In my 2017 Goals post I mentioned that my ultimate goal for my emergency fund was to save 1 year of living expenses.
You may wonder why I want so much in savings. I’m single. I don’t have any dependents, and I live rather frugally. Simply put, I want more because what I have saved so far doesn’t align with my goals.
My current 2.5k mini-emergency fund is a needed life line, a life preserver, should something unexpected, yet minor happen in my life. The life preserver doesn’t look pretty, nor does anyone using it; but that’s not the point. The life preserver has only one job, to keep your head above water until you’re out of danger. It does not provide comfort or space/buffer from the danger.
This level is savings is fine for some, particularly those who have a relatively low amount of debt compared to their income and who will be out of debt in a relatively short amount of time (less than one year). This is where my savings are now, and I’m seeing that this is not enough.
In the near future, within the next couple of years, I’d like to build up a larger $8,000 safety net. This is where I should be. A good safety net would provide me with more of a financial cushion. It’s a more elevated, softer place to land that would provide more of a buffer between me and the dangerous abyss of destitution below it. heh.
This middle tier of emergency fund (~ 3 months of expenses or so, depending on personal circumstances) is for those who have high amounts of debt relative to income that will take years to pay off. $8,000 is way more than 3 months of current expenses for me, but there will likely be other circumstances involved which would cause me to use my emergency fund.
If I have to move suddenly because Landlord finally flips all the way out or something else happens, my rent will go up, way up. I’d have to pay first months rent, last months rent and security deposit plus moving expenses. $8k would far more than cover this scenario.
If I fall ill and reach my out of pocket max on my health insurance. $8k should cover this and most additional smaller non-covered medical expenses.
A worse case scenario, albeit rather unlikely, is that I lose my job AND have to move at the same time, or some other combination of job loss, illness, or forced housing relocation. The cost of this kind of scenario would run over $8k, but that is what the fully funded emergency fund will be for. Once I am out of debt, I will increase my savings. In the meantime, the $8k safety net is my new emergency savings goal.
I will take a look at my options for that soon. I should know what my salary increase will be in a couple of weeks, so at that time I can start playing around with a spending/savings plan. I’d hate to have to sacrifice contributing to my Roth IRA or something else, but… Ugh! I hate being in debt and always having to make such choices! 😡
But ultimately, for me, even $8k is not enough. I’ve realized that I want a full 1 year savings cache because, in the future, if the proverbial rug is pulled out from under me and I lose my job again, I don’t want to land on a life preserver or even a safety net. I want to land on a hammock.
If I suddenly find myself unemployed for any reason, I want to have enough cash in liquid savings, that I can take a solid 3 months to travel abroad (frugally) before returning to look for work. I expect that I would be able to find another job within 4-5 months max (in the current economy at least). So if I ever get RIF’ed (laid off) or let go for any reason, I would walk out of my employer’s doors with a smile. Having the ability to afford to do that would give me incredible piece of mind.
Is a One Year Emergency Fund Overkill?
The answer is, of course, it depends. I think it makes sense for me. Some may think that 1 year of living expenses is too much for anyone to keep lying around somewhere (not invested), but I disagree for a few key reasons.
Reason one – My current living expenses are relatively low (~$1,250). If someone has 6k, 7k,or 8k in monthly living expenses, then yeah, 12 months of that might be a lot to keep in a super low-interest bearing account.
Reason two– I am a household of one supported by one income. I have neither a spouse/partner to fall back on nor additional streams of income (at least not yet) to support me if I lose my job.
Reason three – The Great Recession. Enough said right there. If you were unemployed during that time, it wasn’t pretty. It took some people a year or more to find work. If we have another massive economic downturn, it could affect my industry, and my job, and my ability to find another job. See reason number two again.
I don’t yet know what dollar amount I will target as my fully-funded emergency fund. I’ve got a few years before I need to deal with that, and many things in my life could change in that time. For now, weaving my emergency safety net is a priority.
“Debtor’s prison is real, and opportunity cost is a bitch.” (DDSW) (All posts on one page)
The beauty of paying off debt is the monthly expenses get lower so coming up with a 3, 6, or 12 month emergency fund gets easier and easier. Good god you!
I think DDSW is fully aware of that. But if you check her current debt numbers, there’s YEARS, not months left before she has the luxury of that ease.
She’s light years ahead of me lol
Good for* you. Sorry, haven’t found a way to edit comments after they’re posted. I wrote this comment in reference to your current living expenses which I assumed was so low because of your hard work. I’m a new reader so forgive me if my comment seemed condescending (?). You’re an inspiration to me, and I can’t wait to be more like you 🙂
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I didn’t read anything negative into your earlier comment. Thank you!
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Thanks. Very true. It will take time, just like everything worthwhile 🙂
I agree with your rationales on bumping up the savings fund. I am a bit frightened to say the least about the coming years. Companies may panic and buckle down, start hoarding money, cutting wages and employees etc., just like 8 years ago.
Run all the numbers (I can help if you’d like :-)). Look at it statistically and from a stress/health point of view. In my case, I insist on paying $160 extra each month (because that’s all I can afford right now) for my student loans, but I’m still looking at 9 more years of payments at that rate. Hopefully that ‘bigger shovel’ presents itself soon, because otherwise, my grip on finances is so clean, it’s sickening.
Above all, I hope NOTHING happens in your life that you even have to touch those funds, and that instead one day within the next couple of years, you treat yourself to a fabulous and only reasonably non-extravagant vacation.
You’re truly inspiring.
Yeah. Unfortunately, a lot of companies, at least in some industries, never stopped hoarding money since 2008, and have held down wages and other benefits owed to employees. I don’t want to know what they will do when the next recession hits.
Thank you for the kind words. 🙂
I’m in a similar situation as you – in my 40’s, have student loan debt (soul-sucking-future-ruining-student-loan-debt), and am single. I love your analogy about the life preserver small fund, net sized middle fund, and hammock large fund for emergencies. I thankfully have a small life preserver fund in place but as you described – that can be destroyed by even a minor emergency. So I also struggle with the “pay down debt, or increase emergency fund, or increase retirement fund” dilemma. I love reading about your thoughts on this and appreciate you writing about them. After reading your post today, I think I will revise my long-term goal from “net sized – to hammock sized” emergency fund. It will be a long time in the making but it’s a smart goal to have. Thank you for sharing!
Welcome! I hope you stick around. You aren’t alone. There are several of us here who are stuck paying off evil student loan debt – the worst debt on the planet. I like your description. Yeah the Debt vs. Emergency Fund vs. Retirement Fund choice is one that is not easily resolved. You can see from my past posts how I go back and forth on percentages and priorities. It’s one of those things that I never feel that I have the balance quite right. In any event, thanks for reading!
What you’re saying makes sense to me! Are you planning to build your emergency fund up to 4000 (if I rememeber correctly, that was your goal for 2017) as quickly as possible, or will you do it over 2017?
I second the other readers here. You are very inspiring! 🙂 I check your blog more often than I’d like to admit, I always enjoy your posts.
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Oh, it will have to be over time. I don’t have $5,500 lying around at the moment. Ha! Thank you for the positive words and for continuing to hang around. 🙂
Ah, the mid-80s. Your time machine has jetted back past the fall of the Berlin Wall!
I think a year of savings makes complete sense. I have one now — actually a bit more than a year — but most of it is in what I’m calling my “life” fund, to be used in case of, well, life. Either for income if I’m jobless, or for a down payment on a house, or for a used car in cash. Honestly, I’d kind of like it to be more robust than it is. I know theoretically that “keep it all in cash” isn’t great advance planning but the markets are absolutely terrifying right now and I prefer to stay out until the crash comes at this point (I mean, except for what’s already in there.)
Yeah, I think the travel piece, my being able to take an extended vacation if I lose my job, kind of puts part of my planned one year of savings in that category of a “life fund” as well. I agree, now is the time to stack cash, if at all possible. I’d rather have the cash and not need it, than the opposite.
I’m with you on wanting a bigger EF. She has not agreed to marry me & I have these massive student loans. I also work as professional temp, because my industry was gutted as I entered it. I’ve never known job security, and don’t anticipate that ever changing. A hammock sounds very comforting.
Sorry to hear that. Having lots of debt, particularly student loan debt, can affect our marriage prospects. I can’t blame people for wanting security, not financial uncertainty, in a union, but it sucks for us, doesn’t it? Our parents’ generation may have been the last to know true job security. I don’t think it exists anymore for most of us. We are all one downsizing away from unemployment. Don’t give up.
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Financial security is definitely not something I offer. Thankfully, my girlfriend values what I value and understands what I can give.
I am really sorry to see that ordinary people have to get into debt to have the necessary things in life such as healthcare and education. You shouldn’t have to live like a debt slave after you get a diploma. Try going abroad. There are developed countries in Europe that return better value for the taxes collected.
Hi Sena. Thanks for stopping by. I would LOVE to go live in Europe somewhere. Unfortunately, my career field isn’t very portable internationally. I’ve looked into it in the past and it’s quite difficult to get a work permit/visa and skilled job in Europe as a non-EU citizen. If there is a way to do this that I’m not familiar with, I’m all ears to learn how. I agree with you. Knowing what I know now, I would have gone to graduate school in Europe. I know a few people who did it and they are much better off. I’m going to compile a short opportunity list where I look into paths I can take once I’m out of debt or if I lose my job. Thanks for suggesting this.
I am with you on having a 1 year Emergency fund. And that hammock sure looks lovely.
I am 45 oops 46 come next Friday and although I have paid off my school loans 10 years ago,I help my parents with debts. They are divorced and I am POA over one and help with debt for the other. I travel back and forth from Ga to AL to see about them often. I wish more Women, single or married need to know what will happen if you lost or job or your spouse. There are many married women who have no clue what happens if their spouse left or passed away.
I still have $73,000 for an underwater house to pay down with an almost 6% interest (boo)So if I lose my job It would be ugly.
I love your blog! Keep pushing!
Thanks, Nicole. 🙂
Yes, a big ‘Booooo!’ 😦 to bad debt. Looks like we’re in similar places debt-wise. Another sister-in-arms! Do come back and let us know how things are going.