Tuesday, April 8, 2008

How big an emergency fund do I really need?

I've been contemplating changes to my asset allocation. Right now, I have $10,000 in a c.d. that will mature in a month, $8,041 in online savings, enough money in checking to get me through the end of the semester but not a lot extra, one $50 I Bond I bought a couple of years ago, $8 in my wallet, and a bank full of miscellaneous coins. I'll get a $2,000 signing bonus as part of a fellowship in June as well and will start a teaching job making around $27,000 to $35,000 a year this fall.

I know moving, paying deposits, and buying supplies for my classroom will take a bite out of my savings. I'm also planning to put $5,000 in a Roth asap since this will be the first year I'll have earned income instead of fellowship income. Even after doing that, I'll be left with a substantial amount of money.

There's the dismaying possibility that my astonishingly reliable 1999 Ford Taurus with 111,000 miles on it will need big repairs or even replacement in the next couple of years. In addition, I won't feel comfortable without some reserves for emergencies. The big question is: how big should these reserves be?

My mother told me that she and my father always felt that $10,000 was the minimum they needed, and I've had that in mind as a goal. They arrived at that figure many years ago so inflation is an issue, but they also had a mortgage and two small kids back then. Lately, I've started wondering whether I really need that much on top of the car fund as I'd previously assumed.

Let's say the worst happens and my car requires repairs that cost far, far more than its value and I end up deciding that replacing it is the better option. If I have a grand total of $10,000 in savings, I can get a good newer used car for $6,000 and still have more than three months living expenses in reserve while I begin to build the account back up. That doesn't sound like the height of recklessness, does it?

It isn't as though I'd be forgoing the larger emergency fund in favor of lavish meals, shiny baubles, and a great dvd collection. The whole reason for keeping less in an e-fund is to be able to put more toward big, more distant goals like a house and retirement where it makes sense to take a bit more risk and/or sacrifice some liquidity to pursue higher returns. It all makes good sense, but I'm still reluctant to leave behind the security of a huge emergency fund.


Mary Sue said...

I'd consider starting a 'car emergency fund' seperate from your general emergency fund.

But that's just me.

Anonymous said...

I mean, it's all a pool of cash. I have a goal of 15k for an efund (but my rent is quite astronomical), but if I needed a car sooner than I had saved up for one, so be it.

Really, what does it mean if you answer your question with "smaller than what I have" At this point you can put your 5k in a roth, but the rest of the money is just going to wait around until there is actually some decisions to be made.

I handy rule of thumb I personally use (but I invented it, so don't put too much stock in it) is roughly to take my rent and multiply it by 10, and that is enough cash to make me (as a signle person) feel okay.

Jim ~ mydebtblog.com said...

Best guideline is 3-6 months worth of living expenses. If you're doing anything beyond this you're saving for something like retirement, a house down payment, or to buy a car. You sound like you have your finances under control, you'll know what to do.