I love the blowing up of these saysings (your rainy day fund) that just make personal finance MORE complicated.
I think of my rainy day fund as the money that I have that is liquid and accessible with little or no costs or penalties associated with it. Can't count my house, car, IRA, illiquid investments (none, all index funds) tractor, etc. All else is my rainy day fund.
It is important to always have a reserve fund that acts as a safety net for whatever life throws your way, but setting up a fund based on a generalized statement seems like an inefficient plan. Since umbrellas of different sizes exist for different people and activities, the same should be true for reserve funds. The amount in a fund needs to be based on an individual's or household's needs and should align with their priorities. People should save an amount of money that aligns with maintaining a comfortable standard of living and how much risk they are comfortable with.
The umbrella analogy clicked for me, it’s such a simple way to explain how everyone’s savings needs are different. It’s interesting to think about how setting aside too much or too little can both create problems, and it makes me question the 3-6-month rule we always hear about. I’d love to know more about what specific factors people should focus on to find the right balance. Is it just about income and risk, or are there other things to consider?
How can households determine the "right-sized" rainy day fund that balances financial security with maintaining their living standard? Do you think most people would benefit from using these tools like baseline economic planning to make these decisions, or do simpler approaches still have their place?
I mentioned in another comment that a household can quickly build a menu of rainy day fund amounts and associated living standard outcomes. Then choose off the menu.
It is definitely important for us to have some sort of rainy day account because in life nothing is absolutely certain. I really liked the analogy of the umbrella's because as the article said, not everyone needs the same amount of savings in that account. I always wondered about the 3-6 month rule so I am glad that this article has cleared up that it isn't accurate. What I do wonder however is if that isn't true, then what amount, if any, can be generalized for everyone? Does it just depend on your income and risk tolerance, or are there other factors of the unknown that can affect it as well?
The generalized solution to the rainy day fund question is the process. Rainy day fund target $x produces $y of annual living standard. Run a half dozen scenarios. Then choose based on preference.
Obviously, it is very important to have a rainy day fund or some sort of emergency fund to protect yourself against a downturn in the market or just a bad financial situation. However, no one is the same nor has the same exact investments, income, or financial plan; therefore, it makes no sense to generalize the same "3-6 month" rule to everyone. I think that your rainy day fund, just like your investment portfolio or financial plan should be tailored to you and what you are comfortable with.
The analogy of the umbrella really puts it into perspective. Not everyone needs nor has the same umbrella. with savings, there is no one size fits all. like we have looked at in class maxi-fly is a really good financial planner to look at and help you make the decision on the right amount that maximizes your spending and saving. Aside from maxi-fly, what would you say is the next best thing, if not better?
MaxiFi has no software competition yet. Hopefully, it will. Certified financial planners have zero training in economics-based financial planning, because a lot of their training is based around selling investment products. Hopefully, MaxiFi will begin to have competitors, and households will be well-served by financial advisors who understand economics-based techniques. BTW, there are financial planning firms who use MaxiFi....just not enough of them...
I like your description of reserve funds being more subjective than, like you say, enough to cover 3-6 months of your expenses saved. How much you save ultimately surrounds many things that frankly come down to each individual and their situation. I think that having a rule of thumb may be important. Still, overall each person's reserve fund should be different and fit to a person and hopefully suffice their unexpected expenses and situations.
A rule of thumb is too sloppy, when a financial life doesn't have to be that way. You would have better fitness doing 100 push-ups daily than 5. If 5 is a choice, stay a couch potato. 🙂
They don't evaluate the living standard loss.....that is why modeling a menu of rainy-day targets against living standard results helps decision-making.
I believe that having a reserve fund of some sort is essential just in case a horrible problem occurs! Although the 3-6 moth of expense rule could work, I believe it is better to set aside money based on your investments and financial stability instead of following this exact rule.
Playing what-if is really important and easy to do with MaxiFi. Choose an allocation amount for a reserve, and view the living standard trade-off. Looking at 5 or 6 pairs of choices then choosing is a good approach.
I believe having a "rainy day fund" is very important as there can be no indication of a financial disaster coming. Having a strong financial base plan is important, but setting up your finances for longevity and into diverse assets can help if there is a possible financial disaster.
Yes, Jack, I understand where you are coming from. "Comfort" matters for most of us. How the living standard changes when you put money aside puts a dollar amount on the trade-off.
The 3-6 months of expenses rule definitely doesn’t work for everyone because it’s too generic. A better approach is to set aside what makes sense based on your personal needs, risks, and financial goals. Starting with a plan that fits your life will build a more realistic safety net.
I thought this post was incredibly influential, highlighting the absolute importance of having a baseline financial plan, ensuring that you find a happy medium when it comes to saving for an emergency in the future. Ensuring that you're aware of your financial situation is incredibly important to make sure you're not overcompensating or underprepared.
I just want to say that I have enjoyed if not all of the articles you have published and the questions you pose at the end of them. Not only does this allow me to explain to my parents that not everyone is can afford the same size "umbrella" it takes some pressure off of my shoulders!
Agreed. These "one size fits all" statements simply don't work. Question. How do I determine the right emergency fund size for my specific financial situation without setting aside too much or too little?
Great question. You scenario build after you run your baseline plan. If you want to save toward an emergency fund, then you can set one amount, then run the model.....Set another amount and run it again.....Four or five would give you a set of choices. Then compare how much lifetime discretionary spending you are giving up.
I agree with this 1000%. I think it is so easy to fall into the belief of these traditional norms of saving and “Experts say you should have 3 to 6 months of living expenses saved,in case you have an emergency" is a prime example of that. It fails to analyze many important elements of finance making it far from realistic.
I love the blowing up of these saysings (your rainy day fund) that just make personal finance MORE complicated.
I think of my rainy day fund as the money that I have that is liquid and accessible with little or no costs or penalties associated with it. Can't count my house, car, IRA, illiquid investments (none, all index funds) tractor, etc. All else is my rainy day fund.
Makes perfect sense to me!
It is important to always have a reserve fund that acts as a safety net for whatever life throws your way, but setting up a fund based on a generalized statement seems like an inefficient plan. Since umbrellas of different sizes exist for different people and activities, the same should be true for reserve funds. The amount in a fund needs to be based on an individual's or household's needs and should align with their priorities. People should save an amount of money that aligns with maintaining a comfortable standard of living and how much risk they are comfortable with.
The umbrella analogy clicked for me, it’s such a simple way to explain how everyone’s savings needs are different. It’s interesting to think about how setting aside too much or too little can both create problems, and it makes me question the 3-6-month rule we always hear about. I’d love to know more about what specific factors people should focus on to find the right balance. Is it just about income and risk, or are there other things to consider?
How can households determine the "right-sized" rainy day fund that balances financial security with maintaining their living standard? Do you think most people would benefit from using these tools like baseline economic planning to make these decisions, or do simpler approaches still have their place?
I mentioned in another comment that a household can quickly build a menu of rainy day fund amounts and associated living standard outcomes. Then choose off the menu.
It is definitely important for us to have some sort of rainy day account because in life nothing is absolutely certain. I really liked the analogy of the umbrella's because as the article said, not everyone needs the same amount of savings in that account. I always wondered about the 3-6 month rule so I am glad that this article has cleared up that it isn't accurate. What I do wonder however is if that isn't true, then what amount, if any, can be generalized for everyone? Does it just depend on your income and risk tolerance, or are there other factors of the unknown that can affect it as well?
The generalized solution to the rainy day fund question is the process. Rainy day fund target $x produces $y of annual living standard. Run a half dozen scenarios. Then choose based on preference.
Obviously, it is very important to have a rainy day fund or some sort of emergency fund to protect yourself against a downturn in the market or just a bad financial situation. However, no one is the same nor has the same exact investments, income, or financial plan; therefore, it makes no sense to generalize the same "3-6 month" rule to everyone. I think that your rainy day fund, just like your investment portfolio or financial plan should be tailored to you and what you are comfortable with.
You understand well a better way to think about personal finance questions!
The analogy of the umbrella really puts it into perspective. Not everyone needs nor has the same umbrella. with savings, there is no one size fits all. like we have looked at in class maxi-fly is a really good financial planner to look at and help you make the decision on the right amount that maximizes your spending and saving. Aside from maxi-fly, what would you say is the next best thing, if not better?
MaxiFi has no software competition yet. Hopefully, it will. Certified financial planners have zero training in economics-based financial planning, because a lot of their training is based around selling investment products. Hopefully, MaxiFi will begin to have competitors, and households will be well-served by financial advisors who understand economics-based techniques. BTW, there are financial planning firms who use MaxiFi....just not enough of them...
I like your description of reserve funds being more subjective than, like you say, enough to cover 3-6 months of your expenses saved. How much you save ultimately surrounds many things that frankly come down to each individual and their situation. I think that having a rule of thumb may be important. Still, overall each person's reserve fund should be different and fit to a person and hopefully suffice their unexpected expenses and situations.
A rule of thumb is too sloppy, when a financial life doesn't have to be that way. You would have better fitness doing 100 push-ups daily than 5. If 5 is a choice, stay a couch potato. 🙂
What considerations do you think people often overlook when determining the right size for their emergency fund?
They don't evaluate the living standard loss.....that is why modeling a menu of rainy-day targets against living standard results helps decision-making.
I believe that having a reserve fund of some sort is essential just in case a horrible problem occurs! Although the 3-6 moth of expense rule could work, I believe it is better to set aside money based on your investments and financial stability instead of following this exact rule.
Playing what-if is really important and easy to do with MaxiFi. Choose an allocation amount for a reserve, and view the living standard trade-off. Looking at 5 or 6 pairs of choices then choosing is a good approach.
I believe having a "rainy day fund" is very important as there can be no indication of a financial disaster coming. Having a strong financial base plan is important, but setting up your finances for longevity and into diverse assets can help if there is a possible financial disaster.
Yes, Jack, I understand where you are coming from. "Comfort" matters for most of us. How the living standard changes when you put money aside puts a dollar amount on the trade-off.
The 3-6 months of expenses rule definitely doesn’t work for everyone because it’s too generic. A better approach is to set aside what makes sense based on your personal needs, risks, and financial goals. Starting with a plan that fits your life will build a more realistic safety net.
Yes.....And it is easy to use alternative scenarios of differing amounts to fund for an emergency and assess living standard effects.
I thought this post was incredibly influential, highlighting the absolute importance of having a baseline financial plan, ensuring that you find a happy medium when it comes to saving for an emergency in the future. Ensuring that you're aware of your financial situation is incredibly important to make sure you're not overcompensating or underprepared.
Indeed. Knowing the numbers does help in making a choice that is also qualitative.
I just want to say that I have enjoyed if not all of the articles you have published and the questions you pose at the end of them. Not only does this allow me to explain to my parents that not everyone is can afford the same size "umbrella" it takes some pressure off of my shoulders!
Awesome. A little education is helpful to make a more informed choice.
Agreed. These "one size fits all" statements simply don't work. Question. How do I determine the right emergency fund size for my specific financial situation without setting aside too much or too little?
Great question. You scenario build after you run your baseline plan. If you want to save toward an emergency fund, then you can set one amount, then run the model.....Set another amount and run it again.....Four or five would give you a set of choices. Then compare how much lifetime discretionary spending you are giving up.
I agree with this 1000%. I think it is so easy to fall into the belief of these traditional norms of saving and “Experts say you should have 3 to 6 months of living expenses saved,in case you have an emergency" is a prime example of that. It fails to analyze many important elements of finance making it far from realistic.
We are on the same page. It is an easy intellectual victory.