Is it worth it?

[Emerald]

I have a dream of having 2 years worth of salary in an emergency fund. The first year would be strictly for job loss. The second year would be my dream money. I love the idea of being able to take off an extended period of time, maybe travel or just bum around for a summer.

The more realistic part of me thinks a year of savings is just fine, and I should put the rest towards the house or retirement. For the record, I have 10 months in an emergency fund, I'm saving 15% for retirement (with a 5% match), and my only debt is the mortgage.

Comments or advice? Yea or nea?

[jpg7n16]

Well, my thoughts are that you have more options for investing than just either cash or retirement. There are a wide range of investments in between that you could use to save for your goal of traveling the world.

How do you have your EF invested currently? How were you planning on investing the 2 years of expenses?


Most people keep their EFs in very low risk, very low return, cash/money market accounts. The main risk you'll run is losing to inflation.

Say you save up a year's worth of expenses, which you think is enough to finance a world trip for 6 months. But you don't take that trip for 10 years. After 10 years, inflation makes the cost of your trip much higher (about 33% more expensive) - so you'd have to cut your trip short by a couple months. Your dream 6 month trip turned into a 4 month trip. Not exactly what you wanted.

From: Things to Consider Before You Make Investing Decisions

On the other hand, investing solely in cash investments may be appropriate for short-term financial goals. The principal concern for individuals investing in cash equivalents is inflation risk, which is the risk that inflation will outpace and erode returns over time. With today’s market volatility, investors must evaluate their acceptance and comfort zone for risk.

If you want to save for traveling the world, I think that's great - just don't save it in cash unless you're planning to take the trip really soon.


In fact, I'm of the opinion that you should have no more than 6 months expenses in cash. (meaning in all likelihood, I think you've got too much in cash already) Beyond that you should consider better returning investment options, and keep them in a non-retirement brokerage account.

[MonkeyMama]

Most people keep their EFs in very low risk, very low return, cash/money market accounts. The main risk you'll run is losing to inflation.

Say you save up a year's worth of expenses, which you think is enough to finance a world trip for 6 months. But you don't take that trip for 10 years. After 10 years, inflation makes the cost of your trip much higher (about 33% more expensive) - so you'd have to cut your trip short by a couple months. Your dream 6 month trip turned into a 4 month trip. Not exactly what you wanted.

This is true. But you have to consider the flip side. If you invest more aggressively, you can easily risk losing much more.

Things to consider are your knowledge of investing, how long until you will likely use the money, how likely you will even use it, etc.

[bjl584]

I have a dream of having 2 years worth of salary in an emergency fund. The first year would be strictly for job loss. The second year would be my dream money. I love the idea of being able to take off an extended period of time, maybe travel or just bum around for a summer.

The more realistic part of me thinks a year of savings is just fine, and I should put the rest towards the house or retirement. For the record, I have 10 months in an emergency fund, I'm saving 15% for retirement (with a 5% match), and my only debt is the mortgage.

Comments or advice? Yea or nea?

So really you are talking about having two seperate accounts. One will be your EF (which you should focus on buiding up first.) The second will be your "travel around the world" fund. That one should come only after your EF is fully funded. I probably wouldn't have more than 6 months in the EF, but it depends on the security of your job, your estimated expenses during a job loss, and how long you think you will be out of work.

As far as travelling around the world, what will you do about work? Quit? Will you be able to get your job back once the trip is over? What about housing, your car, other bills that you may have? The point I am trying to make is to make sure you cover your bases before you leave everything behind and travel the world. You don't want to come back to a financial disaster. And, as already mentioned, make sure you have enough money to take your trip for the length of time that you want to, see the sites that you want to see, and do the things that you want to do.

[MonkeyMama]

I think I am more pro-cash than most around here. Cash has always meant tremendous flexibility for us. & I have many financial mentors who have been heavy in cash. I think this comes up more for personalities who over-save (are already investing a lot in the markets) and have a conservative side. For those types, I don't think it is so bad. I have seen people do *very* well with large cash positions.

I think you probably do need a more clear goal to get any useful advice though. My first thought, as is with so many of these type posts, is that "it depends." For one, I have no idea how old you are and what kind of a financial position you are in. Obviously, it sounds like you run a bit on the conservative side, wanting to hold onto that much cash. Without more clearer shorter-term goals, I would err on investing the second year's salary. If it is a realistic goal to travel in the near future, then cash may make more sense. The time frame of when you would need the money would really come into play.

[thekid]

This is true. But you have to consider the flip side. If you invest more aggressively, you can easily risk losing much more.

Things to consider are your knowledge of investing, how long until you will likely use the money, how likely you will even use it, etc.

I agree.

Personally, I don't invest in non capital garanteed vehicles any money that I may need in under 10 years. I basically prefer the inflation risk than the market risk with an under 10 year horizon.

I thought that was pretty standard. How do you guys see it?

[thekid]

I think I am more pro-cash than most around here. Cash has always meant tremendous flexibility for us. & I have many financial mentors who have been heavy in cash. I think this comes up more for personalities who over-save (are already investing a lot in the markets) and have a conservative side. For those types, I don't think it is so bad. I have seen people do *very* well with large cash positions.

I agree. Again.

We generally keep much more than EF in cash. We keep our new car funds (which we accumulate over the time of ownership of previous car), expected house expenses and upkeep and any other expected major upcoming purchases funds in cash/cds. Above that, we also like to keep a certain level of "opportunity money", for when/if interesting business/investment opportunities come up.

I recognize that the latter isn't necessary a goal for everybody, but doesn't it make sense to keep all expected future capital expenditures in principle guaranteed vehicles?

[Emerald]

Let's see... I currently have my EF in savings accounts and CDs, since I consider it truly an emergency fund and I want it safe and liquid. I probably would be more aggressive with the 2nd year's money, but I honestly haven't thought ahead to actual investment strategies.

My job is pretty secure, but I would be more comfortable with a year's salary saved. I know several people who have been unemployed recently, and it took them all over a year to find new jobs.

I try to keep my living expenses low, I don't see a problem covering basic utilities, etc., if I'm away for an extended period.

I don't have specific plans to travel the world, etc., but I love the idea of having cash on hand to do it. With enough planning, I could probably take a leave of absence for an extended period of time without risking my job.

Any recommendations for saving outside of retirement funds and savings accounts?

[cypher1]

I'm definitely more of a cash person also. But I realize I need to start shifting a chunk of my EF to other investments (nothing too aggressive) to keep up with inflation. Otherwise I'm thinking of keeping only 3-4months cash, out of 12.

[Mr Tipps]

Personally I think that if you have a mortgage and you are not putting your money in there you are costing yourself a fortune! I am not exactly sure how mortgages work outside Australia, but over here we can make additional repayments, hence save heaps on interest repayments. If we then need the money (Eg emergency funds), we can simply withdraw the additional funds. For example, lets assume a mortgage is 120K and we put an additional 15k, you would save about 72k in interest and about 9 years off the home loan.
I know Australia probably has a higher interest rate than most countries, but I am sure the savings would still be significant wherever you are!
For me money sitting there is ded money, I would rather it either earn me money or save me money.
But, whatever you do - its great that you are saving!

[LivingAlmostLarge]

When do you want to do this? How long to save up one year sabbatical? How old are you? Closing in on retirement?

Doesn't that change the scenario. Is it an early retirement trial? Is it career shift? Is it being burnt out? My answer would depend on the situation you would be using the money for.

[Emerald]

When do you want to do this? How long to save up one year sabbatical? How old are you? Closing in on retirement?

Doesn't that change the scenario. Is it an early retirement trial? Is it career shift? Is it being burnt out? My answer would depend on the situation you would be using the money for.

I'm 39 with 18 years till I'm eligible to retire, though I plan to continue working another 5-10 year after that. I suppose I may be a little burned out. I have the itch to travel and I'd like to do it while I'm relatively young.

[skydivingchic]

I'm 39 with 18 years till I'm eligible to retire, though I plan to continue working another 5-10 year after that. I suppose I may be a little burned out. I have the itch to travel and I'd like to do it while I'm relatively young.

So take a vacation or two. Its not an all or nothing proposition where you either have to work all day every day or take a full year off to travel. We've put a high priority on travel as well and though we both still work full time, we've taken some really fabulous vacations. We also want to do some of the harder destinations while we are young and can get around easily. We try to do one big trip each year, aiming for every other year out of the country. That hasn't quite been the case, but we've done and seen a lot - more than most people and neither of us are 40 yet.

My philosphy is that there is never a good time. There will always be more work to do. So we simply plan it and go. I give my employer plenty of warning (a year plus in some cases), but I don't let work stop me from going. We recently got back from a 4 weeks trip. That was the third time I've taken more than 2 weeks off from my employer in the 12 years I've been working and its never been an issue.

As far as saving the money, I just use cash instruments and do what I can to maximize interest. My EF sits in cash as does my personal savings. The personal savings is meant to cover a new-to-me car, vacations, and any other large one off items like a new couch. So I sit on a pretty big chunk of cash at any given time. But it has worked out well and allowed me to do the things most important to me.

[LivingAlmostLarge]

I agree with skydivingchic. It's not all or nothing and I'm not sure how easy it will be to get another job after a year off in this economy. I would focus on using the cash instead to take vacations. My DH gets 5 weeks a year and he uses it. Lots of his coworkers use it to visit family overseas for extended periods.

You could do trips like that instead of quitting for 1 year or more.