How about: get 6 months of expenses, then get up to 6 months of net, then 6 months of gross, then keep saving at that rate while investing anything you don't need to keep liquid? There is no ceiling past which it doesn't make sense to have money.
That assumes decent real returns on investment, which I'm not convinced really exist any more without taking on more risk than many are comfortable with. If your savings get to a level where they're evaporating to inflation faster than you can top them up, that arguably doesn't make sense any more.
Good piece on Bill Gross today which I largely agree with; key pull quote for me is "capitalism cannot function efficiently at zero-bound rates".
Presently, in the US, inflation is 2-3% a year. Savings interest rates definitely don't keep up, but they don't fall so far behind that your money is evaporating.
Save up that 6 months of expenses, and each year keep adding to it to make up for the "evaporating" amount. An extra $1000-2000 a year should be more than enough.
Move the money into a CD ladder, which has a better opportunity for keeping up with inflation, once you're more comfortable (about 1 year's worth of savings). You effectively risk 1 year (but the cost of breaking a CD open early isn't that bad if worst comes to worst). You put your money into 4xCDs at 3, 6, 9 and 12 months. As each comes to maturity you bump them to 12 months. So every quarter you have one quarter worth of expenses accessible. Keep 3 months worth of expenses in your checking account to ride out the wait for the first CD. Now you actually have 15 months of savings. A single, competent tech worker can easily achieve this after 3 years, probably earlier, outside high cost of living areas.
I was thinking of chunkier savings, i.e. more on the order of 10-15 years' worth of expenses. The evaporation starts to hurt more at that scale, and here in the UK fixed rate bonds (which I think are the equivalent of your CDs) still pay less than inflation. Even "official" inflation.
If you have accumulated 10-15 years worth of savings, that money should be somewhere it is earning a return (easily beating out inflation). It certainly should not be in your savings or checking account at the local bank.
I have roughly six months worth of expenses in cash, that I could go take out of the bank right now should something happen. I'll be fine as long as the remainder is somewhere I can get to (some of) it within six months -- and it is.
I think you missed the first sentence of my earlier comment:
> That assumes decent real returns on investment, which I'm not convinced really exist any more without taking on more risk than many are comfortable with.
I can't see anything right now that isn't at bubble levels based on the expectation of zero interest rates continuing forever everywhere. Maybe they will, but I think at that point you're gambling rather than investing, and gambling doesn't appeal to everyone.
So maybe hold the cash and short-term assets you feel compelled to have, and index the market with the rest? It may decrease in value for a time, but if you avoid realizing those losses, it'll likely bounce back. If you think the whole economy is in for a serious contraction with a decade+ horizon for recovery, you could go into previous metals, but you may just be screwed either way.
I actually do believe that the US is in for serious contraction due to the unsustainable infrastructure and development patterns. I'm hanging out in the market anyway, because the federal reserve and misplaced public trust in municipal bonds will kick that can decades further down the road before we ever face the facts.
Until then, I know that I don't have the forecasting ability of large banks, so I play the game with the only advantage I've got: patience.
Oh, absolutely. I wouldn't want that much as savings or CDs. My goal is 2-3 years worth of savings in this CD ladder scheme (international dating has seriously hampered my ability to save at my desired rate). But, yes, you're correct, for that amount, savings and CDs or fixed rate bonds suck.
Typically it means 6 months of expenses you can't get rid of if you have to.
So if you current budget says that you need $500 a month in groceries, but you know you could get that down to $200 with realistic sacrifice, you count the $200 not the $500.
~12% or more judiciously applied in historically stable investment funds and in savings towards future vacations/gadgets
~33% spent in housing
~35% spent (or not spent) in everything else, eating out, buying random stuff, clothing, etc.
Since a small scare, I always maintain an emergency fund easily accessible which covers 7 months of expenses at my current levels (housing, utilities & food)
Besides all of these I still have the luxury of living in a country where there's an unemployment pay that covers an hefty percentage of your last gross salary for at least 2 years since the day you became unemployed.
I can't tell you how less anxious and relaxed I became since the day I completed my emergency fund and started making proper savings and investments.
Parent strongly suggests that they don't live in US.
The utilities thing was what I found crazy. I was paying about 1-2% of take home pay to utilities at my place in California, despite making what I assume is far less than most people here.
I'm not the parent, but utilities for me in Uruguay are closer to 10% of my take-home pay than to 2% (electricity alone is 5%). I pay 5,6 URGP per kWh (about 22 U.S. cents).
According to Google, it's twice the price paid on average in the U.S.
The same goes for most other utilities. They're usually NOT included in rent contracts, that's another sticker shock foreigners have (also, houses have no basic appliances when rented out).
Most groceries are also way more expensive. Third world doesn't mean cheap, sadly. Only labor is cheaper (and some locally produced and nonexported goods, or subsidized).
My first salaried job was at $60k, which came out to roughly $3000/month take-home.
Utilities were split among roommates, but about $60-100 depending on the time of year. If you add in other recurring costs like internet and mobile phone, that can easily go up to $200-250, which is about 8%, so the parent's 10% isn't too far off (especially if you have to pay for heating/AC in more extreme climates).
