Monthly expenses are roughly $6k on house (mortgage, insurance, utilities), $2k on childcare, $4k on everything else (food, car, subscriptions, shopping, etc), totaling $12k a month (or ~$72k for 6 months).
Our HYS has an interest rate is ~3% which is okay, but I feel like we are being too cautious with that amount just sitting in a bank account.
We’ve never had a major emergency where we have needed to dip into this and fortunately we haven’t had any issues with our jobs (although I work in tech which is very volatile at the moment and you never know when a layoff will happen).
I think an emergency fund is still a good idea but I’m wondering if I should just cut it down to 3 months (so just $36k) or do a deeper review of the “everything else” bucket and see what is truly essential and what could be cut out in an emergency so that I can have a better sense of what needs to be in the EF (e.g., recalculate the everything else to only be things like food as opposed to shopping expenses).
My thinking is to just throw it into VOO or something as it’s still technically accessible if needed to liquidate. One thing to note here is that investments (household 401ks, IRAs, brokerages) are already at ~$1M and we are age 35 if that matters.
The other option is to throw it as a lump sum payment into student loans (biggest loan has an interest rate of 7%) or pay down principal of mortgage (which has an interest rate of 5.5%). Students loans we haven’t started paying yet due to forbearance (this something else we go to figure out considering all the changes happening here – payments will be required starting this summer I think).
Any advice would be appreciated.
Is a 6 month emergency fund of ~$72k too much / a wasted opportunity?
byu/DCMoving17 inpersonalfinance
Posted by DCMoving17
30 Comments
I mean, you have high monthly bills, so you should have a high safety net. Pretty simple.
Plus you have kids, so I would leave that safety net there as a safety net.
> We’ve never had a major emergency where we have needed to dip into this and fortunately we haven’t had any issues with our jobs
It’s like if I asked you: Do I really need to buckle my seatbelt?
And I provide the additional context of: It uses up time that I could be using to do other things and I’ve never been in a major car accident where a seatbelt would save my butt.
> I’m wondering if I should just cut it down to 3 months
How long would it realistically take for you/spouse to find another job?
Now ask yourself… why did you lose your job?
Was it because the overall market is doing poorly?
Would this lead to an *even more* difficulty finding a new job?
$72k isn’t wrong, it’s just on the conservative side. Given your situation (kids + tech job volatility), 6 months makes sense, but you could refine it by calculating true essentials only, that might bring it closer to 3–4 months instead of a full $72k.
Putting all of it into VOO isn’t ideal for an emergency fund since markets can drop right when you need it. A middle ground is keeping a solid cash buffer, then using excess toward higher-interest debt (like the 7% loans) or investing. It’s less about wasted opportunity and more about how much stability you want vs. optimization.
Investing a tiny bit of money (relative to your current wealth) once isn’t going to materially impact your life.
Not having savings when things really go south can.
If you didn’t save another dollar for the next 30 years, you’d have $7.6 million invested (assuming 7% returns). If you also invested your $36,000, it’d be $7.8 million.
In my mind, there is no material difference in retiring with $7.4 million, $7.6 million or $7.8 million.
You could invest, but you need to ask your self if having it sitting there gives you a peace of mind. If so then leave it be.
No. It is what someone with several kids and mortgage should have.
If you have a couple of high limit credit cards and no other dept, I would chip away at the 7% student loans. Maybe an extra $1000 per month so you still have emergency fund and cash flow.
$72K does sound like a large number to me, but your expenses are very high. If you were to invest half of that $72K in VOO, the issue isn’t really liquidity. As you indicated, if it’s just in a standard taxable brokerage account; you can get to the money in a couple days. The issue is what happens if the market drops. If you can stomach that $36K becoming $24K in the off (but real) chance of bad market, then there is no reason you can’t reduce your emergency fund.
I think having hard and fast rules like “You must have 6 months in savings” is less helpful than spending 5 minutes to think through “What would we do if I or my wife loses our job” and “what would happen if we were hit with an unexpected $50K bill”. Someone will always be able to come up with some hypothetical scenario that you won’t be able to easily handle, but it sounds like you are in much better shape than most people.
You didn’t mention how much you have in standard brokerage account already, but if it’s a good amount, at 7% I’d probably tackle the loan first, but investing it wouldn’t be foolish either.
I don’t know what you mean by emergency.
I have more than this amount in a high interest money market account. This is a deliberate decision so that I wouldn’t have to liquidate stocks when the market is down.
However the amount I have in a money market account is far less than my total investment portfolio which I keep invested in the market for long term growth.
The money market might yield a bit less than some stocks but conversely it isn’t going to lose value like a stock. The market will go up in the long term but I was glad I didn’t have to sell during the pandemic nor do I have to sell during the current down market.
A simple tweak is moving your emergency fund into treasuries. VGUS (there are many, I’m just providing an example) is currently a bit north of 3.6%. it’s not going to revolutionize your savings, but a 20% increase on yield isn’t nothing.
Beyond that, there’s no absolute right or wrong answer. I keep around 18 month’s expenses on hand given my job is volatile and difficult to replace. That potentially delays my retirement date marginally, but I sleep well at night and am still on pace to be FI decades ahead of traditional retirement age.
I’ll also reduce my cash position somewhat this year if the markets continue to be challenged when I rebalance to my preferred equity/fixed income ratio, given I would be overweight on cash. This has a moderating effect on portfolio performance, causing you to buy a bit more into discounts and convert a bit more to cash when the markets are good. I’m about 90/10 equities-to-cash, so I don’t want to overstate the impact, but it does exist.
Right now in tech, it can take a long time to get a new job, especially if you’re trying to get at least the same salary you had before. The market has volatile as it’s been lately. I find having a large emergency fund cushion, even if it’s only getting 3% or so worth the potential opportunity cost.
with mortgage and kids i would definitely keep 12 months. the point of the fund is to help for emergencies foreseen and unforeseen. you dont know the entire set of things that can cause an emergency
You have to decide how much EF you need.
Sit down and figure out the worst case: All adults lose their jobs simultaneously for 8 months and the furnace/AC goes out and car is totaled. Or all adults are injured in a car crash and in rehab for 6 months.
What’s the base burn rate? What extra money/setvices are needed?
What other resources are available? (Family?)
Then keep enough. Think of the lost growth as an insurance premium..for peace of mind.
If you had put it in VOO in January you would be down 7.54% vs up 0.75% (3 months at at 3% is $540 on $72k = 0.75%). I think 6 months of living expenses is a good thing, particularly with kinds in the mix. I also think you can do better than 3% and likely should look at some sort of tax advantage holding.
I’m running an emergency fund around $200K, so I won’t think $72K is unreasonable.
That’s a lot of cash, but your expenses are pretty high. I’d first consider all your expenses and see which would actually still exist if both you and your wife were to be unemployed. Once you figure that math out, I might consider paying extra principle to the student loans to get that balance down. If those were government student loans, I believe I read they’re considering garnishing paychecks if needed so might as well get an ahead of that by getting rid of it ASAP.
Having 40k in an emergency fund has been a lifesaver for us. We had a plumbing disaster that put us out of our home.. repairs + living expenses…. Insurance is coming but is too slow.
I have a similarly sized emergency fund, where my thinking is it really only needs to be that large in the event I was laid off. What I do is invest half of it in rolling 4 week t bills offset each week. This way I get a slightly higher return with some tax efficiency and if I ever need that money I can access 1/4 each week.
I sit in couple other reddits and a bunch of people in tech are noting how hard it is to find jobs. I got a new one recently but there we weren’t a lot of good options and my last job was both high stress and high risk since it was pre-revenue.
What helped me deal with some of that stress was a very large emergency fund that I was really confident would get me through a rough patch, especially if there was a short recession and the market dropped during that time.
My big fear wss the big 3 happening at once : recession, job loss, some thing that needed a bunch of money. Aiui, hard to get a loan without income, and really wouldn’t pull out stocks when they’re down as you’ll not be able to recover. (My spouse makes much less fwiw, so couldn’t rely on just her salary, and good chance it’d also be affected by recession)
If you’re pretty confident that at least 1 of you will still have a job, you could lower your emergency fund to 3 months if you’re OK with the risk.
One extra advice, especially if you’re in a state with income tax, is to consider treasury bill funds as alternative to HYSA as it’s exempt from state and local taxes and slightly higher yield than 3%.
No. You have too many factors counseling in favor of that efund. For reference, ours is higher with lower expenses (i.e. more months’ worth; used bare bones expenses to calculate, but do not forget to include ACA marketplace health insurance if you go the bare bones route).
And you didn’t ask but I don’t see it in budget, but as high earners with small kids, make sure you have good independent term life insurance for both of you even if one doesn’t work (all that “free” labor is not actually free). And then a trust to receive those proceeds and designate a trustee.
With what you already have invested, throwing even the entire emergency fund into investments would make no material difference for you.
If that fund is not available in an emergency, the downside could be catastrophic. I keep a 1-year emergency fund primarily because it gives me peace of mind. I know it’s not optimal, but the effect of me investing that entire fund would be basically negligible at this point.
1M in investments and you were using forbearance on your student loans?
You are smart and doing well so financial mistakes mean nothing. Keep doing what you’re doing and there is only a slight chance of crashing and burning. You are not really interested in financial stability and make enough for any potholes that come up.
Read the wiki to begin to understand the answer to your question and I wish you the best.
Your finances are very similar to mine and I have a very similar sized e fund.
The job market is tough right now and childcare is no joke — I can’t imagine having to look for a job while also having to watch the kids at home to save money (plus losing their spot at daycare), so for my peace of mind I want to be able to be able to keep them in daycare for at least 6 months.
I agree with everyone that investing part of your Efund will not significantly change your future wealth outlook for retirment at your current age.
I would look hard at those student loans though. You say you are in forbearence. During forbearence interst is actively accruing, so your balances are currently rising. You could see that in the first months of payments that all you are paying against will be interest. I would take a deep look into your student loan balances and be prepared to paying down accrued interest when payments begin otherwise you could find yourself not making any significant progress against your loans.
It’s a little wild to me that you have a million in retirment at 35, but have loans in forbearance that you haven’t even started paying yet? I know we are in an environment where F student loans is popular, but falling behind on student loans in this environment can have significant financial consequences in a volitile time.
Don’t include optional expenses like shopping, travel, entertainment, restaurants, etc.
Here’s my thoughts. If you had a real emergency where you had to tap into your emergency fund.. would you not try to tighten up things a little? Would you continue ALL your subscriptions? Would you continue to eat EXACTLY the same way you are? Would you buy the best things you do, or go for store brand? If the answer is “yes, i want to maintain the same lifestyle if we had an event like losing a job” then you’re probably fine.
> One thing to note here is that investments (household 401ks, IRAs, brokerages) are already at ~$1M and we are age 35 if that matters.
You’re already well-invested for your age. Throwing an extra $36K into more investment is fine but I’d rather have a bigger cushion given how things are going on in the world. And like others have written- it’s not going to make a material difference in 30 years when you retire.
My wife and I are a few years older with two kids and a 12-month emergency fund. Ever since Covid we’ve been carrying a larger e-fund because of uncertainties outside of our control. Recently, my 15-year old car died and we bought a new one with 2/3 of our e-fund. I’d rather have that flexibility than needing another $50K invested in a $2M portfolio.
I have 72k in a 3.6% HYSA as our emergency fund also. It’s fine. You can look into stuff like bond or treasury ladders but I couldn’t be bothered.
Even with this we are only 14% cash.
In today’s job market 6 months is the absolute minimum. I recommend 12 months.
Other people have covered the other things in terms of reducing expenses in an emergency, risk tolerance, etc, but I didn’t see anyone really give feedback about putting money into the mortgage.
I wouldn’t make a lump sum to the mortgage at this stage of life. If you later need to get that money back out, your only options are to either do a cash out refinance, HELOC or home equity loan. All of those come at a cost.
I would consider putting a chunk towards the student loans and getting those knocked out. You didn’t mention the amounts on the loans but they never (or rarely) go away, so that would be a priority for me.