If you dig back through the BLS unemployment archives you’ll notice that there were very few months where that number exceeded 20 weeks.

A recession, of course, will result in higher lengths of unemployment. But I think this is different. I think we’ve entered a new era of hardcore job cutting and hesitation to hire at the slightest sign of economic trouble, in the name of profitability. Job security is fairly non-existent.

Consider this for a moment – would there have been such a deep recession if employers hadn’t laid off so many people right away? It’s kind of a self-fulfilling prophecy: employers see murky economic indicators and want to keep profits the same despite lower revenue -> they lay people off -> others see their peers getting laid off and spend less -> leads to deep revenue declines. Sure, corporate profits may have slightly stung for a quarter or two, but could the economy have bounced right back? One has to wonder… but I digress.

How Much Emergency Savings is Enough?

The point I wanted to make is this: the traditional advice is that 6 months of living expenses in emergency savings is enough. However, with the average unemployment duration at 40.4 weeks, 6 months (or 26 weeks) is no longer enough, particularly when you take into account the possibility of medical emergency, pet operations, or other unforeseen circumstances.

What is a good length these days?

1 year, at a minimum.

Right at the beginning of the recession, my wife was laid off for a few months. Having received unemployment, I can tell you that it’s enough to maybe cover your food expenses – but housing, transportation, and everything else? Forget about it. If you’re in a one income scenario, you will really be put in a tough situation if you are unemployed.

If you have a mortgage, even in a two-income household, you are going to feel it. When you’ve been there, you understand the importance of the stability and peace of mind an emergency savings fund can offer. And they are really quite simple…

How to Prepare an Emergency Fund

1. Figure out how much you need: use a budgeting spreadsheet and go back and look at what your actual expenses were over the last 12 months. Total up how much it would take to cover your living expenses over 12 months based on your findings.
2. Start saving: if you have savings already built, move it to a separate emergency savings account that you won’t dip in to.
3. Let it sit! the goal is to not get this money tied up in things where you cannot access it. Traditional advice has been to let it sit in a savings account or money market account, which are both highly liquid. The problem with this is the earnings are pitiful. A good would be to keep 3 months in an interest-bearing savings account and keep the remainder in a CD like the Ally Raise your Rate CD, which offers 1.8% right now and it can be raised if rates go higher. This allows you to avoid some of the erosion impact of inflation. The early withdrawal penalty is only 2 months of interest earned if you need to access the funds before the term is up.

Emergency Savings Discussion:

How much do you have or want to have in emergency savings?

Emergency Savings: is 6 Months Still Enough? is copyrighted by 20somethingfinance.com without consent to republish.

In a recent post on where to allocate your cash flow, I highlighted that step 1 should be to start an “emergency” savings fund. Starting an emergency savings fund is one of the fundamental building blocks in building a personal finance foundation for yourself. Many personal finance gurus agree that this is one of the first things you should do, ranking ahead of paying off high interest debt. It’s not a flashy topic, but smart personal finance has little to do with flash. This post will cover why you need emergency savings, how much you need, and where to put it.

Why Save for Emergencies?

There are a number of situations that arise in life that you simply do not have control over. Should these situations require immediate cash flow, it is essential to have emergency savings to cover it. If you have a personal investing account or retirement account you could pull funds from these, but for a number of reasons including bad market timing, early withdrawal penalties, or a delay in the liquidity of actually selling your investment and receiving your funds, this is the last thing you want to do.

Having money set aside for emergencies not only prevents this from happening, but also gives you the peace of mind that if something unfortunate was to happen that you will have a little financial cushioning to ride it out.

What Types of Situations May Require Emergency Savings?

I’m sure that you have needed fast cash for a number of situations in your life, or seen situations where others have. Insurance may cover many of these scenarios for you, but there is always a chance that it won’t cover fully what you will need. Here are a few examples:

• lost job or layoff
• began a new job that required you to expense a geographic move
• auto accident, auto retirement, or major repair
• major home expense such as a broken water line, tree falling on your roof, fire, natural disaster effects, etc.
• pet health care
• unexpected taxes owed to IRS
• death in family that required you to help pay for funeral and other expenses
• unexpected medical expenses not fully covered by insurance

How Much Should you Put in Emergency Savings?

This is where the experts tend to differ. There are a wide range of guidelines out there for how much you should save. Pick one or a combination, but ultimately, you have to choose an amount that you’re comfortable with and that feels right for you. Here are some of the general guidelines out there:

• 2-3 months worth of take home salary
• 6 months worth of living expenses
• Start small and pay off debt before building 3 to 6 months worth of living expenses. Dave Ramsey falls into this camp. He advocates starting with $1,000, paying off all of your debt, then building a six month emergency fund.
• 8 months worth of living expenses. In the Laws of Money, the Lessons of Life, Suze Orman told readers that the 6 month time frame was no longer enough and that you should have “8 months of cash saved”.

I believe in a combination of the above, with a little twist. I think it is wise to start small and work your way up, as Ramsey recommends, however, I don’t think it’s realistic or wise to pay off ALL of your debt before saving more than $1,000. Focus on paying off high interest debt, but when it comes to school loans and mortgages, paying all of those off first before adding to your emergency savings is not a good idea. Once you’ve paid off high interest debt, then shoot for a minimum of six months of expenses.

Here’s where the twist comes in – if you are anticipating a major life changing event coming up, add to your fund or simply another savings account. You do not want to be pulling from emergency funds to pay off anticipated expenses.

Where Should you Put your Emergency Savings?

You should be earning interest from your savings, otherwise, you are losing value due to the effects of inflation. Place your emergency fund into a high interest savings account, checking account, or money market account (MMA). Stay away from certificates of deposit because if you pull your money out prior to the CD expiring, you will lose interest in the form of a penalty.

Go with a bank that offers quick and easy access to your fund and a competitive rate. The 4 online banks with a wide variety of product offerings and the highest savings yields are usually Discover Bank, Ally Bank, EverBank, and Ing Direct. The banks still offer free checking accounts and debit cards. Use this as a starting point to see what the current going rate is before committing. Check back periodically to see if you’re getting the best going rate. If you’re not, don’t be afraid to switch. If you haven’t already, start building your emergency savings. It will help you sleep better at night.

Emergency Savings Discussion

• How much do you have in your emergency savings?
• What percent to your end goal are you at with your emergency fund?

You may also find the following articles of interest:

• Emergency Savings: Is 6 Months Still Enough?
• Ally Bank Raise Your Rate CD
• Index Funds Vs. Mutual Funds

Emergency Savings Fund: Why, How Much, and Where? is copyrighted by 20somethingfinance.com without consent to republish.