How Much Should You Have in Savings?
Published on - October 7th, 2009 (Modified on - June 21st, 2010) (by J.D. Roth) 
A couple of weeks ago, we had a fine discussion about how much we should save for retirement. But how much should we have saved for today? How much should we have in cash reserves?
As I write my own book, I’m reading (and re-reading) dozens of other money manuals. While perusing Bert Whitehead’s Why Smart People Do Stupid Things With Money, I came across his table of “minimum base liquidity”. (Whitehead is a highly-educated financial advisor. He uses terms like “minimum base liquidity” instead of “cash on hand”.)
Whitehead writes:
After making the commitment to save 10% of their income, the next question most people ask is, “Where should I be investing these savings?” The first goal is to have adequate cash reserves.
Many financial pundits in the media say everyone should have cash reserves equal to 3 to 6 months of income. For most middle-income people, that is simply a pipe dream…With our clients, I use a different and more realistic approach.
To Whitehead, adequate cash reserves differ depending on your circumstances. His “different and more realistic approach” uses a tiered system:
- If you are an employee with a regular income, you should have 10% of your annual income in a high interest savings account.
- If you are self-employed or your income fluctuates (through commissions, for example), you should have 20% of your annual income in savings.
- If you are retired, you should have 30% of your annual income in savings. (I’m assuming this means retirement income since if you’re retired you don’t have employment income.)
- If you’re in danger of losing your job, you should have 40% of your annual income in savings.
Whitehead draws a distinction between cash reserves and emergency reserves. I’m not exactly clear on what he thinks each is for. I get the impression that the cash reserves — the “minimum base liquidity” — is merely the minimum Whitehead believes we should have on hand to aid in our cash flow. This should also be used for occasions when the car breaks down or the roof leaks.
As insurance against severe emergencies, Whitehead recommends maintaining “emergency liquidity” equal to twice your cash reserves. (He also says to hold this money in retirement accounts, not savings accounts.)
Though I find certain elements of Whitehead’s plan confusing, I do like his tiered approach to saving. It makes sense to me that not everyone should save the same amount. Our circumstances and needs are different. As always, do what works for you.
For more information, borrow Why Smart People Do Stupid Things With Money from your public library.
This article is about Ask the Readers, Basics, Savings
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We have about $23,000 in our emergency fund and we are hoping to boost that number to $30,000+ by the end of this year.
What we did was look at our regular expenses for each month and socked away 6 months of those expenses. Plus we need more because we have investment properties so we’ve been adding more to our emergency fund to cover 3-6 months of expenses for our investment properties (i.e. all our properties were empty and we had to cover the carrying costs).
And we’ve been working to add more to our emergency fund just because the economy is iffy these days. While we both have good jobs we both know people who have been laid off and that motivates us to put more money away in savings.
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This is relevant to a question I’ve had for ages and have never found an answer to: what are these types of advised figures based on? Why 3-6 months? Why 10% of income and so forth? They all seem so seat-of-the-pants.
It is plausible (I’m not saying right, I’m saying plausible) that one does better in the long run investing more and holding less in cash reserve, even if one has to raid one’s investments for an emergency. It all comes down to how much return one forgoes by holding cash, the probability of an emergency, its expected size, and so forth.
Has anyone done a credible study of this? Such a thing would be really helpful as a basis for recommending a certain amount of cash holdings. Who knows, maybe 10% or 6 months worth or whatever is too little? Maybe too much?
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It is really different for everyone. I’m looking to have at least 6 months of expenses saved up in addition to saving for home and car repairs.
The problem with saving 40% of your income if you are in danger of losing your job is that you probably don’t have time to save that much up when you realize you are in danger of losing your job. I’d rather have it saved up before I’m in danger of losing my job.
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We have $20k in our emergency fund which is roughly 6 months of expenses. This might be too much but we feel better for having it.
We don’t have any high interest debt but our mortgage is 5.19% so there is a cost to having such a large EF.
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Does he really mean 40% of your annual income or 40% of your annual expenses? If your income is much higher than your expenses it seems like your income would not be a good figure to use.
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Amen #2! How about the logic behind the particular numbers?! And, if there is none, just tell people to save enough money that they feel confident in case of an emergency? Some people are very risk averse, some are not.
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I agree with the Incidental Economist. It seems a little silly to have a large-ish chunk of cash sitting in a savings account making very little in terms of interest, in case of an event that may or may not happen.
It makes more sense to have a reasonable amount in a savings account (maybe a few thousand) to cover those smaller emergencies that do tend to happen – car repairs, house repairs, emergency trips. And the rest invest, and in the event you have a large emergency (you lost your job and cannot replace it quickly enough), then take money out of your investments and eat the loss.
I would rather chance a small loss or fee if I have to sell an investment for a infrequent (or maybe never) emergency situation, than tie up a much larger amount of money indefinitely in an account that makes no money.
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I read recently that according to one study the average job search was 6 months. I wish I could include the link, but I really don’t know where I saw it. For me, the emergency fund is to cover bills and rent in the event that I loose my job. So I see 6 months of expenses as being a goal to shoot for. I don’t want to be overly optimistic and think that I can find another job in a month or two.
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I like it when you cite people by whose standards I’m saving too much
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I don’t think I’m in imminent danger of losing my job, but I’m over 45 and have been working at the same place for a long time, so I would be pretty worried about being able to find another job at similar pay if I did. I’m definitely more comfortable having a full six months of income (actually a bit more) fairly liquid. I could probably get by for a year on that.
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Interesting approach. I’m glad there’s advice out there that at least addresses the fact that we’re all different and there’s no magic number we should all aim for.
Incidental Economist (#2),
Your approach is something I’ve considered as well. While there is inherent risk in the stock market and you probably shouldn’t have your whole EF there, I don’t see any reason why, with a solid plan for how you will use it, you shouldn’t necessarily invest a portion of your emergency fund above and beyond a set amount of cash that you keep in the bank as a back up.
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@ The Incidental Economist (#2)
Regarding the question of how large your emergency fund should be and the rationale for that size:
In my household we have an emergency fund equal to our living expenses for the period of time we must support ourselves before our Long Term Disability Insurance kicks in – in our case 90 days.
Hopefully it is never needed, but if one of us becomes disabled (in a car accident or something) we can still survive until we get our insurance claim.
This makes sense to me, but (as always) do what works best for you.
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@The Incidental Economist — based on my personal job history, the 3-6 months of expenses represents a “best guess” amount of time that you might be without steady income. Of course, the times we are in now are pretty unreasonable with jobs being more scarce and hard to find. Of course, it was also unreasonable in the dotcom era, with effectively zero unemployment.
I would disagree with putting emergency funds in retirement accounts. Getting an additional helping of pain from the IRS on an early withdrawal on top of dealing with some emergency just makes things worse. Emergency funds should be instantly available and not subject to market conditions. I guess, though, that it could be a barrier to having “a new TV”, “a new pair of shoes” or “Christmas” be called “emergencies”.
It also seems funny that the author calls 3-6 months of income some kind of pipe dream and then advises to save what will likely be a similar amount of money, anyway — since expenses and income are not the same thing at all. One thing his plan has is more simplicity — you take XX% of your income and that’s the goal. The 3-6 moths of expenses implies you have some kind of budgeting system, which means more work — and many people just don’t do that.
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I agree with Adam; you can’t go from 10% to 40% in the time it takes to find out your job is in jeopardy.
Christine, these percentages (10%, 40%) seem low to me; I guess that already accounts for the fact that absolutely required expenses are often much lower than income?
For people that don’t follow web sites like this, suggesting a blanket percentage of their income may be the only way to get them to address the problem. I think most people following this site would look for something more customized, such as the following:
Figure out how much it costs to live every month without you and your spouse killing each other or having anything repossessed then save for n months of that, where n is 3-12 months based on ease of finding a job (relatively small n for nurse in metropolitan area; relatively big n for autoworker anywhere).
Treat emergencies like roofs and heat pumps and transmissions as a different issue, as they hurt even if you have a job.
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I like Bert Whitehead; he’s a bright guy, but the defined “adequate cash reserves” are not really much of a deviation form the 3-6 months of necessary expenses (Whitehead compares it to 3-6 months of income, but most promote 3-6 months of necessary expenses, not of income).
When you consider that a 50-30-20 budget results in half of your after-tax income allocated to your needs, 3 months (one-quarter) of that amount is going to be about 10% of your annual gross income, the same as Whiteheads minimum. 20% is about 6 months of needs. And most agree that if you’re in danger of losing your job, a year’s worth of necessary expenses (about 40% of gross income) is smart.
I’m not sure I understand the one for retired people either. I think that’ll really depend on the sources of income like pensions, social security, and part-time employment compared to the amount you withdraw from your own nest egg each year. I think it makes sense to maintain 100% to 500% (a 1 to 5 year withdrawal cushion) of that amount in cash. This ultimately depends on risk tolerance as it is easier to ride out bad markets knowing you’ve got the next 4 or 5 years worth of withdrawals already in cash.
I generally define “cash reserves” as money you plan to spend to aid in cash flow, like for quarterly or annual expenses such as vehicle maintenance, insurance premiums, and estimated taxes. An “emergency fund” is for the unplanned expenses, and therefore must be above and beyond the planned needs for the cash reserve.
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I have about a year’s worth of expenses in saving right now – with how bleak the job market is, if something happens where I work, or worse, I get injured and can’t work, I want to know that I’ve got enough set aside to last more then “just a few months.”
As the economy turns around, the amount I have saved will fluctuate I’m sure, but for now, it’s where I’m most comfortable. Rather have more then less.
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The savings guidelines seem nice on paper, but you can be a regular employee with 10% saved, and 24hrs later be in danger of losing your job with anywhere from 2 weeks to 2 months to prepare. That is not enough time to beef up your savings to 40%
I think the concept is great, but there are way to many factors to consider: marriage, children, other assets, career field (how quickly can you find another job), etc
Kita
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What is missing is that an emergency fund should cover the approximate time it would take to find a new job. That might take one month for some and up to a year for others. Plus – I disagree that it should be a certain percentage of your salary. The emergency fund should cover your expenses for the time period you think you will be unemployed.
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When people ask me this question and then balk at my 6-12 months of living expenses answer, I tell them they should save whatever amount allows them to sleep easy at night.
Personally, my cash at hand is about $5k…because that’s what I need in my checking account for the bank to waive the monthly fee. Emergency funds are a little sad right now because I have the mortgage in the cross hairs, but I’ll be ramping it up next year. I won’t feel entirely comfortable until that emergency fund is close to 6 figures, which means I’ll need about two years to get it together.
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@2: I figure that 3-6 months is the amount of time it’d take a reasonably employable person to find a new job if he or she was laid off. And you might be right, for example I know if I cash in my 1-year CDs my penalty is 3 months *interest* so unless I cash in within the first 3 months I still come out slightly ahead. That’s just one example. I’d anyways want it to be still fairly accessible and most of all safe (CDs yes, stocks no).
@3: I agree! on all points.
@4: Yeah, but you can’t anticipate now when you might be insanely glad you did that. Only in hindsight. I say whatever works for you is what works. I’d feel great if I had that much too!
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I agree with Adam and Lakita; it’s not reasonable to think you can boost your emergency fund by 20-30% of your annual income from the time that you learn your job is in jeopardy until you actually lose it. That’s the point of an emergency fund – it should already be in place when the emergency strikes.
From the responses I read here, it sounds like most people already have their emergency funds saved, it’s just a question of where. Some have it in stocks, others in cash, and still others in retirement accounts. For a long time I counted the credit available on my HELOC as my emergency fund and a year ago changed my way of thinking when the market crashed. I am scrambling to save 6 months of expenses. I’m halfway there. Since I budget, it’s easier for me to consider 6 months of expenses than to consider an ambiguous 10-40% of income. I don’t know how safe my job is. If I thought it was genuinely in danger, I’d be looking for a new one.
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I agree with many of the comments posted, that 40% is arbitrary if you lose your job within a matter of months and didn’t see it coming.
It’s great to promote saving 10% or more of your income, but I think this scares people off initially. Many people will automatically think, “I can’t save that much!” Maybe a better tiered plan would start with baby steps, sort of like Dave Ramsey’s $1,000 emergency fund. Then, the tiered plan could build upon a solid number and eventually get to that 10% or more.
It’s just a thought. I see 10% and I shutter. My husband and I are saving for a down payment on a house, and we’re not saving 10% at the moment.But, it’s a great goal that we’re looking forward to.
thanks for the post-
Little House
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This article outlines the approach my wife and I have taken. We have cash reserves and true emergency savings in some Roth IRAs. There is no penalty for withdrawing principal from a Roth so in a real case of an emergency these funds are available almost overnight with no penalty. We also pay no tax on the interest I earn. We can alway place funds back into a Roth up to the yearly limit.
The one key piece missing from the whole equation is lines of credit. Like most people I have a credit card but you can also have a line of credit on your house which you can draw on at any time. These are generaly fee free so they cost you nothing.
This credit provides another source of emergency funds which as long as you have emergency fund to back it, it is not risky. This provides options when you need them the most. In an emergency liquidity is important.
As for putting funds in investments. I think the last year clearly indicates when you need cash the most your investments might be held at a loss (your EF is less than what you actually saved). EF should only be invested in almost risk free vehicles. CD’s are great options as long as a bank allows you to borrow against the CD if you need the funds immediately or allows you to pay the penalty. Although, cash is alway king.
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I strongly agree that the reserve account needs to vary depending on the circumstances of the individual involved. There never can be one rule.
I am coming to believe that rules of thumb do more harm than good. They are great for marketing purposes. It makes the person giving money advice appear smart for him to cite an official rule of thumb. But it hurts the people following the advice to do so. First, the rules of thumb are often dangerous for a large number of the people following them. Second, hearing a rule of thumb stops thinking in its tracks. These questions are not so difficult. People could come up with reasonable guidelines on their own. But they hear the rule of thumb from a Big Shot and cut off their own thinking processes.
Rob
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Someone I admire took an incremental investment approach regarding her emergency savings. First she saved 10-months worth of essential expenses (mortgage, car pmt, utilities, insurance, etc.)funds, figuring her unemployment, a part-time interim job or disability would cover other basics like groceries. Then she placed 1/10th of the total savings into a 6-month cd each month for the next 10 months, while continuing to save, so that by the time she reached month 11 & 12 she had saved funds for those months as well. Each month that passed without need, the cd’s were allowed to renew for another 6-month period. Should the need arise, she has created a monthly emergency fund she can access without penalty for the next twelve months. Considering the longest she’s ever been unemployed or laid up is 60 days, she feels pretty confident about her ability to weather the storm.
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I love these kinds of posts and I think they present great ideas. Right now I am in a quest to achieve financial stability. What about those who are drowning in debt? Bad debt? It’d be great to see some posts about what to focus on first. Should you still save when you are underwater?
Thanks as always for the thoughtful posts.
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This seems very low to me. In the past few years I’ve had 5+ friends in various fields who have been unemployed for at least a full year. Yes, there is unemployment insurance for a while, and yes, if you must, you can tap your retirement accounts, but don’t forget that some expenses can actually increase when you lose your job – especially if you have a family and you lose your employer-supported health insurance.
Of course, maybe that proves JD’s point: different amounts are appropriate for different people.
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@Rob, I agree rules of thumb can do more harm than good and that people generally stop thinking when they hear one. However, that’s not the fault of the rule of thumb or the person quoting it. Rules of thumb, just like statistcs, are not inherently evil, bad, or wrong. They should be used as a starting platform for your own thought process. Like you said, people who hear a rule of thumb and stop thinking are the ones to blame.
I know it’s sort of a subtle difference but it’s important because it places the responsiblity on us to think for ourselves and not blame someone or something else for circumstances within our control.
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This post is interesting, and Id like to offer a follow up:
Assume your in your mid 20s, able to cover all expenses, fully fund an IRA and contribute to your 401K up to your employer match. You dont own, you rent a place, so have no mortgage. You are able to save nearly 100K over the next 5 years.
What do you do with this money, aside from letting it sit in an ING account?
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Is this 10% of your gross annual income (or is it income post 401K, post taxes and 401K)?
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@ Incidential Economist
The average time from search to job is around 6 months. That’s why its used. It’s not exactly that for every person, but its a rule of thumb.
I disagree that you should invest buffer funds. Investing a buffer fund could be a ST investment and that is very subject to wild swings.
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@Little House – that’s an interesting way of doing things, saving money in laddered CDs which then essentially gives a payout each month. I have considered a similar path, but I don’t want to tie up my money that way. It works if the emergency is the loss of a job. However, there are other types of emergencies. For instance, a new transmission, a medical emergency, a special assessment if you’re in a condo, or travel to a funeral. With laddered CDs you may not have enough money and then you’d have to pay credit card fees until the CD comes due.
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To restate/clarify my original comment (#2):
If average job loss is 6 months, that’s somewhat of a justification. But that’s just an average. Why be satisfied with the average? What is the distribution? What is the variance? What is the median?
Let’s be honest, 6 months is a guess. It is a way of making us feel safe. But is it prudent? Is it too prudent?
All I seek is a credible study on optimal emergency fund size and trade-offs for various sizes. It would be a valuable contribution. I wish I could do one myself but I am in another line of work.
If anyone knows of literature on it, please contact me through my blog. I’ll write about it.
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I’m going to still be paying off my debt for the next 6 months or so, but I imagine once I am out of debt, I will save towards the 6+ months of emergency fund and keep it in a high interest savings account, as well as keep several grand in my chequing and/or other high interest savings account just to have a nice float and not have to dip into emergency savings for things I might need to buy.
After that, I will look into retirement savings. Maybe I will even start contributing to an RRSP (Canada) or some other retirement account before I get my 6 months’ worth of emergency savings. I will have to see. I also want to save money for the company I want to start, and of course I want to learn more about investing so I can start on that too. Luckily I’m in my early 20s so I hopefully can do all this relatively fast and have a nice, early, comfortable retirement
Perhaps 6 months’ worth of expenses is quite a lot to have in an emergency fund (for me right now I’d be comfortable with $15,000 or so saved), but after people keep losing EVERYTHING in the stock market, that slightly smaller amount of interest I’d be earning offsets some of the worry of having it in a higher risk place and losing it…).
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@Suzanne–I have a CD ladder as “unemployment insurance” and also a smaller emergency fund in a savings account for car breakdowns, etc.
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It is a difficult decision and the reality is if you have that problem of possible saving too much, that’s an amazing problem to have. Being in mid 20′s and in the balance of work, life, fun and future it is difficult to begin saving when expenses are high and the future isn’t a reality in our mindsets.
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@ebyt – you might consider a Tax Free Savings Account. You can save up to $5000/year without getting dinged by the tax-man.
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I agree with Alexandra above. With all this focus and discussion on the amount of the emergency fund, people are not spending enough time looking at the allocation of the amount. While its great to have a boatload of money saved away, there is little point to putting it all in cash or cash equivalents, paying a crap interest rate.
Why not put the amount most likely to be needed (for me its the cost of buying a used car) in a cash account, and then put the rest in a diversified bundle of higher returning investments? I have enough money in such savings to cover years of expenses (which will eventually be turned into an early retirement fund) and am absolutely 100% as safe as someone with 6 months worth of savings earning nothing on a boatload of cash. Realize that by letting so much money sit in cash, you are incurring a tremedous opportunity cost while gaining nothing in the way of additional financial security.
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I guess I’m “lucky” but honestly I feel I’ve just made great choices (along with many bad ones), and one of those choices has been my employer. I chose to work there because they treat their employees fairly. I would have NEVER thought I’d be with the same employer for as long as I’ve been at this one (9 years next month), as it usually means cheating yourself out of market value compensation, but I’ve managed to get promoted several times, several ‘market adjustment’ pay raises on top of that, and for those folks (all deadbeats) who have gotten laid off from this company they all got healthy severances, more than enough to get them through 3 months of expenses.
I have $10k in cash saved for emergency fund and I feel it’s too much. I have disability insurance, so if I got hurt I’d be able to survive. Losing my job without severance isn’t a real concern for me. So for me, I’m seriously considering taking $5k of that emergency fund and putting it into non-retirement investments.
I think that if you have disability insurance, and are not one of those with so much pride as to not take a part-time lower-wage job while job-hunting, then 6 months’ of emergency fund is just too much.
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@ 28
I suggest you go to 20smoney.com. The whole website is dedicated to financially responsible people who are in their 20s, have almost no debt, are fully contributing to their 401k and are wondering what the next step is.
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I still think having a separate “emergency fund” as opposed to any other sort of savings is fairly pointless. Sure, you need emergency savings, but if you actually *have* an emergency, then pulling from your “house down payment” savings account is functionally identical to pulling from your “emergency fund”.
I don’t keep a special emergency fund account, because if something drastic does happen, there are other places I can pull money from.
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@Tyler Karaszewski – That only works until you buy the house (or what ever else that savings is for).
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@ The Incidental Economist:
It’s difficult to study optimal emergency fund size, because of differing definitions of a) what an emergency fund is and b) what an emergency is. But here is a paper exploring the tradeoff between liquidity and yield of funds:
Should Households Establish Emergency Funds?
Charles B. Hatcher (2000)
Hatcher finds that the probability of an emergency has to be relatively high (greater than 1/yr) – even with quite a low spread between the yield of a low-risk, high-liquidity investment and yield of a high-risk, low-liquidity investment – for the borrowing costs to outweigh the lost yield. But, remember that he is writing pre-2000, before the last 2 recessions. And his example of a low-liquidity investment is a 1 year CD, meaning that you have to borrow for up to a year before you can access it. Right now the spread between liquid savings accounts and CDs is lower than he probably anticipated when he did the study.
The formula he offers is quite useful, though.
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I don’t expect people would argue about having a savings fund, but a lot of people today have ZERO savings and foresee never having any.
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@Tim, #22: You say: The one key piece missing from the whole equation is lines of credit. Like most people I have a credit card but you can also have a line of credit on your house which you can draw on at any time. These are generaly fee free so they cost you nothing.
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This is WRONG. One of my co-workers relied on his HELOC to pay his property taxes, and he was diligently paying off other credit lines. When it came time to write a check from the HELOC to the taxes, the bank had REDUCED his LOC because house values have plummeted.
To get the taxes paid, he had to pull on a ST LOC from USAA, and now he has even more debt.
DO NOT RELY on a LOC for your expenses or your emergencies. There is no guarantee that it’ll be there when you need it – unlike cash.
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Here’s my version of the CD “ladder”:
Instead of having to worry about renewing a CD every month, I created what I think of as a CD “bridge”. I put most of my EF into one CD that was paying a good rate. I then opened two smaller (5K each) CDs for the same term. If I need the money, I can use one or both of the smaller deposits. The result: better interest rates, less renewal hassle, same access to my money if needed. Alas, they’re all coming due soon and the good rates will be gone, but that’s a separate issue…
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Some really good feedback in the posts above. I like the laddered CD idea, smart play with your money. I do agree though that one should have a small cash reserve on top of that to handle a leaky roof, blown water heater, new exhaust kind of thing.
When I first started out in my career I always had a EF of at least 6 months of the bare minimum expenses. In my field I notice that most people take about that long to get a job. If you don’t know your field well enough to know about how long it takes to get a job start looking around NOW and save accordingly.
I mention when I first started out because I have found ways to help with job loss issues by starting other business, rental properties, etc. By spreading the income sources I minimize the risk if one dries up. I only keep about $10k liquid now, the rest is fully invested in some form or another. If I need more I have other sources of income and/or I can divest pieces from a rather large portfolio that is well diversified.
Some people mention not saving as much because of unemployment covering some of the expenses. REMEMBER, not everyone gets laid off, god forbid that you get fired! No unemployment then. I thought it would never happen to me but I joined a company and through some quick changing politics ended up working for a new SVP that was a real moron. We never saw eye to eye and in short order he fired me. I managed to talk some sense into HR and they treated it as a lay off with minimal severance. Had they not done that I wouldn’t have been able to get unemployment. Fortunately I saw it coming and was prepared with a new job that started about six weeks later.
That’s another thing folks, if things are going south at your work you should be aggressively looking. Don’t put your head in the sand and wait for the inevitable. It used to be you could expect employers to treat their employees like people but today we are just commodities. Be aggressive and plan not only your emergency fund but work your job network, keep your resume up to date and keep your feelers out.
As far as investing your EF… I would NEVER put my EF into my retirement funds, NEVER! Those have always been sacrosanct to me, never shall the two meet. I don’t want to be penalized for withdrawals, I don’t want to ever be tempted, that money stays there always!!!
That said, I have always invested the bulk of my EF in my brokerage account. If you don’t understand the market at a minimum you should consider a laddered CD approach. Don’t let your money sit around earning bare minimums in interest.
Finally, NEVER, EVER consider your Line of Credit of any kind as part of your emergency fund. People are seeing their lines of credit being cut off, whether it’s HELOC’s or CC’s. In this economic climate that is a very foolish way to plan for an emergency. It could very well be gone when you need it most.
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To answer your question (the title of the blog post) – it depends….
What are you saving for?
A house? – then shoot for 20% of the estimated cost, plus closing costs (usually another couple %)
A car? shoot for the cost if you want to pay cash, or at least a sizable downpayment plus taxes and registration fees
A medical emergency – what’s your annual out of pocket maximum?
A job loss/unemployment – how long does it take the average person in your field to find work? Take that # of months multiplied by your fixed monthly expenses.
These numbers are different for everyone, there is no cookie cutter answer.
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@Mark #38
“I feel I’ve just made great choices (along with many bad ones), and one of those choices has been my employer.”
Be warned, circumstances can change. Companies can be bought out by others who are not quite so ‘nice’. This has happened to my husband. A year ago the lay-offs started, but my husband felt ‘secure’ because he had a contract for 6mths severance. We are a family of five and this is our only income.
I was not so certain, so I set a goal to pay down debt, save an EF and still contribute to our 401K and IRA’s. It has been very tough, but last week we became debt free except for our mortgage. We have 20K in EF savings and are owed 12 weeks holiday pay.
In four weeks time my husband will be unemployed. His company is refusing to honor his contract and we have had to take legal action. These costs are now denting our EF.
Right now, where our fund sits is unimportant. Having it is vital. I am expecting increased medical costs for our children, who all take regular medication, when we lose our insurance and a potential 6mth period without work (it’s a jungle out there.) Only time will tell if we’ve saved enough to survive. When the chips are down, you want peace of mind. Knowing you have amble funds, accessible when you need them and for whatever amount you need is what helps you sleep at night.
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I was going to mention the idea of staggered/laddered CDs, but a lot of folks beat me to the punch.
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@Dylan: Yes, that’s true if you only have a single account with savings, and you empty the entire thing.
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