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- cross-posted to:
- [email protected]
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I know this is just a meme, but I think it’s an important clarification: The rule of thumb is ~6 months’ worth of expenses, not salary. It really is important to hold you over in case of sudden job loss, since it takes most people 3-6 months to find a new job (but it doubles as a fund for genuine emergencies too, which can save your ass for stuff like unexpected medical or vet bills).
But unfortunately, lots of people live paycheck to paycheck, so for them, a month’s worth of expenses is the same thing as a month’s salary…
It gets worse than that. Many of us have expenses that are higher than our income.
I was going to say, until roughly 12 months ago 6 months of expenses would have been more than 6 months of wages for me.
Hell, still is if all I’m counting is my own income, and not household income
I call it Cadillac Advice. I was telling someone I was looking for a used car when I was like 17, and had a part time job, clearly still a kid. And they told me they had heard this and gave me the valuable advice of how to find a Cadillac dealership. I didn’t even know how stupid this advice was as a kid. I was just confused. Like ‘I guess this guy’s so dumb he dosen’t know what a used junker car is. Weird’’ anyway, I bought a Pontiac T-1000. Which you’ve never heard of or seen because that were all recalled a few months? Years? After they were originally oftered to the public. An old guy I didn’t know had one in his garage somehow, totally forgot about it for a few decades, then died. His wife wanted me to clean out the garage for a few bucks. I took the car as payment. Believe me, she made out like a bandit. That car nearly killed me a good few times. And the $50-$75 dollars I used to fix it up was a total loss.
T-1000
nearly killed me a good few times
Hmm…
Have you seen this boy?
Isn’t it supposed to be expenses not salary? That’s what I’ve been told at least.
Yeah the salary thing was the wedding ring bullshit.
When Your living paycheck to paycheck, it’s the same.
Real talk? This shit is out of reach for most Americans. The best you can do is make sure you maintain a low amount of debt. It’s better to live paycheck to paycheck if it means reducing any outstanding liabilities. If you’ve got a decent enough credit score, banks’ll have no problem bailing you out of trouble with a quick loan or a credit card or a payment plan. The problem really comes if you’re already heavily making use of debt, and then something goes wrong.
I declare bankruptcy
This always felt like banker advice to me. That’s an insane percentage of cash to have sitting in an account that’s earning less interest than the rate of inflation.
I would suggest everyone have a stock investment account and not worry about the percentage. Setting aside $1 per month is infinitely better than $0.
Bank advicers usually don’t advice people to it either, because the bank doesn’t make any money on those accounts,.
They do make money on those accounts as they only have to keep 10% of it to hand and can loan out the other 90
The European deposit protection is fixed at €100000 pr. customer instead of a percentage. They are not allowed to use customer savings for their own investment or loan outs. It’s handled completely separately…
Regardless of guarantee, the bank earns a lot more on loans than deposits, so their advisors will always try to push their loan products even when you have money in the bank. They want the customer to be in debt to them. That’s how banks earn money and always have.
The idea that a bank is some kind of piggy bank where they use customer deposits for investment is a bedside story. They loan money to loan out and then take a cut. It’s loans all the way. Banks have no interest in plain deposit accounts except for being a point of contact to the customer so they can sell loans.
The goal of an emergency fund is to be available for an eventual emergency. If you lose your job and need to live on saved up money for a few months, you might be forced to sell stock at the wrong time, losing capital. There is a middle ground where you invest that money in a low-risk investment product that will grow with time, without the volatility of the stock market.
To be fair, 6 month is a lot, and most likely not the first goal someone should have when it comes to personal finance starting from zero.Indeed. I think 3 months is reasonable too, that’s more than enough time to find another job. And you can leave it in an easy access savings account so it makes a little interest
This always felt like banker advice to me. That’s an insane percentage of cash to have sitting in an account that’s earning less interest than the rate of inflation.
First, if you’re getting less than 3% on your savings account rate, find a better bank (or even better a credit union).
Second, you will find that there are times in life when having cash you can lay your hands on immediate solves problems that nothing else can. An extreme example: if you need to get bailed out of jail or retain a lawyer right now, the stock you have in your portfolio is going to take more than 24 hours to liquidate and get transferred into your checking account you can pay the court or a bondsman. More than likely its closer to 48 for the market to open to close your position and perform a wire transfer to get the cash in your hands. A less extreme situation may be a desperate car repair or a dental root canal.
Lastly, you really don’t want your emergency money in volatile stocks. Even an boring S&P500 index fund is a bad choice, why? Because there are times of financial crisis that can drive down the value of your stocks or mutual funds. Its entirely possible that is the time when you’re going to need cash to float on. Selling at the bottom of the market in a crisis is a bad place to be. This was many people’s situation in 2007/2008 during the financial crisis where the market tanked the second worst in US history, and people were losing their jobs left and right.
S&P500 returns over the last 100 years:
All those red years would mean your desperately needed emergency fund is worth a fraction of what you put into it.
Those graphs make it look scary but clearly the stock market had trended upwards. If you’re using your emergent fund within a year or two of putting the money in, I would argue it’s not an emergency.
Bail is a weird thing to be planning for and I don’t think you have the timeline right on how quickly bail is set.
But my main point was to simply put money aside at even the smallest amount rather than make excuses.
Putting it in an investment account rather than a savings account sitting right next to your checking account is too easily to access. The withdrawal delay can be a feature.
The balance of the emergency fundis not something one should be seeing or thinking about as often as one sees and thinks about their bill payment account.
Even if one is only comfortable using a saving account, I would still suggest using a separate financial entity.
that’s what high yield savings accounts are for
