My husband and I are trying to figure out how much money we should be saving for an emergency vs if we should free up cash for investments and home improvements.
I have a stable government job, my husband works in tech.
We currently have an emergency fund that covers 1.75 years of expenses (mortgage, taxes, utilities, daycare, regular monthly spending for necessities and fun money) and a house specific emergency fund around 2% of our houses’ current worth to cover any unexpected fixes that we need. All funds are kept in HYSAs.
My husband is very afraid of losing his job to layoffs and not being able to find another job for a long time- we are seeing people not being able to find jobs for a year or more. However, on my end I feel like 1.75 years of expenses seems a bit excessive and would rather put money in a 529 for our child, pay down our mortgage principal, or upgrade our kitchen which would improve our general lifestyle.
However, I want my husband to not stress about this and if having this money accessible helps, maybe I just need to lay off.
Anyone have any thoughts?
How much of an emergency fund is “too much”
byu/Special-Capital5998 inpersonalfinance
Posted by Special-Capital5998
37 Comments
> we are seeing people not being able to find jobs for a year or more.
Sounds like 1.75 years of EF is not too unreasonable if this statement is true.
Yes, tech is volatile at the moment. Yes, 1.75 years of expenses is also on quite the high end.
I would consider if you’d be cashflow negative on your salary alone, and if so, how long you’d want an emergency fund to last based on that.
Both of you losing your jobs in unrelated fields simultaneously and being unable to find work for years is a very low probability event IMO.
I think this is going to heavily depend on if you’re meeting your investing goals. I wouldn’t mind having a few year of savings if I had 7-figures in investments, but I think having $100k+ in cash when your retirement is sitting at $130k is probably a big mistake.
It all depends on your situation.
Sole providers or people who may not find replacement jobs quickly due to location/specialization will absolutely want more EF than the “average” advice of 3-6 monthd
I agree with both of you guys. That’s a TON to have sitting in HYSAs. But it’s also great to be prepared and not stress about wondering how you’ll feed your family.
Is it possible you compromise by having something like six months in a HYSA and the rest in big broad market investments?
1 year of expenses is optimal. Put money in Roth IRA if eligible, 529 is good too. Pay down mortgage only if interest rate is fairly high (over 10 year treasury rate of 4.3%)…otherwise invest in ETF’s such as S&P 500.
I mean..yeah it’s too much but personal finance is *personal*. If there is significant volatility in your fields, it makes sense that he feels the need to have a large fund available. I would not define a government job as stable in this economy.
There are lower risk investments that may be a good way to split the difference between you.
A kitchen renovation is a want that you should save for separately outside of your rainy day savings and would not be a wise use of this money. Neither would locking it up in your child’s 529. Paying down your mortgage is debatable depending on the interest rate.
There’s no objectively right or wrong answer on this. Almost 2 years of expenses is much higher than most people have, but you have to counter-balance that with how secure you feel your jobs are. Your husband’s industry is unstable. If having that kind of emergency fund provides him with peace of mind and prevents him from yanking his hair out with stress, then it might be worth it even if it’s not the mathematically most optimal way to manage your finances.
i would consider keeping 1 year of expenses in a hysa and then putting the rest into a brokerage account. i wouldn’t want to keep that much money out of the market. but, it’s whatever lets you lay your head down at night and not worry.
If he is in tech, he is absolutely on point to keep a big EF fund like you have. Go check out the r/layoffs sub to see the reality of that field in the US right now, especially if he is an older worker too.
Given the state of the tech sector. Having that much is reasonable to me. Good news is now any future savings can go towards other goals.
You do have other options other than keeping *years* of expenses in your savings account. If you have taxable investments, you can always liquidate those in the event you have an extended unemployment period, and it will generally generate more than a savings account. You can also do hardship withdrawals out of your 401k if you *really* need it (like both of you losing your jobs for years – which is unlikely).
Also – I wouldn’t plan on being unemployed for more than a year. At that point your skills become seen as out of date compared to people currently employed. Instead, I’d highly recommend looking at things like temping or working in adjacent fields.
Some observations I’ve seen recently after i was laid off recently in biotech: I landed a new temp postion very very quickly (less than 1 month). It took 9 months to land another full time job (which is a lot compared to years prior)- but I was not “unemployed” so to speak. Many people on reddit saying they are out of work for more than a year are likely either not open to all types of jobs (eg temping), are looking for something extremely specific (like remote work or a promotion), or are speaking colloquially (eg they ARE employed, they are just temping or something like that and dont consider that their career job since its temporary).
I get why your SO is anxious. Layoffs suck and are definitely a source of anxiety. Instead of hoarding money in a savings account, your SO is likely gonna do better by networking, maximizing linked in, finding good recruiters to work with and polishing that resume. The idea is to be ready to find that job when you get laid off quickly by prepping for that – not hording money in a savings account.
1.75 years is a lot! That being said, we’re experiencing far more volatility and uncertainty right now than anytime after the 2008 crash. It might not be a bad idea to keep the current funds for another year or two, then start investing
Disregarding the time frame of your emergency fund, you guys should probably reassess the intended use of the emergency fund. EFs are not suppose to replace your income such that you dont skip a beat. For us, we designed ours to the bare minimum that we needed to survive per month. Mortgage/Rent, bills (including cars and insurance) and food. Food was 60% of our average while working….meaning, we could spend 60% with mindful shopping and easily feed our family. Once you get that number, then determine how long of a time frame you want to plan for. 3 months? 6 months? 18 months? thats up to you. So to answer your question, saving for complete salary replacement for 1.75 years, is probably too much.
I am in demand in my local market for sales I prefer a 9 month emergency fund. For one reason I take 2-3 months off between jobs. If I had family I would double that in a heart beat so i don’t think your husband too far off. Im fine with 6 minimum because Im single with low bills.
We keep 2 years but that is short before FIRE (with another 8-10 in bonds). 1.5 years would be plenty in your case – because you would tighten the belt and if it would be an extended situation for your husband then he would take on the daycare, cooking and all that. 1.5 years of sunshine budget stretches easily to 2-2.5 years of rainy day budget.
This question is in the same vein of “How much umbrella insurance do I need?”, it ultimately gets down to how much risk you’re willing to assume because technically there isn’t a number that is “too much.”
Based on the facts you’ve laid out, having 1.75 years of expenses in savings seems appropriate.
Between loans, grants, and scholarships, there are a thousand ways to pay for an education. Risking financial stability to fund a 529 isn’t advisable.
Paying down mortgage principal or upgrading your kitchen are worth having a conversation about, but without numbers we can’t really weigh in.
Normally, I’d say 1.75 years of expenses is too much, but I also know of many people who haven’t been able to find jobs for a year now, and not just tech jobs. I know multiple people who’ve had to take 60%-70% pay cuts just so they would have a job, any job with health insurance. A cousin whose government job was eliminated last year because of DOGE just got an overnight job as a front desk person at a gym because it was the only job he could find that has health insurance.
What is your mortgage rate?
A kitchen upgrade is a wildly irresponsible thing to even think about in this market.
Your housing fund is not enough to cover roof, foundation, or HVAC.
How old are the kids? If your husband was out of work for 2 years, could you pull them out of daycare and have him watch them?
If you are cash flow negative on your salary, I would find a way to not be and keep at least 1 year of full expenses in an EF.
Unless you are federal military with a contract, your safe government job is not as safe as you think it is. California is running a massive deficit and is bound by its own constitution to balance its books.
First, move the excess cash above 6mos to TBills at a minimum. You’ll likely get a better return with minimal risk. Since you can get short term tbills, you can get ones the mature in less than six months. If he loses his job, all you’ll have to do is not reinvest the money at maturity.
Since we are in inflationary times, it’s not a bad idea to build in a buffer on top of your normal expenses.
I’d probably invest half of that in a safe ETF like VTI. Too much opportunity cost to leave it in cash. Especially since that amount includes fun money. If he does get laid off and can’t find another job for a year then sell some. If he doesn’t get laid off you’ll be glad you invested in something a little better producing than an HYSA.
Round it to 2yrs, then end of discussion.
He’s happy, and it’s a nice round number so my OCD is pleased.
I think you’re going to get a lot of uninformed answers here. You say that you have a 1.75 year emergency fund, but in a comment you say that the 1.75 year value is based on you keeping your salary. The typical emergency fund recommendation is 6 months and then one year if you have a volatile job (like tech)–these are calculated using all expenses, not all expenses except those covered by a potential remaining salary.
So look at all of your expenses for a month, multiple by 12 and that’s probably where you should try to be at given the volatility in the tech sector.
Some thoughts.
1/ There is no right and wrong answer. It is really a question what do YOU think is reasonable a risk.
2/ In tech, I would make my plans not on a 6 month gap of employment, but more on a 1 to 2 year gap of employment at this point. So maybe 1.75 years isn’t a terrible overshoot.
3/ If one of you get laid off, then your budget will naturally shrink. You might forgo daycare. You might forgo some of the “fun money”. And go more on a minimal expense for some time. That’s a lifestyle decision that should be made as a couple. But that cna let you contribute more now.
4/ I would not keep THAT much money on a HYSA. You can get CDs which should give you better rates. You can “ladder” the CDs to still retain a monthly available fund. Google how that works, you’ll probably squeeze an additional percent of interest. No good reason to leave it on the table. Though that is not terribly critical.
5/ I would also not keep that money on a HYSA because you can contribute to a Roth IRA. Roth IRA let you take your money out without penalty. (You can’t take the interest out without penalty, but you can take your contributions out.) And so you could contribute to the Roth IRA now and put that in a CD within your Roth IRA. This gives you your cash available and Roth IRA contribution at the same time. So later in life, if the volatility of the market goes down, you would be able to reallocate some of that emergency fund within a Roth IRA. Because the contributions are capped per year, contributing now may make a difference in the future.
Anything over a year of salary or household expenses
If it helps him sleep better at night, 1.75 years is fine. Tech jobs are pretty shakey these days.
Given the market, I’d say have at least 2 years covered. It took me 3 years to find a job.
It really depends on the stability and saleability of your investments. Personally, I keep very little in my emergency fund. It’s only about 0.6 months worth. I trade options that expire quickly, so in a worst case scenario I could still pull a decent amount from my brokerage account within a week’s notice. Depending on what the market looks like, that might trigger some losses that I’d prefer to avoid, but if they are significant enough to ruin me they’d also be ruining the entire economy so the point would be moot.
A 529 is the best investment you can make in your child’s future. 529’s can be used for a wide range of education and living expenses for students. An investment now will be vital to their future in 15 years. If they don’t use it all, you can put up to $7k and year into a Roth IRA. You could literally find your child’s education and a big portion of their retirement with a 529.
I seriously doubt you’ll regret investing in your child. Good luck.
I’ve worked in tech for 22 years and was just laid off this month. I always had 6 months of expenses on hand, but a few months ago I started to get a weird feeling so I upped it to a year. I think that’s plenty when combined with severance and unemployment. And if I’m wrong, we’ll find out in a year or so. Although not ideal, I can also dip into some investments if need be, but that’s a long ways down the road.
1.75 years is a bit much. I’m not sure I would put it towards the house principal. The 529 is a good idea. Redoing the kitchen could produce a pretty good return as well. Perhaps it sounds crass, but if you do both lose your jobs and end up, needing to sell the house, you’ll probably get back whatever money you put into the kitchen in the form of increased House value
Consider that you can still treat an investment like a mutual as an extension of your emergency fund. Keep 6 months in the hysa and put the rest into a fund, or pay down the mortgage if you have a high rate. If you have the equity you could take out a loan on the equity later if you absolutely needed to (beyond the 6 month fund). Either option can cost you due to bad market timing in the event you actually need it, but losing a job always cost something in the first place, you are also losing opportunity with the money as well on something right now that has a higher roi. I wouldn’t use it for a new kitchen though.
12 months is ridiculously healthy. Anything more than that should just go into a retirement account IMO
12 months be a solid emergency fund.
I am in a similar position to your and your husband. Highly volatile tech job and my wife has a stable, if much lower paid, job with excellent benefits. My e-fund is at 2 years. I would not go ANY lower right now. What I do with my e-fund is 6 months in a HYSA and the rest are laddered CD’s making 4-4.5%.
I’m sure your husband is not trying to freak you out but for MANY tech people if they lose their job they will not work in the industry ever again. I have many contemporaries who have lost their jobs and have no hope whatsoever of getting a new one anytime soon. The tech job market is gone, there are no jobs. When this current shitshow subsides (and it will in a few years) there’s nothing to stop you using that money for college, maxing out the 529 every year with this money to get the state benefit. Right now though? Save every cent. Seriously.
I used to keep 2 years when I was a regular employee. As an employer, my business maintains 3 years of payroll and keeping the lights on in an emergency fund. As far as my household expenses now, we more try and mitigate them (ie spend less) to fit within what I can make from investments in interest only. The better I do, the better lifestyle I can “afford” without touching the principal.
Personally I say 6 months expenses to absolute max 1 year in HYSA, and out the rest of that into a diversified S&P500 or total market fund. The only way you end up really in trouble there is if your husband loses his job, and the market crashes for more than 6 months all at the same time, right after you put money in the market, and even then it’s not like the money in the market will go to 0 it will just be less than ideal. Even if it crashed 50% you’d still have 1.125 years worth of money to work with between the HYSA and the S&P. If the S&P is up withdraw from that, if it’s down withdraw from the HYSA, also even in the worst economy he can always get a job at a hardware store while looking for a better paying job to stretch that 1.125 year money as far as possible. In the mean time every year that your husband doesn’t lose his job you’ll be getting a much higher return on that money and after a few years the chance that you’ll have to sell when it’s down from where you started gets lower and lower.
Another thing about HYSA that people don’t factor in is you have to pay taxes annually compared to buying and holding an ETF where you only pay taxes when you sell. Doesn’t seem like a big deal but if you get 4% annually you actually get 3% annually after taxes, and then inflation pretty much wipes that out so you don’t get the compounding effect. If you put it in the market which gets 10% – 3% for inflation you’re getting ~7% conservatively. 100k in a 4% HYSA account adjusted for inflation will be 100k after 10 years where 100k in the market even conservatively adjusted for inflation will be ~200k after 10 years. The risk of the market goes down a lot over time so after a few years the gain will be so much more no dip will wipe it out. Just my 2 cents!