One of the members at the Tap Dancing to Financial Independence group posted this question a few days ago.
“The member and her husband have a 6 month emergency fund and as of now their employment is safe. The member is a paralegal and her husband is a software engineer. They have one child with another on the way in July. They have had an influx of cash in addition to the stimulus check. Also, as a result of increased earnings and lower spending they can increase savings by $1K per month.
She is wondering if they should:
1 – Save it in a high yield savings account;
2 – Put $5,000 in child’s 529 (planning on doing this at some point in 2020 anyways)and save some to put in new baby’s 529 once born in July;
3 – Max out my Roth IRA ($6,000);
4 – Invest in VTSAX; 5 – Spend some on improving our home. We plan on living here for at least another 2 years. Need new carpets upstairs, new floors downstairs, new hot water heater, and new furnace, among other things.“
I am no economic expert, but with every passing day I am more concerned about our country’s short term economic health. Without diving too much into politics, the shutdown and the resulting recession will last longer than the local and national governments are willing to admit because of lax enforcement of social distancing.
Therefore, if there is a prolonged recession, the best route to invest is my own mental health. Personally, I consider emergency fund as sleep insurance, and the better I sleep, the better I can work and protect my economic engine. While this is a drag to the overall return, I would trade return for more security. For the record, I have one year of emergency fund available.
Logically, the discussion of how much emergency savings is needed depends on how likely you need to access it. How likely would both the husband and wife be laid off and how long would they need to rely on unemployment income and the EF? But as we are emotional well-being, the question should be “how much do they need to sleep well at night?”
This is not to say that she and her husband can’t consider the remaining options. She can max out her and her husband’s IRAs and also the children’ 529, but perhaps later in 2020. She can also upgrade their primary home, but she can find better deals in materials and labors if there is a prolonged recession. However, my top choice is increasing her EF till there is more clarity.
As a side note, she can invest in VTSAX in her brokerage account, IRA account, and 529 plan (if offered).
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