As the title says I am trying to see where people stand on this. Obviously this is all personal preference. But that is what I am after.
After depleting our savings when buying our apartment 2 years ago, we’re about to cross 6 months liquid savings in just plain old savings account with ability to immediately withdraw money.
(To clarify that is 6 month assuming 0 income, which is very unlikely given the social system of our country - so realistically we have even more in savings.)
As you can imagine, the interest in this account is not great, so I want to set a limit as to when we stop dumping every spare penny into the savings account and begin doing other things (likely try to invest).
I personally have ~1 years worth of cash savings. I have it as an emergency fund plus slush fund for any big purchases so I won’t have to sell my stocks. For instance, I was able to purchase a new HVAC for my house without having to move any money around or sell any investments. I’ve just been slowly replenishing my savings alongside investing since that purchase.
If I was you, I would definitely make sure I have at least 6 months savings and then maybe split investments/continued savings until I was at a point I was comfortable with in terms of savings (whatever it is that you decide that value is). Also, you say your savings account pays low interest. I would look to see if there are any High Yield Savings Accounts available in your country. Here in the US you can find accounts paying ~5% which is great for an efund.
Personally, as a rule of thumb, I don’t think you can have enough in savings.
Our society is built upon going into debt… and I’d rather pay up front for things like a replacement vehicle or heater/pump or what have you, which means having enough to survive on—as you are inferring—and enough to survive Murphy making an unannounced and unwelcome visit.
The point of the question is how much money does one need in a liquid form as opposed to less liquid investments.
A fair point.
Personally, I use ‘savings’ as a catch-all for any form of money you have no intention of spending frivolously. Be that in savings, stocks, or other forms of investment.
I’ve got a relative who saw anything beyond the 6 month mark as spending money. I don’t know what form his investments manifested in, but it clearly didn’t work as he’s in financial do-do, and it’s an unpleasant topic amongst the family.
I keep almost all of my ‘emergency savings’ in index funds. Its value may fluctuate more than cash savings, but the higher return more than compensates. Unless, maybe, you face events that force you to tap it yearly or more, in which case I wouldn’t really consider it savings, so much as budgeting. I’ll generally have around a month-and-a-half worth of spending in cash, but that’s mostly because it’s going to get spent this month.
I think a significant part of recommending to keep cash savings falls to the legacy of financial markets. There used to be significant costs associated with transactions - I don’t mean $7 E-trade commissions, I mean $50+0.10/share - that meant it was really expensive if you needed to get $1000 out of the stock market for car repairs. There used to be significant lags: you’d call your broker, order the transaction, then have to wait several days for the proceeds to be delivered, a few more days for the check to arrive in the mail, then a few more days for the check to clear your bank; now, you order the trade online and they’ll have funds in your bank within 2 days at no cost. If you had an expense come up that needed paid today, then money locked away in the market was useless. Today, you put that expense on your credit card - which only became common in the 1970s - don’t need the actual cash for weeks, and can easily get investment funds that fast.
Example: I’ve been putting money into medical savings (USA) for a few years, which all goes into a S&P 500 index. That’s “down” about 10% from 2021, but I have around 40% net gains in the account. It turns out I have significant medical expense coming up, and it’s going to be a lot easier to deal with because of those gains. For scale, I’m expecting this thing to cost something like 3-4 month’s total spending and the healthcare savings is around 9 months.
It depends on what alternatives I have available. Prior to this year, I was aiming for 3-6 months of liquid savings and the rest in my investment accounts.
Now that reasonable interest rates are available, I have changed my priorities. My goal now is 2 months savings in my checking account. This allows me to cover nearly any expense that comes up without the annoyance of transferring money to cover it.
I keep another 1-2 months of expenses in a MMF earning >4% interest and immediately available for withdrawal.
Then I have a decent amount (no particular target) invested in a short-term treasury ETF (TFLO) earning >5% interest, but it takes about a week to sell and transfer funds if I need it.
Altogether, I’m probably keeping 6-12 months readily available, but most of it is earning interest now. I would also likely get 3-6 months severence if I lost my job and could probably cut back on some expenses to stretch things a bit further.
Finally, I used to contribute to a Roth 401k (I’ve since switched to traditional 401k), so I should be able to access those contributions without penalty, if needed. This would only be relevant for someone in the US though.
You may be interested in switching your checking to a brokerage like Fidelity or Schwab. Some benefits:
- at least at Fidelity (haven’t checked Schwab), your checking can be invested in a money market fund - mine gets >4% interest
- access to your Treasury ETF much sooner
- Fidelity and Schwab refund intentional ATM fees (depending on account type)
Basically, you’d get better interest in your checking and fewer accounts overall.
I switched late last year and I love it. My structure is:
- Fidelity Bloom Spend - main checking, core is SPAXX, only has 2-3 weeks spending money
- Fidelity Bloom Save - main savings, core is SPAXX, and has ~1 month spending money, plus Treasury bills that make up the rest of my efund
- Fidelity Cash Management Account - usually near $0, but I’ll load it with some cash when I travel so I can use the free international ATM feature as needed, core is a basic savings at ~2.5%
SPAXX gets just under 5% right now, and it’s nuts that I’m getting that in my “checking.”
Imagine it’s 2008, your credit cards have been cancelled, and you just lost your job.
How much would you need to pay off all non-mortgage debt and then stay afloat without going into debt until you can get a new job?
That much.
I keep around 2 years of living expenses in a mixture of government bonds, treasury bills and high yield savings account. This gives me peace of mind to invest the rest of my money in the stock market and sleep well at night, regardless of how the market performs since I will likely never have to touch my investments in times of emergency.
3-6 months. Right now, I’m around 5 months expenses, and most of that is in Treasury bonds.
I have other money invested in stocks that I could draw from if needed.
6 months is the usual rule, but you should assess your likelihood for extended unemployment. Do you live in a states with low unemployment payout? Is your career in a niche industry? Do you live in an area with fewer jobs overall? All those factors would make me consider pushing to a year+ of liquidity.
OP specifically asked about EU, where we generally have unemployment benefits and at least a bit of job stability :)
We both work in very precarious fields, so we aim at 12 months of expenses plus cash on hand equal to the single largest machine/system in the house (maybe it’s the heat pump, air conditioner, etc for you). I’m happier when we have 18 months in reserve.
I personally keep like 4 weeks cash in a checking account, some traditionally invested that I don’t plan to touch for many years, and everything else (12+ months at this point) in an investment account at the same bank as my checking, but exclusively invested in a money market fund with same day liquidity. MMFs are earning around 4+% while fed interest rates are so high, and being able to sell and transfer to my checking in a single day feels like it’s basically liquid already.
Since that’s the case, I don’t want any more than necessary sitting in an account earning 1% or less, just doesn’t feel like that much of a difference between investments that can be liquid in 2 hours vs. savings, but my bank is great about quick investment selling and transferring.
I’m not sure I follow your reasoning.
I mean, 1% interest is admittedly criminal, but it’s still better than the 0% in checking. And a month’s wages feels like a lot—to me—to leave entirely idle.
Everything else though sounds like you’re well and ahead of the game though! Kudos for balancing your portfolio. 👍
A big part of that decision is honestly that we live in a very old house, and a few times we have needed to buy new appliances or pay $10k+ in a ≤24hr. emergency, so we try to keep roughly that amount as liquid as possible. Since that’s earning zero and the MMF is nearly as liquid as savings, we just keep all the rest in the higher-interest options, and none at all in a traditional savings account. It’s just been the most convenient and highest yield, lowest risk, most easily liquidated option, with the ease of liquidity cutting minimally into returns while MMF rates are so high.
Okay, that makes sense. Thanks for clarifying. 🙂
6 months
Having too much savings is plain stupid, as the inflation is eating them every day. I am keeping only 3 months and the rest I invest in an ETF.
Although I agree to some point, keeping too much in ETF increases the risk of it all going down the exact moment you need it since you loose the job at the same time the market crashes in a crisis.
You forget that I have a buffer of 3 months plus I live in Europe, so the money I will receive for unemployment would help me to further extend my financial cushion. I can create a standing order with a limit and only sell some ETFs if the price is reached, in order to reduce the financial losses.
Plus if I invest my money in ETFs long enough I would most certainly always be on the plus side.
