Saving

QUESTION: Kristi works for a community college where a mandatory 20 percent is taken out of her paychecks for retirement. She asks Dave’s thoughts on this practice.

ANSWER: That is a lot to take out. I’ve heard of a few places that have a mandatory 12 percent contribution, but 20 percent is very unusual—and it’s unusually high.

I’m not sure what to tell you. I mean, you took the job. It’s what you signed up for. You may have to decide at some point if you’re still willing to work there under those circumstances. But at least you’re not losing the money, so it’s not the end of the world. It’s your money that’s going in there for your use some day.

QUESTION: Will and his wife are completely debt-free. They want to keep a portion of their emergency fund in cash at home in a safe. Dave doesn’t mind the idea, but he stresses caution and reason.

ANSWER: Typically, homeowners insurance policies have a limit as to how much cash they will cover. I’d advise re-reading your policy, and double checking with your insurance agent just to be sure. When it comes to documenting valuables, I’d suggest making a video or taking photographs.

When it comes to the portion of your emergency fund you keep at home, I’d recommend just being reasonable. If you’ve got $10,000 set aside for emergencies, I’m okay with you keeping $5,000 at home in a quality, fireproof safe. I wouldn’t put all, or even most of it, in a safe, though. I certainly wouldn’t keep some huge amount like $200,000 at home in a safe.

Again, just make sure your homeowners policy covers it, and make sure, too, you’ve got a really good safe.

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.