When I was saving to buy my house, it was the first time I had that much actual money put away in savings. I had saved up about $15,000 (I didn’t put much money down), and it was by far the most I had ever had at one time in my bank account. I had struggled for a long time when it came to my career and finances, and I soon realized the weight that is lifted off of your shoulders when you have a nice cushion of cash available to you.
I’ve finally been able to build up my cash reserve again and have about $20,000 in emergency savings. For my family and I, that’s about 5 months worth of expenses. I know some would say that’s too much and that I’d be best putting that money elsewhere so it can work harder for me. For my situation though, I like the 5 to 6 month rule. Since I have a family and have experienced being laid off, I’m a little more conservative with my financial decisions and estimates. We recently bought our house (including furniture to fill it) and two new cars so we’re at a time in our lives when our debt is at it’s most risky. Having that much in reserve allows us a little more flexibility in righting the ship if something bad happens.
When you’ve got your emergency savings together, where should you put it? As with most financial advice, you can get a million different answers from a million different people. For me personally, I like a formula that allows for enough liquidity to be a strong emergency fund in times of trouble, but also allows your emergency money to earn a decent return without fluctuating too much.
For my emergency savings, I decided to put $4,000 (approximately 1 month’s expenses) into a high interest savings account. This is to ensure that I have a decent amount of emergency money that is accessible with a trip down to the local ATM. You could also use something like a money market account in much the same way, so you’ll just have to analyze the options available to you to see what you like best. I put another $6,000 into a low expense short-term bond index which allows me a little higher return, low expenses, and just a little less liquidity. I then put the rest of the savings ($10,000) into an intermediate (or long-term) bond index fund which offers a little more fluctuation in price, but not as volatile as stocks.
I know a lot of people would say that this investment plan is way too conservative, but since it’s really my emergency savings, I don’t want to risk losing any. This money is not for long-term capital, it’s for security in knowing that I have cash available if I ever need it. So, investing in lower risk bond index funds and/or money market accounts allow a nice balance of liquidity, low risk, and marginal return for good measure. A savings plan is really the first step to getting your finances in order. Make sure you analyze the options available to you and the amount of risk you are willing to take with your money. Once you have that security blanket in place, it takes a big weight off of your shoulders and allows you to focus on building your wealth without having to worry as much about life’s little surprises.
