Emergency savings: HOW MUCH???

[jimmykiff]

Dave Ramsey suggests Emergency Savings of $1,000 to start.

Vanguard suggests at least $2,000 in this new video:

Who should we follow?

 

[ginnyweasley1222]

@jimmykiff I think that people can get lost in the numbers. In my opinion it is important to just start an emergency fund.

 

[maurits]

@ginnyweasley1222 Exactly. Dave Ramsey says have $1k just for the psychological benefit. $1k emergency fund and anything over that should be going to debt. $1k should make you uncomfortable and incentivize/push you to pay your debt off as fast as possible. It’s not meant to be enough

 

[theodoric]

@jimmykiff $2,000 due to inflation. Dave's been saying $1,000 for a while.

 

[hoping2serve]

@theodoric He's also corrected people by saying $1k is not the end goal for an emergency fund. It what you should start with. Once you get your finances in order you should absolutely increase the emergency fund beyond $1k.

 

[broseeker]

@jimmykiff Both of those amount are starter amount, not the actual final amount one should have for emergency savings.

The reason for those numbers is not to make the task look too daunting for an individual with limited income and no savings. It should be viewed as a beginning baby step.

 

[drex]

@broseeker Yeah, you should not be 25-30-40 with only 1-2k in emergency funds.

You should have 1k in emergency funds the day you turn 18 at minimum.

Ideally, you want your emergency fund to cover... emergencies. $2,000 doesn't do that, it's just a number to get people started.

$10,000 is more like what it actually needs to be at the end of the day. That's enough if you lose your job tomorrow you're good for a few months, if you blow the motor in your car tomorrow you're good, if you need to pay a lawyer you can, etc.

 

[anonbeliever]

@jimmykiff Personally, I think trying to save $1,000 each year is a mostly reachable goal (depending on your situation). So you can save to reach that number and then if you hit the goal by September or October, you can budget the funds elsewhere until the start of the next year.

My current goal is $5000. My monthly expenses are about $1,200 so I have 3 months covered plus left over for an extra month if needed. In the next four years (when I'm 35) I want to bump it to $10,000. Honestly, I think it's level of comfort. What number is going to put your mind at ease? Right now, $5,000 puts my mind at ease. In four or five years, I would rather have $10,000. And a few years after that (when I'm in my forties) probably $15,000 to $20,000. That's going to take time. May not reach it. (Growing up poor, crippling student loans, a low paying job right now). But having that goal in mind keeps me going and eases my anxiety if I can't reach it or if I have to stop to move money to more pressing matters because at least I have an okay pot if anything happens.

Dave Ramsey, in my opinion, is not much of a finance guru. His information is outdated and stuck in the 80s/90s. I find his philosophy best suited for a particular type of audience, which does not include women or POC (this is just my honest opinion, I'm not going to debate or fight with anyone about my statement). Anyways, good luck.

 

[dharmachrsitian]

@jimmykiff Ideally, you want a few months of expenses as an emergency fund.

It also depends on your circumstances. If you have a steady job and your car isn't making weird noises and your housing is steady, I'd go for $1000 before really starting to pay down debts and save for retirement and other costs. This is what I did. That $1000 was enough for small things that came up, but would not have been sufficient for a large emergency. Once I paid down consumer debt and built a habit of retirement contributions, I kept saving.

If things are less stable, I would suggest saving at 2-3 month's expenses, then tackling debts and longer-term savings/investments. As you start to pay things off, you'll ideally also find a more reliable car, housing, etc.

Things rarely go perfectly according to plan, and an emergency fund can't compensate for low wages. Ramsey is often (rightly) criticized for being out of touch, and even my path won't be the best option for some people. Which is why flexibility in these rules is important!

 

[mike77777]

@dharmachrsitian Ramsey doesn't realize what basic necessities cost.

 

[dharmachrsitian]

@mike77777 Some of his advice is WILD!

 

[mike77777]

@dharmachrsitian It absolutely is. Going to the grocery is depressing and even horrifying. Shit's expensive and I don't buy pricey food. No meat, no brand names. Vegetarian. No fancy Vegetarian meat substitutes either.

 

[christfollower1995678]

@jimmykiff Ideally 3-6 months would be best. But that is unfathomable and also unreachable if you have too many debts and bills to pay. So there are people like Dave Ramsey who have been teaching for years to save $1000 and then attack your debt. I like this approach, because it does create a cushion, and for many people it’s good motivation to see $1000 in their account for the first time in their lives. But I also think that in the current economy, $1000 is no longer enough (he started that $1000 idea 30+ years ago), so I agree with Vanguard stepping that up to $2000. I personally did sort of a hybrid approach when I recently got out of debt. I got that initial $1000, and then figured out a few of my smallest, easiest to pay off debts first, paid those off, and then paused the debt payoff to save up that next $1000. That 2nd $1000 happened pretty quickly because of the discipline I learned from the first $1000, and the extra money being saved from the payments on those few cards I paid off. And I must say that $2000 became very advantageous for a couple emergencies that back in the day would’ve been less than $1000, but these were $800 and then $1300. Having only $1000 would’ve put me back in the hole again, but I had just replenished enough after the $800 emergency to cover the $1300 emergency, so all was good. All this to say, $1000 is better than nothing, $2000 is more appropriate for emergency costs these days, and obviously 3-6 months is ideal.

 

[khairfactory]

@jimmykiff One moth rent or mortgage payment is a good start imo

 

[duvduv]

@jimmykiff Your ideal is 3-6 months of expenses but there are other factors to think about. For instance, if you're drowning in debt, it's smarter to start with a small emergency fund of 500-1k and then dump any excess money into your debt. This way you still have enough to cover small emergencies like a flat tire or a few sick days while more effectively bettering your financial situation. Once your debt is at a reasonable point, then you can think of getting multiple months of expenses covered. Choosing 3 or 6 or anywhere in between is up to you and your risk tolerance. This money will hold you over if you lose your job, have a major family emergency, a major medical expense, etc.

Besides enormous debt, other factors that may make you consider starting with a smaller goal would be if you're majorly behind on retirement savings and need to catch up, or if you're expecting your car to give out any day and need to prepare to purchase a new one, or if you have a teen and need to catch up on college savings ASAP. No financial decision or financial advice is one size fits all. It's important to understand why they're giving the advice and then adjust according to your own life circumstances.

Edit: factors that may require you to save more for your emergency fund are if you're in a highly volatile field, meaning you're more likely to become unemployed, if your income is very unpredictable, if you have chronic conditions that lead to frequent medical bills, if you're in area with frequent natural disasters, high crime, etc., if you're living with a roommate that's unreliable with bills, if your parents are older or sick and you think you could be paying for a funeral in the next few years, etc.

 

[mike77777]

@duvduv I'd wager to guess in the poverty finance sub, most of us are not giving our kids a free ride on college.

 

[duvduv]

@mike77777 Having 1k for them is still better than 0. You'll still be setting them up for a slightly better financial future, even if you're not in the position to give them a "fee ride" (which wasn't even anything I suggested). Plus there's more expenses to getting your teen into college than just tuition. They often go to college hours from home so you may need transportation expenses. There's application fees. They may need a laptop. They're often required to go to an orientation before school actually starts so that's more transportation costs, plus you may need somewhere to spend the night depending on how far they go. They may need small items for their dorm depending on how it's furnished and how much they're able to take from home. SATs and similar entrance tests often cost money to take. Even trade schools will often require you to buy your own tools and/or protective clothing/gear.

As I said, every financial decision is a personal one, and this may not be a priority for you, and what you want to provide may be higher or lower than others. However, if you're building an emergency fund, that means that you have at least a little extra money available to you. This was simply one example of why you may choose to have a lower than ideal emergency fund temporarily, opting to put that extra money towards whatever is of higher value to you.

 

[mike77777]

@duvduv I'm not reading all that ish.

 

[duvduv]

@mike77777 Then don't comment on a discussion you aren't prepared to engage in. It was 2 short paragraphs, you should try some critical thinking some time. Good luck with your life.

 

[tron422op]

@jimmykiff The idea is that both of those numbers are "low" and "start somewhere" numbers. You can attach whatever number you want to, that makes you get into the habit of saving vs spending.

First step is just to have enough that you aren't saying "I don't get paid until Friday and I have no money for food and my phone is going to be shut off." When you have even $500 in savings, you're not in that boat. Just to put it into perspective.

And there's a world of people who are giving all this same advice, it's not about following "Dave" or following "Vanguard".