The following is a guest post from Crystal at Budgeting in the Fun Stuff, where she writes about finding the balance between paying your bills, saving for your future, and budgeting for the fun stuff along the way.
As a middle class young adult, I view emergency savings as very necessary. Many investments may make a better return than a boring old bank account, but only cash on hand can cover immediate problems with the least stress as possible.
Our First Reminder to Build up an Emergency Fund
My husband and I bought our home about 4 years ago. We were young, 23 and 24, and didn’t properly plan to have much cash left after shelling out $23,000 as our 20% down payment. In fact, we only had about $8000 left in cash and maybe $10,000 in my 401(k).
The first night in our new digs, we discovered that although the air conditioner fan would work, we weren’t getting any cool air out of the thing. We called my husband’s grandpa the next morning and asked if he could take a look since he had years of a/c experience under his belt.
Within 10 minutes of arriving, he discovered that the previous owners must have stolen the connection that allows power into the unit itself. Luckily he had a connection on hand and we had our a/c back for the price of a pizza and some soda.
What if my husband didn’t have a grandpa that knew all about air conditioners? What if the whole unit was broken and it wasn’t just a missing piece? That could have cost us $4000-$6000 and we would have been completely broke within 2 days of moving in.
Our Second Reminder for a Better Emergency Fund
A few months later, our electric water heater went nuts. After some time looking for the issue online, I decided to personally try to replace the two thermostats and heating coils. The problem was that the heating coils were stuck in place. We ended up paying a plumber $150 to use a crescent wrench the size of my arm to replace the 4 parts we bought at Home Depot for $25. Once again we got lucky and this quick fix worked.
What if the water heater needed to be replaced? That would easily cost $1500-$3000 with labor and I certainly couldn’t do it myself. I took this as a sign and started funneling more cash into a side fund just for big, silly problems.
My View of an Emergency Fund
I think that having cash on hand is beneficial for at least the pop up emergencies like car problems or home issues. I don’t believe having 6-12 months of expenses in cash is necessary, but having $10,000- $15,000 lying around for cruddy days/weeks is just a good idea. If my husband or I lose our job, we can live on the other’s salary but there would be an adjustment period that would need to be covered.
Stock investments, mutual funds, Roth IRA’s, 401(k) and investment ISA contributions are all ways to get money you need if something truly awful happens, but why cash out your investments for one-time money needs?
The interest we give up by keeping some cash in a 1.2% interest savings account is worth it to us in the long run if we never have to touch our retirement funds or other long-term investments for something as unexpected as a new refrigerator.
What do you think? Is emergency savings necessary to you?
[Kevin] I agree with Crystal and I believe that some buffer is necessary; it’s not very fun to find yourself with unexpected expenses and no cash to pay for them! I also believe that keeping a healthy gap between income and expenses is very important, and in fact is necessary to build up a buffer in the first place.
For a semi-controversial view of the opportunity cost of large emergency funds, read my post “Is It Worth It to Have an Emergency Fund, or Should I Pay off My Mortgage Instead?“.
“I don’t believe having 6-12 months of expenses in cash is necessary, but having $10,000- $15,000 lying around for cruddy days/weeks is just a good idea.” I like having at least 3 months expenses put aside in case something happens and my husband or (hopefully not “and”) I are unable to work. $10,000 to $15,000 seems like a lot of money just for “cruddy days.” 🙂 That cruddy day fund equates to nearly six or seven months worth of my monthly expenses!
I personally use the chequing accounts as the buffer. We keep a certain amount in there to avoid paying fees which amounts to about 3 months of expenses. Kills two birds with one stone. 😉
Nice idea!
I used to think $5000 was enough but then my friend tripped and needed an emergency surgery on her knee. Until all the details were worked out, she had to front all the money. Now $10,000-$15,000 is for my very cruddy days. Less than that makes it hard for me to feel secure…
I love having my emergency fund. It is just a lump of money I have in a money market account. I had to take from it this month actually, and I will replenish it in April. I don’t have 6 months of expenses put away though.
I would be real nervous if I didn’t have easy access to cash if something came up.
Me too!
Emergency funds are most definitely important! For some reason, they seem to get overlooked when budgets get put together. 6-12 months is a good amount of time to save for, but if not, save as much as you can. I would say, even if another category needed to be reduced or eliminated so you could have an emergency fund, then do it. You may find you need it, especially in this economy.
Thanks Crystal.
I am one of those who really likes to have an emergency fund, and I recommend 9 months of expenses. I know that’s very conservative compared to most people, and many if not most might feel ok with much less. But it also depends on one’s life/financial situation, how many income earners there are in the household, and the household’s expense levels.
There is an opportunity cost to keeping that much money for sure, as it’s not earning much – if anything for you. However, there’s also the sleep well at night factor, which is more important for some of us than for others.
$15,000 covers us for 6 months of expenses or two-three huge problems. That’s a big enough sleeping pill for me but I don’t have kids. 🙂
I don’t believe in an emergency fund! I have leeway in my budget and a line of credit at a very low interest rate, if I need it. I want my money working for me, particularly not in these low interest savings accounts. Is this appropriate for everyone? Definitely, no!
That’s a very popular way of going too. Cash on hand is my personal security blanket but I am losing out on some investment returns. 🙂
I spent last year building up targeted savings, including an emergency fund. I’m very glad to have it, especially since I don’t have another person’s income to fall back on. (I was divorced two years ago; which is another reason why I needed a year to build up an emergency fund, since all the cash savings went to my ex so I could buy out his half of the house.)
I’m actually facing a situation where I may need to tap into the emergency fund within the next few weeks. I had some dental work done and the dental insurance is dragging their feet on reimbursing me. I had to pay the doctor at time of service so I put it on my Discover Card. When that bill comes due it looks like I won’t have the insurance reimbursement in hand yet, so in order to avoid paying interest fees and penalties, I have to dip into savings to pay the bill. I’m so glad it’s there! 🙂
If I was single, I think I’d be saving up a ton. You are so right. When it’s you relying on you, it takes more to feel secure.
I think it’s a good idea to have a buffer for life’s surprises. Once I build up to a $5000 “bubble”, the excess amounts go into Tax free trading account and is invested in dividend growth stocks. I can even spend the dividend income if need be or else it gets re-invested once a year. That way the money that sits in an account for 10-20 years will keep up with inflation with every dividend increase to the point my dividends become my buffer and eventually my main source of income.
That is a fantastic system!
Of course emergency savings are necessary! I tend to keep anywhere between 5-10k in my chequing account because you never know what’s coming around the corner. My HELOC would be the extension of my emergency fund in case the mount required exceeds 10k.
Good article.
I agree:
“I think that having cash on hand is beneficial for at least the pop up emergencies like car problems or home issues. I don’t believe having 6-12 months of expenses in cash is necessary, but having $10,000- $15,000 lying around for cruddy days/weeks is just a good idea.”
For us, an emergency fund is absolutely necessary and always will be!
While it’s probably a good idea for many people, I don’t keep a cash buffer. I do have a virtually untapped credit card to cover the month’s unexpected, and if I get strapped, I sell some of my bond index. I certainly don’t want the credit card company making a penny off me if I can help it. Over time, more money will be working for me this way, I believe.
It depends on how dangerously you want to live. Nothing wrong with a small emergency fund in a good money market fund somewhere.
You can never have too much money saved, in my opinion. Sometimes I find it tough because I know we have too large of an emergency fund for the amount of student loan debt we have, but even though it doesn’t make sense numerically, I need that peace of mind, even if it is largely illusory.
I think having liquid cash is a necessity – atleast for us. Might earn paltry interest, but that’s the tradeoff. I wouldn’t consider stocks a part of emergency funds.
We keep one month in savings during the school year and ~5 months over the summer (when we don’t get paid). Then about a year in taxable stocks that could be tapped. But we also can’t get laid off without at least a year’s notice, which would give us time to build more of an emergency fund if necessary.
This article was really detailed and well written. I liked the grandpa example! My personal belief is that a solid emergency fund offers tremendous peace of mind.
nice post.we always need to have a emergency fund because nobody knows whats there for you in the box in the near feature.
I agree with the ER fund being around $10K. I think it should cover true emergencies, like car problems, vet bills, or emergency repairs. I don’t necessarily think it needs to cover living expenses, at least not in my case, since my husband and I have various sources of income and pretty much work for ourselves. We don’t hold a typical 9 to 5 job and my sub. teaching fluctuates so we’ve never banked on just one source of income. Great post, Crystal.
I agree. Probably we wont need one year of living expenses, but having some available cash in hand is very desirable and potentially helpful. I’ve planned for four months of living expenses and I’ve used it a couple of times when something unexpected comes. It helps a lot… at least in terms of stress.
I typically keep a six month reserve being a single guy, but would probably change my stance if I was married to someone who also had a steady stream of income. One thing to consider is that Roth IRA’s allow you to pull out funds if you invest within the same year without getting hit so you can still technically invest, but know you can pull out your $5k if you really need to.
I actually have more invested than I would ideally like but it is more of a case of taking a slight risk because the benefits far outway the downside. I agree with you about keeping cash to hand, but for me at the moment everything I have is currently invested in one thing or another…mind you I havent moved out yet…