A caller on The Ramsey Show came to Dave Ramsey with a disagreement he had with his wife. The couple had a situation most households would envy: a paid-off house, a $150,000 salary, and $150,000 sitting in savings. The only remaining debt was a $60,000 car loan.
The caller wanted to use part of their $150,000 in savings to eliminate the $60,000 loan, while his wife feared giving up the security of their six-figure savings balance. Dave Ramsey agreed they didn’t need to keep so much money in savings: “You’ve lost $50,000 for screwing around with a stupid savings account,” he told the caller. “That’s expensive. That ain’t okay.”
How $150,000 in Savings Became an Expensive Mistake
When Dave said the couple lost $50,000, he meant the extra return they could have generated by investing an extra $50,000 several years back instead of keeping $150,000 in cash.
Money sitting in a standard savings account typically earns close to nothing. The FDIC national average on a 12-month CD is nearly 2%, and plain savings accounts at big banks tend to pay even less. A 10-year Treasury, about as safe as anything in the financial system, yields nearly 5%.
Meanwhile, the S&P 500 is up about 74% over the last five years and about 256% over the last ten.
Additionally, the couple’s $60,000 car loan is almost certainly at a higher interest rate than the savings account pays. That means it would make more sense to pay the car loan down than keep the extra money in savings.
How Much You Should Keep in an Emergency Fund
The second lesson in Ramsey’s response is that emergency funds are not a “more is always better” category. He told the caller: “Your emergency fund should be about $30,000, maybe $40,000. And you should have $50,000 in investments and no car payment. That’s where you should be.”
The standard guideline is to keep an emergency fund of about 3-6 months of essential expenses in cash. The FINRA National Financial Capability Study found that only 46% of U.S. adults have set aside three months of rainy day funds, down from 53% in 2021.
By Ramsey’s math, the couple should keep roughly $30,000 to $40,000 as an emergency fund, which frees up the rest of the $150,000 in savings to pay down the $60,000 car loan and invest an additional $50,000 or so.
What Is the Scenario You’re Afraid Of?
Ramsey advised the husband to ask his wife: “What is the scenario that you’re worried about, that you’ve dreamed up, catastrophized in your head? Let’s talk that through.”
The caller had already given a clue. Earlier hesitation had been tied to infertility costs and worries about medical bills with a second child. Those fears may have been rational at the time, but it’s important to see if they’re still relevant today. As Ramsey put it, “just because your body is reacting doesn’t mean that those are facts.”
Key Takeaways
Dave Ramsey advised the couple to keep only $30,000-$40,000 as an emergency fund rather than $150,000, and eliminate the $60,000 car loan they had. Following this advice would leave about $50,000 available for the couple to add to their investments. The real lesson is that holding excess cash can be a costly mistake because you miss out on the returns you could have earned by investing the money instead.
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