Some people say you need a minimum of 3-6 months, 6-12 months, or 12+ months of living expenses saved in case of an emergency. Others prefer a flat, clean number, sometimes even as low as $1,000. What do I recommend? Certainly more than $1,000, because ten benjamins may not even buy you new tires in 2024. My personal strategy is to never let my true emergency/core savings go below 3 months of living expenses (though I prefer 6-12 months), and to utilize sub-savings accounts for other spending buckets. In this post we'll discuss why I like this strategy and how you can try it out too.
Emergency fund plus sub-savings
Basing your savings target on living expenses requires you to actually know your living expenses, and that's a good thing. Sticking to a budget is a wonderfully boring but proven way to ensure you consistently spend less than your earn. So whether your savings target is a fixed amount or proportionate to living expenses, make sure you know what it generally costs to exist.
Most Americans have less than $1,000 in savings, and over half of Americans carry credit card debt (at an average interest rate of over 22%). Yuck, that's a very unfriendly financial situation. If you fall into one of those camps, the savings targets and strategies discussed here may seem unrealistic. Don't let it get you down, let it get you going. I encourage you to read this post, tuck away the knowledge for when you're ready, and focus hard on your improving your wages and/or reducing your spending so you can free yourself from credit card jail. If you aren't sticking to a detailed budget, the time to do so is right freaking now. You are tough enough to find a way to get it done, even if the odds are stacked against you. Financial health is part of a healthy life and financial education is worth your time.
My rant here is done. On to the strategies!
Core emergency savings
I like to think of emergency savings as the funds I'd use to cover loss of income and/or expenses so unlikely that they don't have a place in my regular budget. This is where I ensure that I have a minimum of 3 months of living expenses, and usually try to stick to around 6 months. Beyond 6 months of living expenses I may find better uses of the cash; however, being a homeowner, I haven't had that situation as often as I'd prefer.
I keep my emergency savings bucket in a high yield money market account with a solid interest rate. At the time of writing, my money market interest is still getting it's butt kicked by inflation, but I enjoy keeping my liquidity while earning decent interest income. Better than nothin'!
Sub-savings for everything else
My credit union allows members to create "sub-savings" within their existing bank accounts, and it makes organizing your savings so much easier. A sub-savings account is basically just a digital version of keeping different piggy banks for different expense categories. I use sub-savings accounts for spending that is likely to occur but has inconsistent or infrequent timing.
My budget includes simple estimates for things like home maintenance, vehicle maintenance, pet care, gifts, hobbies etc. and I transfer those specific amounts into my various sub-savings buckets each paycheck (i.e. $25, $50, or $200 each paycheck). That way there is money available when the bills show up, or when I simply want to buy something that isn't strictly necessary. This helps immensely with staying within budget, avoiding surprises, and saving toward larger purchases. It also helps me feel ok about using the funds for what they were set aside for.
Below I'll describe the sub-savings accounts I have set up, and why each of them make sense for my lifestyle. Sure, these same funds could be earning more interest in a high yield money market account, but this makes my financial planning much easier, and the balances don't often accumulate a ton anyway. I don't usually carry much forward year to year, since it's set aside in anticipation of spending near-term.
Home improvement (joint)
My wife and I have a joint home improvement sub-savings account for home maintenance and voluntary updates. We contribute enough to add up to about 1% of the value of our home per year. This is intended to cover things that are bound to pop up for homeowners - outdoor needs, minor plumbing or electrical issues, appliance maintenance/replacement, painting etc. For larger home needs, such as a roof, we use high yield money market accounts and/or Certificates of Deposit (CDs), but the smaller stuff all runs through the home improvement sub-savings.
Travel (joint)
One of our most treasured non-essential spending buckets is travel, and it just keeps getting more expensive. We budget and set aside a specific amount from each paycheck so that when we feel like booking a trip, we can do so without feeling irresponsible. It's so easy to overspend on travel, and having funds set aside helps us avoid guilt if we treat ourselves to something cool. We may occasionally adjust our contributions up or down depending on what we plan to do in the next 1-2 years. We have a long greedy list of things we want to do in the US and abroad, and having the authority to use funds and the boundaries to not overdo it helps us enjoy ourselves and avoid stress.
Vehicle
Car issues happen, and it's rarely on your schedule. New tires, oil changes, regular maintenance, insurance deductible, damage not covered by insurance, several hundred dollars per year for tabs in the state of Washington... yeah, maintaining a car ain't cheap. But it's probably cheaper to maintain the vehicle and keep it long-term than it is to trash it and not have it work for very long. Anyway, I set aside funds each paycheck to cover the various annual fees and maintenance, as well as anything I haven't thought of that might surprise me down the road.
Medical
If you have access to a tax-advantaged medical savings plan like a Health Savings Account (HSA) or Flexible Spending Account (FSA) I hope you take advantage of those. I wish I had an HSA, because the funds can roll over year to year which makes it less risky to contribute a ton. I have an FSA, which is better than nothing; but since it's use-it-or-lose-it, I have to accurately guess how much I'll spend. In order to not forfeit unused funds, I tend to go with a conservative estimate. For that reason, I also utilize a medical sub-savings in case my actual costs exceed my annual FSA contributions.
I've hit my max out-of-pocket for my health plan twice in the last eight years, so I can tell you first-hand how quickly and unexpectedly medical bills add up. No wonder medical debt is a leading cause of bankruptcy. Don't be part of that stat, and set aside funds for unplanned medical bills. If you have access to an HSA, hammer it and get the tax benefits. If not, I suggest a sub-savings.
Pet
If you don't have pet insurance, and you want to prepare for the risk of high medical costs of a beloved a pet, I recommend a sub-savings account. I'm going to be totally honest with you - I have no idea whether or not you should get pet insurance. It all depends on the plan options you can find, your pet's breed and lifestyle, and your attitude about pet care. It's best to make the decision early in the pet's life before they have any minor thing show up in an exam, which might make insurance impractical or impossible. It's disgusting to think about having to make money decisions about healthcare for our pets, and I try not to think about it. Just remember that even if you do have insurance, don't be surprised if the insurer does anything they can to not provide coverage - it's just how the game works.
Kid
We love our boy so much, but being a parent is nothing like what Jennifer Lopez used to sing in 2001 - our love does cost a thing. In these first 6 months as a new dad, my experience tells me that parents should expect some big, ugly near-term costs to jump out and startle them. I suggest using a sub-savings to set aside funds each month to help avoid the extra surprise and drama.
The items that surprised me most were car seats and strollers. Woof. Safety and comfort are not cheap. That said, there are some great stores that sell and exchange all varieties of used kid stuff, and we utilize them frequently for clothes and gear. Our best find so far was a quality jogging stroller, still in it's packaging, for $300 cheaper than buying new. But you can't always count on finding what you want used or on sale, so I like to use sub-savings to prepare for the inevitable money dumps.
PFE
This is by far my favorite sub-savings bucket - my Passion, Fulfillment, and Empowerment (PFE) fund. By setting aside money to do the things that add color to my life (but cost money) I don't have to feel guilty and I never (ok, rarely) spend more than I have available. Every paycheck I put money in, and I pull it out when it's time. Concerts, sporting events, race fees, music equipment, Spanish lessons - the world is my oyster and I (mostly) stay within budget.
Gifts
The bigger our extended family gets, the heavier lift we'll have for gifts. Imagine how much easier holiday shopping would be in November and December if you'd been casually setting aside $10-$20 per paycheck toward your big shopping binge. Remember also that it's ok to be honest about where you are, and reduce/avoid gift giving if it means you'd have to take on debt.
Home Gym
This fund is to address one of my biggest spending triggers - the glorious garage gym. I'm simply setting aside money each paycheck, and when I've saved enough I can buy what I want. I've been slowly building out my home gym over time, and there are some larger items that I think I'd use a ton, but don't necessarily need. The sub-savings forces me to be patient and avoid giving my healthy hobby an unhealthy price tag.
Book sales
This is an example that isn't specifically relevant to most folks, but demonstrates that you can use sub-savings for anything that makes it easier for you to monitor and track income and expense. My royalty checks are deposited here, and it makes it easy to see what I have available to re-invest in the business.
When to use CDs and high yield money market accounts
We keep the funds for bigger home projects (roof, HVAC, water system, siding, remodel etc.) in higher interest rate accounts since we (hopefully) have more influence over the timing and the dollar amounts are higher. I would suggest the same if you're saving up to buy a home or a car, where you may accumulate larger balances for a longer period of time.
I don't mind if I have $1,000 in a sub-savings account is missing out on some interest, since it keeps me on budget and lowers stress; but if you're saving toward a 5-digit or 6-digit cash outlay it's probably worth it to chase the higher interest options.
In addition to the high yield money market accounts, I like flexible CDs that allow you to adjust the amount you have invested. Some CDs allow you to withdraw the vast majority of funds if needed, with no penalty, making it a highly liquid option with a competitive interest rate. Others allow you to add unlimited money on, so you can make additional deposits into the CD with each paycheck. Some financial folks may recommend a Roth IRA to save for larger purchases and projects, but I'd rather avoid the risk of market troubles and stick to the boring reliable accounts mentioned previously.
Wrapping up
I may just be enamored with sub-savings because I'm an accountant, but I think non-numbers-nerds would benefit from sub-savings even more than I do. Less math, more transparency, easier planning. Let me know in the comments what other sub-savings accounts you might be interested in setting up. I especially like using this for fun things like travel, PFE, and hobbies - the things that add fun. Your finances should be a healthy and positive part of life, and it certainly feels that way when you can responsibly treat yourself.
Another thing of note related to core emergency savings - stay aware of the value of any large paid time off accruals you have through your employer. I personally hope you (and I) actually use the majority of your time off each year, but sometimes it builds up and is often eligible to be paid out at termination. Also, job loss may come with severance that could help float the boat for a bit before having to tap into emergency savings. That said, don't count on good luck, and save accordingly.
If you found this helpful, please like the post and subscribe to the blog, and check the other posts. Please check out my book, Healthy Dough: Ingredients for the financial health you crave.
Your best life is a healthy life. Go get it. Thank you!
Comentários