Frugal living challenge

[GrayMatterWife]

I really should cut back on my book purchases but dang, that's a really tough one.

My weakness, too. It is shameful. I have no self-control.

[HouseofWool]

I tried doing the "track every penny" method recommended by Dave Ramsey and I swear I broke out in hives. So, now, on payday, I pull out a set amount for groceries and household consumables for the week. I also need to pull another set of funds out to use for home improvement stuff on a monthly basis. If I can do it from the grocery money, great, but I need a bit more for things like paint. Gawd is paint expensive.

Most of my projects are fairly long term and I finally have most of the tools that I need. It is stuff like new vent covers for C's room now that it is painted or hardware for his curtains that I can't really budget well. I don't know what they will cost, and while I am making due with a lot of things, some stuff really just needs replacing.

I have started to set aside a specific amount into a specified account that I use for purchasing gifts throughout the year. Christmas killed me this year. I didn't spend a lot, but I didn't have the funds set aside like I normally do. Blech.

[alison]

Alison, have you found that the amount you want in your emergency fund fluctuates? Once dd starts school full time (private pre-k most likely), the amount we will need for tuition will have to be added in. We have an 8-month emergency fund. Any less, and it makes me nervous.

Do you really need the entire emergency fund readily accessible? A new roof, an emergency trip to dh's parents if anything should happen, etc. won't drain everything, so couldn't some of it go into something that yields a higher interest?

[spotty_dog]

We downgraded the emergency fund number while rebuilding it this year, after we pilfered it to do our cash-in refinance. It's a set figure that we aim for, the fact that I think it would cover about 8 months is just a rough estimate that partially presumes we'd pare back hard on extraneous spending if we had to live out of savings. If our fixed expenses changed dramatically, I'm sure our e-fund figure would change too.

The brokerage account and Roth contributions could also be tapped within a few days of transactions, so we kind of count that as the second tier of e-fund, and that almost triples the total. It also makes the cash account that much overkill, LOL. Some day I'll put everything but 1-3 months expenses into a CD ladder or I-bonds or something similarly riskless but accessible, but for now I feel pretty strongly that developing a saving habit is much more important than what, exactly, we do to make that money work for us. (Of course, with interest rates as low as they are, we're actually losing purchasing power by leaving the money there, but I still feel less than urgent about changing that right now.)

[MrsK]

We downgraded the emergency fund number while rebuilding it this year, after we pilfered it to do our cash-in refinance. It's a set figure that we aim for, the fact that I think it would cover about 8 months is just a rough estimate that partially presumes we'd pare back hard on extraneous spending if we had to live out of savings. If our fixed expenses changed dramatically, I'm sure our e-fund figure would change too.

The brokerage account and Roth contributions could also be tapped within a few days of transactions, so we kind of count that as the second tier of e-fund, and that almost triples the total. It also makes the cash account that much overkill, LOL. Some day I'll put everything but 1-3 months expenses into a CD ladder or I-bonds or something similarly riskless but accessible, but for now I feel pretty strongly that developing a saving habit is much more important than what, exactly, we do to make that money work for us. (Of course, with interest rates as low as they are, we're actually losing purchasing power by leaving the money there, but I still feel less than urgent about changing that right now.)

We do this too. We kept an emergency with an amount equal 8-10 mo living expenses. Most financial advisors recommend a 6 month fund but with this uncertain economy and unpredictable residency lifestyle expenses, we wanted a bigger cushion. If our savings exceeded the agreed upon $$ amount, we would take the excess and pay down a previously agreed upon priority debt. (We prioritized smaller loans, higher interest and consumer debt.) Emergency savings can be invested in 1yr Certificates of Deposit if you ladder them. So, you put 1 mo worth of expenses in a 12mo CD in January, then another mo worth of expenses in a 12 mo CD in Feb, and so on. That way, when the rainy day comes, you can tap into the funds each month. We looked into doing this but at the time the CD interest rate was the same as our savings account savings rate. The emergency fund absolutely saved us when I lost my job. After I lost my job (actually, when we found out that it was likely that I'd loose my job), we restructured all of our debt, tightened our budget, and moved to a smaller home, and looked into ways we could earn extra money, so we could stretch our savings longer. We had to take a significant portion of the savings out to pay off law firm debt which upset me but, since that debt was our previously prioritized debt, we had already paid down more than 2/3rds of it so it was not as bad as it could have been. Without the savings, we would have been totally screwed at that point. Also, my job loss put us in a much lower tax bracket so our tax refund that year replaced all the money we used to pay the law firm debt. Almost two years later, we are still using the savings to supplement DrK's income but not nearly as much as we would have if we maintained our prior lifestyle. Also, we are still adding to our savings. We lowered the $$ minimum that we keep in the savings account and we continue to apply anything over that amount to our prioritized debts.

[spotty_dog]

If we do a CD ladder, I'd probably plow everything into staggered maturities from 3 months to 5 years, then just roll over into 5 year certificates as they mature. I wouldn't worry about the low interest on a 3-month certificate; it can't be much worse than the savings account! And I wouldn't worry about the long maturity on a 5-year; the early withdrawal penalty is only on the interest earned, and often is waived after a certain holding period. It would be worth breaking in a true emergency.

But I-bonds might be a better choice, since it's mostly inflation risk I want to protect against, and since the early withdrawal penalty is pretty minor (3 months' interest if you redeem between 1 and 5 years, nothing after 5 years). With the interest adjusting every 6 months to keep up with the CPI-U and the fed, it's a pretty flexible and decently-yielding riskless investment. Only downside is you can only buy $10K per spouse per year, so we couldn't do it all at once. Especially since I kind of want I-bonds in my fixed-income allocation for retirement purposes, so we'd prioritize between the two goals. Maybe the e-fund could go in a combination of CDs and I-bonds, or hi-yield online savings and I-bonds...honestly, it's probably a good idea to keep a nice chunk of cash during the year that the I-bonds are completely inaccessible...hrm.

[houseelf]

FWIW, the White Coat investor does not keep a 6 month retirement fund because he feels like he can make better interest on his money elsewhere and physicians normally can find some type of work if desperate well within a six month window if the excrement hits the fan.

[GrayMatterWife]

DH says that he has a great 6-month emergency fund: my job.

(How do I insert an "eyeroll" emoticon???)

[SuzySunshine]

I think our financial guy recommends 3 months, we've just started saving hard this month and it was so nice to see these little bucket withdrawals taken out of our checking account automatically. I needed that push to get it started.

[Deebs]

We were also told three months. A lot depends on your disability and other insurance plans.

[spotty_dog]

Yep, there's no good reason for us to sit on tens of thousands in cash/equivalents, and I don't recommend it. There are a lot of very good logical arguments to keep the total smaller, including the ability to rely on brokerage accounts, Roth contributions, even HELOCs and credit cards in the case of a true emergency, job loss, or disability. But our system works for us and lets us sleep easy, and as far as I'm concerned the only way it's broken is that there is a negative real return on the account it's in; the amount is technically being bled away by inflation. But it's not so broken I'm rushing to fix it.

[reciprocity]

Maybe hyper-organizing grocery shopping is a lawyer thing? Once you've prepared a massive trial exhibit book or a real estate closing binder, you become obsessive about organizing information...

I wish!