Saving

QUESTION: Laura asks where identity theft protection should fall within the Baby Steps. Dave thinks it needs to be part of your regular monthly budget, rather than included with the Baby Steps.

ANSWER: Everyone needs identity theft protection. Unless you’re one of these folks who have gone completely off the grid, someone out there probably has a few of your numbers. Whether it’s carelessness on the part of consumers, or the massive data breaches that have occurred in the last few years, almost everyone has experienced some sort of identity theft.

I don’t really consider identity theft protection part of the Baby Steps. It’s like life insurance or car insurance, in that it’s something almost everyone needs. Things like that should just be part of your budget every month.

QUESTION: Don and his wife work for the same company. Because of this, he asks Dave if they should have a larger emergency fund than normal.

ANSWER: No, I don’t see a reason to set aside more than six months of expenses. My recommended range for an emergency fund is three to six months of expenses. If your employment situation is one where there’s more risk, you should lean toward saving six months of expenses. If your employment outlook is stable, you can go with setting aside three or four months of expenses.

I look at your situation as being more high-risk. You each have jobs, so that’s good. But if the company went down, you could both find yourselves unemployed. My advice would be to save up six months of expenses for your emergency fund. With that kind of cash just sitting there, you should be able to handle almost any kind of scenario.

QUESTION: Scott would like to get a dog after he becomes debt-free and has his emergency fund in place. He asks Dave if it’s a good idea to have a separate emergency fund for pets. Dave loves animals, but he doesn’t think this is necessary.

ANSWER: No, I think your regular emergency fund of three to six months of expenses will cover you and your pet.

My wife and I love animals. We’ve had a least one dog the whole time we’ve been married. You go through some expense as a pet owner, along with happy, wonderful times and heartbreaking things, too. We lost our golden retriever recently, and I can tell you that was really hard on everyone. You love them like they’re family, but you still have to use common sense sometimes, and remember that they’re animals and not human beings. Part of that includes spending reasonable amounts of money on them.

What is a reasonable amount? That depends on how stable you are financially. It’s really a ratio question of expense to means. But no, I wouldn’t recommend a second emergency fund just for pets.

QUESTION: Lewis brings home $4,100 a month through Social Security and military disability pay. His wife brings home an additional $2,000 a month. Lewis asks Dave if they should base their emergency fund level on her income only, since his is guaranteed.

ANSWER: Your emergency fund shouldn’t be based on income. I recommend folks have three to six months of household expenses set aside in an emergency fund.

I don’t anticipate your income stopping, Lewis. But income loss isn’t the only thing you’re guarding against with an emergency fund. You’re also guarding against things like an illness in the family, or if the transmission in the car goes out. There are many more crises that can come upon a family other than a loss of income.

I don’t mind if you two lean toward the three-month side of expenses, since your income is pretty stable. But always remember, an emergency fund should contain three to six months of expenses, not income.