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I had two pieces of financial advise I stuck with over the years.
- Can you write a check for it?
- Can you afford to loose it?
One came from my mother the other from a manager in my banking days. It worked so far. Mad money is in my wallet, emergency money for a couple of months is cash. The rest is in traditional instruments.
The "6 months of living expenses" is a pretty good standard, but if you're a high-income earner, then it's less applicable simply because having 6 months of living expenses can equal having $35,000 or more sitting in an account and not making very much (if any) return. It's probably better in that case to have 2-3 months readily accessible and the rest invested. That's presuming the person is being smart with their money and could liquify enough investments to live on for a while, if necessary.
The "6 months of living expenses" is a pretty good standard, but if you're a high-income earner, then it's less applicable simply because having 6 months of living expenses can equal having $35,000 or more sitting in an account and not making very much (if any) return. It's probably better in that case to have 2-3 months readily accessible and the rest invested. That's presuming the person is being smart with their money and could liquify enough investments to live on for a while, if necessary.
Not to mention it is also significantly easier for most at a higher income to "cut" expenses in a time of need than someone just who is barely making ends meet.
I'm pretty conservative and my wife and I combined are upper-middle income (~130k soon to be 170k). We have around 35k in an Ally savings account. My wife lost her job earlier this year and it took 2 months to find another - I was amazed how much we were able to cut expenses during that time given she is the primary earner right now and we only had to dip into savings by about $1000. So 35k seems enough for an emergency or if we need to make a large purchase in cash. I might be comfortable with a little less if we had other money in somewhat easily accessible investment accounts, but we're still building up (income has tripled over the last 3 years and we're simultaneously saving for a house down payment in a separate account). Once we get the house I'll probably want to bump it up a little more.
That said, everyone's needs are different. My job feels unstable to me (soft-money academic) but compared to industry folks its a great deal. I'll basically have a full year's notice if I'm going to lose my job and thus plenty of time to find another. My wife is mid-level in a private company at her new job. Reasonably stable, but anything can happen at any time (obviously). We're in a great part of the country for her though, which makes finding a new job much easier in the event of a loss (as evidenced by her recent 10k "promotion" after the job loss). Were we in a more tenuous position - I might have different views.
1. If your income is based on rentals, you're pretty stable. (Passive income doesn't require your physical self in many cases, so declining strength isn't a big concern.) You also have to worry about scammers or someone stealing from you. Again, less likely if you'r e in the rental business, but suppose your manager pockets the rents, doesn't pay insurance, etc. The rental business should have its own reserve. The amount of reserve depends on your local market.
2. You did mention travel. If you're going to third world countries, an international mishap--getting sick, arrested or in trouble, in a foreign land can suck your cash reserve to nothing in a flash. You would want enough reserve set aside in a manner that you can safely access internationally. (Bitcoin / paypal / local funds or a combination).
3. All your eggs are in one basket. Although rentals are safe (assuming enough diversification) they still carry risks of a crashing neighborhood (think: las Vegas). You would need enough buffer to rebuild your business (which means a LOT). Or you could diversify your retirement by delaying retirement and dropping some funds into other products (or if you're stuck on real estate, other markets).
4. If you're retiring, consider the major obstacle- health. Do you have sufficient health insurance? What about long term care? Health issues and LTC specifically can suck your retirement fund dry. IF you're savvy enough, you can hire your own private long term care staff or you can hedge with insurance. It ain't cheap, though.
5. Final consideration, where are you parking your emergency funds? Are they readily liquid? I'd recommend keeping it in a combination of places and in a combination of types of accounts. Just in case an account is compromised, or a lock box is stolen, or a foreign market expropriates, enough diversification can keep all the dominoes from falling.
The "6 months of living expenses" is a pretty good standard, but if you're a high-income earner, then it's less applicable simply because having 6 months of living expenses can equal having $35,000 or more sitting in an account and not making very much (if any) return. It's probably better in that case to have 2-3 months readily accessible and the rest invested. That's presuming the person is being smart with their money and could liquify enough investments to live on for a while, if necessary.
Stocks and bonds are a terrible place to keep an emergency fund. The last thing you'd want to do is sell stocks or bonds when they are low because something happens that requires you to dip into your emergency fund.
Even worse, the times you are most likely to need your emergency fund due to job loss and extended unemployment are also the times when the market is likely to be down significantly. Imagine what it would happen if your emergency fund was in stocks and bonds circa 2008-2009. The market is down by half so your six month fund is now a three month fund - at the exact same time it is the worst job market in years.
Don't kid yourself by calling a taxable investment account an emergency fund. It's not.
Last edited by shamrock847; 08-28-2016 at 09:10 PM..
Stocks and bonds are a terrible place to keep an emergency fund. The last thing you'd want to do is sell stocks or bonds when they are low because something happens that requires you to dip into your emergency fund.
Even worse, the times you are most likely to need your emergency fund due to job loss and extended unemployment are also the times when the market is likely to be down significantly. Imagine what it would happen if your emergency fund was in stocks and bonds circa 2008-2009. The market is down by half so your six month fund is now a three month fund - at the exact same time it is the worst job market in years.
Don't kid yourself by calling a taxable investment account an emergency fund. It's not.
The "emergency fund" concept was a marketing trick made up by finance companies to increase deposits. If you are spending the majority of your income and have a high likelihood of a decrease of income then yes you need to carry a significant savings balance. This is just prudent planning.
My wife and I both work but in reality we could easily live of either income if it came down to it. She has a very secure job in the pubic sector so the odds of her becoming unemployed is slim. Given these reasons, we keep very little in emergency savings.
There are a ton of other factors that go into how much you need in reserves.
1) How is your health?
2) What are your employment options if you were to lose your job?
3) How much of your current spending is required versus discretionary? Good example of this is day care... If something were to happen to my job (knocks on wood) then I could immediately save 1K a month by not having to put my daughter in day care.
4) Do you have any other skills that you could trade to get by with friends and family?
5) All of this prepper stuff has gone too far.... Don't put your savings in seeds, gold or medical supplies. Those who tend to need them had massive poor planning that put them in a bad position to begin with.
Not to mention it is also significantly easier for most at a higher income to "cut" expenses in a time of need than someone just who is barely making ends meet.
I'm pretty conservative and my wife and I combined are upper-middle income (~130k soon to be 170k). We have around 35k in an Ally savings account. My wife lost her job earlier this year and it took 2 months to find another - I was amazed how much we were able to cut expenses during that time given she is the primary earner right now and we only had to dip into savings by about $1000. So 35k seems enough for an emergency or if we need to make a large purchase in cash. I might be comfortable with a little less if we had other money in somewhat easily accessible investment accounts, but we're still building up (income has tripled over the last 3 years and we're simultaneously saving for a house down payment in a separate account). Once we get the house I'll probably want to bump it up a little more.
That said, everyone's needs are different. My job feels unstable to me (soft-money academic) but compared to industry folks its a great deal. I'll basically have a full year's notice if I'm going to lose my job and thus plenty of time to find another. My wife is mid-level in a private company at her new job. Reasonably stable, but anything can happen at any time (obviously). We're in a great part of the country for her though, which makes finding a new job much easier in the event of a loss (as evidenced by her recent 10k "promotion" after the job loss). Were we in a more tenuous position - I might have different views.
it is not higher incomes that let someone cut back . it is discretionary spending in the budget . i know plenty of high income people that created lifestyles where everything they put in place is a need and not a want .
on the other we know more normal incomed folks and they have built in higher discretionary spending
The "emergency fund" concept was a marketing trick made up by finance companies to increase deposits. If you are spending the majority of your income and have a high likelihood of a decrease of income then yes you need to carry a significant savings balance. This is just prudent planning.
My wife and I both work but in reality we could easily live of either income if it came down to it. She has a very secure job in the pubic sector so the odds of her becoming unemployed is slim. Given these reasons, we keep very little in emergency savings.
There are a ton of other factors that go into how much you need in reserves.
1) How is your health?
2) What are your employment options if you were to lose your job?
3) How much of your current spending is required versus discretionary? Good example of this is day care... If something were to happen to my job (knocks on wood) then I could immediately save 1K a month by not having to put my daughter in day care.
4) Do you have any other skills that you could trade to get by with friends and family?
5) All of this prepper stuff has gone too far.... Don't put your savings in seeds, gold or medical supplies. Those who tend to need them had massive poor planning that put them in a bad position to begin with.
The emergency fund concept is far from a marketing trick. It's a sound part of a financial plan buts it's comical you think it's a trick
some marketing trick . half the country says they could never come up with even 2k in 30 days if they needed it .
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