Money Commandment #2

The book The 10 Commandments of Money: Survive and Thrive in the New Economy lists money commandment #2 as follows:

The old-school rules: Save for a rainy day.

The bubble economy rules: Who needs savings? Leverage to the max!

The new rules: Build both your cash savings and your access to credit for maximum financial flexibility in emergencies.

Here are my thoughts on all of these suggestions:

• Again, I'm old-school here since I favor the "save for a rainy day" strategy. Actually, my "rule" is to "save as much as you can as soon as you can for as long as you can." ;-)
• I understand the author's thoughts on needing both savings and credit in case of an emergency (you may HAVE to charge something if it truly is an emergency), but I think this is more of a beginning-level suggestion. Over time, you should be able to build your emergency fund to the point where it will be very unlikely that you'll need credit to see you through all but the worst of times.

Then again, many Americans are at the "beginning-level" stages of managing their money. The book shares the following about Americans' status when it comes to savings/emergency funds as follows:

• 43% of households have less than $1,000 in liquid savings.
• 28% live literally paycheck to paycheck with no savings whatsoever.
• Only 30% have a cash hoard that would tide them over for at least three months.

It's pretty bad out there. Some thoughts:

• Almost half of Americans don't have $1,000 in savings? Is that right? Then again, the average American could probably sell a ton of their junk and raise $1,000 if need be.
• I was surprised to see that 28% live paycheck to paycheck. The book The Difference (which was done based on a massive amount of research) listed 54% of people who are living this way (for details, see How to Be at the Bottom of the Financial Barrel).
• So 70% of Americans don't have enough saved to make it three months. That's sad -- in more ways than one.
• We have enough saved to last a year or so -- even without an income. But that has come over time (you can't expect a 22-year-old to have this much saved.) However, the average U.S. household isn't 22-years-old. And yet they have the savings of one. Ugh.

What's your take on this issue? And how many months could you live on your emergency fund?

Comments

[First Gen American]

Wow, those stats are depressing. I really hope we change our way of life as a whole. It can't be good that so many people are living on the bring of disaster.

[Matt]

Save for a rainy day and then save some more.

With all the bank foreclosures, this is living proof that people don't save enough because they have a temporary set back and they loose everything.

It is a pathetic state of what people have in savings but all to true. People don't worry about how much it costs they only worry about the monthly payment.

[texashaze]

The bigger long term issue is what people are saving for retirement. These statistics should provide some clues that many folks will be solely or almost solely dependent on social security to finance retirement. That is not much money now and it will be even less in the future. I predict serious social problems in the future for the elderly. You also have to wonder how us "savers" will be penalized since we'll be the only ones with cash.

[Everyday Tips]

I am all for saving for a rainy day. If you do that, you won't have to rely on option 3, which is having credit in case of emergency. I don't view my credit limit that way at all. I strictly use credit for convenience and rewards.

We could probably live about 5 months on our emergency fund.

[MC]

I wonder if the 28% who are living paycheck to paycheck mostly represents the long-term unemployed and we're not talking paychecks here but unemployment or welfare checks?

[Bogey]

My wife and I are 25 and 26, respectively. We have cash savings that would cover us for 14 months - assuming we had $0 in income coming in. If we were to cut out a couple items from the budget that are not really necessary, that length of time jumps to 16 months.

It feels good to have that type of cushion, although I am always trying to grow it bigger, and I am always hesitant to use any of the cash!

We just bumped up our retirement savings begginning this month. We decided to shift our focus more into this direction, instead of saving so much in cash.

Our retirement savings are going to be bumped up to 25% of our gross income each month. We should still be able to save about 15% in cash and/or other investments.

[Jonathan]

I doubt those statistics are reliable - similar to the vacation time statistics yesterday, there are surely many ways to interpret the data based on the questions asked. But that said, I am also sure that the actual numbers, whether higher or lower than those stats, would be depressing to most readers of this blog.

My wife and I aren't too concerned with having a "rainy day" fund. We both have very secure jobs with rising salaries; at our current spending level we could live on either one of our salaries by itself; we have some room to cut back our spending if it were necessary; we have high credit card limits (we've never carried a balance, but the option is available); we have a number of different assets that we could sell or cash out if it were absolutely necessary; and we have a few different "passive" sources of income. As a result, we have no problem taking all of our cash and dumping it into a new investment, leaving us nearly cash-broke for a couple weeks until more paychecks come in. To us, having a large emergency fund would be an unnecessary waste of capital during one of the best real estate markets in history.

[ACS]

Our cash reserves fluctuate since we work on a part-time/semi-retired basis. We accumulate cash while we are working and then use that throughout the rest of the year. Right now we have a year's worth of expenses liquid, but if we were concerned about the economy we could reign in our discretionary spending and probably be able to stretch that several months more.

[Alotta Lettuce]

We currently have enough savings to sustain us for about 5 months on our current budget, or as much as 8 months if we were to bare-bones it (which we would absolutely do IF we were in a position where we had to rely on our savings at all).

Also, to texashaze: regarding the fate of savers as they age: There is a reasonably good chance that one of the "fixes" for social security's current woes will be to transition it to being a means-tested entitlement, meaning people who have X amount of money in retirement savings will not be eligible for SS benefits, even if they've paid into the system for their entire careers. If done at all, it will most likely be on a sliding scale, with the overwhelming majority of people receiving SOMETHING, and a relatively small % of people receiving nothing (since a relatively small % of people will ever reach whatever benchmark is set for 100% ineligibility).

[Old Limey]

Most people have some idea how secure their job is. In 1960, I was 26 with two young children and had just moved across country from Denver to Silicon Valley to start a new job as a junior engineer for a large aerospace company. Naturally my wife wasn't working so everything depended upon me. Even though my division had a nice contract to design and build the first submarine launched ICBM, that contract was in its final stages and in between contracts there are usually some layoffs and with my limited time with the company I was concerned that I might be let go. For this reason we were saving as hard as possible and building up a good emergency fund in case we had to make another cross country move. I also did everything possible to make myself as valuable as possible to the company by taking company classes, starting a company sponsored program to get my MS degree, and never under any circumstances declining an opportunity to work overtime. Gradually our savings kept growing, I started investing in the market, and was fortunate that my broker recommended Chrysler and by 1963 it had tripled in value, helping us to make a 20% downpayment on our first home. During subsequent years I saw others get laid off around me but was promoted a few times and eventually stayed there for 32 years before retiring in 1992. By then, my wife had also been working for many years, our home was paid for, and our total investments including our IRAs amounted to $320K.

I cannot overemphasize that a young family needs to live frugally, well within it's means, buy only what you need, save all you possibly can, be the best employee you possibly can, never turn down overtime, and don't try to impress others by buying expensive items when a far less expensive one will serve your needs. You will still be subject to the whims of the economy but at least you will have done your very best to have a long career followed by a long and happy retirement.

In our particular case, the future exceeded all expectations and we ended upoverdoing the saving of course, but if the future hadn't worked out very well for the USA we would have still been able to have a comfortable retirement.

[BD]

As someone who earns almost nothing, I find it amazing that so many people in America have less than $1000 in liquid savings. Even on my meager income, I have more than that saved up. Then again, as you all know from previous comments, I don't own a TV, or a landline, or a car, or any of the things that most people have. I'd rather have very little 'stuff', and instead, have money in the bank. You can't eat your TV or live in it, and if no one wants to buy it, you won't have money for things you absolutely need, like food or rent. That would make me very nervous to have 'stuff', but no money in savings.

[KMI]

We have 6 months cash for bare bones, no income. If we count in the ROTHs as a backup emergency fund, we have about another year on top of that. I'm working on getting to 6 months cash for what we spend now as opposed to the bare bones version.

[Lucia]

I am once again disturbed by the us-vs-them tone of some of these comments. After We worked and saved and did everything right all Our lives, while They sat around on Their sofas watching big-screen TVs bought on credit, the government wants to reward Them for Their sloth by giving Them Our money.

My husband and I have had at least three months' living expenses ever since we got married in our early 20s -- but a main reason we did in the beginning was that our parents paid almost all our college expenses, my husband's gave him a new car as a graduation gift (a very cheap car, but it got us where we needed to go), and I lived with my parents for a year while saving most of my pay from my first job. Our savings have grown to the point where I couldn't even tell you how long they would last, but it would be years -- in large part because we both stumbled into tech, we made good career moves, and my husband's employer was bought out by a highly successful public company with a stock-option plan. In other words, we were smart, we were frugal, and we were also extremely lucky. We have many friends and relatives who haven't been so lucky; divorce and bad health can happen to anyone.

Everyone knows at least one ne'er-do-well. I know a few myself. Ne'er-do-wells we have with us always, to paraphrase the Bible. I try to concentrate on keeping my own financial house in order, earning and saving so we have what we need and can also put a little toward feeding the hungry, healing the sick, and clothing the naked.

[Georgia]

We never had $1k in savings until about 1985. I had about $3k in an IRA. We bought our first home & I withdrew half of my IRA for the down payment. The next year I was out of work and we had to withdraw the rest. I was 48.

I was out of work for 1 full year and our cc debt skyrocketed. I was looking for work all over the northern part of our state and helping our daughter out. She was working 2 full time jobs, still unable to make ends meet and living 500 miles away. I finally found work and started a small amount to a 503b. When I retired at 69, I had about $78k in my 503b and we were finally out of debt. I keep 2 cc's, which are paid off monthly.

Right now I have about 3.5 years of emergency fund, which will go down to less than half if I need to buy another car. Also, I can use the minimum withdrawal of my 503b each year for any sudden expenses or to fix any problems with my home.

My net income is about $2k a month after taxes and health insurance are taken out. I do the 60-20-20 idea of 60% for living expenses & fun, 20% for tithe and donations, and 20% for savings. I have an 11 y/o car that seems to be going well. I own my home. I feel I ended up very well in my old age - just hit 74 on Sunday. Yippee!!!! Love getting old!!!!