Emergency Savings
Do you have a set amount of savings dedicated for "emergency" situations? If so, how is that level determined? Is it a percentage of net worth -- or dependent on the amount of money you would need for X months? In the past I have put as much money away as possible, operating under the idea that this was saving for "emergencies". Am I saving enough, or does this level of savings damage my retirement investments?
Jeff Opdyke, of the WSJ, published this article that challenged my thinking: In Case of Emergency ... Save More. (I'm not sure if it requires a subscription to view). Here's a quick excerpt.
"How often do you call on the fire department to save your burning house? Probably not too often, if ever. Yet if you ever have to, you're glad it's around. That, I realized, is analogous to an emergency savings account. It's there specifically for that moment when all the stars line up exactly wrong in your life."
I'm working on a monthly dashboard to track my personal finances (see June Goals) This has forced me to look at my accounts and figure out what they represent. Currently, between CD's and a money market account -- I have $42K saved. I have called this my emergency savings for years, however I dip into this pool of money too often to be a true "emergency" source of cash.
First, I must define an emergency. Unemployment is definitely an emergency --a 50% discount sale at Van Huesen is not. At this point in my life, I belive emergency funds are there for protection during times of unemployment, serious auto problems, or major healthcare expenses.
I believe that 6-months of expenses should be a good estimate of an emergency account. $12,000 fits that model if I only look at mortgage & monthly bills. I figure that other basic living expenses account for $570 a month, or $3,420 on a 6-month basis. That brings the total to $15,420. For some reason, that doesn't look like a number I could live on for 6 months. But, I now feel better about dipping in to my $40K in savings from time to time.
The upcoming wedding will change how I view emergency savings. I plan to talk to the bride-to-be this week about emergency savings and see if she agrees that 6-months in expenses is a good place to start.
Thanks for reading! Welcome back from the weekend.
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