I have historically been against having a huge emergency fund for those who are employed and living below their means. Savings accounts earn about 1% interest nowadays and I would rather have that money invested and compounding.
Personally I have kept $10,000 in a savings account as my emergency fund. This would cover at least four months of expenses for me currently. I’ve always felt comfortable with that amount for multiple reasons. First, if I were to get laid off from my job I would get paid out severance most likely, along with accrued PTO, which would total over 12 weeks of gross pay. Second, I have no debt and don’t own a home, and therefore large unplanned cash outflows are not something I worry about. Third, I’m an accountant by trade and with my certifications and experience I would expect myself to find another job in short order (I’m an optimist) that would at a minimum cover my expenses.
Lately I’ve been feeling an itch to increase my emergency fund to $20,000 up from $10,000. Below are some reasons why I think I’ve felt that way.
Investment Opportunities – All of my net worth, with the exception of my emergency fund, is tied up in low cost index funds. At some point I’d like to diversify a little bit more. I currently have zero interest in being a landlord at this point, but maybe down the road that may change. I recently came across a real estate private investment opportunity. A friend’s in-laws had been investing through the real estate development firm for years and years and only had nice things to say. After looking at the numbers, reading the investment memorandum, and analyzing the related risk, I figured it would be something I would eventually want to look into further. Unfortunately at this point the investment carries a minimum investment of around $100,000 so I don’t think I’ll be partaking anytime soon. In the meantime I’d like to have some extra cash around for various investment opportunities, if they present themselves and I do my homework and decide they would be a good fit for my portfolio.
Starting a business – I’ve always thought I’d start a business at some point. Right now the golden handcuffs keep me concentrated on my day job, but I could see pulling the plug in the next 5 years or so and trying to make it on my own. Who knows what type of business I’d start. Maybe it would just be doing what I do now as a 1099 employee or maybe it would be something completely different. Having an extra cash buffer will help smooth the transition if I ever decide to go the self-employed route.
Home purchase – I don’t think a home purchase is in the cards anytime soon. I like the freedom of renting and with my current career it just wouldn’t make sense. But I do see a home base in my future. I’m constantly on Zillow when I have down time, so I could see myself potentially going after a great deal if it was a perfect fit for me.
Car purchase – I don’t own a car and things could change in my life that would require me to purchase one. I’d much rather have the cash on hand to do so, if I decide to purchase a vehicle. Cash gives you the upper hand when negotiating a car purchase. I’ve always wanted to try out Uber, and I can’t do that unless I have a car. But it obviously wouldn’t be a reason I would buy one.
Cash is king – Cash gives people a sense of security. I don’t think I’ll ever be kicking myself for having a little too much on hand.
Luckily with my cash flow it should only take me a few months to get my emergency fund up to $20,000. I wonder if I’ll feel satisfied when it’s at that level or I’ll want to push it to $25,000 or $30,000. Personal finance is as much about emotion as it is about numbers.
How much do you have in your emergency fund? What is your reason for having that amount (i.e. strictly numbers based, emotional reasons, etc.)?