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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?
Yes it is wise. What if you get hurt and can't work, get fired, laid off, etc. I would say 6 months TOTAL expenses minimum. (Gas, Groceries, utilities, etc)
Some people just save 6 months of mortgage, car payment, etc. and burn through 6 months of savings in 4 months because they didn't account for living expenses and groceries.
If you are worried about it affecting government aid/unemployment etc., get a fireproof safe and keep your cash at home
It may be tough and somewhat unrealistic for some to save-up 6-months worth of expenses ... over a short period of time. However, it's unwise in today's job market for anyone to avoid moving in that direction.
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.
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.
So, is it really wise to expect people to save up 6 months in living expenses?
Entirely. Well, if they ever want to have all the other things in life it is.
Quote:
Or does this turn people off to the idea of saving at all?
The ones turned off by the idea are those who wouldn't save anyway.
The rest get a realistic target to work toward.
If the number is VERY high (relative to their income) it will also help motivate them to look
inward at their choices and preferences and their work qualifications too.
Note that this character I described isn't me. In fact, I made him up, but with realistic figures.
The $800 / month includes utilities. Whatever you use (natural gas, electric, diesel), heating a house or even an apartment in northern Minnesota is expensive. With renters abusing the privilege of having their utilities paid for (the stories I can tell...), more and more landlords are beginning to exclude utilities from the rent charge, thus forcing tenants to either utilize their own resources or turn to LIHEAP. I am guessing that this character would make too much to qualify for LIHEAP.
A new car for $250 / month? Really? Even if that all goes to principal, $250 / month only pays for $12,000 over four years.
The $150 / month might be excessive for communications, but it is realistic. My most recent job was at an adult foster care home, and about half of the workers had iPhones with the AT&T logo - and the workers were mostly students and/or what you would call "low-income". Those iPhone plans are expensive...I see my sister's AT&T bill, and it's about $90 / month. The worst thing is that they are contracts, so breaking out of it incurs a heavy fee.
The individual case mentioned here is not "living above his means". He is probably better off than 70% of his peers. However, considering concretely the prospect of saving for six months of income, though it may be possible, is likely to turn him off to saving. Perhaps two month's of lost income might be a more realistic starter goal for him?
Seriously... $13K for six months of expenses looks about right. You're supposed to have that sitting somewhere, plus put 20% down when you buy a home, plus not go into any debt so, vacations - none, Christmas/B-day/etc. gifts - cheap as can be, going out to socialize at bars and restaraunts - can't, hobbies.. retirement.. weddings.. travel to visit family...
I hope you like Ramen noodles. Don't forget to give 10% to the church...
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