Reader Poll - Just How Much Is 6 Months Worth Of Expenses?

Jun 13 2008

Posted by NCN under Debt Story, Emergency Fund, Polls |

Many popular personal finance ‘gurus’ suggest maintaining an emergency fund with enough money to cover 6 months worth of expenses. I thought it might be interesting to see what my readers thought about this advice. If you are reading this post in a feed-reader, you will need to click through in order to leave a comment and vote in the poll.

How Much Is 6 Months Worth Of Expenses?

Now that you’ve voted, a few questions -

Question 1: Where do you keep you emergency fund? In a savings account, money market, checking account, or under the mattress?

Question 2: What about six months worth of expenses? Is this too much… or too little?

Question 3: Would you sacrifice a fully-funded emergency fund in order to fully-fund a Roth IRA (or other retirement / education savings account)?

Question 4: What is the smallest emergency fund with which you wold be comfortable?

Thank you for your participation. Your answers will help me write a future post. If you are a blogger and you write a post about this subject, click the contact button at the top of this page and let me know about it. I’ll be more than happy to link to your post.

56 Responses

Rachel

June 13th, 2008 at 9:30 pm
1

1. We keep our emergency fund in our savings account at our credit union.
2. 6 months I think would be ideal, but for us, I think three months is more realistic.
3. I think initially, it is more important to build at least a 3 month emegency fund before putting alot of focus into a retirement account. IMO, the ability to be able to deal with the unexpected in the short tem is more important than planning for something 30 yrs in the future. (As long do not ignore the fact that you need to plan for this as well)
4. The smallest that I would be comfortable with would be about 6 weeks worth.
Mike

June 13th, 2008 at 9:36 pm
2

1) Bank-backed money market.

2) I’m single, early 20’s, in (stable!) grad school. Six is fine.

3) No! Plan ahead!

4) In “real life,” six months would be OK, but I feel my expenses will go up after I graduate.
Stephanie

June 13th, 2008 at 10:03 pm
3

Question 1: Where do you keep you emergency fund?

ING Savings

Question 2: What about six months worth of expenses? Is this too much… or too little?

I think I’d want perhaps 8 months…just in case…I just got laid off, and am not quite sure how long it will take to get a new job.

Question 3: Would you sacrifice a fully-funded emergency fund in order to fully-fund a Roth IRA (or other retirement / education savings account)?

I think if I were to use emergency money to fully fund a Roth IRA, I’d then work hard to build it back up…and also hope that if worst comes to worst, I could take out what I put in the Roth.

Question 4: What is the smallest emergency fund with which you wold be comfortable?

$8000, maybe?

Really, there are a lot of factors related to having an emergency fund…how long it will take to get back on your feet, the minimum your budget can handle…etc.
Angela

June 13th, 2008 at 10:15 pm
4

At this point our EF is in ING Direct where we have checking and savings. As we get closer to our goal then we’ll move it to a higher yield account. We just needed to keep it more liquid at this point.

I think 6 months is about right, especially if you over estimate monthly expenses so there is a buffer in case of well a reason to use it. For us thats about 13K, we’re at about 5K, but by the end of the year we’ll have it.

To me an EF is much more important than an IRA. The reason being is the penalties and hassle of accessing the IRA in an emergency. I need to take care of things now before I go preparing for retirement. Obviously there is a balance there.

$7000 is the lowest I’d feel ok with as that is about the cost of 6 mortgage payments.
Kacie

June 13th, 2008 at 10:22 pm
5

1. Ours is in an ING Direct savings account. If we need it fast, we can transfer it to our ING checking, and use our debit card or transfer it to our brick & mortar bank.

2. I think six months of expenses is just about right for us. My husband has the main job; I do freelance things and earn a much smaller amount.

3. While I think saving for retirement and education is important, not having an emergency fund in place would be just asking for trouble.

4. Our current emergency savings fund goal is $10k. We have $7k saved up so far. I’d start to be concerned if we had a big enough emergency that would drop it to $3 or $4k.
Anne

June 13th, 2008 at 11:43 pm
6

1. In a Roth IRA
2. Six months is too much for a taxable savings account.
3. Yes, in the sense that I would (and did) fund a Roth before funding a taxable savings account. But I don’t consider it “sacrificing” the emergency fund. Contributions to a Roth can be withdrawn without penalty at any time, so it doesn’t make sense to let a Roth go unfunded while putting money in a bank account.
4. $3000.
Brian

June 13th, 2008 at 11:45 pm
7

1. Ours is in a money market with check writing capabilities. (5.5% interest - Unlimited checks per year - minimum check $250 - no account fees - manage online with my mutual funds - unlimited online transfers.)

2. 6 months is perfect. Extra money should go in longer term investments like mutual funds or IRA.

3. NEVER sacrifice the emergency fund. IRA’s and Education savings are NOT emergencies. They can be planned for. Find ways to make some extra income for IRA’s and ed. savings.

4. 1-3 months minimum. Any less and money/budgeting gets stressful.
Kevin

June 13th, 2008 at 11:47 pm
8

1) We keep our emergency fund in a regular savings account.

2) I think 6 months is too much. I mean honestly, are you really going to be unemployed for half a year? We plan on 3 months, tops.

3) Yes, I would (and do) sacrifice a fully-funded emergency fund for our before-tax investment accounts (RRSPs, because we’re Canadian). In a pinch, we could use our line of credit for an emergency fund, and then start the process of accessing our registered funds before too much interest accrued.

4) The smallest emergency fund with which I would be comfortable would be 1 month.
William Stewart

June 14th, 2008 at 1:36 am
9

Unfortunately for me, 6 months of expenses is something close to 6 months of wages ! tell you how much I’m saving.

Seriously, you should be able to find this out easily if you’re using Microsoft Money or Quicken, which is a must for anyone serious about their finances. Of course, should the worst happen, you may have to spend a lot more than usual (doctor’s bills, hospital bills), or less (you’ve lost your job, you start reining in the purse strings.).

The best advice is, save as much as you can.
Bryce @ SaveAndConquer

June 14th, 2008 at 3:42 am
10

1. Half in savings account, half in money market.
2. Especially with jobless rate going up, hiring going down, 6 months seems like a minimum.
3. I would sacrifice some emergency savings for tax deferred savings as long as I had enough in emergency fund for one month.
4. 2 month’s worth of emergency expenses.

Our budget has “Total Necessary Expenses” and then “Total Necessary Expenses if we lost out jobs.” That second category could also be called “Critical Expenses.” It does not have stuff like payroll taxes, clothes, home repairs. It is about half the size of our Necessary Expenses.
Wendy G.

June 14th, 2008 at 7:55 am
11

1. Currently our emergency fund is in a savings account, but it’s just a little bit (we’ve just started!). Once we have it more fully funded, I’ll probably switch to a money market or ladder CDs.

2. I think basing the fund on six months of current expenses is about right, because if there were a true emergency, like job loss, I would really cut down on the middling necessities like cable TV. We have a highly funded Medical FSA, so that would cover co-pays and stuff if it was a medical emergency.

3. Right now, the emergency fund is the priority over IRAa and education. With the exception that money the kids get is put into their accounts and we don’t touch it — but it is also part of our emergency account. But, we put a decent amount into 401(k)s before kids, too. Retirement will be the priority after debt and emergency fund is done.

4. I would say two months is the smallest I’d be comfortable with, although we have than that now.
valerie

June 14th, 2008 at 8:01 am
12

1. Kept in a insured MMA with check writing privies.

2. Having weathered a job loss a few years ago, I think 6 months is good but for me and my need for feeling financially secure, I think 1 year worth of wages would be optimal.

3. I would not sacrafice fully funding an emergency account to fully fund a Roth. A person can find other ways to fully fund a Roth: frugality, tax returns, unexpected windfalls, just plain doing it!

4. 6 months would be the least amount I would feel comfortable with. I like to sleep at night.
Sylvia

June 14th, 2008 at 8:55 am
13

1. Primarily ING direct savings, although we’re putting some of that into a money market soon. We also have a portion in our local credit union for faster access.
2. Six months is a little much - we keep closer to four (see #3 below).
3. Once you have at least a three-month emergency fund, I think it makes sense to put some money into a Roth IRA, since you can always take out your contributions if necessary. If you want to put money into any other type of retirement/education vehicle though, I’d recommend the fully funded six-month emergency savings first.
4. The smallest emergency fund I’m comfortable with is three months.
Matt N

June 14th, 2008 at 10:11 am
14

I voted $16K-$20K. Actually 6 months for me and my fiance is right around $19K.

1. I keep all of my emergency fund in an E*Trade savings account.

2. I think 6 months is a bit much, although my fiance might disagree. Currently we have one month and we’re working our way towards 4.

3. Probably not. I’m young, my retirement is already well funded, and I have other financial priorities right now.

4. I think the smallest emergency fund I’m comfortable with is one month of expenses.
Eden

June 14th, 2008 at 10:13 am
15

I want a 6 month emergency fund, but I’m not there yet- currently less than 1 month as I work to get out of debt.

I keep a couple of different emergency funds. $1,000 in savings with my primary bank for overdraft protection and instant transfers to my primary checking account.

I keep a second emergency fund with a broker (Schwab), which pays a better interest rate and also offers a debit card and checks so I’ll be able to access that money quickly when needed.
Ashley @ Wide Open Wallet

June 14th, 2008 at 11:58 am
16

1. We keep ours kinda spread around. The bulk of it is in a CD at our local credit union, some is in a money market, some is in a regular savings account.

2. I think 6 months is about right. For us anyways, we are a one income family. If my husband lost his job I could get something to supplement while he looked for work. It could easily take several months before he found something that pays what he is making now.

3. No, we have about 5 months in an efund right now and we are still contributing. We do contribute some to our IRAs as well, but the efund is more important.

4. The smallest efund I could live with is 3 months.
Laura

June 14th, 2008 at 12:23 pm
17

Question 1: We kee our emergency fund at ING Direct. We use a savings account to earn higher interest than Wachovia.

Question 2: We saved 3 months of expenses.

Question 3: With the current job market/economy, no.

Question 4: To be honest, 3 months allows me to sleep, but I could survive with 1 month in the bank.
John Hunter

June 14th, 2008 at 1:24 pm
18

> Question 1: Where
High yield savings.

> Question 2: What about six months worth of expenses?
Good. It could be less if you have good health and disability insurance and are very employable (unlikely to have trouble finding a comparable job in 2 months) and 2 earner family, but why push it…

> Question 3: Would you sacrifice a fully-funded emergency fund…?
Yes, the truth is money could be taken from some sources in an emergency such as retirement account, savings for house… I would want the emergency funds to be outside of retirement accounts (since I don’t want to tap those) but for someone just starting out I can see funding retirement savings prior to building up the 6 month cushion (I did).

> Question 4: smallest
Really I have not had a separate emergency fund but I have other funds that are an emergency fund (saving for down payment on house, savings for vacations…) if need be. I would not be comfortable with less than 6 months. When I bought my first house I didn’t have this (I put 20% down) and part of my emergency plan was to rent out the basement (which should have been possible, if needed).
Natalie

June 14th, 2008 at 2:08 pm
19

1) Credit Union in town
2) Too much for us to save as we are paying off debt now, but it really would be ideal.
3) No way.
4)Three months.

I voted for $25,000, which kind of shocked me when I calculated it. My family pays for their insurance out of pocket and it costs a fortune- this really ups the amt we have to save.
Mike

June 14th, 2008 at 3:43 pm
20

We have been keeping about 3 months of expenses in bank accounts — 2 months worth in a money market and 1 month in checking. I think this is sufficient for us since we’re a dual-income family. If one of us loses our job, 3 months of expenses in our savings will still last us 6 months (we both make around the same salary). It’s highly unlikely we will both lose our job at the same time.

I always fully fund both our Roth IRAs even if it means sacrificing my emergency fund since I also have mutual funds to lean back on if money ever gets really tight. Emergency funds can always be replenished, but you can never go back and fund a Roth IRA for 2007.

I would feel comfortable with about 1.5 months worth of expenses as an emergency fund since this still equals 3 months of living if only one of us loses our job. I don’t think it would take more than 3 months to find a new job, and we always have credit cards to lean back on (except to pay the mortgage). Once we are both working again, we can easily pay off the credit card since we live below our means.
Bruce

June 14th, 2008 at 3:59 pm
21

Question 1: Where do you keep you emergency fund? In a savings account, money market, checking account, or under the mattress?

I have it in a Vanguard Money Market, with check writing. The middle of July I will have 6 months completed! Finally!

Question 2: What about six months worth of expenses? Is this too much… or too little?

My wife does not work outside the home. We only have my income so I think someone in my position 6 months would be a minimum. My brother-in-law, a HR guy high up the food chain took a year to find work after losing his job. You just don’t know.

Question 3: Would you sacrifice a fully-funded emergency fund in order to fully-fund a Roth IRA (or other retirement / education savings account)?

Nope.

Question 4: What is the smallest emergency fund with which you wold be comfortable?

I think for my situation a three month fund would be the minimum.
Mike

June 14th, 2008 at 4:03 pm
22

@Natalie: We wouldn’t be able to survive in MA if we had to pay $13,000/year for your typical family HMO plan here. Luckily, my spouse’s employer kicks in 75% and we only pay 25% of the premium.
MP - The Morphine Princess

June 14th, 2008 at 6:12 pm
23

Question 1: Where do you keep you emergency fund?

I keep it liquid - combination of CDs and money market savings at my bank. I have a variety of funds for different needs/purposes:

A. A “rental unit” fund. I have a rental unit and (try) to keep three months of rent and HOA fees in this account should the unit be empty and I need to carry the unit until a new renter is found. I also keep my current tenant’s deposits in this account and add $50 every month to build it up for repairs and maintenance.

B. An “emergency fund” for unknown and unanticipated expenses - like when my car went on the fritz and it cost me $1,100 to repair. I try to keep this at around $5,000. Again, this is in a money market account.

C. An “emergency living expenses” fund equal to six months of my net (take home) pay. I make $60,000 at my job ($5,000 p/mo), but after my 401(k) and HSA contributions, my take home is approximately $3,000. So, $18,000 in this account feels like a good cushion. These funds are also in the bank in a combination of CDs and money market account.

All total, there is about $25,000 kept between three different accounts.

Question 2: What about six months worth of expenses?

Six months is good - there are many reasons people are unable to work: illness (either of themeselves or a family member), layoff, termination, self-resignation, etc.

While it may be difficult to foresee the reason for not working, looking at the possibilities and review the longest term you may need to support yourself is the best for planning. In my case, I considered unemployment due to medical illness or disability. I thought my long-term disability insurance “waiting” period from the time the disability started to when you’d been out of work was 180 days. I just got the paperwork (I’m on a medical leave of absence right now) and it is 90 days.

Question 3: Would you sacrifice a fully-funded emergency fund in order to fully-fund a Roth IRA (or other retirement / education savings account)?

Hopefully, with careful planning, you can do both. However, for everyone a “full-funded” retirement account can mean and be different things. At $60,000 p/year salary, it is difficult to fully fund my 401(k), so I do 10% of my salary - $6,000 p/year of pre-tax dollars. At the same time, I fully fund my Roth IRA - between both, I am contributing to my retirement over 15% of my income - which is a good amount. So those are my two retirement savings goals. By keeping this realistic, I’m able to maintain my funded emergency accounts.

In both cases I know I’ll need the $$ - one possibly in the short term future and one for sure in the long-term which must grow to meet my retirement expenses.

Question 4: What is the smallest emergency fund with which you wold be comfortable?

Three (3) months living expenses.
Money Millionaire

June 14th, 2008 at 7:16 pm
24

1. Savings account
2. Depends on how secure and diversified your income is
3. Yes, without a doubt
4. It goes back to #2. I don’t know how much of an emergency fund Britney Spears needs… she’s got royalties from all her songs and probably some other ventures. Is all that going to dry up overnight? The sun probably would stop rising first.
Jeff

June 14th, 2008 at 9:15 pm
25

1. keep the emergency fund in an online checking account that is currently at 6% interest
2. 6 mos. is a little too much for me because both my wife and I are in a profession that is in undersupply and can get full time jobs w/sign on bonuses in a very short period of time if something were to happen to our current employer.
3. The emotional freedom that comes from having the emergency fund fully funded is well worth any loss of potential investment opportunity.
4. 3 months
Aviva

June 14th, 2008 at 10:55 pm
26

1. We keep our emergency fund in a Vanguard money market account.

2. In a perfect world, I’d like to have a year’s worth. But I’m not willing to skimp on the other savings we do to get our emergency fund up to 12 months from it’s current 6-8 months.

3. No, although I think retirement savings are super important, I think it’s crucial to have emergency savings that you can access without paying penalties, the way you do if you raid your retirement savings.

4. I really think six months should be the bare minimum. My husband got laid off in 2005, just four months after our daughter was born. He was out of work for 4.5 months, and then could only initially get a contracting job with no benefits. I was really proud of us for getting through that time with no income without having to create any debt and without raiding savings that would cost us penalties. One thing we hadn’t realized when we created our emergency savings fun is how expensive COBRA benefits are. With a newborn baby, we weren’t about to let our health insurance lapse, but it was $1200 a month in after-tax money, which was a shock. So even though we cut back our expenses to the bare minimum — primarily by cutting out savings but also eliminating entertainment funds, hobby money, eating out, etc. — we actually had slightly higher monthly expenses than we did before he was laid off. That was a huge surprise to us since we had assumed that we could cut our expenses a lot farther than that.
Danny Gamache

June 15th, 2008 at 12:59 am
27

Just a quick comment that relates to both questions #2 & #4.

Developing a part-time business can have a couple of benefits here.

Benefit #1 It can help you fund your emergency fund.
Benefit #2 It can diversify your income to protect you from emergencies (ie. a back up if you lose your job).
Benefit #3 If you can develop a business that has residual income (money that comes in after you stop working), you can in effect supplement your emergency fund.

As a result, my wife and I keep a smaller emergency fund - about three months, plus have a residual income that would cover a substantial portion of our expenses. When you combine our residual income and the same emergency fund, it would cover over six months of expenses.
Washington Mutual Online Banking

June 15th, 2008 at 7:54 am
28

Question 1: Where do you keep you emergency fund? In a savings account, money market, checking account, or under the mattress?

ANSWER: We keep our emergency fund in our ING Direct savings account.

Question 2: What about six months worth of expenses? Is this too much… or too little?

ANSWER: Six months is too much for me. That is too much money to be sitting in savings at a short-term interest rate like 3.00%. Additionally, if you have a credit card, it can help in an emergency. Just make sure you pay it off.

Question 3: Would you sacrifice a fully-funded emergency fund in order to fully-fund a Roth IRA (or other retirement / education savings account)?

ANSWER: I would try to get 2 months of savings in an emergency fund. Then the rest in a Roth IRA. Additionally, you emergency fund can be in any type of investment as long as it can be withdrawn within 6 months.

Question 4: What is the smallest emergency fund with which you wold be comfortable?

ANSWER: One month would be the bare minimum. But, you better have the ability to borrow for at least 2 more months of emergency expenses.
Sam

June 15th, 2008 at 10:54 am
29

Question 1: Where do you keep you emergency fund? In a savings account, money market, checking account, or under the mattress?

I keep $1000 of our emergency fund in a regular Wachovia savings account linked to our checking account. The rest of our emergency fund is in an ING savings account.

Question 2: What about six months worth of expenses? Is this too much… or too little?

I think it depends on your circumstances, are you a two income family, do you have kids, etc. We would like to have 6 mos. in our fund, right now we have about 4.6 mos. worth of expenses.

Question 3: Would you sacrifice a fully-funded emergency fund in order to fully-fund a Roth IRA (or other retirement / education savings account)?

We are fully funding our 401ks this year so I guess the answer is yes. We could dial back our retirement savings (and other savings) and put more into our emergency account.

Question 4: What is the smallest emergency fund with which you would be comfortable?

As our emergency fund grows larger, the less comfortable I am with a small emergency fund. But to answer the question, I would say 3 months of expenses is the smallest fund I would be comfortable with.
Cytoman

June 15th, 2008 at 12:24 pm
30

Question 1: Money market account (ING, HSBC, or Vanguard depending on who happens to be paying the mosts.

Question 2: No - I prefer 12 months.

Question 3: No - a Roth is for retirement, not emergency savings.

Question 4: 3 years ago I was comfortable with 6 months savings, now I prefer 12 months.
SingleGuyMoney

June 15th, 2008 at 12:27 pm
31

1. I keep my EF in a savings account at my local credit union.

2. For me, 6 months is not enough so I’ve opted for 8 months right now for a total of $20k.

3. Given the current state of the economy, I am more comfortable having a fully funded EF. I don’t have any kids so Education Savings does not apply.

4. The smallest EF I would be comfortable with is 6 months. I’m pretty confident in my current occupation, it would not take longer than 6 months to find another job.
Thrifty Femme

June 15th, 2008 at 4:31 pm
32

Now that you’ve voted, a few questions -
Question 1: Where do you keep you emergency fund? In a savings account, money market, checking account, or under the mattress?
FNBO Direct.

Question 2: What about six months worth of expenses? Is this too much… or too little?
For my situtation, it’s probably too much, but I like to plan for the worst case scenario which is 1 year of expenses.

Question 3: Would you sacrifice a fully-funded emergency fund in order to fully-fund a Roth IRA (or other retirement / education savings account)?
Yes, although I contribute to both simultaneously.

Question 4: What is the smallest emergency fund with which you wold be comfortable?
6 months.

Thank you for your participation. Your answers will help me write a future post. If you are a blogger and you write a post about this subject, click the contact button at the top of this page and let me know about it. I’ll be more than happy to link to your post.

I wrote about eFunds last month.
Pamela Grundy

June 15th, 2008 at 6:09 pm
33

1) I have a saving account at the bank where I work.

2) It’s a reasonable amount to have put aside. Do I have it? No!

3) I’d sacrifice my emergency fund to buy home heating oil. In fact, I just did, this week, before it jumps from 4.45 a gallon to 8.45 a gallon. It’s gone up 67% since the beginning of this past winter.

4)I’m already at the smallest emergency fund at which I would be comfortable. Working on my first million though–hope to hit it before I drop dead.

Cool post, thanks!
kitty

June 15th, 2008 at 6:30 pm
34

Question 1: I don’t divide my savings into groups. It’s all just “savings” to me - it can be used for emergencies, but it is mainly a percentage of my money that I want to keep safe. At my current age - late 40s - it is about a third of my non-retirement savings. Hence it is a considerably larger amount than what many people would consider “emergency fund”. I keep it in money market, high yield saving, CDs with different maturity dates, and a small amount in series I bonds. The latter isn’t for emergencies, but everything else can be used if needed.

Question 2: too little unless you have job security, are young, healthy, and have no kids. It doesn’t have to be called “emergency fund” per se, but you need to have more than 6 months in savings you can easily get too.

Question 3: No. I’ve always been a bit scared of not having enough money, so I’ve always put a minimum amount of non-retirement savings ahead of retirement savings. Roth may be OK since you can withdraw the original contribution. But you don’t want to go hungry while having money in IRAs. Really, how is your retirement account is going to help you in an emergency if you have no money?

Question 4: Nowadays I am barely comfortable with what I have, and I could live on it for a few years - at least if I count necessities only. When I was young, less than 6 months might’ve been OK, but at the time my employer had no-layoffs policy. It really depends on one’s age, family status (kids can have serious emergencies) and job security.
mbhunter

June 15th, 2008 at 11:56 pm
35

1: In a savings account
2: I’d like 12 months a little more
3: It costs more to draw on a Roth IRA than from a savings account, so I’d probably like to have that before committing money to a Roth
4: 75 years
CyanSquirrel

June 16th, 2008 at 2:34 pm
36

Question 1: Where do you keep you emergency fund?

Our emergency fund is split between short-term CD’s (6 months term) and a money market fund at an online bank. This keeps the money within reach, but not so easy it can be tapped for routine stupidness.

Question 2: What about six months worth of expenses? Is this too much… or too little?

Six months savings in today’s environment would be too little in my opinion. Prices and inflation are eating away at the value of today’s money, and the job environment is not stellar in many places. I’d opt for at least a year’s salary in savings. It’s my goal. Right now we have a little over one month’s expenses stashed away. Building emergency savings is a long term project, not something done overnight. But windfalls and tax rebates help, heh.

Question 3: Would you sacrifice a fully-funded emergency fund in order to fully-fund a Roth IRA (or other retirement / education savings account)?

No. I try to contribute to both. The Roth gets a set amount each month, and between my Roth, 401(k), rainy day savings, and emergency savings, along with my husband’s retirement contributions, we are saving almost 15% of our pay each period. The rainy day savings is also a sink fund for planned expenses like insurance, property tax, etc.

Question 4: What is the smallest emergency fund with which you wold be comfortable?

What I have now…one month’s expenses. I minimized debt repayments just to get this built up. I am now focusing on debt again, but all windfalls and unexpected income goes at least partially to pad this fund even more.
CyanSquirrel

June 16th, 2008 at 2:47 pm
37

Anne said: “Yes, in the sense that I would (and did) fund a Roth before funding a taxable savings account. But I don’t consider it “sacrificing” the emergency fund. Contributions to a Roth can be withdrawn without penalty at any time, so it doesn’t make sense to let a Roth go unfunded while putting money in a bank account.”

That information is dangerously incorrect. Contributions to a Roth can only be withdrawn without penalty for very specific reasons, making the Roth a poor choice for an emergency fund vehicle. Additionally, withdrawals can have red tape around them. I recommend Anne talk with a financial advisor stat, at least to get a better grasp of Roth IRAs. If her emergency doesn’t fall under one of the narrow exceptions, she will have to pay 10% penalty on the distribution (although no taxes, like a traditional IRA requires.) The exceptions (from http://www.fool.com/Money/AllAboutIRAs/allaboutiras07.htm

The early withdrawal penalty does not apply to distributions that:

1. Occur because of the IRA owner’s disability. (This can be a very narrow definition, so if you get a severe paper cut, don’t consider a Roth IRA distribution for a disability until you review IRS Code Section 72(m)(7) and IRS Publication 590.)
2. Occur because of the IRA owner’s death.
3. Are a series of “substantially equal periodic payments” made over the life expectancy of the IRA owner.
4. Are used to pay for unreimbursed medical expenses that exceed 7 1/2% of adjusted gross income (AGI).
5. Are used to pay medical insurance premiums after the IRA owner has received unemployment compensation for more than 12 weeks.
6. Are used to pay the costs of a first-time home purchase (subject to a lifetime limit of $10,000).
7. Are used to pay for the qualified expenses of higher education for the IRA owner and/or eligible family members.
8. Are used to pay back taxes because of an Internal Revenue Service levy placed against the IRA.
NCN

June 16th, 2008 at 3:03 pm
38

@CyanSquirrel -
You are correct - there are very specific rules for when a withdrawal from a Roth IRA can be made…
NCN
Sylvia

June 16th, 2008 at 11:28 pm
39

CyanSquirrel:

Anne’s information on Roth early withdrawal is correct. Contributions that you have personally made to the account can be withdrawn at any time without incurring any type of tax or penalty. Earnings on those contributions are another story entirely and fall subject to the narrow list of exclusions. I’m of the belief that it’s never a good idea to raid the retirement funds unless absolutely necessary, but a Roth WILL allow you to take out whatever you put into it, although of course if you maxed out your contributions, you’ll sacrifice the ability to deposit money back into the account until the next tax year.
Robert

June 17th, 2008 at 1:17 am
40

Question 1: Where do you keep you emergency fund? In a savings account, money market, checking account, or under the mattress?

Answer 1: My ING Direct Account. 3% isn’t a lot, but it’s better than the 0.2% that some traditional banks offer for smaller customers. I figure it’s almost enough to keep up with the government’s rediculously under-calculated inflation figures.

Question 2: What about six months worth of expenses? Is this too much… or too little?

Answer 2: For me, too little. When I was laid off in 2002, it took over a year to find any work, and then it was a temp job working 12 hour shifts 6 to 7 days a week to barely cover minimal bills. Now that my finances are better I want at least 1 year in my emergency fund, just in case. As it is, emergencies aren’t just lay-offs. Needing to buy another car unexpectedly (if mine dies or is in a wreck and I don’t get enough to repair or replace it) or any of a number of other emergency events can quickly deplete even a year’s worth of expense funds.

Question 3: Would you sacrifice a fully-funded emergency fund in order to fully-fund a Roth IRA (or other retirement / education savings account)?

Answer 3: Currently I am not fully funding my retirement funds. Instead I am mostly building my emergency funds while putting a fair amount towards retirement (roughly 10%). As my emergency fund gets up to my target I am going to shift that money gradually over to my retirement until I am putting 30 to 35% (hopefully more) into retirement savings.

Question 4: What is the smallest emergency fund with which you would be comfortable?

Answer 4: Over 1 year’s worth of expenses. That should be enough to handle up to a couple “small” to “medium” crises in a short period, or an extended period out of work if it ever happens again.
CCA

June 17th, 2008 at 6:58 pm
41

Question 1: Where do you keep you emergency fund?

ING

Question 2: What about six months worth of expenses? Is this too much… or too little?

For my wife and me, six months is probably too much. We have jobs in different industries, and it’s unlikely that we would lose our job at the same time. Even in that event, it wouldn’t take us long to find new jobs. Otherwise, we don’t have kids and are mostly debt free, and if necessary, we have taxable accounts that we could tap. That said, we probably keep more than six months worth of expenses. It’s not an emergency fund per se, but it provides liquidity if an investment opportunity or real emergency pops up.

Question 3: Would you sacrifice a fully-funded emergency fund in order to fully-fund a Roth IRA (or other retirement / education savings account)?

We’re not eligible for a Roth IRA and we don’t have kids, but if we really had to, I guess we would forgo 401k contributions (although it hasn’t happened yet).

Question 4: What is the smallest emergency fund with which you would be comfortable?

20k.
Maria @ Frugal Homesteading

June 17th, 2008 at 7:22 pm
42

1. ING Direct carries the bulk, the rest is in my savings account attached to my checking account that has instant transfers.

2. Six months’ expenses would be a very nice safety net for us right now since my husband is self-employed.

3. As I build up my passive income streams, we won’t need as much just sitting in savings and would be comfortable with about 3 months’ expenses in savings.
Karla (threadbndr)

June 20th, 2008 at 11:40 am
43

Question 1: Where do you keep you emergency fund? In a savings account, money market, checking account, or under the mattress?

Combination of savings account attached to my check book, ING, and a CD ladder at the local credit union

Question 2: What about six months worth of expenses? Is this too much… or too little?

6 months is about right - If I also dip into taxable investments, I’m up to about 2 years, which is plenty. If push comes to shove, I’ll work temp jobs.

Question 3: Would you sacrifice a fully-funded emergency fund in order to fully-fund a Roth IRA (or other retirement / education savings account)?

No - I meet the match on my 401K, and contribute to a Roth outside of work. With the company match, I’m putting back 15% of my gross income. I also have a tradional pension at my job and I’m already vested. I’m close enough to retirement that I’m pretty sure I’ll manage.

Question 4: What is the smallest emergency fund with which you wold be comfortable?

$10,000
Xeal

June 24th, 2008 at 2:47 pm
44

1:) Savings Account. Though there’s very little in there now, since I’m paying off some debt and attempting to maximize the rate at which I do this. I hope to be totally paid off except for the mortgage in 4 or 5 months.

2:) Way too much. I’m paying down debt presently, and doing so rather rapidly, but I’m single and live pretty simply. All that really concerns me is making the mortgage payment and filling the gas tank for a couple months if I have to job search. 2 months is plenty for me.

3:) Possibly. I suppose that would depend how comfortable I felt at that particular time with my job.

4:)
$4000. Like I said, I don’t need much. Even my mortgage is really low relative to my income, and thus I’m hoping to pay off the house in 4 years or so. Then I’ll really be living cheap.
Jen

June 24th, 2008 at 4:29 pm
45

Question 1: Where do you keep you emergency fund? In a savings account, money market, checking account, or under the mattress?

If we had an EF anymore it would be in CDs with staggared maturity dates. Hubby was laid off last year so we actually used up our fund and then some.

Question 2: What about six months worth of expenses? Is this too much… or too little?

I think 6 months is about right, maybe even less. I think it really depends on your career and how much of a demand there is for people with your skill set.

Question 3: Would you sacrifice a fully-funded emergency fund in order to fully-fund a Roth IRA (or other retirement / education savings account)?

Hmm good question. I would say yes. I contribute to a 401K, and in an emergency I could always take out a loan against it. And if that emergency does not happen I get the benefit of the additional tax deferred growth. But I would still want at least 1 or 2 months of emergency fund first.

Question 4: What is the smallest emergency fund with which you wold be comfortable?

Right now, as I have none at all, I would be thrilled with $1,000 so I’ve got something to cover unexpected car repairs and the like. But I still would not really be comfortable. I’d say 2 months.
Anne

June 26th, 2008 at 10:11 pm
46

@Sylvia: Thank you for correcting the misstatements about the Roth withdrawals of contributions. I haven’t visited this site since my post and am glad to see that the “corrections” to my post were corrected. I only wish people would verify information that they post before condescendingly telling someone else to “get a better grasp” of a topic.

My post was very clear in referring to contributions only. Earnings are a different story, as Sylvia kindly pointed out.
Jane

June 29th, 2008 at 9:59 am
47

1. 3 months in U.S. Savings Bonds 3 months in my banks Money Market Fund

2. I think it depends on your situation. I am shooting for 1 year as I am single and if say I get sick and can’t even do temp/part time work there is no money earner in my home.

3. I do I fund my IRA and 401K to the Max each year and I am also willing to fund other potentially higher earning investments AS LONG AS I STILL HAVE my 3 months in savings bonds. For example I have currently diverted about 1 month from my Money Market to my brokerage account in case a stock I have my eye on falls below a certain level. However, I think in part I feel comfortable doing this because I have more than a years worth of overall investments outside of my retirement accounts.

4. 3 months.
.d.

June 30th, 2008 at 11:27 am
48

1) online savings account
2) too much for now, I’m in grad school and don’t need to worry about job loss for at least 2 more years - I’m really saving for the inevitable moving expenses when I graduate
3) currently, but I would maintain at least 3 months expenses first
4) $1000
RandyMan

July 1st, 2008 at 11:22 pm
49

Well, for one, I don’t believe in keeping all of my emergency stash in a savings/CD type of account. I have about 2 years of expenses split between my local bank’s savings/mmf account and then other in a brokerage account with half in inverse dollar (basket of strong currencies) fund, gold (GLD), and an international bond fund. That’s effectively, an 8-10% portfolio which has never gone down. I have approximately ~$60K in this. This I won’t draw from, ever.

My expectation is that part of the ‘rainy day’ is having to change cities for a new job which requires money to pay for hotel/motels, flights, etc. So far, being proactive may prevent me from having to use this option.

This is separate from my investment accounts which are commodities/futures accounts for indices, ETFs, currencies, etc, where I aggressively trade on bi-monthly or quarterly contracts/options. This trading yields 20-40% per year. This is apart from saving for a rainy fund. I’m expecting to grow this until I can live of it as a income replacement source, a.k.a swing trader.
Frugal Babe

July 22nd, 2008 at 11:28 pm
50

We keep our emergency fund in an online savings account
Six months worth of expenses is a great goal - we’re working on it, very slowly!
We have made the emergency fund a lower priority than our IRAs and our HSA. The HSA is sort of an emergency fund already, since that is how we would deal with any medical emergency that required meeting our health insurance deductible.
We’re putting $100/month into our emergency fund. We have $1700 in it right now, although $5000 is really the minimum that I’d need in order to feel comfortable. We keep plugging away at it, but we’re also maxxing out our HSA and our IRAs this year, saving for our son’s education and solar panels for our house, and working to pay off our mortgage as fast as we can. But it’s gratifying to see the balance in the emergency fund going up each month.
Velvet Jones

July 24th, 2008 at 11:53 am
51

1. I kinda have 2 emergency funds. One is $1,000 for fairly minor stuff (emergency vet visit, etc.). The other is my unemployment fund. With my next paycheck, I will reach my goal of $10,000 which should cover me comfortably for 8 months (it includes estimated COBRA payments).

2. Ideally, especially in our current economic climate, I’d like to have a 12-month unemployment fund. Maybe I’m worried for nothing, but I’d rather oversave. I’m stopping at 8 months though because I have other financial goals I’d like to get started on. I can’t predict the future, there’s only so much I can self-insure.

3. No. I fully-fund my Roth IRA, however I do not fully fund my 401k (although 20% of my gross income goes into it). Having a fully-funded unemployment/emergency fund gives me a certain amount of security and freedom.

4. Three months would be the smallest I’d be comfortable with.
Velvet Jones

July 24th, 2008 at 11:55 am
52

doh! forgot to mention that i keep my money in a high-yield online savings account
tiffanie

July 24th, 2008 at 9:19 pm
53

My goal right now is for a $10,000 emergency fund, but I’ve put it on hold since I met my mini goal of $1500. I keep my money in an HSBC high yield savings online (3.5% as of right now).
Deborah

August 18th, 2008 at 2:34 pm
54

We keep our emergency fund in an online, high yield savings account. We don’t have 6 months of expenses saved up - more like 3 - but now that all of our vehicles (car, ex’s car and motorcycle) are paid off, we’re socking money into that account as fast as we can.

Our monthly expenses are $2,350 - but more than 25% of that is child support for my stepson. That’s our biggest monthly expense, and the only one we wouldn’t be able to put off paying for 30 days if we needed to. Other than that, my background in the service industry means that I may have to get a job waiting tables again - but I wouldn’t let myself go more than 30 days without being unemployed. It wouldn’t be my first choice - or even my 50th - but Waffle House and IHOP are always hiring.
Holland

October 24th, 2008 at 4:57 pm
55

We keep our emergency fund in a HSBC online savings account. Right now we have a baby emergency fund of $3k, and even if I was to loose my job we could cover all our minimun monthly expenses with my husband’s income. We have zero credit card debt, no car loans, but a big amount of student loans. We are focusing all our efforts to pay off one student loan at a time. After these student loans are all paid off we’ll focus our energy on saving up an emergency fund to cover 6 months of expenses.
Kate Kashman

March 21st, 2009 at 1:14 pm
56

Question 1: Where do you keep you emergency fund? In a savings account, money market, checking account, or under the mattress?

In a money market account at my credit union. When it is full, I move some to CDs.

Question 2: What about six months worth of expenses? Is this too much… or too little?

Ideally, 6 months would be great. We have outstanding job security so we could probably get by with less as our primary breadwinner can not lose his job without about a year’s advance notice.

Question 3: Would you sacrifice a fully-funded emergency fund in order to fully-fund a Roth IRA (or other retirement / education savings account)? We have chosen to fund IRAs and other retirement savings while maintaining a small emergency fund. It is not fully funded.

Question 4: What is the smallest emergency fund with which you wold be comfortable? $2500

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