The latest unemployment numbers show the nation lost 655,000 jobs last month, bringing the unemployment rate up to 8.1%. In four states, Michigan, California, Rhode Island, and South Carolina, the rate was above 10%. So if you haven’t already, this is a good time to think about what you’d do if you lost your job. An emergency fund can help expenses when the paychecks stop rolling in, you have to pay for an unexpected home repair, or otherwise need some quick cash.
Depending on which financial guru you ask, you’ll get different advice on how much to keep in your fund. Automatic Millionaire author David Bach says four months, while TV personality Suze Orman says to aim for eight months of expenses. But everyone agrees that an emergency fund is an indispensible protection against a “rainy day.” Just ask the 655,000 Americans who experienced their own rainy day last month.
Financial blog Wisebread has a good guide to figuring the size of your emergency fund, including
- Minimum monthly bills This is basically all your bills that are either necessary to live, or that you are contractually obligated to pay: rent or mortgage, utilities, car payment, … cable TV, fitness club membership, and so on….
- Routine monthly expense This includes groceries, gas for the car, cost of prescriptions beyond what insurance covers, etc. You can take a minimalist approach here–assume you’ll be eating lots of rice and beans–but be realistic.
- Job-hunting expenses Be sure to include all the expenses that you’d need to support a job search–your phone bill, internet access, enough money for gas (or bus tokens) to get to job interviews, dry cleaning for interview clothing, etc.
- Other mandatory expenses This would be tuition, taxes, insurance payments (monthly share for annual expenses), etc.
If you are in debt, you should still try to build up some emergency cash. Especially if you have low-interest debt like student loans, paying the minimum each month while you accumulate some savings won’t cost too much in interest. Blogger MoneyGirl explains:
How you decide to balance paying off debt with creating your emergency fund depends on the interest rate on the debt and whether you want to pay the debt off as quickly or as slowly as possible. If it’s a really low interest student loan, for example, you might decide that paying it off as slowly as possible makes sense for you. In this case, you’d want to save up your emergency fund while continuing to make minimum payments on your student loan.
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