How much liquid savings is needed?

[ScrimpAndSave]

After an emergency fund is fully funded, how much does a person need in liquid cash before investing? Is there a formula for this? If I have 6 months expenses in the bank and my Roth is maxed out for the year...should I work on having a years worth of expenses in the bank?

Thank you!

[KTP]

I think it depends on the stability of your job. If you work for the government or something you can probably get by with like a 2 week EF, where if you work for GM you might want something more like 2 years before you start investing.

[ScrimpAndSave]

I'm a tenured music teacher in my 6th year of teaching..MUSIC teacher...although I feel safe - I know there is no certainty. I also have my masters in administration with a principals cert if I need it...so fairly safe but no safer than anyone else.

[jIM_Ohio]

SnS- I think 6 months expenses for you is good enough

reasons

a) you spend less than you earn
b) you have a stable job
c) you have a decent idea of where your money goes

[Broken Arrow]

You know, I used to think that a certain limit would suffice, and that's basically one year's worth of expenses.

But nowadays, I'm beginning to look at my EF more along the lines of conservative investing.

And why not? It's still an emergency fund, but it would be a shame if it simply sits there and doesn't make some kind of interest or dividend. I'm currently getting 3% interest. That's still something.

[jIM_Ohio]

BA- I agree with you. The most important thing is to not chase returns though (not get a higher return- the return you get on an EF is secondary to the safety of the money).

For example if you found another online bank offering 4%, you might change accounts because you are gaining in return without taking on more risk.

However if I told you about some land in Florida which had a 5% return, there is incremental risk to get that 2% more return, and its not a good decision to switch from 3% to 5% return if you take on more risk to get the higher return.

[EconoMutt]

If you are a Suze Orman fan, the answer is 8 months. :-)

[Broken Arrow]

However if I told you about some land in Florida which had a 5% return, there is incremental risk to get that 2% more return, and its not a good decision to switch from 3% to 5% return if you take on more risk to get the higher return.

Yes. The function as an emergency fund is still the primary task, so I wouldn't want anything to compromise liquidity. Thanks for clarifying that.

[zetta]

I agree for your situation 6 months expenses in the EF is enough. It might make sense to keep half in cash and put the other half in CD's to earn a bit more interest.

Next you can start investing, perhaps in a no-load index or balanced (50% stock/50% bonds) mutual fund. In a pinch, this investment becomes your backup emergency fund that you can sell if you're out of work long enough to eat up your 6 month EF.

[jIM_Ohio]

I agree for your situation 6 months expenses in the EF is enough. It might make sense to keep half in cash and put the other half in CD's to earn a bit more interest.

Next you can start investing, perhaps in a no-load index or balanced (50% stock/50% bonds) mutual fund. In a pinch, this investment becomes your backup emergency fund that you can sell if you're out of work long enough to eat up your 6 month EF.

I second the advice of investing for a secondary emergency fund. My advice would be to outline what type of emergencies you might tap into this for.

a 50-50 mutual fund will have volatility be higher than returns. Meaning if you put in $1000, its equally possible to see a 10% return ($1100) and -2% return ($980).

If the volatility will "bother" you, then 50-50 is way too aggressive, and consider something with more bonds. A 20-80 or 40-60 is what my initial advice would be. Vanguard Wellesley or T Rowe Price Spectrum Income would be my top 2 choices (Wellesley is 40-60 and spectrum income is about 15-85). I personally use PRPFX for my secondary emergency fund (Permanent Portfolio). It does have higher volatility than a traditional balanced fund, but the volatility is slightly higher than a 40-60 fund and returns are slightly higher too. In 2008 PRPFX lost a decent amount, but it made it all back in 2009 (my current account value is only $2 under what my only contribution was). Account was opened in early 2008.

Then once you have this secondary mutual fund to point that its gains are larger than your deposits, I would advice taking on more risk with new money for secondary emergency fund, or just moving new money to another part of budget.

[bheem]

How much you need is a very subjective question. General rule of thumb is to have 6 months expenses in completely liquid fund that can be withdrawn anytime( you don't worry about its growth). Then on it becomes more subjective.

If you want to build wealth, you HAVE to invest the money. Cash is going to get beaten by inflation and become less worth day by day. So, investing is the way to go. In order to handle risk in investing you have build an asset allocation plan and spread the money in different risk categories such as stock, bonds etc.

No, I wouldn't keep more than 6 months for "rainy day". To cover you more, it is better to take proper insurance such as AD&D and term life insurances.

There is no limit to increasing the liquid cash as a reserve. You can not bank on the liquid cash to survive for ever in the event of job loss. Instead, proper steps should be taken to find another job.

bheem

[jasonnoguchi]

I am afraid only you have the answer to that as it has pretty much to do with EVERYTHING going on in your life here...too much info to be presenting here. Basically, too much or too little is no good and only you can determine what too much or too little mean for you.

[segmond]

6 months liquid is ENOUGH.

the keyword being LIQUID.

you should have another savings that can be liquid in 6 months, that way if an emergency happens, and you deplete your 6 months savings, you can then touch the other one.

example, 6 months savings. and 6 months CD.
then you can have other long term investments, the idea being you don't have to pay touch your long term investments and face penalty, and if you did have to. you will be able to plan in the long term.