Emergency fund – how do you work out what you need?

Hi All

2 related questions:

1) What metrics people use to calculate how much they keep in a reserve/emergency fund? It would be helpful to determine how others calculate it so I can do my own calcs. For example, do you keep a certain ratio of emergency fund to expenses (eg. cash to cover X months’ expenses); cash as a % of net worth or % of net debt, or something else?

2) What rules of thumb / yardsticks are there to determine how much you personally should in fact keep in the emergency fund? Obviously this depends on risk profile and goals, but I would be keen to hear what emergency fund some people do have. By way of example, I am looking to keep cash to cover 12 months of all costs and expenses. I am mid-30s, wife and no kids (yet) looking to consolidate our existing investments.

Apologies if this Q has been asked before. I had a look / search on the forum and couldn’t find anything.

Thanks

Prothonotary

 

Personally, I keep 3 months of my salary tucked away for emergencies.
That might be low for some people here, but I have about 30% cash flow after all my expenses (including IPs).
I have done my own risk assessment. In my line of work, it’s very unlikely that I will be out of a job for more than 3 months (I have income protection as well).
Plus, I am more the optimistic type- what are the chances that you lose your job and all your IPs are vancant for more 3 months all at the same time? (I hope I haven’t jinxed myself!)

 

Currently, our cash holdings are:

1. 10.5% of our total assets.
2. 15.0% of our net worth.
3. 35.1% of our loan portfolio.
4. 20.7% of our SMSF balance (we keep at least 3 years pension payments in cash).

These are probably a bit high for some people's expectations but my view is you can't have too much in cash when the **** might hit the fan .

 

I now budget for at least one property to be vacant at any one time so effectively 100% vacancy on a given property at any one time. That way if I have prolonged vacancy in any one place e.g. for renovations or insurance claims (as I have just gone through) I'm not pressured and it also then allows others to go vacant at the same time. It's unlikely this scenario will eventuate (100% vacancy) so I'm well covered.

- Andrew

 

when that happens I thought you wanted gold bars and well planned prepping?

 

Nah, you are confusing “**** might hit the fan” with “the end of the world is nigh” .

 

Personally I like the idea of 12 month expenses as a measure, and keep this in an offset.

I also note that when reading the budget papers last night that Australia's well performing 'Future fund' keeps 15% cash (attached) @kierank is a model student

side note: i found the property/aus shares allocation interesting

 

See what your super or income protection will cover you for if you have any health / work issues.
Then cover the rest with savings for at least a years worth of annual income, peferably two.

 

By Property it doesn't mean Aussie properties, it is a mixture of commercial properties fund spans the globe

 

Noted, I did assume our government isnt buying new build resi studio units in blacktown..

 

I think 6 months of expenses is a happy medium for emergency fund. Most professionals should be able to find a job in this period based on their experience, or be covered by 'Underwritten' income protection insurance. In terms of cash holding % of total net worth, this is a tricky one. I would think ~10% is a good number.

 

Kiyosaki once said, there are just 4 precious metals; Gold, Silver, Guns and Bullets! You need the last two to protect the first two!

 

10K buffer per property