Savings

[cindygenit]

I was told by someone that you need to have enough money in the bank to live on for 6 months so that you can support yourself through hard times (like this dang recession).

Exactly how do I calculate that? Is it money for rent/mortgage + food + play money, or money just for necessities?

Fortunately, I am one of the lucky ones who wasn''t made redundant in the office. UNFORTUNATELY, where I live has a boom-bust type economy so the recession is bound to happen again sometime in the future. You just never know.

 

[Phoenix]

I'm not sure of what the fiance "experts" would say. But for us, we set aside 12 months salary for emergency fund. This is my husband's salary after tax. Even when we're both working, we still use his salary as the basis for our calculation, as he's the higher income earner and we can survive on just his salary, like we are now.

I'd suggest that if you're able to set aside a sufficient amount of money each month, without having to make too many sacrifices or go without, then you use both of your (or one of your) salaries after tax as your basis. If you can't do that, then just the absolute necessities to make sure that i) you don't get kicked out of your home, ii) you can carry on eating, iii) you can continue to pay for other necessities like gas, electricity, petrol etc. Other things like eating out and vacation do not have to be included but you can put in a small "buffer" (again if you're able to) so that if the worst was to happen, then you could afford to eat out at least once in a while, for example.

I personally think 6 months is not enough. I'd recommend at least 8 months.

Just my 0.02.

 

[cindygenit]

i think it would take me more than 2 yrs to save up that much.....

Hubby to be has a fair amount of shares but he never touches it. I am just starting out and i think I''m spending more than I should because I have never had full time employment before.

Also, PS is not helping LOL

 

[diamondseeker2006]

That''s okay. You just save gradually until you build up your emergency fund.

 

[Haven]

We like to keep an emergency fund in our savings account that would cover all of our expenses for at least one year. Six months goes by very quickly when you''re unemployed in a bad market, so I don''t think that''s enough time.

 

[Clairitek]

Date: 10/14/2009 11:07:32 PM
Author: Haven
We like to keep an emergency fund in our savings account that would cover all of our expenses for at least one year. Six months goes by very quickly when you''re unemployed in a bad market, so I don''t think that''s enough time.

I agree with Haven. 6 months of money can go quite quickly when you''re home and bored. Right now we probably have 7 months, maybe. We are working to increase that amount all the time.

 

[Phoenix]

Date: 10/14/2009 10:47:57 PM
Author: cindygenit
i think it would take me more than 2 yrs to save up that much.....

Hubby to be has a fair amount of shares but he never touches it. I am just starting out and i think I''m spending more than I should because I have never had full time employment before.

Also, PS is not helping LOL

As DS said, you just save gradually. We ALL have to start somewhere.

I agree that PS is not helping. You know what I do though? I only buy jewellery with money that we''ve made from investments, ie. gain made from stocks and properties and only after we''ve actually sold them, never from savings from our salaries (the latter goes to bank and stock accounts). I know it''s all from the same pool, but it kind of instils some sort of discipline (at least in my own mind).

 

[Haven]

Yes, just save a little bit at a time.

We put a certain percentage away immediately after our income hits the bank, and then at the end of the month we put any extra away, as well.

 

[cindygenit]

I think I''m saving the wrong way....

I actually put almost all of my income in my savings account (i can''t access this through my ATM) and i just transfer to my everyday ATM account as I go. Watching my savings spike and then come down is really discouraging. LOL

But I''m scared to have too much money in my accesible account. There is a pretty severe case of ATM skimming going around in Perth at the moment.

 

[Haven]

Cindy--I can see how your current savings method would make things difficult.

Have you tried to put away a set percentage of your income after every deposit, and then vow to *never* touch it. We put away 20% of everything we deposit, and then at the end of the month we move over everything else that we haven't used for the month. We NEVER touch the money in our savings account, so psychologically it's like we don't even *have* that money, if it makes sense.

I would set an amount or a percentage to move over into your savings each time you deposit something, and go from there.

ETA: Knowing that 20% of our income is untouchable is also a really good thing because then we never count on that money as spendable.

 

[cindygenit]

Haven, thanks for the tips.

I think sometimes I aim too high. For e.g. I want to always save 50% of my savings, but most times its not possible and I get really frustrated.

 

[Haven]

I bet it''s very frustrating to set unrealistic goals.

Start with something simple, like 10%, and track how much you can save in addition to that by the end of the month. Then when you feel comfortable, go up to 15%, then 20%, and on and on. That''s what I did years ago when I first started working. Now DH and I put a lot into different retirement and investment accounts in addition to our savings, so we stick to 20% for savings. It works for us.

 

[movie zombie]

the 6 month savings set aside was for when times were good. times now are not good. some professionals have been out of work for a year or two. personally, i''m in the more is better and think 6 months savings is not enough in this economy and job market.


mz

 

[Octavia]

Cindy, it might work for you to have two savings accounts -- a real, do-not-touch account and a "holding" account used to earn a bit of extra interest until you transfer the money to checking. I used to do this when I was working, and I liked it because I could still see one savings account grow consistently, but I didn''t have to keep everything else in checking. Now that I''m a student again, everything is pretty much drained away

.

Auto-transfers to your do-not-touch account are also a good idea, if you can set them up. I found that the less I accessed that account (even if it was to put money in rather than take it out), the less I was tempted to use it for something other than savings. The money would just automatically move over after each payday, so I scarcely thought about it. If you like the idea, it could be worth a try!

 

[MishB]

I can see the theory behind the ''safety net'' but having such a large amount of money (eg 6 months salary) just sitting in a savings account earning virtually no interest seems like a colossal waste of money to me. We put all our extra into a mortage offset account, if the worst happened we could redraw it, but it in the meantime it is reducing our mortgage and saving us a small fortune in interest.

 

[Haven]

Date: 10/14/2009 11:52:33 PM
Author: MishB
I can see the theory behind the ''safety net'' but having such a large amount of money (eg 6 months salary) just sitting in a savings account earning virtually no interest seems like a colossal waste of money to me. We put all our extra into a mortage offset account, if the worst happened we could redraw it, but it in the meantime it is reducing our mortgage and saving us a small fortune in interest.

I agree with this if it your savings account is your *only* form of savings.
In our case, we have a lot more money stashed away in other interest-bearing investment accounts.

 

[cindygenit]

hehe seems like i have so much to learn

 

[katamari]

The concept you are referring to is called asset poverty, and the measure is typically 3 months salary and not 6. It includes making all your financial requirements (like paying housing and medical costs, minimum payments on bills), but generally means only the requirements you are legally obligated to.

I am not sure what the financial experts would say as I have only seen this concept discussed in the social science literature. But, having some sort of savings is of course a wonderful idea. The problem is that it simply isn''t attainable, at least for many Americans. Nearly half of younger adults are asset poor and about a quarter of those in retirement are--and even these numbers often assume that individuals liquidize everything possible in order to make ends meet. Straight savings or investments have been falling since the 1980s.

 

[Haven]

Isn't asset poverty when a family doesn't have the ability to immediately support itself for three months after a loss of income? So, that means they do not have any assets other than their income to support themselves. (No stocks and bonds, retirement funds, etc.)

I think Cindy is asking about the advice we commonly hear from personal finance experts to have at least six months' worth of your budget in savings, not whether she is asset poor. I could be wrong, though.

 

[cindygenit]

I should clarify...

This savings that I''m referring to is for me to live on if i ever lose my only source of income.

 

[joelly]

Date: 10/14/2009 10:47:57 PM
Author: cindygenit
i think it would take me more than 2 yrs to save up that much.....

Hubby to be has a fair amount of shares but he never touches it. I am just starting out and i think I''m spending more than I should because I have never had full time employment before.

Also, PS is not helping LOL

No worries. It''s never too late to save.

First step is to figure out how much your fixed expenses are. Like rent, utility, phone, and gas. Make that figure as your first goal to save then work things up from there.

I was doing the same when I got my first full time employment. Shopping is my expertise but then I realize that I need to save. It wasn''t easy but I feel happier if I get to save my pay at the end of each month. I treat my savings account like my report card. hehehehe

You can do it!!!

Also, visit this website: www.bogleheads.org for any advise on investing and saving. You will learn a bunch. Promise!

 

[jewelerman]

in my opinion(and experiance!)6 monthes isnt enough.But consider in an emergancy(like unemployment,illness,death,ect)you are going to hopfully re-consider the life style and know that luxuries are the first to go while you are getting back on your feet..entertainment,eating out,cable,all extras are curtailed for awhile and those 6 monthes are strictly for shelter,food,medical and the like...it amazes me that people think that things like cell phones,cable tv,going out to dinner and lunch all the time are must haves.

 

[cindygenit]

haha did i also say my rent is ridiculous? Perth''s housing market is a joke...

 

[katamari]

Date: 10/15/2009 12:34:41 AM
Author: Haven
Isn''t asset poverty when a family doesn''t have the ability to immediately support itself for three months after a loss of income? So, that means they do not have any assets other than their income to support themselves. (No stocks and bonds, retirement funds, etc.)


I think Cindy is asking about the advice we commonly hear from personal finance experts to have at least six months'' worth of your budget in savings, not whether she is asset poor. I could be wrong, though.

Haven, no, I think you are probably right about the OP. In rereading the thread, it does seem like Cindy is talking more about cash savings. And, I think this is a beyond wonderful idea, just maybe not terribly realistic. However, so long as a family can make ends meet, I totally agree that a percentage should be put aside for saving, no questions asked.

Asset poverty does mean that a family would not have the ability to support themselves after an income loss through liquidizing assets. Cash saving would be the easiest to liquidize, but it would include anything that could be sold (but often not things that can''t feasibly be liquidated immediately, like homes).

 

[Haven]

kata--That''s interesting about the asset poverty. I have a very limited understanding (read: memory) of that concept, and I didn''t realize it included things that could be sold.
I do remember learning about asset poverty during a discussion about what it means to be poor, and how we define poverty in the US. The thing that stuck with me is that you can be asset poor even if you are currently making ends meet and thus living seemingly comfortably. That lecture and discussion was actually one of the things that led me to reading about personal finance, I was terrified of living right on the edge of poverty like that and became determined to make sure I never found myself in that situation.

Cindy--It took me quite a long time and a lot of sacrifices to save what I believe is necessary for my situation. I started by opening a savings account with only $150 in it, and I slowly deposited $10 here and there for a while until I got to a point where I felt comfortable depositing a certain percentage of each paycheck. You can do it, one dollar at a time is all it takes.

 

[cindygenit]

katamari- thanks for your advice and explanation. Asset Poverty is something I have never even heard of!

Haven- thanks for the encouragement! Its hard right now with the wedding and the mortgage but i always make sure i save a little each month. I''m also sending money to mum each month and when I have enough, I will probably buy myself another house in Indonesia .

 

[movie zombie]

Date: 10/14/2009 11:58:24 PM
Author: Haven

Date: 10/14/2009 11:52:33 PM
Author: MishB
I can see the theory behind the ''safety net'' but having such a large amount of money (eg 6 months salary) just sitting in a savings account earning virtually no interest seems like a colossal waste of money to me. We put all our extra into a mortage offset account, if the worst happened we could redraw it, but it in the meantime it is reducing our mortgage and saving us a small fortune in interest.

I agree with this if it your savings account is your *only* form of savings.
In our case, we have a lot more money stashed away in other interest-bearing investment accounts.

yes, investment accounts that are easy to get the cash out of if push comes to shove, yet they are savings accounts.

many of us started with a $1 here and a $1 there........

mz

 

[steph72276]

I think 6 months of liquid funds put away in a money market account is a good number as long as you have other $ that could be used if necessary (stocks, bonds, 401k in dire situations). I would just calculate your monthly expenses to include the minimum of what you would need if you were out of a job for 6 months. That would include basics like mortgage/rent, food, basic utilities, transportation, and healthcare costs first and then minimum payments on other things if you have any loans out there.

I agree with the method of having a certain percentage taken out of your paycheck every month that goes straight to savings. We have been doing this for a while and it really adds up without you noticing too much. Hope this helps a little!

 

[NewEnglandLady]

Our savings method is almost identical to the Havens'. Right now we put away 30 - 40% of our income into what we call the "vault" (and some goes to our separate savings accounts). Once it's in the vault, it never comes out. Even when we paid for our wedding, it didn't come out of the vault, we just rerouted our savings to another account. When we bought our vehicle, the money came out of a separate account. The money will come out of our vault for a house and from that point on we won't be able to put away as much, but we are absolutely keeping at least 6 months of living expenses and it will become our emergency fund. Aside from retirement accounts, extra money will go to paying off the mortgage ASAP.

What we consider living expenses will be the mortgage, bills, food, gas and a small reserve for necessities. We don't include any of our current luxuries like our dogs' play group, travelling expenses, etc. I hear people calling into the Dave Ramsey show all the time asking what qualifies as a living expense for their emergency fund and there is no set list, it's whatever you and your husband decide is a necessity.

DH and I were very young and poor when we started saving and we just immediately got onto a written budget where every dollar was accounted for. It became such a part of our lives that when we no longer really needed the written budget it was hard to move away from it. I always hear that the hardest part is the beginning, when a person shifts into "savings" mode, but it ALWAYS gets easier.

 

[steph72276]

NEL, we are huge Dave Ramsey fans....love his show! We def. have a different view of money since reading his book years ago.