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emergency savings funds are boring

Since I read all those financial books last year I re-arranged our budget and we've done a better job building up the savings account. Well, that, plus a raise, and marc doing lots of contract work, and my etsy business is just clipping right along... anyway, yes, I feel much better about our situation.

Savings accounts are boring though.

Well, or in general maybe I'm just questioning things. The books say to save up an emergency fund of 3-6 months expenses but that seems like a shload of money just to have in a .00002% interest rate CD or whatever the crap is you can get now.

We need to buy a car next year. Like, not just for fun, we actually need a bigger car to fit growing Josie and her growing carseat, what we have is just not practical. I've asked Marc to at least deal with the situation until we can file our tax returns because that can be a surprising gain or loss, but after that I'm curious on what to spend on the car... we'll need a loan for the rest. Do I keep our savings tied up because zomg we need all this emergency fund money because we do, or do I put more of it towards a down payment so we're not in debt? We'll be buying a used car, and sure the older you buy the less it costs, but that's life that you're not getting out of the car because they all have a finite number of years in them.

I also wish I was throwing more money at my home mortgage, since we just bought the house three years ago the overwhelming majority of our monthly payment goes to NOTHING. We'll never get anywhere on the principle if I don't send more dedicated extra cash in that direction.

I wonder if, once you have a couple grand in an emergency fund, getting ahead on your mortgage also "counts"? After all, if I lost my job I like to think I could call up the bank and say "hey, the money I owe every month is not related anymore to the total of my loan, how about you give me a break?"

I've looked at the "emergencies" that people say emergency funds are for, the biggest expenses for us would be unexpected car repairs, appliance replacement, vet bills... all stuff that's typically $1000-$3000. Not SIX MONTHS OF EXPENSES. And I have a separate CD set aside for job loss, which would be unlikely but I think traumatic no matter what. It just doesn't seem likely enough that we should be throwing every penny at an emergency fund to deal with it, when we could be paying off our house or making a better down payment on our car.

Does that make sense?

I'm wondering if I know my situation better than those financial experts who say you have to have this giant pile of cash someplace meaningless.

Comments

( 17 comments — Leave a comment )
naath
Dec. 22nd, 2012 01:03 pm (UTC)
Some mortgage companies are more flexible than others - so maybe if you lost your job you could get them to offer you lower payments, or a payment holiday; but also maybe not. And when you have no job is not a good time to be trying to get a better mortgage deal!

I think house-owning comes with bigger costs than "the washing machine died" too. Things like "the roof blew off in a storm" or "my entire central heating system upped and died".

But yeah, I'm not sure why you'd save up months of expenses if you have debt. Savings interest rates are very very rarely going to be a better deal than avoiding having to pay more debt interest. However if a car loan has a higher interest rate than your mortgage you might want to save up for the car rather than overpay the mortgage.
easter
Dec. 22nd, 2012 02:06 pm (UTC)
I am obviously new to all of this but I think that when people say to have that much saved up, it's in case you lose your job and you need the money for food and mortage payments and bills for up to six months if you can't find work right away.

Since my husband is basically on a six-year contract until tenure, things feel a little less scary for us, although nothing is gaurenteed. This year, our emergency expenses are a $4,000 bill for our cat's bout with cancer, and I hope we do not have any more things like that crop up. Hopefully, he has the option of working during the summer, which will wipe out that debt. In future summers, we think that money will go toward either savings for something like this again, or toward the principal on the mortgage. We haven't figured out either which is more practical. But then we'd like to redo the bathroom and kitchen...that gives us more resale value but isn't an emergency...ugh. Money is scary!
easter
Dec. 22nd, 2012 02:08 pm (UTC)
Also, I don't worry too much about the roof or appliances because we have homeowner's insurance for the roof, and we have some kind of insurance for all of the major systems like the AC/Heat and the hot water heater so that if something goes it only costs us $500. Not pennies, but not crippling.
sandokai
Dec. 22nd, 2012 02:48 pm (UTC)
I think it's important to have a larger fund if you're a homeowner. If you realize you need a new roof, siding, major plumbing, electric redo, etc., you need $10,000. Plus if your car totally dies. Of course you could get a bank loan, but...

I also think a lot of people think of it ias a "if we unexpectedly lose our jobs" fund. Not to mention that a lot of people need several thousand for medical deductibles if they have unexpected medical expenses.
aparecida
Dec. 22nd, 2012 03:29 pm (UTC)
The emergency fund is in case of job loss. It needs to be liquid because it's no good if you can't get at it in said case. The low interest rate is the tradeoff for the liquidity, and it's a reasonable one. Look into high interest checking accounts if you haven't already.

A known need for a new car is a planned expense, not an emergency, so it should have a separate savings fund. Going into debt for a depreciating asset means you're paying double, so it should be avoided where at all possible. Choose a car with a reputation for longevity and maintaining value.
astrogeek01
Dec. 22nd, 2012 05:05 pm (UTC)
I think that depends actually. If your savings money is earning more in interest (whatever it's "saved" in, stocks, CDs, whatever) than the interest you're paying on your car it can totally be worth taking out a loan for the car.

We paid cash for our car because a) we could and b) none of the interest rates we were offered either through the bank or through the car company were worth it and our savings weren't making much (this was right when the economy tanked... so it was far better to buy straight up). At the same time, I didn't pay off my student loans while they were at a lower interest rate than we were earning even though that was really hard for me to not just pay it off already.

So I guess the thing is: what can you get vs what can you get through other things? Either way (to spacefem here) if you have a CD that already covers job loss I don't think you need as much in other emergency savings areas. Beyond that, see what makes more financial sense.
aparecida
Dec. 22nd, 2012 05:49 pm (UTC)
I guess these low interest rate loans are completely off my radar because I've never seen one. My medical school loans are at 6.8%, thanks economy. And last I checked into interest bearing accounts like Cds, a few days months ago, they were paying 1% or less. In an economy where student loans are 2.3% and CDs are paying 4.5%,the calculations are certainly different.

The other point that I'd add is that a CD isn't liquid enough for a job loss fund, because it locks your money up until it's term. If the job is lost, you need that money then, not in six or eleven months.

Edited at 2012-12-22 05:52 pm (UTC)
aparecida
Dec. 22nd, 2012 05:53 pm (UTC)
*unless they're in a CD ladder that would provide consistent income, in which case that's reasonable.
spacefem
Dec. 22nd, 2012 07:18 pm (UTC)
eh, my CD basically takes back your last 6 months interest or something like that if you take it out early. So really not a bad deal. It's good to look into the penalties but at my nice credit union it's not that big a risk to tie emergency funds up in a CD. Actually, it really helps me not touch it!
metawidget
Dec. 23rd, 2012 04:14 pm (UTC)
I'm definitely an emotional pay-it-off-already sort, and Elizabeth even more so.

I'm with this comment in that I think you can treat the job loss fund as a general emergency fund. Also, I keep a line of credit open for emergencies — my bank doesn't charge maintenance fees on it, so it's free as long as I don't need it and negotiated from a better position than after an emergency hits.
spacefem
Dec. 22nd, 2012 07:16 pm (UTC)
Well let's put it this way... I can only put aside X amount per month. I cannot put aside the total amount of the car by the time we need it (really before the next baby, so we've got 3-4 months). I also cannot get my emergency savings up to the 6 months expenses like some people say the goal should be.

So what percentage of the "amount I can put away" should go towards the savings, and what percent should go towards the car? that's what I'm struggling with.
lonecow
Dec. 23rd, 2012 11:59 am (UTC)
I read an interesting book a few months ago, not sure if you may have come across it in your research? 'All your worth' by Elizabeth and Amelia Warren.

If you haven't seen it, they suggest breaking up your income like this:

50% income for 'needs' (bills that have to be paid whatever your circumstances)
30% income for 'wants' (discretionary items)
20% income for savings and debt repayments, which is what you're asking about here.

Paying off a loan which is generating interest expenses is definitely worth paying off, because you're reducing how much you'll need to spend in the future.

I really enjoyed the book, and am planning on getting my own copy because it's changed the way I manage my money.
spacefem
Dec. 23rd, 2012 02:45 pm (UTC)
I'll check it out, is this by THE Elizabeth Warren? Love her!

Actually what this post is about though is how to split up the "20% for savings and debt repayments"... what goes to savings, and what goes to debt repayment?
lonecow
Dec. 24th, 2012 08:31 am (UTC)
Not sure if she's 'the' Elizabeth Warren, but she's a Harvard professor who specialises in bankruptcy and consumer advocacy?

Also, sorry, I realised that I hadn't really answered your question - I do think the book goes into that in the later chapters, but of course I can't remember! Googling found this answer from Elizabeth Warren - http://www.getrichslowly.org/blog/2010/07/02/ask-the-readers-should-i-invest-or-prepay-my-mortgage/

She suggests 10% into retirement savings, 5% into mortgage repayments and 5% for 'future dreams'.

According to the book I think the minimum payments for credit cards & mortgages etc are part of the 'needs', and additional payments on top of the minimum are part of the 'savings & debt repayment'. That would suggest that 10% of your income could go into savings, and 10% into paying off debt?

It is also influenced by the sorts of interest rates involved - if you were getting 2% interest on your savings account but you're being charged 20% interest on your loan, I agree you should put more of the money you're saving into the loan because that reduction in loan payments in the future counts as a saving.
spacefem
Dec. 25th, 2012 12:47 am (UTC)
She was a professor, now shes a US senator! I looked up up, yeah, same person, I didn't know she was an author too, I'll have to do some reading now :)
binaryprecision
Dec. 27th, 2012 04:59 am (UTC)
An emergency fund is not an investment. It's insurance against unplanned risk (job loss, large unexpected home repairs, health crisis, whatever). Of course I'm coming at it from a no-debt angle. We don't use credit cards to fall back on because we don't borrow money anymore, so the emergency fund is our only stop gap.
mrs_dragon
Dec. 29th, 2012 11:12 pm (UTC)
We have our emergency savings split--one part in a low interest money market fund and one part in a more aggressive fund that's been getting about 9%. This is why I ♥ our financial adviser.

For me our emergency savings is a hedge against job loss. Even though we have two people working and a single job loss won't kill us, I just feel better knowing that we have a fallback. The next biggest thing is the $10K bill that will hit when the heating/air system goes out.
( 17 comments — Leave a comment )

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