I’m a saver, and I have the results of our Archetypes quiz to prove it. Since getting married, my husband and I have proudly saved to our bank accounts, and we’ve been keeping about a year’s worth of expenses sitting safely in cash. Then I started working at Abacus and came across my colleagues’ articles about an emergency plan (not fund) and putting a kibosh on the rainy day fund altogether. As it turns out, maybe I’ve been saving to the wrong place.
With an emergency fund, a person typically uses some rule of thumb, such as 3-6 months of expenses, to set guardrails on the amount of cash that should be in the bank at any time. With an emergency plan, you expand on this idea by actually imaging real life scenarios that might arise and the resources you have (or need) to navigate them. For example, you might move in with family, sell your car, take a loan from your 401k, etc. I slowly started to reassess our cash-keeping tendencies and concluded the following:
Too Much Cash
We were keeping nearly 12-months worth of living expenses in an account earning a measly 1% interest rate. We didn’t need this much of a cushion. My folks and siblings live close by so if we really were in a pinch, we thankfully have a support system to fall back on. First order of business: lower the cash fund to three months worth of lean spending. Lean meaning that in case of any emergency, we’d scale back on unneeded expenses (dining out, Ubers, shopping, etc.).
Get More Aggressive with Savings
I realized that keeping this cash was a huge opportunity cost. Cash in the bank may have been a comfort to us, but it wasn’t doing much else! After lowering our “emergency cash” balance to three months of needs, we increased our 401(k) contributions (so less cash was going into our checking account) and opened an investment account for any surplus. Each month, we now do an auto-transfer to our investment account.
Because we were sitting on a years’ worth of cash, if spending got a bit out of control one month, we didn’t feel the pain of it. With our new auto-transfer plan, cash does not build up in our checking account so we’re much more attuned to our monthly spending. In April 2018, for example, we had some unexpected expenses, and it wiped out our checking account. It forced us to lower our spending for the following months to get us back on track. We never would have done that a year ago!
Saving is a fabulous habit to cultivate, but tantamount to that is strategically saving and putting a cap on keeping cash. I’ve learned that it keeps me more in tune with our overall financial health.