Rainy Day Pennies | Debt Free Living and Personal Finance

How Much Emergency Savings Should I Have? Should I invest in more stocks than bonds?

Every personal finance blogger has their own opinion about this. Most of them say you should have at least 3-6 months if you are single, and up to a year if you are married with children. The best strategy that works for me is the one from the New York Times in their story: Legacy of a Crisis: A Generation Shy of Risk.

Basically, it says that your investment risks should reflect more on what you do for a living than your risk tolerance or time horizon. If you work in a steady income, tenured field like teachers or government employees, then your investments can have more risk since you are less likely to lose your main source of income. Your raises are likely to be steady, but not earth shattering. If you work in a volatile field like banking or technology, then your investments should be more stable. Bankers and tech workers tend to have boom and bust incomes just like the stock market – time of plenty, and time of starving.

I fall into the latter category. I have done this intuitively for some time, but the NYTimes article is the first time I’ve seen it explained this way. I have a higher than normal emergency fund to cover basic expenses. I could stretch it out even further if I needed to. I have zero debts – no student loans, credit cards, mortgages or car payments. The reason is because the fewer liabilities I have, the less likely I am to run into trouble if I am laid off. It also affords me some mobility. If jobs dry up in Seattle, I can move where there are jobs. I save my money in cash until I can afford to buy a major purchase. This allows me to dip into the washer/dryer fund if I ran into a hardship year, instead of being saddled with a payment due for the washer and dryer.

My retirement investments are on the conservative side; index funds that are a mix of some stocks and mostly bonds. Once again, this is due to the volatility of my profession. If I end up on the wrong side of a down cycle at retirement like we’re seeing now, it could be disastrous for my plans for a cabana, botox, and leisurely days in Margaritaville.

I opt for a wealth preservation strategy while times are good. My skills could be completely obsolete in 20-30 years. If I end up in a down cycle year at retirement, I may have a very tough time even choosing to delay my retirement. Technology is an industry that favors the youthful, unfairly as it is. In order to keep my income growing, at some point I will need self sustaining income not tied to my employment. Thus, my retirement income is designed to be from more stable sources (not just 401Ks and IRAs), while my career is more volatile in my prime income years.

This is could apply to anyone, but if you work in a field with highs and lows, this is especially important. I’ve seen more than one tech worker surprised by a layoff with a nasty Audi payment and no savings.

Filed under:
Investing, Life Management, Retirement by Cathy