How Much Cash we Keep for Emergencies

As we go into the 2nd month of Glen missing his paychecks*, I started thinking about how much money we have traditionally had on hand to pay for emergencies.  What we consider an emergency probably differs from others’ definitions.  We tend to consider expenses under $1,000 as non-emergency events.  On average, we save $2,000/month.  We will be taking out a line of credit on the house, and our estimated payment on that line of credit will be $1,200-1,400 to pay it off in 10 years, though we likely will pay it off sooner.  This means that we will be saving $600-800/month next year, give or take our income and investing levels.  The point, though, is that we do not view fixing a dent in the car as an emergency.  We view job loss, or a major medical problem as emergencies, but even those we plan and save for.  Here is how we break down the amount of cash we have on hand.

Drop Dead Emergency Cash On Hand

Drop Dead Emergency Cash On Hand (DDE), is cash we always keep available no matter what.  This is money we access in the event that there is no other way to live.  When we were both unemployed and had major house expenses, we had a frank conversation, and agreed to sell our truck prior to touching our final stash of DDE.  We view this as last resort money.   There have been a two times in the last 7 years we have had to access this money, but never all of that money.  We divide our DDE into two places.  The first stash is our regular bank account.  The second stash is our dividends from stock.  Each stash is equal to one month of required expenses: mortgage, utilities, groceries, etc.  We need about $5,000/month to pay our absolute basic needs, which is pretty reasonable for the Washington, DC area.  We don’t have any debt outside of our mortgage, though we are planning on the upcoming loan, as I mentioned.

The reason we have two separate locations wasn’t planned, but we started to find it useful.  We reinvest our stock dividends, which is how we have slowly grown $10,000 of stock into nearly $70,000.  We ignore our stock as much as possible.  As long as the value stays within reason and we receive our dividends, we just let the dividends grow and then wait for a slight price drop to buy more.  Boring but effective.  However, we always leave $5,000 in dividends.  We like having it there because it is both very easy to access, but not visible.  To me, that is the purpose of DDE cash.  You want to be able to get it immediately, but you don’t want to see it, so you never keep it in mind when you are thinking about other day-to-day problems and expenses.  We have another $5,000 that we keep in our bank account.  We transfer some money from our checking account to a money market account, so we get a little extra interest, but we just ensure we have that much money in the bank.  

General Problem Cash On Hand

General Problem Cash On Hand (GP) is the amount of money we know we need to pay for the usual problems we all deal with, generally related to medical issues or the car.  I track the money we put into our cars (all used), and it seems to come to $2,000/year.  I’m not talking oil changes, or routine work – that’s in the regular expense category.  We’re talking the time we lent our truck to a friend, and he smashed the side of it (or, the time I smashed the side of the truck in the parking garage).  Glen can do things like change out the rotors, and alternator, but there is still the cost of parts, and sometimes we pay for labor, too.  We like to have $3,000 in cash “floating” at all times.

If you do the math, that means we have $8,000 hanging out in the bank at all times.  We  don’t spend much time reviewing specific accounts.  We both check our accounts at least weekly.  Even our math skills can quickly see if we are within the $8,000 threshold.  Whenever we make a financial move, we always ensure we have at least $7,000 remaining, after all expenses are accounted for.  Less than $7,000, we get nervous.  That’s the power of habit.  We are used to see a certain amount, and we get nervous when we get lower than that.

Other Planned Saving

We have other things we plan and save for.  For example, we know that in 5-8 years, we will probably buy a new (to us) car.  Our used minivan was $11,000.  We assume our next vehicle will be at least $13,000.  We know we will need to save for that, since we pay cash for our vehicles.  Some people have specific budgets, with a line item for these expenses.  We don’t do that.  Instead, we talk about what is coming up in the next 1-2 years, and put all our remaining discretionary money toward those items.  This is probably a much more aggressive approach than most people take.  We are both achievers, and we find it easier to focus on specific items and save for them, rather than spreading things around over many years.

Prioritizing Saving – Just Another Habit

In the event we use some of our DDE or GP cash, we put all our focus on building those accounts back up.  We allow our dividends to build up on their own.  We are very focused to always save and keep above $7,000 in the bank accounts.  That means we have cancelled trips, or put off buying furniture, for instance.  At one point, when we were really low on cash, and building it back up, we reduced our meat consumption to once weekly (for about a year).  I’ve talked about saving as a habit.  I know saving is a habit, because it seems odd not to have a certain level of money on hand.  When we have that amount of money in the bank, it is so normal, that we don’t even discuss it.

We Don’t Follow the Experts

Money experts argue that you should have three-eight months of expenses saved and available to you.  Suze Orman has said that since it takes eight months to get a new job, you might want eight months of cash on hand. Dave Ramsey recommends three-six months of cash for emergencies such as job loss. If you add our two DDE stashes and our GP stash, you get $13,000, which is less than three months.  However, Dave Ramsey also recommends that your housing costs be 25-35% of your take-home, and our housing is 18% of our combined take-home pay – almost half that.  We do not follow the experts exactly, and in over 12 years of marriage we have found that our pattern of saving and spending has the exact effect we like.  In the end, keeping cash on hand for “emergencies” is simply a safeguard, and we find keeping to the concept of DDE and GP, when combined with regular planned saving has kept us in good shape.

*Glen is a furloughed federal employee due to the partial government shutdown. Legislation was passed that will restore his backpay once the government reopens. For now, he is not working and is not receiving pay since Christmas.

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Suze Orman: “Emergency Fund 101” – https://www.suzeorman.com/blog/emergency-fund-101

Dave Ramsey: “A Quick Guide to Your Emergency Fund” – https://www.daveramsey.com/blog/quick-guide-to-your-emergency-fund

Photo by Aaron Burden on Unsplash