Rainy Day Fund Size

[kablooey]

I have been setting aside a small amount of $ each month for a rainy day fund. It's all going into a government-backed, but low-interest account.

Is there a rule of thumb as to how much I should have in there in terms of monthly expenses? I've gotten a lot of contradictory advice.

The fund I'm creating will be used in case I, say, get hit by a car and can't work, or someone breaks into my apartment and steals a lot of valuables, etc.

Currently:

• I live alone.
• My parents and close relatives can take care of themselves physically and financially.
• I do not have a wife, kids, mortgage, or debt of any kind.
• I am self-employed and thus do not get paid if I don't work.
• I'm in good health.

Thanks!

[CoolBee]

Depends on what makes you feel comfortable!

I guess you could look at your insurances (if you have 'ill-health' cover of some sort), what social security you might be able to get and at what point, and at what help parents or others may be able to provide for you if you really hit the bottom.
This might give you a better idea.

Also, depends on whether you mean 'salary' or actual 'expenses' - figure out exactly what you NEED (taking into account if you are laid up you may not need gas for the car, but you would probably be spending more at home on heating and electricity and so on).

Some would say 1 month, others 3 months and others 6 months.

Also, what is the lead time in your work between doing work and getting paid.
Say you are laid up for 2 months.
Then you do some work - how long would it be before you see your first invoice paid?

Personally, my view is get 1 month expenses down as quickly as possible and then build up to 6 months over time.

[Mounds]

If I were you, I'd let my fund grow indefinitely.

There will never be an easier time than now. If you end up factoring in marriage, kids, and a house, you'll find that you can't put away nearly as much.

-Tim

[Acting Like Godot]

Originally Posted by kablooey

I have been setting aside a small amount of $ each month for a rainy day fund. It's all going into a government-backed, but low-interest account.

Is there a rule of thumb as to how much I should have in there in terms of monthly expenses? I've gotten a lot of contradictory advice.

The fund I'm creating will be used in case I, say, get hit by a car and can't work, or someone breaks into my apartment and steals a lot of valuables, etc.

1. Traditional rule of thumb is six months worth of average living expenses to deal with unemployment / loss of income.

2. Getting hit by a car leads to medical expenses which is something you should seek to cover by insurance, not savings.

3. In general, personal financial planning does not cater to theft scenarios. I would suggest a good padlock, perhaps a CCTV, a burglar alarm system etc.

[kablooey]

I live in Canada, so I don't worry too much about medical expenses. The vast majority of those are covered by universal insurance.

[Albalida]

I vote 6 months of average living expenses -- rent, water, electricity, food. Once you have that filled up... I used to think like Mounds, because who knows when you might be between jobs for more than six months? Or inflation gets really extreme? If a rainy day never comes, you could direct those funds to your retirement!

...But, well, there are often more valuable things than money (that somehow still cost money,) so I think 6 months of living expenses can be cue enough to worry less about it.

[Requiem]

Depends on numerous factors. In addition to the ones you listed are things like a) to what extent you want to build wealth, b) how concerned you are with financial security, and c) what other kinds of funds you have besides pure cash.

I'd say more is better; I prefer 6 months of cash available. Any more than that, and I'd suggest putting that money to a lot better work: bonds, stocks, business ideas, real estate, etc.

I've got around 4 months of cash handy, but in terms of liquid assets, I could easily go many years without any external income.

[Zaphod]

I would like to keep 4-6 months of cash handy, but definitely keep more liquid than that (e.g. in stocks you can sell if needed).

[Fred Tracy]

Yup, like everyone else said 3 to 6 months of living expenses.

Personally, I'm shooting for 5 months, which for me will be only $5000 because I have very few expenses.

[lycan]

There is no need for a rainy day fund when you have credit available. Do you?

[Mounds]

Originally Posted by lycan

There is no need for a rainy day fund when you have credit available. Do you?

I don't know if you're serious, but I'd like to advise otherwise.

When people talk about saving months worth of living expenses, it's with the idea that they might lose their job someday. That way, they won't end up in financial ruin if that day were to come.

If your income got pinched and your back-up plan is a 19% APR credit card, that's not a good position to be in. People go into bankruptcy like that.

-Tim

[lycan]

Originally Posted by Mounds

I don't know if you're serious, but I'd like to advise otherwise.

When people talk about saving months worth of living expenses, it's with the idea that they might lose their job someday. That way, they won't end up in financial ruin if that day were to come.

If your income got pinched and your back-up plan is a 19% APR credit card, that's not a good position to be in. People go into bankruptcy like that.

-Tim

1. I am aware of the arguments.
2. I am dead serious.

In countries where a low interest rate on a credit card is 50% a year, keeping a cash balance is a reasonable course of action. In civilized countries where a high interest rate on a credit card is 20% a year, it is not a reasonable course of action. If you stay jobless for so long that the interest becomes a real problem, your problem is not the lack of a backup fund, your problem is a lack of marketable skills.

[Mounds]

That's a level of risk that I'm not comfortable with, nor am I comfortable spreading it as a good idea. I don't agree at all.

I'd rather have no emergency fund and no credit than partake in this.

[lycan]

Originally Posted by Mounds

That's a level of risk that I'm not comfortable with, nor am I comfortable spreading it as a good idea. I don't agree at all.

I'd rather have no emergency fund and no credit than partake in this.

You would rather die of starvation than borrow money?

[Mounds]

Originally Posted by lycan

You would rather die of starvation than borrow money?

I'd eat garbage before dying of starvation, lol. Plenty of that to go around.

[Peterw]

I have 3 months which seems to be a popular minimum amount. I'd prefer to have a year though.

[Mounds]

Just to clarify my own position on using credit as an emergency fund...

I'm against it when it puts you in the red. If you've got substantial investments to fall back onto, who cares? If you're living paycheck to paycheck, I think it's a bad idea.

[Peterw]

Originally Posted by Mounds

Just to clarify my own position on using credit as an emergency fund...

I'm against it when it puts you in the red. If you've got substantial investments to fall back onto, who cares? If you're living paycheck to paycheck, I think it's a bad idea.

I've been there before and it's not fun having loan/credit card people on your case when you're struggling as is.

I would only advise falling back on credit when you've exhausted your rainy day fund.

[aelle]

I am currently building my emergency fund. My contingency plan needs to cover not only events like "job loss" but also "North Korean nukes / I need to get out of here immediately", so it's a little different from most people. I aim for 6 months of living expenses + relocation money for 2 people and a dog. I am confident that in a country with no visa requirements (ie in the EU), either myself or my partner could find a high paying job within 6 months, even in this economy.

In practical details, it means having about 1,500+ euros of perfectly liquid savings in my country of residence, another 1,500 in my country of citizenship, and 7,000 in an easily accessible hub with good banking protection (not implemented yet, but I'll probably go for Singapore as it's a cheap place to fly to from anywhere in the world).
At the moment, I have the 10,000 aside but they're all in one place (earning a guaranteed 3% a year, which is less than the market, but a price I am perfectly happy to pay in exchange for liquidity).

I have more mid-to-long savings and investments for other purposes of course, but they're not as liquid and I may not have a chance to access them if I had to leave the country with days or hours of notice.

[Mounds]

For the sake of continuity, I stole this quote from this thread. Off-topic to that thread and on topic to this one.

I wish you would have said this from the start. What a lot of people are doing is spending all of their money and relying on credit when things get tough. Not a good idea.

What I've also heard of is people not having an emergency fund but having substantial investment funds. Credit cards have a grace period, in which you could withdraw what you need from your investments to cover the emergency. In that sense, it works.