Comment by toomuchtodo | Hacker News Reader

Comment by toomuchtodo | Hacker News Reader

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This could be an entire blog post, but yes, its common in the US to become overleveraged without a sufficient emergency fund.

Its usually recommended to have 3-6 months of expenses in the event of income loss, but its only a rough guideline. In some industries or economic scenarios, you may go almost 12-24 months with a job or significant income (I leave out part time jobs or gig for keeping this simple).

In short, we don't save enough in America (for a variety of reasons), and we don't have a proper social safety net for when that comes back to bite us.

<soapbox>

Have 6-12 months of expenses saved in your emergency fund. This is critical. When possible max out your retirement accounts (a Roth IRA can be used as an emergency fund in a pinch; contributions can be removed at any time penalty fee, but this should be a last resort). Save more. Live below your means.

</soapbox>

https://www.reddit.com/r/personalfinance/wiki/commontopics

Infographic: https://i.imgur.com/fb7Dtmh.png

The dimensions of this can change somewhat when dealing with long-term loans. If you have a mortgage on terms which allow this, then you're probably better off keeping several months of overpayments in your mortgage account, on the understanding that you're allowed to stop payments for that long in an emergency. Most lenders have some sort of terms like these, but check yours carefully before doing this.

This implies setting your mortgage repayment rate at a level which leaves you with sufficient income to overpay it. Having set things up this way, you can then size your emergency fund on the assumption that you won't have to pay your mortgage out of it.

Why do this? Simply put, the savings on interest are massive and this improves your financial stability a great deal over time.

Why not do this? It requires careful and diligent financial planning, and that sort of person probably doesn't need telling how to take advantage of the subtleties of mortgages.

Yeah, I'd recommend 6-12 months in cash, with surplus savings in something liquid (like stocks) and a maxed IRA/401(k).

An investment property isn't liquid, and it's also leveraged.

If you're overleveraged, you'll make extra profits during the inflationary boom, but you'll get wiped out during the next recession.

I'm not sure I agree with the placement of debt. It is often the case that you can you off the debt, but the money invested properly could increase faster than the debt increases.

High interest debt in that graph is usually understood to be above market returns (8% and up).

On the other hand, if you pay off that debt, you're entirely removing the risk of default, which means you can take on more risk with the remaining capital, and don't have to have 6 months of debt repayments in your emergency fund.

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