Confused about savings account

[Tiger926]

We have not had a savings account for awhile now, as we don't make much interest with keeping money in the bank. The only debt we have is our home. So, it has never made sense to us have a savings account with money just sitting there that could be used to pay other things. We've paid off 2 brand new vans over the past several years, plus private school for kids, and DVC, not counting other monthly bills. We also have RSPs and life insurance policies, but all of our extra money goes onto the house.

I know on this board, people extoll the virtues of having large savings accounts, yet I can't wrap my head around this. Why would you have thousands of dollars sitting around in an account, doing nothing, when it can be put on the house and knock years off of the mortgage?

Just looking for more opinions on this from those of you in similar situations, with or without savings accounts, factoring in all monthly expenses, of course in the household as being paid.

Tiger

 

[CowboyCO]

Because if you lose a job or have an emergency, you'll have to rely on credit if you have no savings. Without hubbies job as a bank supervisor, would that $240K line go away? Does his bank have reserves? If it's good enough for the goose...

Savings equals freedom. With your current state of nearly no-debt, it should easy to save up 6 months of monthly budget as a safety net.

For me, having savings allows me to live without stress. Water heater goes out? Not a problem. Transmission goes out? Got it.

For me, we have several different savings plans - Emergency (6 months of income - not there yet) Vacation or other goal, and retirement.

We also want to pay off debt as fast as possible, but we need the savings cushion to allow us to attack the debt.

 

[lizerbug]

From what I have read and heard from different sources, and I agree with, you should have AT LEAST three months worth of your family's income in a savings account for emergencies. Putting your extra money in your house is a good thing but please say that you've been saving for your retirement. That is sooooo important. People are living longer and running out of money when they thought they had enough to last.

 

[tinkerbelletreasure]

I think savings and investing is very subjective to where you are in life. Most people have more debt than you and not as much acess to liquid cash. If someoen doesn't have a large equity line of credit, then it doesn't make much sense to have all your money wrapped in a house that can't be quickly liquidated if you have an emergency come up.

 

[lovesmurfs]

We have not had a savings account for awhile now, as we don't make much interest with keeping money in the bank. The only debt we have is our home - $170,000, and it's worth close to $300,000 (just had it re-appraised for insurance). We have a credit line with an available limit of $240,000.00 which can be raised in the event of an emergency, as hubby is a bank supervisor.

So, it has never made sense to us have a savings account with money just sitting there that could be used to pay other things. We've paid off 2 brand new vans over the past several years, plus private school for kids, and DVC, not counting other monthly bills. We also have RSPs and life insurance policies, but all of our extra money goes onto the house.

We are re-doing accounts now, as hubby just got promoted, but he left and went to a different back, so that has necessitated re-doing everything. We get amazing staff discounts on all of our products too, so we are closely looking at things as his new bank, has a few different perks than the other one did (RESPs, etc.). We can put extra money on our house as many times as we want, with no penalties, so this is what we've been doing.

I know on this board, people extoll the virtues of having large savings accounts, yet I can't wrap my head around this. Why would you have thousands of dollars sitting around in an account, doing nothing, when it can be put on the house and knock years off of the mortgage?

Just looking for more opinions on this from those of you in similar situations, with or without savings accounts, factoring in all monthly expenses, of course in the household as being paid.

Tiger

It sounds like your family's been really blessed to this point. For us, having a savings account with 6 months of living expenses in funds that are easily accessible (i.e. liquid) in the event of an emergency provides us a cushion of protection in the event of the unexpected.

It's all about risk. In the event of illness or injury and your DH is not able to work, you might find that the credit line is cut altogether. Ours was because home values declined, and ours had a zero balance. And do you really want to borrow on your house to pay for groceries in the event of unemployment?

I'm glad it works for your family, but for us, we like the security of accessible cash.

 

[AlbertZeroK]

From what I have read and heard from different sources, and I agree with, you should have AT LEAST three months worth of your family's income in a savings account for emergencies. Putting your extra money in your house is a good thing but please say that you've been saving for your retirement. That is sooooo important. People are living longer and running out of money when they thought they had enough to last.

It doesn't have to be in a savings account either. We have money in CD's which earn a fair interest rate (they are old CDs). We get the longest length of time we can for the best rate, and if we need the money, we cash it out and take a 3 month penalty if our interest.

I agree, savings makes us feel better, in fact, we have most of our savings at an old rural bank we'd have to drive to in order to get the money out.

 

[Tiger926]

Thanks for the replies! Here is more info:

Salary - we both have stable jobs and we make very good wages. Between hubby's promotion, my raise (bonus year for hitting max), and absence of child's private school tuition, we will see an extra $20,000 in our budget this year.

Insurance - we have large life insurance policies, with critical illness, as well as premium health insurance and long term disability.

Retirement - we both have RSPs, plus pensions (my teacher's pension is fabulous).

Debt - only debt is our home. If hubby changed jobs, we would still qualify for almost the same amount, just on my salary alone. I actually make more than my hubby does. We would just lose the staff discount on the interest.

Emergency - we wouldn't need to use credit line for groceries or such right away, as we put extra money on our house at the end of each month, after all bills are paid. Hubby just spoke to his colleague, and he suggested a small working savings account that we can re-evaluate, draw from or top up as necessary.

Thanks for the replies, Tiger

 

[monarchsfan16]

How would you pay the mortgage if your income was gone?

 

[wdwfan16]

We have not had a savings account for awhile now, as we don't make much interest with keeping money in the bank. The only debt we have is our home - $170,000, and it's worth close to $300,000 (just had it re-appraised for insurance). We have a credit line with an available limit of $240,000.00 which can be raised in the event of an emergency, as hubby is a bank supervisor.

So, it has never made sense to us have a savings account with money just sitting there that could be used to pay other things. We've paid off 2 brand new vans over the past several years, plus private school for kids, and DVC, not counting other monthly bills. We also have RSPs and life insurance policies, but all of our extra money goes onto the house.

We are re-doing accounts now, as hubby just got promoted, but he left and went to a different back, so that has necessitated re-doing everything. We get amazing staff discounts on all of our products too, so we are closely looking at things as his new bank, has a few different perks than the other one did (RESPs, etc.). We can put extra money on our house as many times as we want, with no penalties, so this is what we've been doing.

I know on this board, people extoll the virtues of having large savings accounts, yet I can't wrap my head around this. Why would you have thousands of dollars sitting around in an account, doing nothing, when it can be put on the house and knock years off of the mortgage?

Just looking for more opinions on this from those of you in similar situations, with or without savings accounts, factoring in all monthly expenses, of course in the household as being paid.

Tiger

1) You only have $130K equity in your home and you have a $240K LOC and think you can make it higher. Are you serious? If your DH losses his banking job watch the LOC go away and not go up.

2) Your DH is a banker and you need help on savings accounts?

3) Having an emergency fund to cover unemployment is a great thing. Retirement accounts is a great thing. Bragging about owning X, Y an Z not a great thing.

4) Many here don't have ANY mortgage, so no need to throw money at it.

Thanks for the replies! Here is more info:

Salary - we both have stable jobs (banker and teacher) and we make very good wages. Between hubby's promotion, my raise (bonus year for hitting max), and absence of daughter's private school tuition (only son is there now), we will see an extra $20,000 in our budget this year.

Teacher jobs are not that stable today. Have you read how many teachers, even with 20+ years on the job, got laid-off this year?

Use that extra $20K to fund the kids college, build an emergency fund and put money away for retirement.

Insurance - we have large life insurance policies, with critical illness, as well as premium health insurance and long term disability.

You don't have LTC insurance.

Retirement - we both have RSPs, plus pensions (my teacher's pension is fabulous).

Pensions, even teachers, are falling faster than a meteor these days. Don't bet on it even if your are retired. I know two teachers who are already collecting and are scared because their state pension fun is near to bankrupt. How much will they get once the money is gone?

Debt - only debt is our home. If hubby changed jobs, we would still qualify for almost the same amount, just on my salary alone. I actually make more than my hubby does. We would just lose the staff discount on the interest.

No you won't. The equity is not in your home. You might see that number be closer to $50K.

Emergency - we wouldn't need to use credit line for groceries or such right away, as we put extra money on our house at the end of each month, after all bills are paid. Hubby just spoke to his colleague, and he suggested a small working savings account that we can re-evaluate, draw from or top up as necessary.

What about a loss of a job due to medical problems? Where will you get the extra money from for all the copays, mortgage and food?

It's hard sometimes as hubby is used to doing this for other people, and sometimes, it's hard to financial planning for your one self - LOL! So, it's good to get other people's perspectives on it.

Thanks for the replies, Tiger

 

[Luv Bunnies]

I am a huge advocate of keeping a good amount of money in an accessible account. We thought we also had stable jobs until my DH was laid off last year after 22 years with the same company. Our only debt is our mortgage but we have 2 kids and plenty of monthly bills to pay. Between my part time job, unemployment payments and our savings account, we have done just fine over the last 15 months. If we occasionally need to withdraw a little from savings, it's not a problem. If there's a cash flow issue while waiting for a check to come, we can borrow from our savings. Our computer died last year and we were able to quickly buy a new one so DH could use it for his job search. If an appliance breaks, we can buy a new one without having to finance it.

A friend of mine thought her husband's job of 18 years was stable and he was terminated for cause last month. He was involved in a situation where he thought he did the right thing but his employer obviously did not. This family has absolutely no savings. They spent every bit of their paychecks every month. The husband is going to have to withdraw his deferred compensation money which has huge tax consequences but they need something to live on. Now they have hardly anything for retirement.

I think it's not only important to have an emergency fund for expenses, but as much extra as you can save up. How do we do it? When we went to WDW, we could have afforded GF concierge but we stayed at Pop instead. When DH needed a car we could have paid cash for a BMW but we bought a Honda instead. We economize, clip coupons and forego luxuries so we can save money. It's definitely paying off for us now that we need it.

 

[Tiger926]

1) You only have $130K equity in your home and you have a $240K LOC and think you can make it higher. Are you serious? If your DH losses his banking job watch the LOC go away and not go up.

2) Your DH is a banker and you need help on savings accounts?

3) Having an emergency fund to cover unemployment is a great thing. Retirement accounts is a great thing. Bragging about owning X, Y an Z not a great thing.

4) Many here don't have ANY mortgage, so no need to throw money at it.

First of all, I'm Canadian. We have an entirely different medical system and insurance over here. If one of us is hurt, we are covered. If one of gets a terminal illlness, we are covered. I'm not sure if you read my posts in their entirety, and I sense an air of snarkiness. I didn't brag about anything - I only said we only owe on our home, and that's it - no car payments, boat payments, no credit card debt., etc. as that would surely be asked of me, had I not posted this info. Not sure if this was a general statement, or, based on something I posted. I don't follow here...? Sorry if I've misunderstood something.

I posted in a serious way for help and opinions. As a banker, hubby has a different way of looking at numbers - he confuses me sometimes with his forumlas and such, so I want to be able to gain more knowledge, in order to understand what he and another financial planner have prepared for us.

Jobs - I am a Canadian teacher - with many years of seniority, I cannot lose my job. It is virtually impossible, unless of course, I did something criminally, and even then, we are still very much protected. My teacher pension is worth billions, and is protected. Again, a much different system over here than in the U.S.

Insurance/Retirement - As I stated, we have long term disability, critical illness insurance, life insurance and premium health benefits. All of this would stay if hubby were to lose job. We have our own life insurance policies, plus, work has life insurance policies on us, as well as long term disability. I have no idea what LTC insurance is? We also have retirement funds, in each of our names.

House - I don't follow your numbers for the house. I am a bit number-challenged - LOL! We owe about $160,000 (the other 10,000 is misc. expenses while I was on maternity leave), and it's valued at around $300,000.

Expenses - We are pretty good with extra expenses - don't eat out, don't drink coffee, bring lunches to work, coupons, recycle, no gym memberships, etc. The most expensive extra we have is DVC, which is paid in full, so just yearly dues to worry about. But, the house alone eats up a good chunk, but we are pretty frugal with groceries, turn off all lights, etc.

Thanks to all for the info and opinions - much appreciated, as it's helped me better understand the whole process!

Tiger

 

[clarabelle]

I feel like I have a lot to save for.
College for two children
roof for house that we won't need for a few years -but that will be a biggie
when the time comes
Car for DD who will be driving next year

 

[Sarah_Rose]

Let me just say that, as a Canadian living in the US right now, you have a different mindset than most Americans. It is one that is very typical of many Canadians, including my parents and my inlaws. They also live as you do - equity in the house, savings all tied up in RRSPs, large line of credit available in case of emergency, and the assumption that their jobs will always be there and that the government will always take care of you. I'm also assuming that you are an Ontario teacher and that you live in Ontario, from the statements that you've made about your job and pension. My husband and I have also worked as Ontario teachers (clearly are not right now, though) - the statements that you make about your pension are correct (the Ontario teachers' pension plan owns most of Canada), but I wouldn't be so cocky about the job situation. Even if you do not lose your job due to lay-offs, who is to say that you won't become ill or injured and have to quit one day? Your medical bills will be covered, and you may have some help from disability insurance (or not, if it's not a covered disability), but you won't be able to live near the lifestyle that you would likely prefer.

My parents thought exactly as you do, until they were both forced to retire early. My father's job moved from Calgary to Toronto and he was forced into early retirement. At the same time, my mother, an Alberta RN (also with a great pension program!), found herself no longer able to work due to arthritis. Meanwhile, their retirement savings were worth very little because of the recession, and their house is worth $200 000 less than it was worth 3 years ago. They are living off of their line of credit on the house and seeing their net worth drop drastically, while they wait to be able to draw from their pensions or cash in their RRSP's without penalty. I never want to be in that situation where I'm forced to go into debt, because I don't have any liquid savings.

My DH and I have really seen the benefit of having a good-sized emergency fund in a liquid savings account, from our time living in the US. We are planning on moving back to Canada within the next 5-10 years, but can't see going back to the "someone else will take care of it" way of living that many Canadians have adopted.

Lest I get flamed by any other Canadians, I'm not saying that ALL Canadians think this way - I just see it so often from my friends and relatives. Medical bills are covered, they have a pension, they have a house - why should they save anything else?

 

[sunnyday123]

Because you could lose your job, something debilitating could happen to your spouse or yourself, he could lose his job, it's never a good idea to live off credit,housing prices can and do drop, and most importantly, if your DH is in banking and doesn't know/care how to operate a savings account, I'd be really worried about his job.

And there are accounts that you can put money into that earn interest, therefore your money would be "working."

 

[Swimalie]

Because if you lose a job or have an emergency, you'll have to rely on credit if you have no savings. Without hubbies job as a bank supervisor, would that $240K line go away? Does his bank have reserves? If it's good enough for the goose...

Savings equals freedom. With your current state of nearly no-debt, it should easy to save up 6 months of monthly budget as a safety net.

For me, having savings allows me to live without stress. Water heater goes out? Not a problem. Transmission goes out? Got it.

For me, we have several different savings plans - Emergency (6 months of income - not there yet) Vacation or other goal, and retirement.

We also want to pay off debt as fast as possible, but we need the savings cushion to allow us to attack the debt.

Very well said. Plus it does earn interest. With enough in savings, we earn quite a bit in interest each month. We don't live on credit, pay it off each month. The only debt we have is our mortgage and we will be paying cash for a brand new car next year. That savings has done it for us. It's like we're paying ourselves.

 

[TheZue]

I would still get a savings account. Get something with interest, once it gets to a certain point throw it at the house. The big thing is at some point interest rates are going to go up, you wouldn't want to have money on your line of credit when that happens. We are currently trying to get rid of ours as well just because we want it gone before that. As for emergencies, it isn't always work related, we just had a year where everything broke within a three month span. The fridge, the lawnmower, the front door knob, the vaccum cleaner, and our taxes got re-assessed because on of dh's employers didn't send in his T-4 properly when they went out of business. Basically we had to spend around 4k unexpectedly at the beginning of the year. That was managable. But you have to plan for things like the roof going, or something happening to the house insurance doesn't plan on covering, etc etc etc. Why would you want to pay interest on that when you can put money away and have it earn interest just in case?

Also even though we have medical here, if either one of you end up with a disability you may not be able to work and may need really costly meds or equipment that may not be covered. Or if something happens to one of your children you may have to take months off. One of our friends got in an accident a few years ago playing football and suffered a terrible spinal injury, it seemed like he'd be a quadraplegic. Fortunately his parents had a massive savings account and she could take a year off and afford to travel to the hospital where they put him into rehab. But for all his equipment and home renovations they were depending on the charity of his football team as they didn't have enough to cover that. There are all sorts of different things where it is good to have some cash put away.

Now I know your husband will have heard all sorts of reason why it doesn't pay right now because interest rates are so low, but you have to keep in mind that the bank feeds them information to make the banks money. Their number one priority is the bank's financial health, not their employees and not their clients. I'm happy we have really strong banks, but I always keep that in mind when I'm dealing with them.

 

[Tiger926]

First time back, as toddler is not feeling well as his asthma is acting up, so not much sleep last night.

Just a few responses:

Savings - I guess I'm starting to see the value of having cash savings. It's still confusing to me to have that money sitting around when it can go to pay down house, and knock years off of the mortgage, but you all seem to be saying that it's better to have this cash, and have more years on the mortgage? Maybe I've misunderstood...? We've paid down over $100,000 on our mortgage in 10 years - is this not good? We've had like floating savings account each month for the past couple of years - extra money this month was for vacation, extra bonus money in June paid for son's tuition in full (got 1 month free). I also don't want people to think that because we haven't had a fixed savings account, that we've been blowing the money, as that is not the case at all. We are behind though due to me taking 2 maternity leaves over the past several years, that cost us over $100,000 in my lost salary. We didn't do a good enough job of leaning out our budget, due to serious salary cuts, so we are almost out of that!

Hubby - I feel like I need to defend my husband. I didn't come on here because hubby doesn't know what he is doing. Goodness, no! I came on because we have been constantly re-evaluating the past few years with different scenarios: savings accounts for awhile, extra payments on house, etc. He has many scenarios to go over with me, but being a numbers guy, he understands things differently, so I wanted to get real people examples of how you all do it. Our friends and family all do different financial things, so I wanted to get some different ideas on here, so as to get more background info in order to understand hubby's scenarios. It's hard talking to him about specific things sometimes, and he does admit, that it's harder to deal with our own finances, than him dealing with this clients, because it is personal.

Monthly Budget - We re-did the budget last night, incorporating the new scenario (savings, RESP and RSP), and we still have over $2,000/month in which to pay for vacation (1x per year @ WDW for tix, transportation & food), donations, gifts and misc. This is over and above savings accounts. And our monthly budget includes everything from a $1.00/month magazine subscription to the mortgage, and everything else in between. Every little amount that comes out of our accounts is in our spreadsheet, except for the few things I mentioned above, as they fluctuate each and every year.

Salary - I am a Canadian teacher, and believe me, I don't take any of my job for granted at all, but it is virtually impossible for me to lose my job, so I've been basing things on hubby losing his job, but as mentioned, I could get ill (I would be mostly covered though), but one of our children could get ill, and so this is important to consider. Actual savings would help here. Hubby also is part of employee stock plan, and receives bonuses, so that is also extra money into our budget (a sizeable amount), but we don't count that in the budget as it fluctuates, or, it could go not happen one year.

Thanks to all for your help. I am a planner, but I overplan and overanalyze a lot of the time, and poor hubby, puts different scenarios together, and because he gets great staff perks, he has access to lots of different numbers, rates, etc. These confuse me a bit, as I'm a tad number challenged at times. I do find he has a different way of looking at numbers though, being that he does this all day, so that is where our issues have been, and that is why we are always re-evaluating our finances. But, as I'm learning, what works at one time, but not work at another time.

Thanks so very much to all, Tiger

 

[pioneer89]

I see you're Canadian. I think you're pretty much covered, not a lot to worry about except a total systemic meltdowm in which case nothing you can do now aside from having a bunker in the mountains.


I think when people talk about having a savings, they are in reality talking in general terms about having readily available cash that can be accessed at any time.

I use about 2 months in savings, and 4 more months in CDs. I'll take an interest penalty if I pull the money early, but in an emergency who cares.

 

[wdwfan16]

First time back, as toddler is not feeling well as his asthma is acting up, so not much sleep last night.

Just a few responses:

Savings - I guess I'm starting to see the value of having cash savings. It's still confusing to me to have that money sitting around when it can go to pay down house, and knock years off of the mortgage, but you all seem to be saying that it's better to have this cash, and have more years on the mortgage? Maybe I've misunderstood...? We've paid down over $100,000 on our mortgage in 10 years - is this not good? We've had like floating savings account each month for the past couple of years - extra money this month was for vacation, extra bonus money in June paid for son's tuition in full (got 1 month free). I also don't want people to think that because we haven't had a fixed savings account, that we've been blowing the money, as that is not the case at all. We are behind though due to me taking 2 maternity leaves over the past several years, that cost us over $100,000 in my lost salary. We didn't do a good enough job of leaning out our budget, due to serious salary cuts, so we are almost out of that!

Hubby - I feel like I need to defend my husband. I didn't come on here because hubby doesn't know what he is doing. Goodness, no! I came on because we have been constantly re-evaluating the past few years with different scenarios: savings accounts for awhile, extra payments on house, etc. He has many scenarios to go over with me, but being a numbers guy, he understands things differently, so I wanted to get real people examples of how you all do it. Our friends and family all do different financial things, so I wanted to get some different ideas on here, so as to get more background info in order to understand hubby's scenarios. It's hard talking to him about specific things sometimes, and he does admit, that it's harder to deal with our own finances, than him dealing with this clients, because it is personal.

Monthly Budget - We re-did the budget last night, incorporating the new scenario (savings, RESP and RSP), and we still have over $2,000/month in which to pay for vacation (1x per year @ WDW for tix, transportation & food), donations, gifts and misc. This is over and above savings accounts.

Salary - I am a Canadian teacher, and believe me, I don't take any of my job for granted at all, but it is virtually impossible for me to lose my job, so I've been basing things on hubby losing his job, but as mentioned, I could get ill (I would be mostly covered though), but one of our children could get ill, and so this is important to consider. Actual savings would help here. Hubby also is part of employee stock plan, and receives bonuses, so that is also extra money into our budget (a sizeable amount), but we don't count that in the budget as it fluctuates, or, it could go not happen one year.

Thanks to all for your help. I am a planner, but I overplan and overanalyze a lot of the time, and poor hubby, puts different scenarios together, and because he gets great staff perks, he has access to lots of different numbers, rates, etc. These confuse me a bit, as I'm a tad number challenged at times. I do find he has a different way of looking at numbers though, being that he does this all day, so that is where our issues have been, and that is why we are always re-evaluating our finances. But, as I'm learning, what works at one time, but not work at another time.

Thanks so very much to all, Tiger

Bold - That is exactly why you need an emergency fund. I think you are beginning to understand why you need an emergency fund.


---------------

I put on the TV this morning and they were talking about Canada. They said that Canada lost ~130K jobs in July and the unemployment rate is ~8.5%. That is better than the US but not by a huge amount. We are are at about 9.8%.

 

[Tiger926]

Bold - That is exactly why you need an emergency fund. I think you are beginning to understand why you need an emergency fund.


---------------

I put on the TV this morning and they were talking about Canada. They said that Canada lost ~130K jobs in July and the unemployment rate is ~8.5%. That is better than the US but not by a huge amount. We are are at about 9.8%.

Good point, but the serious salary cutback was due to my 2 maternity leaves a few years apart. We had savings account at that point, but they went to purchasing kids' furniture and a new van.

So, what do you think about my question about the mortgage? Is it better to just pay a conventional mortgage and do savings, or, pay extra on mortgage like we've been doing, and not have a fixed savings account?

Thank for the discussion, Tiger