The answer to this question seems important when trying to decide what to do with money this year and what to do with extra summer salary or uncertain future DH income. Especially since the one year’s savings on prepaying the mortgage is $425 more than the year’s interest on a termshare at our credit union (or $465 more than savings).
[Side note: Got my raise information– it was more than they said they could give me, so we should have a little cash cushion of 4K/year even after DH leaves his position. And this year they gave me a small kickback (~1K) from the overhead of a grant I got, which is something new.]
[Update: I got a couple of grants… so an extra 2+ months take-home, give or take… well, I’m not 100% sure about one of them, but it sounds like if we give them what they want in terms of paperwork they will give us money? Still waiting to hear from a couple more grants.]
I have a list of where to put our extra money in terms of priority level once DH leaves his job (and this ordering may change):
*529 payments (6K/year/kid)
*DH IRA (5K/year )
*DW IRA (5K/year)
*DW 403b (16.5K/year)
*Mortgage prepayment (up to not quite 100K)
*DW 457 (16.5K/year– we haven’t done this yet)
But before any money goes anywhere, we need to decide what “extra” means. Extra is above and beyond our summer savings and our emergency fund.
For our first few years, I only had one month’s worth of spending in our emergency fund. I hadn’t yet discovered that we had the option of putting money away in the separate 403b and 457 accounts, so our cash flow was more than 2x what we spent each month. An exhausted emergency fund could be replenished right away.
When we started contributing extra to retirement, our cash flow was cut dramatically. I doubled our emergency fund to 2 months because it took twice as long for me to save up the equivalent of one month’s spending.
Now our cash flow is being cut again. We’re barely making more than we spend (not including the 12% mandatory to my retirement). I can’t be fired, but we may decide to leave one of these years. Two months worth of spending may not be enough. Six months (the commonly recommended standard) seems like too much when I can’t be given two weeks notice. We do have a year’s worth of spending in a regular stock account that we could sell if truly necessary.
On top of that, I need to figure out how much to save for the summer, assuming no summer funding. I’ll need private school tuition if we want to get the prepayment bonus. Hm, the preschool also has a prepayment bonus, but I’m not sure what infant room tuition is these days, so maybe I’ll let that come out of the emergency fund if we choose to do that. Then I need the 3 months of summer themselves. Goodness, that is a lot of money.
I’m still a little tempted to take extra money and just hide it from myself, perhaps in the mortgage, thus making us feel artificially poor and forcing us to cut back. But in reality now is not a good time for cutting expenses, not if I want to keep being productive and less stressed. Babies are expensive in many ways.
DH noted that everyone is suggesting we stop mortgage prepayment and start to save up cash because folks are convinced we’ll be moving in 2 years (and we may, but we may not). So he suggested we think about cash needed for that outcome. Here’s what we came up with for that (wild estimates only):
moving costs *taken care of, need float $8K
change jobs *endogenous
fix up house *lawn, carpeting, painting $10K
sell house *taken out of purchase price
rent new place *what if don’t sell before leave? $6K
daycare/public *daycare 2x, but balanced by public for dc1
travel *drive or fly $2K
So 26K all together. That is more than our 2 month emergency fund. BUT, I’m fairly confident that even if there was another major stock market crash we could get the difference from taxable stocks. And if we knew we were moving we could cut back, undrip dividends, re-amortize, etc. if necessary. Right now it looks like even if we save all 26K in savings and not just a portion there will still be 5K leftover, not including summer money (presumably if we move in May, we’ll get paychecks in June and not need that 3 months summer savings), and counting only the summer money that’s already been completely finalized.
How many months of spending do you keep in your emergency fund? Where do you keep the money? Any other thoughts?