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Most of us have come of age in a very prosperous US economy- 6 months is more than plenty when the economy is growing 5-6% per year and unemployment is at 4%.
The "Great Recession" has made many people consider the chance they could become the "long-term unemployed" at some point. I know a guy with a MBA who got laid off in Sept 08 and just started a new job in Jan 11. Over 2 years!! He thought it would take no time to get a new job at similar income. He couldn't even get a "McJob" despite looking constantly. This is a very real threat considering the economy's anemic growth and upcoming inflation concerns (anyone tracked gas prices lately?).
It's prudent to have 6++ months of liquid cash. Even if you could potentially make more money out of the principal by investing in stocks, it's prudent to be conservative with a chunk of your assets. People used to be able to sell homes quickly and cash out their equity. Now many people have no equity or worse, negative equity. People used to easily be able to get a HELOC to cover a tight stretch. Now they are nearly impossible to get (see previous point about equity).
The world has changed, at least for the time being. Even if your financial "ducks" are in a row, it wasn't raining when Noah built the Ark. Prepare yourselves. If you make it to retirement and never had to use your e-fund to get through a period of unemployment or another financial crisis, blow it on a kick-ass trip to Europe or Asia or Tahiti....provided you've saved enough to cover living expenses for 30 years in other accounts
Excellent points! The past few years have been a reality check for those who thought a house would always appreciate, and unemployment would always be under 4%.
Most people should probably have 6 months' worth of living expenses. Since that seems overwhelming to most people....start with a goal of $500, which will cover most minor emergencies
Many families don't have any emergency fund which turns something simple, such as a car alternator that needs to be replaced for $300, from a minor nuisance to a major emergency.'
Starting with $500 is excellent advice and will keep a minor thing from being an emergency.... it will make you a happier person.
Starting when you are young 10% of your after tax take home earnings would be my suggestion. If 25 in 10 years you will have enough for a year and in 40 years if you get laid off at age 60, as has happened to so many that are now losing everything, you most likely will be able to coast until full retirement age.
Hidden well, and in cash, should be enough to go a minimum of three and up to six months. With $10,000 cash in the house minor things never become an emergency.
You should "mentallY" allocate a portion of it for emergencies and NEVER EVER TOUCH IT unless you're in an emergency (loss of income, large medical bills, etc).
OP- Make a goal to start with 6 months of "bare bones" living expenses. Look at your monthly budget and figure out what is "essential".
This is what we've done. Nothing like having gone through being unemployed to know how important that emergency fund is!
I keep two spreadsheets. One if a budget that is bare bones, the other is a more "normal living" budget. We have 6 months of bare bones in a savings we don't touch. That's obviously not accounting for any unemployment funds. So if we were ever in that position again, the 6 months of savings would most likely stretch further. But would never want to count on that of course.
We then having a separate account for our general savings. Money set aside for those unexpected things that come up or the things that only come around once a year.
I actually have a third account - vacation savings.
I keep no less than $10,000 in reserve so that I will have enough to live on after inflation eats away at the buying power of my reserve. It's very possible that $10,000 will only buy what $1,000 buys today if inflation gets as bad as many say it will. It's the buying power, not the amount, of whatever money you have that will determine how well you can live.
An yes, this it the same inflation ,and devaluation, that eats away daily at any money you have saved or in your pocket.
This is what we've done. Nothing like having gone through being unemployed to know how important that emergency fund is!
I keep two spreadsheets. One if a budget that is bare bones, the other is a more "normal living" budget. We have 6 months of bare bones in a savings we don't touch. That's obviously not accounting for any unemployment funds. So if we were ever in that position again, the 6 months of savings would most likely stretch further. But would never want to count on that of course.
We then having a separate account for our general savings. Money set aside for those unexpected things that come up or the things that only come around once a year.
I actually have a third account - vacation savings.
Yeah, I need to open a 3rd account for vacation savings
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