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from the there's-always-the-day-*after*-tomorrow dept.
Economists say this is the Minimum Amount of Money you Need in an Emergency Fund:
Money experts generally encourage you to set aside three to six months' worth of living expenses in an emergency fund. Some even want you to stash away a year's worth.
After all, life doesn't usually go as planned: There could be another recession, you could lose your job, have a medical emergency or have to deal with a car breaking down. That's why, when it comes to emergency savings, "more is always better," personal finance author David Bach says.
But economists Emily Gallagher and Jorge Sabat challenge the oft-cited savings rules in their 2019 report, "Rules of Thumb in Household Savings Decisions." "People are usually given really high savings thresholds, like you should be saving six months' worth of income or you should have $15,000 squirreled away," Gallagher tells CNBC Make It. But those numbers aren't "based on much," she adds.
After crunching the numbers, Gallagher and Sabat found a more realistic amount for low-income households, specifically, to aim for: $2,467. If you have that much saved, your probability of falling into financial hardship (not being able to pay rent, bills or medical care) is low.
To get to that number, Gallagher and Sabat, who are also assistant professors of finance, used data from the Survey of Income and Program Participation (SIPP) to graph the relationship between falling into hardship in the next six months and how much you have saved as a buffer. They looked at financial information on more than 70,000 lower-income households, which the report defines as those earning under 200% of the poverty line. To put that into context, that's up to about $30,000 a year for a family of four, says Gallagher. This group represents "about 30% of the U.S. working-age population," she adds.
They found that if you have very little saved — say $200 to $500 — each additional dollar you set aside dramatically reduces your likelihood of falling into financial hardship. But once you have at least $2,467, "all of a sudden, saving an additional dollar didn't seem to be that helpful anymore," says Gallagher. "It still reduced your probability of falling into hardship a little bit, but it wasn't nearly as effective as when you were at low levels of savings."
(Score: 5, Insightful) by The Mighty Buzzard on Tuesday October 22 2019, @11:08AM (22 children)
Yes, really. If you can't manage a sensible emergency fund, it means you are living slightly beyond your means. I've been telling this to all the poor folks I ever talk about finances with for decades now. The daily stress relief a conservative nest egg gives you alone is well worth tightening your belts until you have one saved up. And having one when you eventually end up needing it is easily worth ten times what you had to give up to save it.
Think of it like general purpose insurance but:
My neighbor's son thinks I'm a fucking genius after I talked him into doing it a few years back. I am but there's nothing especially brilliant about this bit of personal financial advice; it's the absolute least you should be doing.
My rights don't end where your fear begins.
(Score: 0) by Anonymous Coward on Tuesday October 22 2019, @01:34PM (8 children)
It’s almost as if in any particular locale there is a necessary floor for “living within one’s means” that is north of “living on the pavement” and it is almost as if most people live most of their lives at the threshold of that floor.
Shocking to consider, I realize...
(Score: 2) by The Mighty Buzzard on Tuesday October 22 2019, @01:57PM (7 children)
Bullshit. Nobody living on the edge of fucked is on the exact edge. Which means they can trim at least a little bit of luxury to create a buffer to keep them from slipping beyond the edge. It doesn't all have to be done at once but if you're not already on the street you can do it.
My rights don't end where your fear begins.
(Score: 0) by Anonymous Coward on Tuesday October 22 2019, @02:59PM (5 children)
Correct. Most people can put away *something*. Also, most people will encounter successive contingencies that will cyclically erase that something.
QED: The population distribution.
(Score: 2) by The Mighty Buzzard on Tuesday October 22 2019, @04:31PM (4 children)
Incorrect and correct at the same time. Most people can put away something. And most people do not. Most people in fact decide to live beyond their means and run up debt that they then have to pay interest or other penalties on rather than save.
Every single time you buy a cheeseburger or a coke instead of eating beans and rice or drinking water, you have declared that you'd prefer immediate comfort to financial security. If you own a television but have no savings you have done the same. Anything and everything beyond what is absolutely necessary to survive, maintain employment, and maintain your ability to work is a luxury and should be temporarily put aside until you can ensure you have enough squirreled away to cover at least a few months of unemployment or a similarly priced emergency.
Now don't go thinking I blame every poor person for not doing so. I don't. Most of them didn't have parents who were capable of teaching them how to wisely manage their finances. This is not hard to fix though. The ones who know they should save money and still blow it on luxuries can starve in the street for all I care though. They're not saying the phrase Azuma loves so dearly (Fuck you, got mine.), they're instead effectively saying "Fuck you, taking yours". Which is much, much worse.
My rights don't end where your fear begins.
(Score: 0) by Anonymous Coward on Tuesday October 22 2019, @04:51PM (1 child)
But you do, and you did.
(Score: 2) by The Mighty Buzzard on Tuesday October 22 2019, @09:28PM
Incorrect again. You simply can't understand English very well.
My rights don't end where your fear begins.
(Score: 0) by Anonymous Coward on Wednesday October 23 2019, @02:20AM (1 child)
What is property?
(Score: 2) by The Mighty Buzzard on Wednesday October 23 2019, @01:26PM
Stuff.
My rights don't end where your fear begins.
(Score: 3, Insightful) by Reziac on Wednesday October 23 2019, @03:20AM
Easy way to save something, even when you're broke -- every time you come in the door, put all the change from your pockets into your personal tip jar. If you're ambitious, add the $1 and $5 bills. Adds up, and at that level the brain counts it as 'already spent' so it's painless.
And there is no Alkibiades to come back and save us from ourselves.
(Score: 2, Interesting) by Jay on Tuesday October 22 2019, @03:02PM (8 children)
The problem with this is that if you have any debt, it hurts your credit score.
What?
Yes. I'm in this position. Very fiscally responsible, with a solid 3-4 month emergency fund in liquid cash in a savings account. Looking at the breakdown in my credit scores, I'm getting dinged because the credit agencies think I should have $0 saved and more loan paid. I'm unclear if the ding is because they're unhappy that I could pay some of the debt down and don't, or because if I have an emergency with zero reserves I would have to borrow more money.
While I don't really care at the moment, since the debt is a mortgage and I won't be taking on any more debt soon, for people in already struggling financially a hit to the credit score might mean that they can't buy a car or qualify for a loan. Their only option at that point will be to spend the emergency fund on that, and hope that they don't have an emergency while they're rebuilding it.
(Score: 0) by Anonymous Coward on Tuesday October 22 2019, @04:33PM (3 children)
There's a fix for that:
Take out a credit card, put some fixed-cost bill (internet fee, for example) on the card, then set it to be paid automatically every month. The activity on the card shows that you're taking on loans and paying them off consistently, which will raise your score. Fair warning, you will take an initial hit when you open the credit account due to "insufficient time on account" or some such, but after 6 months or so that will go away. Ditto for the credit check they do when you open the account; for some reason having someone check your credit score lowers your score.*
What they're looking for is credit activity, and if you don't have any they don't know whether you're a risk for defaulting on short-term loans or not.
*pro tip: if you know you're going to apply for credit at one place, apply lots of places at the same time. In addition to getting competitive quotes for rates, your score only takes one hit for all the credit checks as long as they happen close together. Type doesn't matter, so you COULD do your car loan, home loan, and credit card at the same time. I don't advise taking on that much debt at once (or at all for cars), BUT if you DID then you would only take one hit on your credit score instead of multiple.
(Score: 1) by Jay on Tuesday October 22 2019, @05:00PM (2 children)
You are incorrect, AC.
That would impact the number of loans and on-time payments, which are separate factors in a credit score. I'm at the top of the category on both of those things, so doing that would not make any difference.
Specifically, what I'm getting dinged for is not enough money paid down on a loan combined with too much money available to do so. If you need an education on how credit scores are calculated, you can ask your local google.
(Score: 2) by slinches on Tuesday October 22 2019, @06:25PM
How high is the interest on your mortgage? It might be smart to pay a few small chunks periodically when you can if it's relatively high (>4-5%), as long as you are able to continue to grow your savings. If you can bring down your total interest costs while improving your credit score, then it seems like a win-win as long as you can maintain a comfortable amount of savings. If the interest rate is under 4%, then it would probably be better to invest what you could otherwise put towards mortgage principle. The credit score will slowly improve on its own as the mortgage gets paid down and probably wouldn't offset the better return you can get in an investment account.
(Score: 0) by Anonymous Coward on Wednesday October 23 2019, @02:33AM
Wait, what? You're sitting on a large amount of debt, owed to several different creditors, are paying it off on the schedule the creditors suggest, AND have a large cash reserve? Do you enjoy paying unnecessary interest?
When I made my comment above I assumed that you had a single large mortgage, and perhaps student loans. You know, one or two large outstanding debts at relatively low interest. In a case like that it makes sense to be working on your cash reserve, and perhaps invest at higher return than you're paying interest on the loans. If you're floating a bunch of nearly-maxed credit cards and making minimum payments instead of dropping a wad of cash to get out from under the banks' thumbs then you should perhaps rethink your financial decisions.
(Score: 3, Insightful) by The Mighty Buzzard on Tuesday October 22 2019, @04:34PM (2 children)
People struggling to hit a credit score shouldn't be. If it's difficult to get, they can't afford to use it on anything it's necessary for.
My rights don't end where your fear begins.
(Score: 1) by Jay on Tuesday October 22 2019, @05:14PM (1 child)
That is blatantly incorrect.
A house is a damn good investment for most people. My mortgage is hundreds of dollars less in rent for a place around 2.5 bigger than I could rent for those hundreds of dollars more. Even if my house loses value, when I sell it will get some of that "rent" back. Best case scenario is that it goes up in value, and I make far more back than what I paid in interest. The best financial decision of my life so far (outside of too much education) was to buy instead of rent. I lived in a small condo for 6 years, paid less than renting, and sold it for 50% more than I bought it for.
It's easy to struggle to hit a high credit score, especially for young people with a limited financial history. They may have a college degree and a solid job, but that doesn't matter when it comes to credit. What matters are your loan histories, length of open credit lines, number of late payments within the last few years, etc. All things that younger folks won't have. And all things that fiscally responsible people might not have! If you saved up and bought your cars with cash, that doesn't help your credit score when you want to buy a house. If you were flat broke and took out an auto loan and managed to pay it on time most of the time, that helps your credit score.
Struggling to get a high credit score can mean that you defaulted or were late on payments, but it can also mean that you just haven't used much credit. Being fiscally responsible and keeping an emergency fund is one of the ways people avoid using credit, so that's a negative on the credit score. That absolutely doesn't mean that someone can't afford to pay a loan - it means pretty much the opposite.
(Score: 2) by The Mighty Buzzard on Tuesday October 22 2019, @09:30PM
Owning a house is not an investment lately. It's only a way to keep from losing quite as much unrecoverable money on rent. In the past that was true but not today outside select areas.
My rights don't end where your fear begins.
(Score: 1, Insightful) by Anonymous Coward on Tuesday October 22 2019, @05:29PM
Credit is just a con for the goyim.
(Score: 3, Informative) by slinches on Tuesday October 22 2019, @05:36PM (2 children)
The importance of savings can't be overstated. It's the first step in really being able to take control of your financial life. Just a bit of savings gives you the flexibility to make choices on what's best in the long run instead of what's immediately necessary. Having the option to avoid future costs by investing a little more today (e.g. replacing a car or appliance with a more reliable one) or avoiding things like short-term high-interest loans to cover unexpected expenses is the difference between being able to build wealth instead of barely scraping by.
As for how to start saving, that's about controlling expenses. There are a lot of things that can be done with living expenses like food and entertainment that add up to significant annual savings for those with higher incomes. But the big difference makers for everyone are housing and transportation. Most people seem to stretch their budget on these things and over-commit their income to fixed costs. This is especially damaging when paying rent. If rent is 35% of your gross income, when you add other necessary bills like water, power, insurance, car payment, phone and internet you can have 80% or more of your after tax income locked up in fixed costs that have zero return. In that situation, trying to save 10% of your gross income could mean cutting your budget for things like food and entertainment in half. In that situation, saving isn't really effective and unexpected costs will eat that up faster than it can grow. If you find yourself in that sort of predicament, you need to get out of it. Go find a friend or family member who will let you stay for a couple months in return for minimal rent or chores and cut as many costs as possible. It can get you out of that paycheck to paycheck cycle and give you an opportunity to build up an emergency fund and it will allow you to build savings into your budget up-front when you do go back out on your own.
(Score: 2) by ElizabethGreene on Wednesday October 23 2019, @12:42AM
This has been the case for me. I remember writing $20 out of my check register* as "oops" money back when I was making a couple of bucks above minimum wage. That $20 saved me from a bounced check fee for a transaction I failed to write down, so I paid myself that $29 fee instead of the bank. I've got about what TFA suggests in oops money now, independent of savings and retirement et al. It is difficult to describe how comforting that money is. Intellectually I know that I'm wasting money by not having that in an interest bearing vehicle, but the comfort is worth the cost.
* A check register is a small paper notebook you use to keep track of your bank balance. It's like a spreadsheet, but in ink.
(Score: 0) by Anonymous Coward on Wednesday October 23 2019, @03:16AM
Of course it can be overstated.
You will starve *much* more quickly at a 100% savings rate than at 0%.
(Score: 3, Informative) by HiThere on Tuesday October 22 2019, @06:25PM
Of course the problem is that the interest you earn will be less than inflation, but, yeah, it's still better than an insurance policy for the same amount...once you reach it.
My basic rule was always "don't buy on time". OTOH, if my wife hadn't had a house, I'd have been a renter. I have a hard time focusing on finances.
There are several rules you need to follow, though. Having a sensible emergency fund is a good one, but you also need to watch ongoing expenses. Credit cards should be paid off within a month. Etc.
Javascript is what you use to allow unknown third parties to run software you have no idea about on your computer.