What happens to your cash-emergency-fund as your net worth grows?

A gai shan life recently was talking about how as her net worth has been growing, she’s realized she doesn’t need to have as much money in cash and CDs.

We’ve gone exactly the other direction — we now have well over a year of savings in savings accounts. It used to be that I only kept enough to get us through the unpaid summer plus a little cushion, so 1-4 months of expenses at any point in time, and I always thought having 6 months of expenses in savings was insane.  Who could afford to do that?  Back when we were in graduate school and I was getting paid 3x/year I would lock up money in CDs partly in order to lock in higher interest rates (we had 4.75% at one point!  Those were different days!), and partly so the money would be there when we actually needed it.  I am less likely to spend if I can’t see the money in checking.  I would not have done that if I’d been being paid monthly or biweekly.  We would put in money for retirement and then there just wouldn’t be that much left, so it seemed like the obvious next place for cash would be more retirement or the mortgage.  Not cash savings or taxable stocks.

Now, for no real logical reason (maybe I just like round numbers), my target for savings is much higher.  There was sort of a loose logic– enough to replace a car + summer savings in case DH loses his job again + random money for other emergencies and slow reimbursements.  We probably wouldn’t keep it quite as high as it is if I hadn’t opened up a higher interest savings account online.   And it definitely wouldn’t be as high if Trump weren’t president, what with fascism and all.  But we’re maxing out our retirement, the mortgage is gone, and we’re saving in 529s at a reasonable clip, so why not pay the opportunity costs to get a bit more peace of mind?

Which is more logical for what to do with your cash as your net worth grows?  You could go either way– you could be like Revanche and realize you’ll be ok even if there’s a crash, or you could go like me and realize that you can afford to lose the gains you’re losing by not picking riskier investments.

What has happened to the amount you keep in cash vs. stocks as your income grows?

27 Responses to “What happens to your cash-emergency-fund as your net worth grows?”

  1. yetanotherpfblog Says:

    Our emergency fund has gone up with expenses (housing, lifestyle inflation). Changes in income haven’t really affected the level much.

    • nicoleandmaggie Says:

      That seems rational. Ours should have gone down when we finished paying off the mortgage, but instead it’s gone up because there’s more ready money available!

    • Leigh Says:

      Yup, this. My husband’s emergency fund used to be a flight to his parents’ and that was it. We are saving up a down payment too now which is much, much larger than what I put down on this place, so we actually cashed in some taxable index funds and put them into CDs so we have the money more accessible. We’d originally calculated how much money we needed if we sold our current place first, which we realized we would prefer to sell it after (because of the market), so we need more cash for the down payment.

  2. SP Says:

    Up with expenses – although I can see an argument for lowering it once T has tenure. We can cashflow many emergencies, but the peace of mind is huge for me as well.

    • nicoleandmaggie Says:

      So only the expenses matter, not the income? How much do you aim for in terms of expenses? We used to have 1-4 months of average expenses, but now we have over a year– that’s changed as our income has grown.

      • SP Says:

        Expenses and stability maybe? Income only to the point of reaching the goal, less in terms of setting a goal level.

        Income would come into play if I run out of more productive things to do with my money – productive could be reducing worry or providing growth or providing tax advantages. But the mortgage is (seems like) a bottomless pit that prevents me from overgrowing an e-fund.

      • nicoleandmaggie Says:

        I guess that’s part of our deal—we ran out of retirement savings room and mortgage. If we had a house where you do things would be very different.

  3. Leah Says:

    Our expenses are pretty darn low, since we don’t pay for housing, so I can’t use that as a good benchmark. Honestly, our Efund is also savings and general cash cushion. If we left our jobs, we would need a lot of money for a house downpayment (though I suppose we could rent for a bit while we figure things out — I forgot that last year when we were thinking about switching jobs). As our income has grown, our efund has too.

    At some point, we need to decide a comfortable level and then start funding stocks. But I have a hard time doing that when we still have room to contribute to retirement accounts.

    In short: I think my husband and I need a money date. But we haven’t managed to make one work yet. I don’t think our kids would go to bed for sitter with us home. Maybe we need to get a Saturday afternoon sitter and do a two hour money meeting.

  4. rose Says:

    Emergency fund absolutely needs to continue to grow along with increased income because increased income usually increases expenses and you are older so the end of earned by labor income is closer and anyone with children have the reality that children only become more expensive with age and education costs can easily continue through their twenties…. even if all you are paying is to transport them home on some major holidays from gradschools. Also their emergency medical costs continue to be potentially something you might want to pay for beyond carrying them on your insurance, and emergency medical is not uncommon in one’s 20’s … when we are still slightly indestructable and our ability to accurately measure risk is possibly impaired by crowds, substances, showing off, erroneous beliefs…….. And if you are very lucky and there is no child related expense……..believe me when you are over 70 each extra penny you put away is a major safety line when you look at the cost of supporting your real old age and care needs. A million dollars will not last long if you need care…….especially in high cost areas…. and the other options are truly unpleasant. When Medicare was being considered in Congress, people were eating cat food to afford some of their life saving meds and today cat food is MUCH more expensive than back then.

  5. gasstationwithoutpumps Says:

    My checking account has grown to almost a year’s take-home pay—way too much for checking. I’m going to close out that account in another month or two (I’m tired of Wells Fargo’s public misbehavior—they were a good bank when they were small, but unchecked growth and bad management has made them evil). At that time, I’ll take most of the money and stick it in my emergency/home-remodel fund, which is a tax-free bond fund. In checking and savings, I’ll just keep a couple month’s take-home pay—more than enough to cover any expenses for the few days it takes to get money out of the bond fund.

    • nicoleandmaggie Says:

      Makes sense. How many months expenses do you keep in the bond fund?

    • Leah Says:

      We closed our Wells Fargo account a few years ago for similar reasons. We moved to a local bank, but we don’t love that either. I use an online bank (Schwab) for my personal account, and we are debating if we can do that for all our banking needs. It is nice to have a brick and mortar for depositing checks. I really should get on getting an app to deposit checks.

      • gasstationwithoutpumps Says:

        I looked at the local banks and credit unions, because I like the idea of keeping my money within the local community. We have our household account at the best of the local credit unions, and they don’t have an easy mechanism for separate checking accounts for one member. The other local credit unions have relatively poor offerings, and the local banks have poor ATM networks, few branches, and again relatively poor on-line offerings. So I ended up choosing online-only service from Alliant Credit Union. I can deposit checks or cash with them from any credit-union ATM (which is a good network locally).

        Both Alliant and our local credit union have the ability to deposit checks over the phone (by taking a picture of the check), but I don’t have a cell phone, so that service does me no good. (My son has used it successfully, and he has accounts with the same credit unions.) I occasionally have to deposit cash (like when I do a group order of T-shirts for my class, and they reimburse me in cash), so having the ATM deposit option was important to me.

  6. chacha1 Says:

    Can only guess. :-( I haven’t had a substantive raise for 8 years.

  7. Bethh Says:

    When I bought my house almost 6 years ago I opted to borrow a bit from my parents (with a 2% interest rate and 15-year repayment agreement) rather than use all my own cash for the down payment (and they were fully aware of this, and I COULD have done it on my own by pulling out every last penny). I did a 10% down payment b/c my awesome credit union doesn’t charge PMI if you do 10% down, and it was worth it to get into the market at that time – I happened to catch things on the upswing. If I had waited 1 or 2 more years to save the other 10% I would not have been able to buy as well as I did.

    I am comfortable with my non-retirement/emergency savings: in all it’s about 1/3 of my gross income (I’m single/no dependents). 2/3 of this is in cash and 1/3 is in stocks. I’m fully aware the stocks could go poof if it were a real crisis situation; my job is secure and I would get unemployment if it went away. With unemployment and my cash savings, I could get by for at least a year; add a roommate and I could get along even longer. Another way to look at the balance of what I have saved is that I could pay for a roof AND a furnace AND a basic used car and would not be totally broke (but wow would I be unhappy).

    I contribute the max to my 401k but I don’t do any Roth or other retirement savings. I’m not adding to my non-retirement savings at this time – I’m focused on paying down my mortgage so I’m fully paid off in 11.5 years/about 14 years early. I hope to speed it up even more, but who knows! Once my mortgage is paid off I think I could quit working if I wanted to. We’ll see!

  8. Revanche @ A Gai Shan Life Says:

    “realize you’ll be ok even if there’s a crash”
    Maybe I haven’t matured as much as I thought I had. Reading that bit made me suck in my breath a little! :) Thanks for the mention!

  9. Susan Says:

    There are two factors that influence our EF. First, i don’t feel the need for a larger cash buffer now that we have a fair amount in taxable, and even contributions to the Roth IRA that are accessible. In a real emergency, we can get to money, so the cash itself isn’t so important. Second, however, my idea of ‘large’ in a cash amount has grown with our portfolio. In grad school, a few thousand dollars was large! But now, 10k is just slush.

  10. First Gen American Says:

    Haven’t touched my E fund in 20 years. At this point it is only 5% of our savings.

    Right now I am using extra cash to remodel house to both build equity and reduce our utility bills. Our home had zero insulation in a cold climate. We are almost 1/2 way through our house and our heating bill is already down 40% and to about what we were paying for the 2 smaller ones and should exceed that once the whole thing is done. Our electricity bill and property taxes are already lower.

    We are also considering a well because town water is expensive. I guess the last thing is that we will save in care expenses for my mom or ( MIL someday) as she no longer lives alone and we are there to do constant wellness checks.

    Perhaps investing in things that would reduce fixed expenses is a good area to consider. I am always scheming dozens of contingencies in case our luck runs out.

  11. Lisa Says:

    Hmm. I love these money posts because it’s interesting to see how different people approach these issues. We’ve never really had much of an emergency fund because when we were students, we could barely make ends meet and when our salaries went up dramatically, we were living enough below our means that things like car and home repairs weren’t too painful. Right now we have ~2 months expenses in cash but could liquidate a lot more in a real emergency. Perhaps I’m not being imaginative enough, or we’ve been too lucky, but it would take a pretty major emergency to wipe out our finances. We just cash flow the things that come up. For example, we had to quickly replace our roof last fall. We are looking at some major renovations right now, which would require us to be more deliberate with our money. We’ve also not been aggressive about paying down the mortgage, but after the reno we should probably make that a focus.

  12. Matthew D Healy Says:

    I have a phone call with our financial planner scheduled for this morning on exactly this question: my wife recently sold her mother’s house and closed the Estate formalities, which means right now there is a chunk of money sitting in Savings at the bank while we decide what to do with it.

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