Hey everyone, I’m a 23-year-old guy who just graduated college and landed my first full-time job. I’ve been investing for a while now, but I’m new to some of these adulting things like budgeting and building an emergency fund. I keep hearing you need to have 3-6 months of expenses saved as a ‘cushion,’ but I’m not totally clear on what that really means.
When it comes to risk, I don’t love the idea of leaving that much money in a regular savings account because it hardly earns anything. I’m considering putting it in something like SPAXX, which has low risk and earns about 5%. But would it be too risky to go even further, like with an ETF such as SCHD?
Also, what about liquidity? I figure if there’s an emergency, I could probably use my credit card to cover things until I can transfer money from SPAXX, even if it takes a day or two. But is it smart to keep maybe a month’s worth of expenses in a regular savings account for quicker access?
And finally, how do you all decide between 3 months vs. 6 months? Thanks a lot for any insights!
Edit: No idea why this is getting downvotes, but I appreciate everyone’s replies so far.
Figure out what your monthly essential expenses are - rent, car payments, food, etc. Add it up, then multiply by 3 or 6 for a bigger cushion.
Keep that money in a high-yield savings account where it’s safe and easy to access. Think of it like a safety net. Life can throw a curveball - losing a job, getting hurt, or a family emergency. That’s what this fund is for.
It’s there to catch you when life gets tough. Not for day-to-day expenses.
@Wei
Your safety net can also be a line of credit. If you have access to a credit line for 6 months’ worth of expenses, you can use that.
I had an emergency fund for about a year, but now I just use margin from my investment account. My 6-month cushion is around $25k, and I can get that amount in my checking within an hour if I need it.
Misha said: @Dru
So your emergency plan is … credit card debt? Good luck with that!
What’s the problem? I have a $100k limit across my credit cards and about $100k in my investments. If something goes wrong, I’d have time to cash out my investments to cover my card bill.
I usually pay off my credit cards each month anyway. Works well for me!
Uma said: @Kip
He’s talking about using high-interest debt as a safety net, though. Not great advice.
To put it differently - if you’re well-invested, a smaller cash fund can work. As long as you have a safety plan, like credit as a bridge while you access funds, it’s workable.
@Noah
This kind of emergency fund approach is super risky because you’re relying on credit. If your income stops and you can’t pay your bills, some payments (like rent) might not even be payable by credit. Plus, interest rates on credit debt can be brutal.
Good luck with that!