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Padding the Mattress

William Ehart

CAN YOU EVER HAVE enough? Yes, I’m talking about money.

But I’m not some gazillionaire burning up billions on a rocket to space. I’m talking about emergency savings for ordinary people. A cash stash. Rainy-day funds. Mattress money.

I thought I had enough a few months ago, but then life happened. Dental work. A blown clutch. More support for my son, who has a great job offer but won’t start work until later this year. Boom, a big chunk of my savings was gone and, for now, it’s not growing back.

Experts say you should keep between three and six months of living expenses in a safe place, free from the vagaries of the stock and bond markets. You can stash the cash in a savings account at a local bank (yielding little more than your mattress), certificates of deposit, saving bonds from the U.S. Treasury or in an online savings account that won’t yield much (but still many times more than your brick-and-mortar bank will pay you).

I can’t bring myself to tie up money in CDs and savings bonds, partly because I may need the money suddenly. Instead, I’m partial to the liquidity of my FDIC-insured online savings account. It’s with Ally Bank, yielding about 0.50%, but there are other providers. You can compare their rates here.

One thing I like about online savings accounts is that I can put my money in buckets—segregated pools that I can designate for certain purposes. I have one for my daughter’s wedding. It isn’t enough to cover a decent reception—yet. But that’s okay, because she’s not engaged and might not be for years. I don’t count that money as part of my emergency fund because I’m determined never to tap it except for her big occasion. But I haven’t been able to add to it lately.

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I have another bucket dedicated to what I hope can be a hefty down payment on my next car. I do count this money as part of my emergency savings. But when I spend from this bucket, my rainy-day fund will be smaller and in need of even more rebuilding. My plan is to make a large down payment on my next car, thereby reducing my monthly car payments.

I’m hesitant, as an amateur, to say the experts are wrong about how much you need for emergencies. They typically suggest having three-to-six months’ worth of your fixed expenses saved up. But they’re wrong.

Three months’ worth of expenses is absolutely nowhere near enough. After I got laid off in 2009, it took me nine months to find a good job. Six months of savings is a better rule of thumb. Except that when unexpected expenses do occur, you might be right back to having just three months’ worth of savings left.

What if surprise expenses creep up on you—and shortly after that you lose your job? That kind of scenario may be unlikely, but it’s exactly what we should be prepared for. Nine months of expenses is my new savings target. I am only about halfway there. I had six months’ worth back in May, before the clutch, the dental work and the additional financial needs of my live-at-home college graduate. I just turned 60, so this would be a bad time to lose my job.

On top of that, when my son does begin office work, he’ll need a car. Car prices have lately gone pedal to the metal. I may give him my car, a 2014 Volkswagen Jetta, or sell it to him for a couple of thousand dollars. Either way, I’ll need another car for myself before long. I’ll probably have to tap that car savings bucket, leaving me with even less for an emergency.

At some point, I’d like to travel again. If my emergency funds were healthy, I’d be able to consider a nice trip. But a vacation involving airline tickets and hotel stays is out of the question for now.

A first-world problem? For sure. How can I complain when the stock funds in my IRA are up so much? But don’t forget, the market could turn on a dime and my account could lose value. That’s another good reason to stockpile cash.

Can I ever have enough?

William Ehart is a journalist in the Washington, D.C., area. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart and check out his earlier articles.

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Chazooo
Chazooo
2 months ago

Take that nice trip while you still have your health because if you or your spouse suddenly lose good health you only get regrets to look forward to. That son can damn well get a job at Starbucks or Home Depot until the skilled job he trained for surfaces and not continue being a drain on poor old dad. He has, what, 25 more years to earn than dad and mom, and can even make car payments while mom and dad see the sights and make some memories. Mom and dad have done their part.

Steve Spinella
Steve Spinella
2 months ago

That was then. Things have changed. In today’s world, investments can be accessed in two business days. If you have a margin account, you can access them today.
Therefore I think this conflates two questions. 1) Do we have enough money for the needs on hand? This might be just a question about balancing spending and saving, since we are talking about an ongoing stream of needs, some uncertain in timing, but not particularly survival needs. 2) How do we access cash when we need it?
I do not see how an online savings account or multiple such accounts addresses either of these needs in a way that is significantly better than other investment options. The quickest way to get cash is to have a debit card from any financial institution that will increase your debit withdrawal limit temporarily and a nearby physical bank that stores that cash in a vault.
If the system crashes? Then none of the options under consideration will provide liquidity. Even my neighborhood bank can only give back cash I deposited with them yesterday if their computers are connected and working.
Whether you bury cash under a mattress or invest it at 1/4 the rate of inflation (only 3/4s as bad?!,) you are betting that less cash sooner will be more important than more cash later. For most of us, that’s a bet we ought to take with as little money as possible.

Guest
Guest
2 months ago

Thank you Mr. Ehart – While I am happy that the savings bucket method works for you and Mr. Quinn, I personally hope that upon my retirement in 6-7 years my wife and I live from just one simple pot of cash. And while some would argue we have too much cash, so what. Not only does knowing we have a lot of cash available help my pillow feel more comfortable at night, but it’s also nice to have dry powder for unpredictable but inevitable market declines. It sure was beneficial in mid-March last year!

Bob Drahushuk
Bob Drahushuk
2 months ago
Reply to  Guest

I agree. I think I had too much of my emergency fund in cash over the years. Today I am increasingly using short term bond funds or equity funds to park my money. I keep enough cash for convenience in paying bills. Comments on negatives of paying taxes out of brokerage accounts??? I sort of view that as if I’m paying more taxes out of those vs a savings account I probably made more money that way plus decent chance I’m saving on capital gains rates vs rates on interest from a bank. Putting money under your pillow will certainly save on taxes and lowers one’s capital risk, but inflation is a cost/risk too. My Ally account (to pay bills and aforementioned convenience) is yielding 0.5% and inflation is greater than that – so it loses money.

Jonathan Clements
Admin
Jonathan Clements
2 months ago
Reply to  Guest

I concur. Given that the big “emergency” risk is losing your job, arguably there’s little or no need for emergency money once you’re retired.

Philip Stein
Philip Stein
2 months ago

Some retirees keep up to five years of expenses in cash so they won’t have to sell stocks during a bear market.

Should such cash accounts be considered “emergency money?” Or should they be considered a form of insurance to avoid illiquidity when stocks are down?

Jonathan Clements
Admin
Jonathan Clements
2 months ago
Reply to  Philip Stein

It’s a great question. I favor your second option — “considered a form of insurance to avoid illiquidity when stocks are down.” This is money to cover spending over the next five years, which is a known expense, not an emergency cost.

Ormode
Ormode
2 months ago

If you save persistently, at some point your wealth should take off. Savers who have regularly put aside a healthy percentage of their income in taxable and retirement accounts eventually reach the point where they have more money than they can spend. It usually doesn’t happen until your 50s, but if you start early and keep going, you can get there.

Jonathan Clements
Admin
Jonathan Clements
2 months ago
Reply to  Ormode

I think this is an important point. If you have large account balances that you can access without tax penalties, those can be available for emergencies, even if they aren’t in cash investments. There’s a risk you’ll need to sell at a bad time in the markets, but if you’re wealthy enough, the hit may not be significant.

R Quinn
R Quinn
2 months ago

Except if you access say a brokerage account, it’s likely to create tax liability if not tax penalty.

parkslope
parkslope
2 months ago
Reply to  R Quinn

The net gain from equities is likely to be greater than the net gain from savings.

Guest
Guest
2 months ago
Reply to  R Quinn

LTCG rates are not onerous for most of us and if I have an emergency, I’ll care little about paying the LTCG tax to access the funds.

R Quinn
R Quinn
2 months ago

I like the way you think…perhaps because I’m in the same camp, bank accounts for set purposes. I may have gone a bit further than you have https://humbledollar.com/2020/07/banking-from-a-to-f/ but the idea is the same. It’s nice to know the cash is there for specific purposes when you need it.

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