I can see why people find Dave Ramsey’s baby steps attractive, I really do. As someone who is prone to paralysis of analysis (and whose husband is even more prone), executing an instruction is so much easier than making an informed decision and then carrying it out.
While watching week 1 of the FPU videos last week on “super saving,” my thoughts were on that 3-6 month emergency fund. We’ve had $1,000 set aside (baby step 1) since before we were married, and within 3 months after our marriage we had put aside the money to pay off my student loan debt (effectively completing baby step 2). At that point we implemented our targeted savings account system and neglected to think about beefing up our EF.
The video this week made me realize that I’ve never even calculated what 3 or 6 months of expenses is for us! Obviously, I know our incomes for that amount of time and I’ve even calculated what an emergency budget would be for us if we lost one of our stipends. But I don’t actually know what we spend in an average month because the targeted savings accounts obfuscate our spending somewhat and Mint gets confused by all our transfers. If the TS accounts were perfectly set up and the net flow averaged to zero it would be easy to calculate our spending, but we have been over-saving into those accounts recently and built up quite a bit of cash.
1) Our net income: I used our 2012 gross income from our tax return, since our monthly stipend income doesn’t take into account our other income sources (Kyle’s tiny weekend job, investment returns), and subtracted out the federal and state tax we owed last year.
2) Our giving: For this figure I used our current monthly giving to our church and the missionary we support, the amount we set aside in our charitable giving targeted savings account, and $13 to approximate the 10% we give from Kyle’s side income.
3) Our long-term saving: We dollar-cost-average into our Roth IRAs with our stipend money so that figure is easy to get, plus we save 15% of Kyle’s side income, which is about $20 per month.
4) The increase in our short-term savings: We’ve been piling money into our targeted savings accounts this year at a much greater rate than we’ve been spending out of them, so I wanted to account for this non-spending. I subtracted the balance of all of our targeted savings accounts on 8/31/2012 from the balance on 8/31/2013 to get an idea of how much money we save into these categories over a year (nearly $6k! I never looked at that figure before).
I estimated our monthly spending from the sum left over after subtracting our giving, long-term saving, and increase in short-term savings from our net income. This actually did seem easier to me than trying to figure out our yearly spending directly and delving into each one of our targeted savings accounts to figure out our real spending! I could have taken a few shortcuts like using our take-home pay instead of gross minus taxes but I just chose to go a little deeper.
When all is said and done, it looks like we’ve been spending on average $2,558.33 per month, or 55.5% of our gross income. A 3 to 6 month emergency fund would contain between $7,675 and $15,350. I was thinking that $10,000 would be a reasonable EF in the past so that is right in line with this range. Of course, we don’t have that kind of money set aside for that purpose alone!
But as I’m a bit of a contrarian, especially when it comes to Dave Ramsey’s teaching, I have to ask if the 3 to 6 months of expenses is really appropriate for our emergency fund. More on various methods for calculating emergency fund size next week!
Can you calculate your monthly spending in a straightforward manner or do you have a convoluted method like mine? Do you have a 3 to 6 month emergency fund?
photo from Free Digital Photos