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All I can say is, if you've ever lost a job, you would never ask the question.
And once you have lost a job and have to live off that savings and the small amount of unemployment and nix every possible expense you can nix, you will forever have a different mindset. The thought that it could happen again at any time and you always want to be prepared.
Thankfully it didn't take my husband 6 months to find another job, but even at that, to me more than 6 months is needed to feel even relatively "safe".
All I can say is, if you've ever lost a job, you would never ask the question.
And once you have lost a job and have to live off that savings and the small amount of unemployment and nix every possible expense you can nix, you will forever have a different mindset. The thought that it could happen again at any time and you always want to be prepared.
Thankfully it didn't take my husband 6 months to find another job, but even at that, to me more than 6 months is needed to feel even relatively "safe".
I've lost a job before, without UEI. In fact, my family lost a business and descended into poverty. I have experienced one tragedy after another for the past seven years. So I know how it is.
I'm not saying saving up 6 months isn't wise or anything; I'm simply trying to make a point that it seems like an awfully lofty goal for many people, especially young people who want to take advantage of their youth while it's still there. Maybe we should be more realistic and expect them to save up 3 or 4 months?
It takes time, but it's entirely realistic and a very important goal. That doesn't mean they need to build it up all at once. If someone is scared off by the total perhaps it's better to just focus on carving out a set percentage every month.
We've had to empty our savings and will be building it up again. Daunting, certainly, but essential. And I often wish I could somehow go back in time and be more frugal in my early to mid-20s, especially when it came to pumping up retirement savings. And a young, single new grad can live pretty cheaply, and would be smart not to rush out to upgrade lifestyle until they can really afford it. No need to get the $800 apartment, for example; just rent a studio or a modest 1-BR or get a roommate until the loans are paid off, at the very least.
I'm not saying saving up 6 months isn't wise or anything;
I'm simply trying to make a point that it seems like an awfully lofty goal for many people...
What sort of time frame to accumulate this fund are you using?
Savings is something that should happening since childhood with some portion of any
money received through the early work and then of course into adulthood as well.
Over the years as our earnings and obligations increase the amount we should have in reserve
will consequently need to be *increased*. But that savings account (or other instrument) really
shouldn't require having to start from zero at age 25 or 30 (let alone even older!).
So... our intrepid example now earning $35,000 or $40,000 with a $13,000 expense need...
may not have had that entire reserve but they sure should have had *some* of it.
I'll say they should have already had MOST of it and if not they better get on the stick. Pronto.
And just in case it isn't clear... once the EF is established they'll still need to keep saving.
Minimum is no less than 10% of their annual pretax gross.
A commonly cited figure for how large one's emergency fund should be is "six months". I've seen this on here as well as in the mandatory online student loan "counseling". How much does this actually work out to be? Let's start with an example, a typical unmarried new graduate who is living in my hometown:
$800 rent & utilities * 6 months = $4,800
$250 car bill * 6 months = $1,500
$600 comprehensive insurance = $600
$100 gas * 6 months = $600
$250 health insurance * 6 months = $1,500
$150 groceries/food * 6 months = $900
$150 communications (subsidized cell phone on a major provider, broadband internet, cable TV / Hulu / Netflix subscription, etc.) * 6 months = $900
$250 student loans * 6 months = $1,500
$1,000 incidental expenses (e.g. car needs repairs, etc.)
This works out to be a mind-boggling $13,300, quite a pressure for someone making $30k or $40k / year. In addition, the assets could disqualify them from government aid should they develop a problem.
So, is it really wise to expect people to save up 6 months in living expenses? Or does this turn people off to the idea of saving at all?
Bolded the problem. Time to stop living paycheck to paycheck.
Roommates could cut rent down by $300 (or $1800 over six months)
Stupidest decision ever to buy a new car right out of school (minus $1,500)
Communications stuff ($30 month unlimited from T-Mobile, save $720)
Student loans are easy to stop paying on if you lose your job (minus $1,500)
Incidental expenses is redundant (minus $1000)
There we go, cut it in half. Off the savings on rent and iPhone bill alone it should only take a few years to build up the reserve fund.
You should be saving 20%. The emphasis should be on your net worth. IF over say 5 years you have been working and yet your net worth has not increased then you did not pay yourself and you have wasted your 5 years.
What's really key, I think, is learning how to live a frugal but fulfilling lifestyle that allows for a few minor luxuries. A person making $30K with the debt described here probably should think twice about renting an $800/mo apartment (even with utilities). That amounts to 32% of the person's pre-tax income! If the person can find an apartment at $650/mo, that's a savings of $1800 for the year. A person making $30K with the debt described can take steps to pay less in insurance, and really ought to rethink spending so much on cell phone/cable, etc. Use of the local bus system may help save money otherwise spent on gas and car repairs.
I know there's a temptation to live for the moment and enjoy what's at hand, but many people earning $30K (for example) want the lifestyle of someone earning $40K or above.... But the problem is that $30K (esp. with debt) is still just $30K. If you live below your means and resist the earn-and-spend treadmill, you'll find yourself able to save quite a bit of money. In fact, with a more frugal approach, $10K or less in emergency savings for 6 months will be sufficient. You can also pay off the car and student loans more quickly, thus freeing up money for other purposes (like more saving). The first step is realizing the limitations of a $30,000 income with debt, including the viable lifestyle choices for living well within those limitations.
Sounds like the new grad needs to get their priorities straight and buckle down. $800 for an apartment? I could get by cheaper than that in Chicago. Try scaling down your expectations and rent a studio instead of a 1 br. Don't know what they are running in your area but I have seen them as cheap as $550/month in some decent parts of the city. Roommates are another option. If you don't have much money, than you probably shouldn't have a need for much space, since you don't own much. Have a lot of stuff but can't afford a large apartment to put it in??? You can rent a storage unit for cheap, or sell it.
$250/month for health insurance... What??? Aetna can hook you up for much cheaper. Try $100/month. Not the best coverage, but no one will turn you down in an emergency. Since you don't have much in the way of assets, once they absorb your puny checking account, the rest will probably be written off. Most hospitals also have charity funds to cover such situations. Worst case scenario, you're back to square one without much money, but you weren't far from that to begin with. You're still in your entry level phase of your career. Life goes on and hopefully your earning potential will increase with experience.
Car bill? What were you doing driving a new car? You just got out of college, you ain't no super star yet! Go buy a newish model used car. Since you don't have much money, use what you have more of... Time spent shopping for the best deal.
In the case of a job loss, you won't be driving to and from work everyday. Therefore, you probably won't be spending $100/month on gas to get you to and fro.
Groceries for a singe person can easily be covered for under $150/month. Kick the processed food addiction and start cooking your own darned meals. Again, you have more time than money, so utilize the resources available to you wisely. Fresh cooked meals also tend to be much healthier and lighter on the sodium. Hopefully, this translates into better health in the future, and less money spent on health coverage, medication, procedures, etc.
Communications??? Here's what I pay. $70/month cell phone, $29/month internet, no netflix, no cable, no premium sports package. Learn to make do with what you can afford. You can also knock that phone bill down. I believe there is a $30/month cell phone option available at Walmart. You can also stay on your parents family plan even after you move out. My mom in Michigan can sign me up under her family plan believe it or not. I believe cell phone companies offer this option to keep folks from moving to the competition.
Student loan... Get a part time job if you need more money. Consider yourself lucky to have had the opportunities that many people in many parts of the world do not. And if you couldn't afford it in the first place, maybe you should have went in the workforce first, saved some money, and then went to college. Every decision made in life has consequences.
Sounds like the college grad is expecting the same standard of living that they enjoyed while living at their parents now. Too bad it's not fashionable for 20-somethings to mooch off their parents forever. Time for jr to lay his/her own shingle in life and EARN the things they feel so entitled to have.
Do not listen to this person. He really seems to have no sense of what's going on.
Maybe we should be more realistic and expect them to save up 3 or 4 months?
Why lower the bar of savings when the truth is many fields/ positions do take 6+ months to find a new job (or require a self-financed cross country move)?
New graduates should save as much as they can, every month. Some months things pop up (new tires, a medical bill if the deductible isn't hit yet, etc) that can be paid for out of that month's income or borrowing from savings. But every month, have the goal to save as much as possible.
If one approaches savings with that mindset- AT ANY INCOME- they will hit the 1, 2, 3, 4, 5, 6 month's worth of savings milestones much quicker than someone who is trying to argue their way out of saving or sees saving $13k (or whatever your 6-mo $ is) as an impossible task.
In my early 20's, I wasn't focused on saving like I became later on in that decade. I was SHOCKED to learn a friend making half of what I did at the time had saved significantly more than I had. We had different spending priorities- well, I had a spending priority and he had a savings priority. He would start to cut his food or fun budget after transferring the monthly $ earmarked for savings and I would save "whatever was left".
Sure, many people have saved it , and more. But I would not expect a new graduate, fresh out of school to get it saved right away. There are so many "new" purchases to make, that the time to save 6 months living expenses takes much longer than for a person with established household and budget. Ideally, graduates should save 10 percent of their income per year, but that is not always possible even with frugal living.
Also the size of emergency fund needs to be based on a person spending, not income.
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