Old wisdom said we should have three to six months of expenses in savings in case you were laid off or lost your job for some reason. On average it took that time frame to find another job so you would have enough put away to get by in the meantime.
But times are different than they have been!
Can we really expect to find a new job in three to six month’s time in today’s economy?!?
I’m hearing stories all over about people being laid off. We brought our cat to the vet and the doctor was telling us that every day he hears from 5-6 people who have lost their jobs. I went to get a hair cut and I found out about two neighbors nearing retirement who are getting laid off. A co-worker was telling me of her friend that not only lost her job but the entire office she worked at was shut down. At my job we were told that budgets were getting tighter and the staffs would have to be reduced.
So is 3-6 months saved expenses enough?
I have to say no. I think a person these days has to expect the worst and save 8-12 months worth of expenses just in case. There are so many jobs being lost that if you were to lose your job you would be competing with a lot of people in a contracted economy to try and find a job.
To quote the New York Times: “Since the start of 2008, the economy has lost jobs at a steeper rate than at any other point in 50 years.” That is staggering!
If you are working then you have to look at what your monthly expenses are and ask yourself if you have enough to get by for a long period should something happen to your job. If you don’t have enough start squirreling it away!
Remember you want these savings somewhere you can access them relatively easily such as on online savings account, certificate of deposit, or money market account.
What do you think? Is 8-12 months of saved expenses enough?
{ 18 comments… read them below or add one }
I think it depends in great measure on how you live and what your expenses are — and where you get your income. Although in this economy, I think 3 months expenses is probably too little. Perhaps 6-10 months?
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@ Miranda – Three months really seems low these days. But I agree that it depends on your situation, so long as you can adequately determine what your situation is.
@ Grant – My point here is that conventional 3-6 months expenses most likely won’t be enough these days. For you it may be plenty but many industries are seeing huge layoffs these days and many can’t expect to find another job so quickly.
@ Hannah – Good point! Were it just me then I could go back to the Ramen noodle days but I can’t really do that to my kids.
@ Penelope – I think when you’re self employed you really have to understand the flow of money in your budget real well. For a lot of self employed there are dry periods and big money periods. Depending on what you do you may have to budget for more dry spells.
@ TStump – Not sure you can depend on lines of credit these days. At least things like HELOC’s. I’ve been gearing about lots of those being shut down to people.
@ Craig – You are right. For most, the 3-6 months is real tough. But a lot of the time it’s because of our lifestyle and expenses that we can’t save that much. It is about security and what you are comfortable with. It’s also about reasonable expectations too. Should something happen how long can you go without a new source of income? I think 8-12 is a good goal to shoot for.
@ Joe – Sounds tough but you still have a job which is good. This is what I’m talking about though. What seemed like a not so great economy is turning into a really bad one with far-reaching implications! If you have a job then you have to prepare for a scenario where you don’t and you can’t expect to get a new one immediately. It’s different for everyone though and only you can understand what your industry is like. I hope your company re-instates the benefits and hiring/raises soon.
@ Jeff – I like your idea of just-in-case money. Not only for emergencies but for “other.” There are lots of bargains out there if you’ve been saving all along (just make sure you have your emergency funds in place).
@ Dave – And that’s it, these days you need an extra buffer. Unemployment is hitting levels we haven’t seen in decades.
@ Carla – It’s definitely tough out there. Maybe we can’t expect most to get to 12 months expenses saved. But maybe if most shoot for that they’ll fall in a better range than if they were shooting for 3 months expenses? Maybe all along 3-6 months wasn’t enough in that we can’t tell what the future holds.
@ Rob – 3-6 months goes by real quick! And add in the rising cost of goods and it goes even faster.
@ Billy – I wish we all had a crystal ball that could have told us what was coming! You have 6 months saved which is most likely better than what most people actually have saved. For each family the amount will be different but I think you really have to look at the situation NOW and make adjustments. I also don’t think you can expect to get severance pay. In some places it may be the norm but when companies are cutting whole departments via email you can’t count on it. Hopefully we never get to the point of needing 2-3 years worth put away. But you even say you have enough should you be out of work for a year. That’s what people have to look at and determine what they need based on that.
I would agree with Miranda. It depends on your situation. What is going to help YOU sleep better at night? Personally, I feel more comfortable with something in the 3-6 month range but I’m self-employed and am confident in my ability to make an income. But for someone else, it may be completely different.
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I agree that the amount you have saved up depends on each family’s individual situation. In my family it is just my husband and me, so if he were laid off, we could cut our expenses down to the absolute bare minimum by surviving on rice and potatoes and getting rid of our cable and other spendy items. But if we had several kids it’s not like we could just stop feeding them nutritious food and stop buying them supplies they need for school and to survive.
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That’s a really good idea. I’m self-employed so I don’t have to worry being laid-off, but I do worry about having enough savings for emergencies.
These days, we’ve cut almost all non-necessity expenditures and are saving as much as possible.
We don’t limit our savings amount to a date range but just “as much as possible just in case.”
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I’m self employed and I like the idea of having 8 to 12 months expeneses, although I’m pretty sure I could go out and get work if I needed it.
I also keep a few lines of credit around just in case I don’t have enough.
But, it seems banks are closing these down nowadays or lowering limits.
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I think everybody would love the security of having 8-12 months saved in an emergency fund. The reality is that will never happen with most people, too many expenses to deal with. Even a 3-6 month emergency fund is difficult to accumulate.
FFB,
I’ve been thinking the same thing! Fortunately I haven’t been laid off, but my employer has initiated staff reductions, or as they like to refer to them – “resource adjustments!”
We’re also under a hiring, raise and bonus freeze. And they are withholding 401k matches until the economy “rebounds”. It’s unclear what the metric for rebounding is however. :-/
It’s getting ugly out there!
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Right now I’m advising everybody to have 8-12 months of expenses in an emergency fund, 8 being very satisfactory. I, too, am self employed, so my revenue fluctuates month to month. The better months we make it a point to sock more away. We reached the 8 month mark in January and are working our way to the 12 month. Part of my logic too is not to just have cash set aside for emergency purposes but also investment opportunities as well. I don’t how many times I’ve heard people say, “Man, if I had some cash right now, I could make a lot of money in the market”. Well, having 12 months of cash saved it would give you that chance.
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I think it hard to argue against expanding the ole Emer fund these days. After all, the entire concept is about having a buffer and today we simply need a bigger one. A year from now (hopefully) that could change and 3-6 will work… but I’d err on the side of extra cash today.
Good discussion!
Dave
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I think you need at least 12 months savings, but can we really expect people to even have that? All of my extra cash is going to medical expenses WITH insurance. Thankfully, I have more savings, but if I didn’t, I would be screwed just with the cost of healthcare.
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I agree! With the rising cost of commodity, it is wise to have at least 1 year worth of savings. 3-6 months will be gone faster than you can even imagine.
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Hey, isn’t it an even BETTER idea to have 2-3 years of living expenses saved up? Of course it is!
It’s easy to dispense “advice” like this now that the economy has completely tanked. People needed this advice several years ago. How is anyone supposed to save that much money now?
I think everyone should save as much as they possibly can. The question is how much to keep liquid. I am comfortable having about 6 months saved up, considering that if I were laid off, I would also most likely receive a severance as well as unemployment benefits. Combined, that would allow me to maintain a reasonable lifestyle for over a year.
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I think it really depends on your situation and how many people you have people depend on you. It is also important how at risk your feel with your job, how stable you job market and field is, and your skillset and drive.
For us being out of debt except for a mortgage makes our monthly expenses pretty minimal, plus we know that if we needed too we could cut back on food, eating out, clothes, etc.
I also think of the reverse too. Every debt that you pay off means more cash flow which means you emergency fund goes further. I would hate to see people with stable jobs storing too much money in the bank while paying 18% interest in credit cards when it is absolutely necessary.
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I still think 3-6 months is fine, assuming that you lean more towards 6 months. While you’re looking for work, find a part time job somewhere (you can ALWAYS find part time work if you look hard enough) and make enough to continue paying your bills.
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I believe 8 to 12 months should be enough. But you should look at the worse case. Do you have enough to cover unexpected medical needs? Will your medical insurance cover this or do you need a larger reserve? Do you have other sources of income to off set a job lost. Its a great question but it really depends on your financial situation. Some people can have less in reserve than others and some may need more.
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I think 3-6 months should be considered a minimum. The more you have the less you need to worry and more control you have over the decisions you make.
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Hmmm… I thought I’d submitted a comment to this yesterday, but clearly my computer hiccuped because it’s nowhere to be seen. (Bad computer! No biscuit!)
Anyway my comment went something like this:
I think that 8-12 months is pretty achievable (over time, obviously) for anyone making around $30,000+. It may be harder for those making less than that — but it’s still a good goal.
That said, I wonder at what point you should value debt reduction above additional EF padding. I mean, 8-12 months’ expenses is all well and good if you’re out of debt. But if you have significant credit card debt — especially considering the low interest rates on savings accounts these days — should you be attempting to eradicate that rather than add to your emergency fund?
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