How much money do you reserve for emergency expenses?

[Altherion]

I was reading this Federal Reserve press release and it includes this interesting statement:

Quote

"The new survey findings shed important light on the economic and financial security of American families seven years into the recovery," said Federal Reserve Board Governor Lael Brainard. "Despite some signs of improvement overall, 46 percent say they would struggle to meet emergency expenses of $400...

She then goes on to talk about multiple jobs and people without bank accounts, but I wanted to focus on the emergency money. Do you think it is surprising that nearly half of American families would struggle to come up with $400? How much do you keep around for emergencies?

To answer my own question: I generally try to keep around $1500 in my checking account which is not allocated anywhere.

[Datepalm]

I keep something similar (about 5000 NIS - 1300ish USD,) at least ideally. I'm not sure what might entail an emergency, to be honest, but I suppose this more or less covers things I can Imagine I might suddenly need at short notice - a few months rent and basic expenses, international flights, a surprise university or tax payments I've forgotten about. National health insurance means I don't think of health stuff, though I probably should since a true emergency (involving ambulances and such) or alternatively a relatively long-term health issue that would require multiple doctors visits, specialists, checks, etc, might involve un-regularly budgeted expenses, which might or might not be eventually repaid. 

[ljkeane]

I keep £500 in my current account beyond what's in there from my most recent wages for no particular reason, I just don't like going overdrawn. I should probably put it in a savings account really. With that plus my overdraft limit I could probably spend about £1800 plus whatever I've got left over from that month's wages on very short notice. I've got a fair bit more than that in a cash ISA which is pretty readily accessible.

[Jo498]

I read once that as a rule of thumb one should have at least the typical income/expense of about one month as readily accessible buffer, better 3 times that. And I bet that even the lesser figure should be more than $400 for most people in the Western World.

Of course, it also depends on how many other assets there are, e.g. stocks or whatever that could be sold in principle in an emergency, how much would be covered by one's medical or other insurances etc.

[peterbound]

1000 emergency fund

3 months pay, long term unemployment plan (18,000) 

 

That's what I try to keep around.  It stays in line with Dave Ramesy's philosophy of saving.  

[Rorshach]

Atm, somewhere around $5000. It's in a fund, so if the fund goes south, so does the money. However, we typically earn more than we use anyway, and we could - without overdrawing anything - probably raise three times that, should the need arise. 

We've got plans for some of that money, however, so I'd prefer we didn't have to use it.

[Greywolf2375]

Right now we're still building our 3 month buffer, our goal is even after we get that one done to continue to build multiple ones basically as investment tools.  At this point it's just over $10k and is inaccessible unless we actually walk into the bank so that we don't transfer or ATM it to nonexistence.

[Dr. Pepper]

I used to keep all of my money in a fairly accessible savings account.  Then someone set up other random accounts for me so that it's not so easy to access.  I'm really money dumb and I also don't care all that much to learn, so I guess it works for me.  I'm really fortunate, though, because I have a guaranteed amount coming in for life and if that disappears somehow, the world is in such trouble that money as we know it probably wouldn't even exist.  

[Iskaral Pust]

I'm shocked by the $400 stats.  That's only 1% of median annual income.  It suggests that a lot of Americans spend every available cent.  The NY Times had an article weeks ago by an author and professor who admitted to being in this situation and feeling financially precarious -- and then described decades of poor financial decisions to live beyond his means.  He really seemed to expect sympathy, but just sounded like a parody of entitlement.

I'm financially more secure than most but I am pretty conservative about living within my means.  I keep a substantial balance in my checking account, and could tap my investment accounts if I ever needed more.  I grew up in a household where a surprise car repair or appliance replacement was a blow to the finances and I put a high value on not having to worry about anything like that. 

[Jo498]

Actually, a lot of Americans seem to spend considerably more than every available cent and are deep in not sustainable debt. Often not "sensible" or necessary ones like a mortgage but from excess buying of consumer goods.
I read that article as well and I was reminded of a scene in Bonfire of the Vanities where Sherman very sensibly argues that he needs about a million or so a year to keep the minimum of what he thinks of as an appropriate lifestyle.

Sure, that author was not living as extravagantly as that 1980s Wall Street guy from that book but he was also living beyond his means and at the same time hardly ever in doubt that he owed that lifestyle to himself and his family. E.g. expensive private schooling and elite colleges for his smart daughters. If they were really so smart, they could either have got scholarships or they would have made it with degrees from less exclusive institutions.

[sagewich]

We had a catastrophic medical emergency that our insurance paid $400 of the first month. In total, it cost us $225,000.  We had savings, but not that much. We paid it, but it took a lot of thought. We had life insurance and several things to borrow against.

[Altherion]

5 hours ago, Iskaral Pust said:

I'm shocked by the $400 stats.  That's only 1% of median annual income.  It suggests that a lot of Americans spend every available cent.  The NY Times had an article weeks ago by an author and professor who admitted to being in this situation and feeling financially precarious -- and then described decades of poor financial decisions to live beyond his means.  He really seemed to expect sympathy, but just sounded like a parody of entitlement.

I'm financially more secure than most but I am pretty conservative about living within my means.  I keep a substantial balance in my checking account, and could tap my investment accounts if I ever needed more.  I grew up in a household where a surprise car repair or appliance replacement was a blow to the finances and I put a high value on not having to worry about anything like that. 

Indeed, I also found it quite surprising -- there are many very nearly necessary things today that can easily top that. Health, home, appliances, cars, computers, phones, special occasions... a single person is almost guaranteed that something unexpected happens which costs hundreds of dollars to deal with in a given year.

3 hours ago, Jo498 said:

Actually, a lot of Americans seem to spend considerably more than every available cent and are deep in not sustainable debt. Often not "sensible" or necessary ones like a mortgage but from excess buying of consumer goods.

The full report (linked from the press release) actually has a table for that (it's on page 17 of the PDF). Overall, 48% spend less than their income, 31% spend all of their income, 15% spend more than their income and 6% have no income. It predictably varies by how much money one makes, but even for people who make more than $100K, there are only 68% who spend less than their income (22% spend all of their income and the remaining 10% spend more).

[ThinkerX]

11 hours ago, Altherion said:

"The new survey findings shed important light on the economic and financial security of American families seven years into the recovery," said Federal Reserve Board Governor Lael Brainard. "Despite some signs of improvement overall, 46 percent say they would struggle to meet emergency expenses of $400...

I attribute this in no small part to our marvelous non-recovery that produces jobs which don't pay squat.

The 'middle class' is being effectively destroyed - or at least severely trimmed in size.

[peterbound]

16 hours ago, Dr. Pepper said:

I used to keep all of my money in a fairly accessible savings account.  Then someone set up other random accounts for me so that it's not so easy to access.  I'm really money dumb and I also don't care all that much to learn, so I guess it works for me.  I'm really fortunate, though, because I have a guaranteed amount coming in for life and if that disappears somehow, the world is in such trouble that money as we know it probably wouldn't even exist.  

This attitude seems kind of cavalier.  Do you have a trust fund?  Or is it a disability payment?  Either way, you should take a bigger interest in your financial situation.  I'd hate to think you're one of the people that come from money, and just don't care about the 'little things' like that.  

 

It's in your better interest to not be 'money dumb'  (whatever the fuck that means).  I mean, it is the life blood of our existence, you might want to take a bit more of an active interest in where it goes, and what you are doing with it. 

[Channel4s-JonSnow]

I think standard advice is 3 months worth of salary. I tend to keep about a years worth hanging around just in case, but I'm desperately cautious!

[HexMachina]

As a student it's pretty difficult to save, but I do have a savings account (in which my parents, grandparents etc have squirrelled away what they can afford to, and I've paid in some of my wages from when I was working) with around £800 in it. That's enough to deal with the "minor" emergencies I might encounter right now, but ideally I would like to give myself a greater security net. It's also slightly worrying to think that this is what I would be relying on if I failed to get a job for when I graduate, because what with cost of rent, bills, food etc...I can't imagine it lasting long at all.

I also have my overdraft in case of larger emergencies (it's 0% interest while I'm a student) but I prefer to avoid dipping into that if possible. 

Once I have a secure job, I would ideally be setting aside a certain amount of my salary each month into savings (all dependent on my expenses and what I am earning). 

[Tears of Lys]

14 hours ago, ThinkerX said:

I attribute this in no small part to our marvelous non-recovery that produces jobs which don't pay squat.

The 'middle class' is being effectively destroyed - or at least severely trimmed in size.

ThinkerX has the right of it.  I'm not surprised at all by how much (or how little) people have squirreled away.  I don't believe that in the majority of cases it's due to uncontrolled spending, but rather that it takes every cent to just pay for the basic necessities of life. 

I **am** shocked, however, at the "advice" that's been quoted that you need so many months of savings.  Think in terms of years rather than months.  Is everyone confident that they could pay their rent/mortgage, food, gas, utilities, etc., etc., if for some unforeseen event you were out of work longer than three months?  If so, things are better out there than I thought.

My SO and I practiced the "one year of expenses" plan - IOW, we could pay the basics if one of us (whoever was earning the most at the time) was out of A COMPARABLE INCOME TO WHAT WE HAD BEFORE for a year or more.  We've since adjusted it to two years.  Experience and the ability to do so have changed our attitudes.

I thank the old gods and new that we decided back when we were in our late 20's, early 30's to start aggressively saving. 

[Dr. Pepper]

6 hours ago, peterbound said:

This attitude seems kind of cavalier.  Do you have a trust fund?  Or is it a disability payment?  Either way, you should take a bigger interest in your financial situation.  I'd hate to think you're one of the people that come from money, and just don't care about the 'little things' like that.  

 

It's in your better interest to not be 'money dumb'  (whatever the fuck that means).  I mean, it is the life blood of our existence, you might want to take a bit more of an active interest in where it goes, and what you are doing with it. 

It's the effects of having grown up dirt poor and just not having any desire whatsoever to be a spendthrift.  Being extremely frugal is just my nature.  I don't care about the "little things" like a frappuccino every day or a new outfit every week or the latest in tech gadgets or going to theme parks.  I have the privilege of being able to choose where I live and I prefer lower-cost areas so only a small portion of my monthly service-connected disability payment goes towards housing which greatly lowers the amount of money I could be spending if I'd chosen to live elsewhere.  Plus, being a veteran, I can and do utilize the VA for nearly all of my healthcare, which is free, if a bit subpar.  

I'm sure it could be better if I took more of an interest.  But so far in my life, I have found living by the general knowledge of "don't spend a lot, save a chunk, give the rest away" to be a good enough motto to live by.  Things would obviously be very different if I didn't have a service connected disability and/or weren't able bodied enough to also work.  Like I said, I recognize my privilege.  

 

[Iskaral Pust]

People living beyond their means is not generally because they spend too much on TVs, lattes, shoes, etc  -- although that happens to some.  For most people it's because they over-commit to the big "fixed" costs in life: rent/mortgage + property tax, tuition, health insurance, car payment + insurance.  These are like the infrastructure costs in our lives and they have generally experienced very high debt-fueled inflation compared to almost everything else consumed and compared to wages, but it becomes very difficult for people to lower their expectations or take a step back in these aspects of lifestyle.  Plus it can be very expensive to unwind any of these due to high frictional costs (depreciation on cars, costs of selling a home and moving, unwilling to switch doctors) or high sunk costs (2 years into a degree, you just remodeled your house, etc).

Wages have stagnated for a large swathe of moderately educated Americans but debt has allowed continual inflation in the largest costs.  Social competition makes people reluctant to step back and live within their means while their neighbors use debt to keep chasing their expectations (and chasing up the prices).  And this is how people get squeezed: their wages have a ceiling so long as their job can be done in the third world but their big ticket costs keep going up.  The most precarious get squeezed first but it doesn't stop there.  Over time, more and more feel squeezed.

Wage inflation is badly overdue in America but Americans are not going to see their wages improve enough to make them feel wealthy again.  That ship has sailed.  There are simply too many poor people in the rest of world competing for those wages.  We can build an economic fence (block immigrants, add trade barriers) but we already know that those eventually lead to recessions and long periods of low growth.  Social safety net and higher minimum wages can improve basic financial security -- which is a valuable outcome but it benefits the bottom of the ladder not the middle -- but Americans need to change their expectations and financial habits too.  If everyone below median income in the US got a 20% raise tomorrow, within 5 years we would have the same amount of people with zero assets.  Their spending would adjust, competition would drive up demand, prices and consumption, and nothing would fundamentally change.

[NestorMakhnosLovechild]

Isn't the answer obvious?

FDIC deposit insurance only covers the first $250,000 in cash being held per depositor, per bank. So really there's no reason to keep a penny more than $250,000 in my checking account to cover any emergencies, like a medical emergency or emergency repairs on my BMW.