Bob Broshack, Member
As mentioned in the other two answers, the typical number is 3 to 6 months of expenses that should be kept in an emergency fund. Now however, many experts are saying 9 to 12 months. These are cookie cutter numbers that may not fit you individually but are meant as a general guide. You should take several factors into consideration.
One of the biggest factors is your job. How replaceable are you and how much demand is there for people in a similar position as you? According to the Bureau of Labor Statistics, over 5.5 million Americans were unemployed last year for 27 weeks or longer. This means that people did not have a job for at least 6 months. With a fickle economy and high job turnover rates, raising the emergency fund level 9 months to a year is starting to be the new norm. Now depending on your specific job situation, and be honest with yourself, how much do you think you will need if tomorrow you do not have a job anymore? Do you think 3 to 6 months will be enough time for you to find another job? Or will it take 9 months to a year to find another job that you will be satisfied with?
Another main factor is to analyze your spending and expenses. Every cost must be accounted for. It is important to make a proper budget and in doing so you can begin a basis for how much money you should actually have in your emergency fund. Also, keep in mind your personal preferences and whether you are willing to give up certain spending costs. For example, can you see yourself giving up going to the movies once a month (or a similar leisure activity)?
Finally, one thing to keep in mind is that it is important not to underestimate. Saving too much money can never be a hindrance, while saving too little may have you eating Ramen Noodles. Therefore, once you have figured out how many months’ worth of expenses your emergency fund should cover, take your budget and multiply it by that amount. Then add another month or two.
Curt Sheldon, Financial Advisor
Generally speaking most people should have between 6 -12 months' worth of expenses (not income) in a highly liquid, no/zero risk asset. Since you are self-employed you may want to hit closer to 12 months.
Lisa Foreman, Member
Jason, this is a very common question these days as we have all seen how tenuous income ultimately is and how financially difficult something like an economic downturn can be.
As you probably know, an emergency fund is cash set aside in the case of financial hardship, such as job loss, medical emergencies, or car and house repairs. While the rule of thumb for emergency funds used to be that you should have three-to-six months’ income set aside, many experts are now suggesting that you save anywhere from nine months to one year worth of dough. Why? Because of the extended period of joblessness experienced by many during the recession and its aftermath. According to the Bureau of Labor Statistics, roughly 5.5 million people have been unemployed for slightly longer than six months weeks or more as of Feb. 2012, and the average duration of unemployment for everyone out of a job is 40 weeks (roughly 10 months).
So, the easy answer is that you should aim to stash away at least nine months’ take-home. While you might consider this to be excessive, too many people underestimate just how much money they’ll need in case of an emergency. We tend to consider only large fixed costs like our mortgages and car, while forgetting those little, yet wholly necessary expenses that can add up quickly. Just tally your total expenses from last month and see for yourself.
Now, there are certain factors that can affect recommended emergency savings, namely who your income supports and how old you are. Single people and retirees obviously don’t need to save as much as people who are married with kids, especially if they depend on a single income.
Finally, it’s important to realize that you likely won’t set up a sufficient emergency savings fund in one fell swoop. You should simply strive to deposit as much as possible each month into a savings account designated for emergencies. However, make this a higher priority than discretionary expenses, such as expensive television packages or dining out, because the downside of being caught off-guard is significant.
Kathryn B. Hauer, CERTIFIED FINANCIAL PLANNER (TM)
These answers are great! One thing to remember is that even if you can't manage to get the 3 - 6 months recommended, ANY amount is better than nothing. Best wishes to you and thanks for writing!
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