts might help you find an answer that works for your personal risk assessment.
posted by Dip Flash at 5:41 AM on March 3, 2016 [2 favorites]
You've made an eloquent case for not investing, but the argument is less sound if I instead choose to splurge an X on household purchases =)
If this is the case, then it sounds to me like the actual problem is you're having a conflict between your needs/wants and how you're organizing your money. I resolved similar issues by creating a separate account for household purchases and the like; there's an Emergency fund that is indeed sitting there for emergencies and Retirement accounts saving up for that, but then there's a Buyin' Stuff Fund that gets a small monthly contribution at the same time as my retirement contribution. And when I want to spend money on something (recent examples: a TV, travel, a camera, moving expenses) then there's a separate place to fund that, so I'm not tempted to deplete my emergency reserves on something that is clearly not an emergency but that can't be easily accommodated from my monthly cashflow.
posted by Homeboy Trouble at 7:58 AM on March 3, 2016 [2 favorites]
If this is the case, then it sounds to me like the actual problem is you're having a conflict between your needs/wants and how you're organizing your money. I resolved similar issues by creating a separate account for household purchases and the like; there's an Emergency fund that is indeed sitting there for emergencies and Retirement accounts saving up for that, but then there's a Buyin' Stuff Fund that gets a small monthly contribution at the same time as my retirement contribution. And when I want to spend money on something (recent examples: a TV, travel, a camera, moving expenses) then there's a separate place to fund that, so I'm not tempted to deplete my emergency reserves on something that is clearly not an emergency but that can't be easily accommodated from my monthly cashflow.
posted by Homeboy Trouble at 7:58 AM on March 3, 2016 [2 favorites]
And presumably these rare emergencies wouldn't all trigger together.
Well in that case, what you are calling "emergencies" are what most people call just life as usual -- one or two things happen all the time. So what you are planning for is just ordinary life, not a real emergency at all.
A real emergency is when three or more things all happen at the same time. And often these "independent" events are highly correlated so that their simultaneous occurrence is not as improbable as you may think. For example, in a recession it is not unusual to lose your job, lose your health insurance, lose your stock portfolio and lose your home equity all at the same time. Throw in an untimely health crisis and you are toast.
posted by JackFlash at 11:00 PM on March 3, 2016
Well in that case, what you are calling "emergencies" are what most people call just life as usual -- one or two things happen all the time. So what you are planning for is just ordinary life, not a real emergency at all.
A real emergency is when three or more things all happen at the same time. And often these "independent" events are highly correlated so that their simultaneous occurrence is not as improbable as you may think. For example, in a recession it is not unusual to lose your job, lose your health insurance, lose your stock portfolio and lose your home equity all at the same time. Throw in an untimely health crisis and you are toast.
posted by JackFlash at 11:00 PM on March 3, 2016
Response by poster: If this is the case, then it sounds to me like the actual problem is you're having a conflict between your needs/wants and how you're organizing your money.
This is more or less the case; I've told myself I won't spend any of that on what you might call "hedonic adjustment" until I've got my retirement plan in motion, and know how much should be held back as an emergency fund. Retirement plan is squared away solidly, to the point that I stump the Fidelity reps. Emergency savings is now the only blocker.
And part of that comes down to figuring out how all the random buckets of money I have squirreled away add together. The vacation hours partially insures against job loss. But I can't exactly liquidate that without quitting, so it's not available if say, I get into a wreck, total the car and land up in a hospital. But I do have two months of sick leave pay accrued, and that income would cover the normal 6 months of expenses. But sick leave isn't payable upon termination, so again, it's only applicable to specific situations.
So far the only surprise I hadn't factored in was COBRA payments. I've added that to my spreadsheet, and my savings acct still appears to be about twice as large as it needs to be. Based on the analysis I've done, I'll slowly draw down to 4x by buying some things off the bucket list every month.
posted by pwnguin at 10:41 PM on March 5, 2016
This is more or less the case; I've told myself I won't spend any of that on what you might call "hedonic adjustment" until I've got my retirement plan in motion, and know how much should be held back as an emergency fund. Retirement plan is squared away solidly, to the point that I stump the Fidelity reps. Emergency savings is now the only blocker.
And part of that comes down to figuring out how all the random buckets of money I have squirreled away add together. The vacation hours partially insures against job loss. But I can't exactly liquidate that without quitting, so it's not available if say, I get into a wreck, total the car and land up in a hospital. But I do have two months of sick leave pay accrued, and that income would cover the normal 6 months of expenses. But sick leave isn't payable upon termination, so again, it's only applicable to specific situations.
So far the only surprise I hadn't factored in was COBRA payments. I've added that to my spreadsheet, and my savings acct still appears to be about twice as large as it needs to be. Based on the analysis I've done, I'll slowly draw down to 4x by buying some things off the bucket list every month.
posted by pwnguin at 10:41 PM on March 5, 2016
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I think even 4X is excessive in cash. I keep about 1X my monthly salary in liquid cash, and that's mostly to ensure by bills clear without having to balance my checkbook - not for any emergency reason. My emergency fund is my credit card. I have never had anyone give me an example of an emergency that:
a) would require a massive amount of cash (more than my monthly salary) that can't be paid with a credit card
b) can't wait for the one or two days it takes me to liquidate some assets
c) doesn't involve the collapse of the US financial system
You are clearly a financially prepared individual. That's awesome. The sort of people that go by the 6X recommendation are generally not so prepared and not so easily able to liquidate assets without incurring financial penalties (ie, by withdrawing from a 401(k)). These do not apply to you based on your description. I give you permission - and encouragement - to take some of your emergency savings and move it to a non-liquid (albeit accessible in some way) investment vehicle.
posted by saeculorum at 10:00 PM on March 2, 2016 [6 favorites]