Is 3-6 months savings for emergencies realistic?

[Alfred_B]

Originally Posted By: mightymousetech
Just curious why people don't consider a secured line of credit instead of stashing cash away in a bank account doing nothing? I would rather invest that 3-6 months of income and make money on it, then if an emergency happens, I have my LOC to fall back on, which is several years worth of income if needed.


Depending in what you invest, imagine a scenario when the economy takes a dump, your investments plunge in value and you lose your job.

 

[mightymousetech]

Originally Posted By: Alfred_B
Originally Posted By: mightymousetech
Just curious why people don't consider a secured line of credit instead of stashing cash away in a bank account doing nothing? I would rather invest that 3-6 months of income and make money on it, then if an emergency happens, I have my LOC to fall back on, which is several years worth of income if needed.


Depending in what you invest, imagine a scenario when the economy takes a dump, your investments plunge in value and you lose your job.



I have continued to make money through the last two corrections, not too worried there. Just seems like a huge waste leaving cash in a savings account doing nothing. Even the most stable investments should be able to make 2-3%.

 

[ArrestMeRedZ]

Originally Posted By: mightymousetech
Just curious why people don't consider a secured line of credit instead of stashing cash away in a bank account doing nothing? I would rather invest that 3-6 months of income and make money on it, then if an emergency happens, I have my LOC to fall back on, which is several years worth of income if needed.


If you could possibly lose your job/income due to any reason, having a cushion is pretty important. If your income is guaranteed, I would see nothing wrong with the LOC approach, especially since the cash to fund it is being invested and not consumed.

Also, you have to consider if your investment is at all liquid. Too much real estate, especially if it is leveraged, requires a larger emergency fund rather than a smaller one. Trust me on this.

 

[mightymousetech]

Originally Posted By: ArrestMeRedZ
Originally Posted By: mightymousetech
Just curious why people don't consider a secured line of credit instead of stashing cash away in a bank account doing nothing? I would rather invest that 3-6 months of income and make money on it, then if an emergency happens, I have my LOC to fall back on, which is several years worth of income if needed.


If you could possibly lose your job/income due to any reason, having a cushion is pretty important. If your income is guaranteed, I would see nothing wrong with the LOC approach, especially since the cash to fund it is being invested and not consumed.

Also, you have to consider if your investment is at all liquid. Too much real estate, especially if it is leveraged, requires a larger emergency fund rather than a smaller one. Trust me on this.


Most of my savings are in my RRSP for retirement, then I also have about a years worth of income invested in my TFSA (tax free savings account) that I could have cash in hand tomorrow if I want. But I would rather draw from my LOC at 2.9% than take money out of my TFSA that is currently making about 12%.

 

[StevieC]

Originally Posted By: mightymousetech
Just curious why people don't consider a secured line of credit instead of stashing cash away in a bank account doing nothing? I would rather invest that 3-6 months of income and make money on it, then if an emergency happens, I have my LOC to fall back on, which is several years worth of income if needed.


That's what I do... See above.

 

[mightymousetech]

Originally Posted By: StevieC
Originally Posted By: mightymousetech
Just curious why people don't consider a secured line of credit instead of stashing cash away in a bank account doing nothing? I would rather invest that 3-6 months of income and make money on it, then if an emergency happens, I have my LOC to fall back on, which is several years worth of income if needed.


That's what I do... See above.

 

[Mr Nice]

Mighty Mouse,

How much per year can you contribute to a TFSA ?

 

[mightymousetech]

Originally Posted By: Mr Nice
Mighty Mouse,

How much per year can you contribute to a TFSA ?



It is currently $5500/year.

 

[Mr Nice]

That's equivalent to an IRA in the USA.

In my opinion, the IRA contribution should be raised to $12-15K max per year

 

[mightymousetech]

Originally Posted By: Mr Nice
That's equivalent to an IRA in the USA.

In my opinion, the IRA contribution should be raised to $12-15K max per year


Agreed. Our annual limit got increased to $10k in 2015, but then they backed it down the next year back to $5500. Grr.

Edit: actually, an IRA gets taxed on withdrawl does it not? Our TFSA is tax free on withdrawl.

 

[StevieC]

Yeah $10K would have been nice if they left it there.

 

[alarmguy]

Originally Posted By: ZZman
Experts will tell you to have 3-6 months savings to help cover unforseen emergencies. Many if not most people live paycheck to paycheck. Is it realistic?


Yes, it is realistic for many people but many people do not know it or care to address it.
Living paycheck to paycheck can mean different things to different people.

If one is living paycheck to paycheck but has a new $20,000 plus automobile and an auto loan, or if they have any secondary toys like boats, bikes, $400 plus cell phones etc and worse yet, took out a loan for those items, then they are not living paycheck to paycheck and should have put that money toward emergency savings account.
If you are loan free except for a house and still can not put money away, then of course its not possible.
For people interested in becoming debt free Dave Ramsey is a great source, just google him, helped millions become debt free.

 

[fdcg27]

Dave Ramsey is a moron selling financial salvation to those more moronic than he is.
Accumulating money is as simple as spending less than what you make.
It really is that easy.
If more folks understood that simple reality, then we'd have fewer people a paycheck or two away from disaster.
We'd also have lower GDP and so less to save.
Economists call this the paradox of savings.
There is a school of thought among macroeconomists that the world is suffering from an excess of savings and too little consumption and while this may not be a problem in our country it may explain the continued sluggishness of the global economy.

 

[Mr Nice]

Dave gives the standard common sense financial advice to everyone.
One thing I do agree with him is to not over leverage yourself and be cash poor to portray an image of success. So many Americans up to their eyeballs in debt and have negative net worth. Then a job layoff happens, illness, house needs new roof, vehicle get wrecked, etc... and they are in serious trouble.

Big ego doesn't provide financial security to your family during the bad times in life.

This year I'll put approximately 35% of my gross pay towards retirement, I'm in this position because of smart decisions made 25 years ago.

 

[ZZman]

It is often hard if your spouse is different than you are as far as being a saver or spender. Financial issues in marriage are rough.

 

[fdcg27]

Agree completely that one must avoid deep indebtedness if one is to accumulate any net worth.
Lots of toys and the appearance of prosperity are a poor alternative to the peace of mind that comes with seven figures of net worth and enough liquidity to ride out any change in current income.
I know people my age who've always had decently high incomes and who always spent it as fast as it came in.
They have little to show for this extravagance and must now either work more years than they'd like or live a pauper's life on what little they'll get in retirement. They may also be forced into this pauper's retirement by some physical malady.
Any two income couple should have no problems in accumulating the funds needed for a comfortable retirement while still young and physically able enough to enjoy it.

 

[ATex7239]

Yes, it’s realistic and necessary in my opinion.

Most people do live paycheck to paycheck, but it’s because they over spend and live far beyond their means.

 

[jj51702]

Originally Posted By: Mr Nice
Dave gives the standard common sense financial advice to everyone.
One thing I do agree with him is to not over leverage yourself and be cash poor to portray an image of success. So many Americans up to their eyeballs in debt and have negative net worth. Then a job layoff happens, illness, house needs new roof, vehicle get wrecked, etc... and they are in serious trouble.

Big ego doesn't provide financial security to your family during the bad times in life.

This year I'll put approximately 35% of my gross pay towards retirement, I'm in this position because of smart decisions made 25 years ago.



Excellent advice. Still can't stand Dave R though

 

[zzyzzx]

Is 3-6 months savings for emergencies realistic?

Personally, I would consider that to be woefully inadequate.

 

[Mr Nice]

Originally Posted By: WhizkidTN
Originally Posted By: Mr Nice
I hate when Dave tells his callers on his radio show to eat , Rice and Beans - Beans and Rice diet for 3 years to get out of debt.


Understand that this is just his metaphor for cutting back on extraneous spending (like eating out a lot) and to use that money instead for getting your plan going well. It is sound advice.


Yes I understand it's just a metaphor for cutting back.

The way he says it as if it's a switch that the person in financial trouble can easily turn off / on.

Sometimes pride plays a big factor in spending habits.