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.
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