It does appear that the most common financial advice on emergency funds is to have 3-6 months of living expenses. However, that seems very small considering the types of financial calamities that people may face, such as loss of job or income. In terms of this type of financial calamity:
a. Economic or industry downturns can last more then 3-6 months, and the subsequent recovery may take a while before the jobs become available again.
b. If your industry or type of job is on the decline, the number of jobs that come back may be fewer than existed before.
c. You may have to change to some other type of job or career. To the extent that this may require retraining, consider the time and money cost of that (particularly if there is occupational licensing required for the new type of job). In some states, even community college courses can be more expensive than you think. If you want to start your own small business, there could be startup costs involved.
d. Consider relocation costs if you are in a region with declining job prospects.
e. Consider the cost of medical insurance. If your medical insurance was heavily subsidized by your employer, you may find it surprisingly expensive to pay for on COBRA, or on some other individual plan.
I agree that 3-6 months would be too skinny unless you are young and have no dependents/minimal expenses. It pays to err on the conservative side if you can. If one is making an effort to systematically save for long term goals like retirement, education, the goal should be to have greater assets to draw upon if needed in an emergency scenario.
True… but for young people even saving that much will take a long time. Of course they often have the safety net of being able to temporarily move back with parents if needed.
Not necessarily “often” due to various factors such as bad family relations/abuse situations and/or families not being able to afford allowing a child who reached the age of majority to continue staying at home.
Know of many families in my city and other parts of the country which forced their kids out once they graduated HS or reached the age of 16-18 because they could no longer afford to keep them at home with younger siblings or the family needing to relocate to smaller/cheaper apt/house due to constrained/worsening finances.
The more you make the longer it can take to find a new job. I think it at least gives you a cushion for the daily bumps like car troubles, needing a down payment for an apartment, etc. I do think it’s a good first step when paying off debt. I wouldn’t forego retirement savings to get more than 6 months saved as a young person.
It took my husband 5 months for find a new upper management job when he got laid off Jan 3rd this year. He is a networker, belongs to several technical groups and is up to date with new ideas and things going on in his industry. Definitely took much, much longer than I expected.
While undoubtedly true for some, I see people who complain about money but waste it on a regular basis.
The security guards in my office building are always buying lottery tickets. The cashier in the building’s sandwich shop is always sporting a new tattoo, and she wears a Canada Goose coat. I would never think about spending $600+ on a winter coat, even though I am a full-pay parent.
Early in our marriage, we went 3 years without DH’s income (he is in a 100% commission job, no salary ever). We barely made it with my miniscule teaching salary.
So we made it a goal to save 3 years living expenses. It took a while, but we did it, and were only able to do so because DH’s industry has no real “ceiling”. If you are very good at what you do, there is potential to make a lot of money (though many cannot and end up leaving the profession). Because it fluctuates, you must have the discipline to save save save through the good times, because the industry has BIG peaks and valleys.
In my career, it would be far more difficult to pull that off.
Can I ask a really dumb question to all you adults as a 23 year old?
What is the difference between “emergency fund” and “all my money”? I save about half my income and hit the 3-6 month mark a long time ago. Should I be taking everything beyond that mark and doing something else with it? I keep seeing that you shouldn’t just keep all your money lying around to depreciate in a savings account, but otherwise how am I supposed to have a stash of money for a wedding I anticipate next year, down payment on a house, etc? I think the term is just confusing me because it seems like, well, of course you should be saving as much as you can, but the “emergency fund” is just a set amount. So what happens beyond that.
@rebeccar I am speaking as a 25 year old. I have my “emergency fund” in a completely separate savings account that I can’t easily touch. My regular slush fund spending is in a checking account.
When I was saving for my wedding and a down payment on my house, that went into yet another fund. (I closed that account after the wedding and house was bought but that’s because I despised the bank.)
We have absolutely no emergency fund, we keep very little available in our checking account. We use our HELOC as a slush fund, if our expenses exceed income, we pull from it. I guess we would be an example of what people shouldn’t do, however we have a decent amount of assets we could get out hands on if we wanted, and we would like to put all our extra cash into paying down the HELOC (that we bought rental property with), and not sitting in our checking account.
Out of sight but not so much out of reach that you can’t get your hands on the money within a 48-hr window.
There are really no good higher than inflation-yielding instruments for short-term savings (I assume that house purchase is planned within the next 5 years - that is short-term).
Emergency funds should be set aside in an easily accessible cash savings account. It will require discipline to not touch it. But it must be done.
Your retirement savings is of course for your retirement.
Your other savings should be held in a money market fund or possibly a lower fee stock mutual fund. Savings rates are so low at the moment that one almost goes backwards when thinking about inflation. If you need the money in a few years for a wedding or down payment then keep the funds in a safe investment (bank savings, money market fund). For the funds you are building for net worth, you would invest in low fee mutual funds.
Laddered CDs can work well too. If you don’t need them when they mature, they will roll right over for another time period.
Our “emergency” fund was thanks to an inheritance. I left it in that bank, and never added any other names to the account. Happydad never knew the balance, and so was never tempted to do anything with it, and we didn’t have to fight about it. When he was laid off, and we lost that breadwinner salary, with that emergency account and what I was making, we were covered for the 13 months it took him to find a new position and the additional three and a half months it took to get through the federal hiring process’s paperwork.
We wre still working on our savings to get it back up to a survive-for-a-year level, but every month we are closer to that goal.
“Know of many families in my city and other parts of the country which forced their kids out once they graduated HS or reached the age of 16-18 because they could no longer afford to keep them at home with younger siblings or the family needing to relocate to smaller/cheaper apt/house due to constrained/worsening finances.”
I believe that as a general statement. But within this scope of College Confidential parents worried about their college grads, I’d say many could make room for a twenty-something college grad kid between jobs (although they’d probably prefer not). Already many of them do help out for the first year(s) to enable savings toward apartment start-up costs and emergency fund.