As the title says I am trying to see where people stand on this. Obviously this is all personal preference. But that is what I am after.
After depleting our savings when buying our apartment 2 years ago, we’re about to cross 6 months liquid savings in just plain old savings account with ability to immediately withdraw money.
(To clarify that is 6 month assuming 0 income, which is very unlikely given the social system of our country - so realistically we have even more in savings.)
As you can imagine, the interest in this account is not great, so I want to set a limit as to when we stop dumping every spare penny into the savings account and begin doing other things (likely try to invest).
I personally have ~1 years worth of cash savings. I have it as an emergency fund plus slush fund for any big purchases so I won’t have to sell my stocks. For instance, I was able to purchase a new HVAC for my house without having to move any money around or sell any investments. I’ve just been slowly replenishing my savings alongside investing since that purchase.
If I was you, I would definitely make sure I have at least 6 months savings and then maybe split investments/continued savings until I was at a point I was comfortable with in terms of savings (whatever it is that you decide that value is). Also, you say your savings account pays low interest. I would look to see if there are any High Yield Savings Accounts available in your country. Here in the US you can find accounts paying ~5% which is great for an efund.
Personally, as a rule of thumb, I don’t think you can have enough in savings.
Our society is built upon going into debt… and I’d rather pay up front for things like a replacement vehicle or heater/pump or what have you, which means having enough to survive on—as you are inferring—and enough to survive Murphy making an unannounced and unwelcome visit.
The point of the question is how much money does one need in a liquid form as opposed to less liquid investments.
A fair point.
Personally, I use ‘savings’ as a catch-all for any form of money you have no intention of spending frivolously. Be that in savings, stocks, or other forms of investment.
I’ve got a relative who saw anything beyond the 6 month mark as spending money. I don’t know what form his investments manifested in, but it clearly didn’t work as he’s in financial do-do, and it’s an unpleasant topic amongst the family.
I keep almost all of my ‘emergency savings’ in index funds. Its value may fluctuate more than cash savings, but the higher return more than compensates. Unless, maybe, you face events that force you to tap it yearly or more, in which case I wouldn’t really consider it savings, so much as budgeting. I’ll generally have around a month-and-a-half worth of spending in cash, but that’s mostly because it’s going to get spent this month.
I think a significant part of recommending to keep cash savings falls to the legacy of financial markets. There used to be significant costs associated with transactions - I don’t mean $7 E-trade commissions, I mean $50+0.10/share - that meant it was really expensive if you needed to get $1000 out of the stock market for car repairs. There used to be significant lags: you’d call your broker, order the transaction, then have to wait several days for the proceeds to be delivered, a few more days for the check to arrive in the mail, then a few more days for the check to clear your bank; now, you order the trade online and they’ll have funds in your bank within 2 days at no cost. If you had an expense come up that needed paid today, then money locked away in the market was useless. Today, you put that expense on your credit card - which only became common in the 1970s - don’t need the actual cash for weeks, and can easily get investment funds that fast.
Example: I’ve been putting money into medical savings (USA) for a few years, which all goes into a S&P 500 index. That’s “down” about 10% from 2021, but I have around 40% net gains in the account. It turns out I have significant medical expense coming up, and it’s going to be a lot easier to deal with because of those gains. For scale, I’m expecting this thing to cost something like 3-4 month’s total spending and the healthcare savings is around 9 months.
It depends on what alternatives I have available. Prior to this year, I was aiming for 3-6 months of liquid savings and the rest in my investment accounts.
Now that reasonable interest rates are available, I have changed my priorities. My goal now is 2 months savings in my checking account. This allows me to cover nearly any expense that comes up without the annoyance of transferring money to cover it.
I keep another 1-2 months of expenses in a MMF earning >4% interest and immediately available for withdrawal.
Then I have a decent amount (no particular target) invested in a short-term treasury ETF (TFLO) earning >5% interest, but it takes about a week to sell and transfer funds if I need it.
Altogether, I’m probably keeping 6-12 months readily available, but most of it is earning interest now. I would also likely get 3-6 months severence if I lost my job and could probably cut back on some expenses to stretch things a bit further.
Finally, I used to contribute to a Roth 401k (I’ve since switched to traditional 401k), so I should be able to access those contributions without penalty, if needed. This would only be relevant for someone in the US though.
You may be interested in switching your checking to a brokerage like Fidelity or Schwab. Some benefits:
- at least at Fidelity (haven’t checked Schwab), your checking can be invested in a money market fund - mine gets >4% interest
- access to your Treasury ETF much sooner
- Fidelity and Schwab refund intentional ATM fees (depending on account type)
Basically, you’d get better interest in your checking and fewer accounts overall.
I switched late last year and I love it. My structure is:
- Fidelity Bloom Spend - main checking, core is SPAXX, only has 2-3 weeks spending money
- Fidelity Bloom Save - main savings, core is SPAXX, and has ~1 month spending money, plus Treasury bills that make up the rest of my efund
- Fidelity Cash Management Account - usually near $0, but I’ll load it with some cash when I travel so I can use the free international ATM feature as needed, core is a basic savings at ~2.5%
SPAXX gets just under 5% right now, and it’s nuts that I’m getting that in my “checking.”
Imagine it’s 2008, your credit cards have been cancelled, and you just lost your job.
How much would you need to pay off all non-mortgage debt and then stay afloat without going into debt until you can get a new job?
That much.
