I totally thought my wife had hit the Listerine too hard that morning.

“$20,000 in a savings account?!”

“Yes” she said as calm as can be. “Twenty-thousand dollars would make me feel safe and secure and then you can do whatever you like to do.”

At the time we were 23 years old and working to blast away about $50,000 worth of debt between credit cards, car loans and student loans (not to mention a couple of car repairs I’d had to finance). All of this on an annual gross combined income of roughly $76,000.

The question she answered from me was: How much do you need in savings to feel safe and secure?

At the time I thought she was insane. Why would anyone need those kinds of funds set on the sideline when they could be invested in the market or real estate or FUN?


While I’ll get back to my feeling about how much to have set aside for safety/emergency reasons (as well as what my wife and I ended up doing),  it seems the question how much do you REALLY need in savings has become quite popular.

In my opinion, it was the study done by the Federal Reserve that began prompting the question more and more. The results, after all, were staggering — 46% of adults reported they would be unable to cover a $400 expense without selling something of value or borrowing the money from elsewhere. It was covered widely from Fortune magazine to NPR.

The government, it seems, is so distraught at the abject LACK of emergency savings that they’re doing something about it. The U.S. Department of the Treasury has a new program called MyRA (Think IRA — super clever, right? Perhaps they didn’t know that’s a Rheumatoid Arthritis sales pitch. Whaddya gonna do, it’s the government.) This program is marketed as a program for beginning savers who may not have the habits of saving down to a science yet. By signing up for the program, savers are encouraged to put a little bit away each month for several years to build up that savings account in case of emergencies. With no cost to setup, no fees and no minimum balance requirements, this program almost seems too good to be true. The funds, after all, are secured by US Treasuries so they’re at least gaining some interest.

And yet, here’s the challenge I see inherent in the government establishing a savings program of any type — it’s set up like a ROTH IRA in terms of withdrawals. Sure, the funds are available when you need them, but there’s no doubt some tax implications, paperwork, or otherwise that the savers are going to have to contend with. It’s a government sponsored program and those typically have limitations.

It’s the general feeling of MoneySavvy.com that you’re just as well off setting up an automated savings program through an online bank as you are through Uncle Sam. The behavior of saving — i.e. the habit — is what either are designed to do for you.


How Much You Need Is Dependent on Several Factors

Financial experts are quick to tell you you’ll need 6 months or 12 months in liquid reserves, but with all things financial I believe it is such a personal number because everyone’s situation is different.

The factors that you have to consider before locking in on an emergency savings number are:

  • Your career or profession. If you and your honey both work for a stable company with no real history of layoffs, then the amount you have in reserves may need to be less than what someone who is self-employed or works for a company that’s wallpapered in pink slips. How long will it take you to either find another job or add a few clients to your consulting list will help determine how many months you need to set aside.
  • Your overall monthly obligations. Have a huge nut to crack every month? Then you’ll probably want several months set aside in cash or cash equivalents in case something happens. We believe in keeping your lifestyle below pace with your income, so spending 90% of what you make to live every month isn’t suggested. However, if you find yourself in this situation and you can’t get out of some of those monthly expenses, it’s best to have a robust savings account.
  • What your spouse is comfortable with. According to David Bach in Smart Couples Finish Rich, men and women have different risk tolerances. To feel safe and secure, what a man needs in a savings account and what a woman needs might be completely different. Either meet in the middle or err on the side of whomever is the most conservative. Having more when you need it is obviously better than having not enough. (Find out the questions to ask your spouse about money!)
  • How much credit do you have available? Emergencies happen and having cash is important in case of emergencies, however the right amount of available credit can also help during certain catastrophes. Have 25-50% equity in your home? Perhaps a Home Equity Line Of Credit (HELOC) is the right bet for you. A simple $5-15,000 line of credit comes in handy when absolutely needed and is fairly easy to establish. Yes, you do need to pay these back and most do come with a monthly payment (when borrowed against), but having them is incredibly comforting for those who worry about how to repair the roof or fix a dented vehicle should either situation arise.
  • Your ability to scale back. In emergency situations involving your finances, how easy is it for you to scale back your expenses on a monthly basis? If you’re paying several hundred dollars a month for cell phone coverage and cable television (and it’s on a contract), getting those reduced may take some effort. However, if your greatest monthly bills are dining out and groceries, it’s more than possible to scale back in those areas.

 

The $1,000 Rule of Thumb:

Having at the very least $1,000 in emergency cash is advised. Listen, an emergency root canal could cost you ⅔ of that depending on your dental program. Add in a kid that sprains an ankle or breaks a finger and you’ve used up that grand already. If you’re having trouble saving the thou in the first place, consider buying a copy of 30 Days To $1K which walks you through saving day by day for one month.

That thousand dollars should live in a money market account that’s not tied to your checking account so as to prevent ATM withdrawals from it. And, if you’re concerned about the state of our economy and the sometimes perilous condition of the dollar, perhaps keeping a few hundred at home and/or in your car would be helpful. (If the banking system is hijacked for any reason and you’re unable to use credit or debit cards, our banks would be shut down for days due to lack of paper currency available.)


With a sincere desire to placate my wife, we ended up with $20,000 in a money market account just about 30 months later. After knocking out all of our debts over 23 months, our nearly $2800 per month was set aside for about 7 months until we hit that magical number. 

Today, the number we “need” in savings is far less, despite the fact we have a larger house, newer cars, and kids to take care of. We’ve opted for a set amount that stays consistent in a money market account, a set amount at home in case the banking system collapses, and a trust that our home equity line of credit will be there in case of larger emergencies.
Being Money Savvy is about using the money you have to create the life you want. Ultimately, having a little more than you might need in savings is advised if it makes everyone sleep more soundly at night… whether you hit the Listerine hard before bed or not.