Dave Ramsey's baby steps say to make sure you have $1000 in an emergency fund, then pay off debt, then build your fund to 3-6 months of expenses. Well which is it? 3 months, or 6? Suze Orman says it should be 8 months! If the average income in my neck of the woods is $60K, are we telling people to put $45K in low-interest savings accounts?
I struggle for a few reasons. First, most obviously, that's a LOT of money to save up. That is not a few months of saving, that is years! And once you have it, you really don't use it? If you can buy a freaking car with your savings, shouldn't you do that instead of taking out a loan?
Second, if you do save up that much where do you put it? An untouchable place? Can you invest any of it? I think a lot of my financial reading-up this year happened because my old go-to, credit union CDs, shifted to about nothing in the interest rate department.
After some reflection in my life, I'm starting to realize I have two very different types of "emergencies" to deal with, and some different approaches.
Normal emergencies happen WILL happen every year. Car repairs, vet bills, appliance replacement, who knows. Shit happens. I must accept it.
So I totaled it all up and looked at my year. I had a $5K over average month, when our fridge died at the same time marc's car needed some major repairs. So that has become my emergency cushion. I thought about our average car repair or vet bill, kinda doubled it in my head, rounded up, thought about my history of unfortunate coincidental events, and that's what I think would be a good level of cushion in the boring checking account.
Then there's the Abnormal Emergency that I've never encountered: the OMG society is crumbling I just lost all my income how will we live. I have no idea how to plan for this.
I do think investing SOME of the money I save for that might be okay though. The stock market can tank, yes. Frequently by 30-50%. But that seems like an easy thing to work around. Whatever my goal is for the fund, make it 30% higher. An emergency fund of $20K in a bank is $20K. An emergency fund of $20K invested in the stock market is like having $14K in the bank, because it can go up or down.
I mean, if it's a six month emergency fund, that means you wouldn't need ALL of it during the FIRST crisis month, right? You could leave a smidgen invested to maybe recover?
Or if it makes you nervous, leave half of it in safe savings accounts?
there is just no winning. there is plenty of confusing.
But I do think we need to plan for both normal and abnormal emergencies, depending on our lives, and really separate them in our heads. Maybe three months in cash, the rest invested, and then shrug off everything else.
I go back to my old stock market charts... if you were the worst at investment timing back in 2016, you'd still be ahead of the terrible 2020 crash. Your 2016 $1000 would have grown a lot, then when the market tanked it'd be $1000 again. If you needed it you could take it. If you didn't need it, it'd be $2000 today. That seems like an okay story.