Emergency savings: Expenses or aftertax salary?

Question: I'm a 36-year-old single professional in the DFW metroplex that tries to think long-term in my financial planning. I put 12 percent of my around $100,000 salary into my 401(k) with company match. Currently, the retirement fund is valued at about $100,000. I owe about $12,000 on my student loans (4.25 percent fixed interest, originally $80,000) and I have about 27 percent equity in my $180,000 town home. I recently refinanced my home at 4.125 percent for 15 years. My credit card debt is maybe $1,000.

After surviving a layoff well (due to a generous severance in the Great Recession), I was scared straight once I started working again. I now have about $15,000 in an emergency fund and next year's bonus will go to this, too. So I have three questions:

1) Do I need 6 months of bills or 6 months of salary after tax?

2) Should I park this in savings? Or is there a better financial instrument?

3) Is the emergency fund a higher priority than nuking the graduate school debt?

I appreciate your guidance. Keith, Plano, TX

Answer: I like your approach to personal finances. To your first question, it's your monthly expenses that matter -- not your salary (gross or net). You want to add up your loan payments, utilities, food and other expenses. Ideally, your emergency fund will cover the bills you have to pay for 6 months or so.

I would park the money in federally insured savings at the bank or credit union. We all want to make more money on our safe savings. But it's more important that you guarantee easy access to the money and preserve its value. In essence, think of your emergency savings fund as an insurance policy rather than an investment.

For now, I would put a greater priority on building up your emergency savings, rather than eliminating your loans. I would also get rid of the credit card debt. Once you've reached your savings goal, however, you can change your financial priorities and target the student loans.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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