Saving too much in an EF?

[kygirl]

Hi everyone. I currently have about 9 months saved in an EF, and although logically I think it's plenty, I can't seem to stop putting money into it.

For those of you that have felt this way in the past, what finally allowed/helped you to get over the fear of not having enough saved?

[dancinmama]

Jan 19, 2011 20:15:52 GMT -5 @kygirl said:

Hi everyone. I currently have about 9 months saved in an EF, and although logically I think it's plenty, I can't seem to stop putting money into it.

For those of you that have felt this way in the past, what finally allowed/helped you to get over the fear of not having enough saved?

I think it all depends on what your intent is for your EF. Our EF has always been meant to cover EVERYTHING (job loss, money for when we needed to buy a car, vacations, car repairs, semi-annual insurance premiums, property tax, etc.). So we have always paid our monthly bills and dumped everything else into our EF.

NOTE: I would suggest the "pay yourself first method" of funding an EF for most people, but this has always worked well for us.

[haapai]

Is your calculation accurate? I once was in the habit of dividing my savings by my monthly rent plus my phone bill and saying that I had X number of months saved up. I do not recommend this method one little bit.

Does this calculation include health insurance? Do you know your COBRA number? The employee contribution to health insurance costs on your pay stub is not the number that you need for this calculation.

I've always found that throwing health insurance or automobile depreciation into the calculation made the oversaving problem disappear.

[verrip1]

At current lousy savings rates appropriate for EFs, you really shouldn't have too much in that account. If you are doing this just because you are risk averse, just put additional conservative savings in conservative investments. Shoveling unnecessary amounts of excess income into low yielding, even negative real yielding, accounts is bad. Better yet, you should make sure you are maxed out in tax deferred accounts.

[phil5185]

We cap our EF at about $5000. And we have a taxable SP500 Index Fund that is readily available as a Fallback EF. An index fund grows tax deferred, and when/if you sell some you pay only the 15% MAX on your profit. It is a good wealth building tool, provides your pre 59 1/2 wealth, available for early retirement, etc. Historically it returns 10% to 12%/yr.

This concept allows you to invest much closer to 100% of your limit - whereas 401k and IRA contributions are irreversible and must be dialed down.

The criticism of this concept is that you could be forced to liquidate some funds during a 'down' market - exacerbating the emergency. But in our case, the 10% to 12% far outweighed the forced sale issue.

[Tiny]

Jan 19, 2011 20:15:52 GMT -5 @kygirl said:

For those of you that have felt this way in the past, what finally allowed/helped you to get over the fear of not having enough saved?

I started telling myself "I have enough saved! I want to do X with the money that I use to put into the EF. I will put Y$ into an account, saving up so I can do X!" I then figured out how long it would take me to get to do X. Once I knew that I worked on focusing on saving Y and getting to do X and not how much was in my EF (because of course I had saved enough).

How's your retirement savings? What about starting some after tax investments maybe you should be investing money in something more risky than a typical EF account? How's your outstanding debt(s) - maybe you should be paying that down faster? what big expenses do you have coming up in the next year (or two) maybe you need to save up for them? Maybe it's time to think about that fun vacation you always dreamed of taking...
That's how I stopped thinking about/worrying about the size of my EF (once I got it where I wanted it to be)

[bimetalaupt]

Jan 19, 2011 21:42:22 GMT -5 phil5185 said:

We cap our EF at about $5000. And we have a taxable SP500 Index Fund that is readily available as a Fallback EF. An index fund grows tax deferred, and when/if you sell some you pay only the 15% MAX on your profit. It is a good wealth building tool, provides your pre 59 1/2 wealth, available for early retirement, etc. Historically it returns 10% to 12%/yr.

This concept allows you to invest much closer to 100% of your limit - whereas 401k and IRA contributions are irreversible and must be dialed down.

The criticism of this concept is that you could be forced to liquidate some funds during a 'down' market - exacerbating the emergency. But in our case, the 10% to 12% far outweighed the forced sale issue.

Phil,
On the other hand if you have some good bonds rather then zero paying MM you could earn more money in a down market as bonds have a negative correlation to stocks. For the numbers use 90% cash equivalent for bond.. IE saving $5,000 would need $5,500 in bonds..

Just a thought,
Bruce

[Deleted]

Just quick question:
-> are you maxing 401K?
-> are you maxing Roth?

[bimetalaupt]

401K/403B...Yes
Roth NO over income limit

[Deleted]

Here's what I do. I have about 1 year of savings in an EF.

I am conservative, plus I'm buying a house next year so I don't know how much I'll need for a downpayment.

So what I do is kinda try and put money into accounts where I can still access it with little pain if it's an emergency..so.

--Emergency Funds (Checking, money market)
--After tax savings (mutual funds, investments, etc)
--ROTH IRA/401k
--529 Plan (only the earnings are taxed/penalized, but you can still take out principle)
--Last resort savings would be 401k.

[ca]

Isn't the rule of thumb to take the Unemployment Rate in your area/field and use that % as the number of months to save? I probably wouldn't go beyond that much. I'd just start treating myself to nice vacation and shopping and putting whatever's left into a taxable investment fund (providing I had enough saved for my long term goals like house downpayment, new car, etc...and of course retirement saving).

[kygirl]

Thanks everyone for the suggestions. The EF is sitting in a savings account. I know that some here think that it should be somewhere working harder for me, but this is money I want to keep safe. This is really the only area I am conservative in, when in comes to my money.

I have both a 401K and am maxing out a Roth. I only contribute to the 401K up to the company match. Would you recommend contributing now to a taxable account, or maxing out the 401K first?

I have no debt other than my mortgage.

[kygirl]

Jan 20, 2011 11:31:05 GMT -5 @ca said:

Isn't the rule of thumb to take the Unemployment Rate in your area/field and use that % as the number of months to save? I probably wouldn't go beyond that much. I'd just start treating myself to nice vacation and shopping and putting whatever's left into a taxable investment fund (providing I had enough saved for my long term goals like house downpayment, new car, etc...and of course retirement saving).

I have never heard this rule of thumb before. Thanks for sharing CA!

[Peace77]

CA,

No, the rule of thumb is not to use the Unemployment rate in the area.

The recommendation is to have at least 9 months worth of your usual living expenses in an emergency fund. Some people need to have more such as those with unstable jobs, single parents, people with chronic health problems and those caring for family members.

The emergency fund should be for emergencies only. Job loss or unable to work for longer than your sick leave due to illness or injury. Major medical bills or other catastrophes.

There should be separate savings for anticipated expenses such as home and car maintenance and repairs, medical and dental expenses, eventual appliance and car replacement.

[souldoubt]

Jan 20, 2011 12:09:34 GMT -5 @kygirl said:

Would you recommend contributing now to a taxable account, or maxing out the 401K first?

I have no debt other than my mortgage.

Rule of thumb from the old board was to contribute as follows:

-401K to get employer match
-Roth IRA
-Max 401K
-Taxable accounts

That said quite a few people said whether or not you max your 401K might depend on the funds available to you and I tend to agree with that.

[kygirl]

Jan 19, 2011 21:13:19 GMT -5 haapai said:

Is your calculation accurate? I once was in the habit of dividing my savings by my monthly rent plus my phone bill and saying that I had X number of months saved up. I do not recommend this method one little bit.

Does this calculation include health insurance? Do you know your COBRA number? The employee contribution to health insurance costs on your pay stub is not the number that you need for this calculation.

I've always found that throwing health insurance or automobile depreciation into the calculation made the oversaving problem disappear.

My 9 month EF includes both COBRA, but not an added car payment. (My current car is paid off and I plan to drive it for many more years). I do, however, include gift and misc. money in the EF also, which could then be used for a car payment in the future (if I don't need the EF until I do have a car payment again).

[Peace77]

Kygirl,

If you have savings to cover the other categories such as car replacement, then I suggest maxing out your 401(k).

What is the interest rate on your savings account? Sometimes you can do better on a jumbo money market account or a high yield savings account. Currently American Express is paying 1.3% on its high yield account.

[ca]

9 months seems very arbitrary. At least using the unemployment rate % has some sort of scientific logic to it, low unemployment rate of 4% in your area means lower need for a huge EF earning less than inflation in interest; while a double digit employment rate in your area would mean higher EF.

9 months just seems to be plucked from the air. It's not a rule of thumb at all, just a number.

[thyme4change]

The recommendation is to have at least 9 months worth of your usual living expenses in an emergency fund.

What happened to 6 months? I always heard 6. I guess it changed when we had a near-depression?

I agree with CA - 9 months is arbitrary, 6 months is arbitrary. You should probably look at your situation. If you are a line worker in Detroit, maybe you should keep several years in an EF. If you are a real estate agent in Nevada, well, you are probably already bankrupt, so whatever. If you are a mid-level accountant just about anywhere, maybe you don't need so much. If you live on a low percentage of your 2-income family, maybe you can get away with less. If you have chronic health problems, maybe you should have a little more. If you have a contract that has a golden parachute, maybe you need a little less.

Critical thinking - it is a beautiful thing.

[dividend]

Jan 19, 2011 21:13:19 GMT -5 haapai said:

Is your calculation accurate? I once was in the habit of dividing my savings by my monthly rent plus my phone bill and saying that I had X number of months saved up. I do not recommend this method one little bit.

Does this calculation include health insurance? Do you know your COBRA number? The employee contribution to health insurance costs on your pay stub is not the number that you need for this calculation.

I've always found that throwing health insurance or automobile depreciation into the calculation made the oversaving problem disappear.

I'm not sure why you'd include automobile depreciation in your EF calculations. Depreciation is sort of a theoretical expense until you sell your car, right? Unless you're saving equal to the depreciation rate in order to buy your next car. But in my mind, that's not really something you'd use your EF for. I made a "poverty" budget, which included everything I would need if I lost my job, plus COBRA costs. There's a lot of line items that don't need to be included, like the various funds for vacation, gift giving, etc. Various other funds like the grocery budget would also be reduced. So 6 months of an EF is a lot lower than 6 months of a normal budget.

[Peace77]

Nine months is not just plucked from the air. It is Suze Orman's recommendation based on her experience. She found too many people had saved 3-6 months worth of expenses and it just wasn't enough.

The amount of time to find new employment is part of the reason for the increase but it depends on more than just the location. It also depends on the type of work the person does. If a person works in the auto industry and every one of the auto manufacturers in laying people off, then 9 months won't be enough.

Even if the time to find new work in your field is very short, you can have other emergencies that would cause you to draw on your EF.

Suppose you have a bad car accident. You car is totaled, you are injured and in the hospital. Your broken leg needs 6 weeks in traction.
Your sick leave and vacation time will run out before you are well enough to walk. So, no income for a time.
You will have medical bills for anything not covered by insurance.
You will need to replace your car long before you had planned to do so.


Buying short term disability insurance would be a good idea if you don't have it already.

[Peace77]

Various other funds like the grocery budget would also be reduced

Why would you reduce your grocery budget? Do you plan to eat fewer meals?

I can see cutting out gifts, vacations, recreation and other non-essentials but food?

[thyme4change]

Why would you reduce your grocery budget? Do you plan to eat fewer meals?

No, but I might cut out that extra bottle of wine, eat an additional meal with eggs as protein, instead of steak, or salmon or shrimp. I might not buy the artisan cheese, and opt for the block of cheddar. I might cut coupons or shop sales (after all, I am out of work. I've got time.) I might make spaghetti every week, instead of Chicken Marsala. I might only buy the cereal that is on sale, instead of our favorites at all cost. I might make our bread from scratch, or other meals that I currently take expensive short-cuts on.

I could easily cut 25% out of our grocery budget. I don't currently live that way, because I don't have to. But, if our lifestyle changed, so would our grocery budget.

[Plain Old Petunia]

Jan 20, 2011 3:08:33 GMT -5 bimetalaupt said:

Phil,
On the other hand if you have some good bonds rather then zero paying MM you could earn more money in a down market as bonds have a negative correlation to stocks. For the numbers use 90% cash equivalent for bond.. IE saving $5,000 would need $5,500 in bonds..

Just a thought,
Bruce

Stocks and bonds have a low correlation, which is not at all the same as having a negative correlation. Perhaps you are thinking of bonds and interest rates? Those are negatively correlated.

[ca]

Nine months is not just plucked from the air. It is Suze Orman's recommendation based on her experience.

Suze plucked it from the air then (don't get me started on her), but when the employment rate is around 9% as it is now, 9 months savings works out to the same anyway.

[phil5185]

I agree with CA - 9 months is arbitrary, 6 months is arbitrary. You should probably look at your situation. If you are a line worker in Detroit, maybe you should keep several years in an EF. If you are a real estate agent in Nevada, well, you are probably already bankrupt, so whatever.

Maybe the answer to the 'EF in savings" question is meaningful only if your tie it to your whole portfolio.

Say that you're 30-yr-olds - if you have $50k in 401k's and zero in a taxable account, then the 9-months savings account is needed. If you have $25k in 401k's and $25k in a taxable account, then maybe $5000 or $10,000 in savings is enough?

If you are 45-yr-olds with $150k in 401k's and $50k in a taxable account, why have more than $5000 in savings? The $55,000 will cover most eventualities, even in a 'down' market.

If you are 60-yr-olds with $500k in 401k's and $250k in a taxable account, even $5000 in savings may be an overkill? The $250,000 should cover anything that you live thru.

[thyme4change]

I agree Phil. I have always kept less than 6-months in a savings account, but had money in a taxable account. Sure, I might have to sell low - but theoretically, the amount of earnings in the years I don't need the money should offset losses.

As we are talking about it, I realize I have about 6 weeks of net income in savings. Even if we only need 50% of that to live off, we have 12 weeks of living expenses in cash. The chances that both of us would lose our jobs and not be able to generate any income in the exact same 12 week span is low enough that I will take the risk and put that money into investments.

[jk70]

I go off of only 2 months GROSS salary. I have that in the AMEX high yield savings (1.30%) mentioned earlier. Using gross means this could probably stretch to 3 months if an emergency hit (like job loss) as I would have no taxes taken out, I probably would stop saving (monthly budget is: Gross - Taxes - Savings - Expenses = Zero), and I would start cutting certain things. I wouldn't do too much more because this $$ is only making 1.30% BUT it is safe.

But, i would also look at what would really happen in an emergency (and don't look at low probability scenarios like what if I lost my job for 6 years, went into a coma, got sued, etc., etc. - otherwise you're building ONLY an EF for 10 years expenses which is stupid) and what money you really have to use. Depending of what else you have my order of funds would go like this:

1) Emergency Fund mentioned above
2) Other cash accounts (like my escrow account)
3) Taxable Accounts like investments
4) My credit card: I never carry a balance but I have a credit limit of 25,000 and would be able to tap this if it ever came to it.

Add all this up and I have more than a year's worth of expenses and savings. So, I wouldn't go crazy having a 9 month EF.

[Urban Chicago]

If you have savings to cover the other categories such as car replacement, then I suggest maxing out your 401(k).

I agree here. I have some "steps" that I follow for this stuff.

1. $1000 in the bank.
2. Pay off all non-deductible debt.
3. Invest enough 401K to get the full match.
4. Real emergency fund (for you, 9 months of expenses).
5. 529 Plans for your kids.(If any)
6. Full 401K plus a ROTH.
7. Save up for big expenses that WILL come (new car, new roof, etc)
8. Pre-pay deductible debt like mortgage or student loans.
9. Big expenses that MIGHT come (house down-payment, wedding, dream vacation, etc...)

Assuming you have no non-deductible debt, you're at about the same place as me, #5 or 6 depending on if you have kids or not.

[thyme4change]

Also, knowing that you have unemployement benefits and a short term disability and a long term disability plan, as well as life insurance on your spouse, you have at least a small portion of your spending covered for 4 potential "emergencies."

I guess I could get fired for cause and not get unemployment.