I was perusing unemployment duration data on the BLS website recently (yes, this is what personal finance bloggers do) and noticed that in early 2015 and the average duration of unemployment is still around 33 weeks.
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
- 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.
- Start saving: if you have savings already built, move it to a separate emergency savings account that you won’t dip in to.
- 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. Today, I think it makes sense to have it sit in an ETF with a discount online brokerage. If you need to access the funds, you can have them within a few days via a bank transfer (and use credit cards in the meantime, which buys you time).
Emergency Savings Discussion:
How much do you have or want to have in emergency savings?
I do not think any amount in a emergency fund is enough. I think you should be saving at least 5% of your income and find ways to make income on the side. No one will keep a job straight for 30 years, multiple income streams are most important, in my opinion. If you have multiple streams of income plus a three to six month emergency fund, I think you would be ok.
I think that 5% is way below what’s necessary to ever retire. Just think about that – excluding capital gains – it would take you 20 years of work just to hit one year of your income.
G.E. I meant outside of retirement savings, as part of your emergency savings. Retirement is a whole other beast, in my opinion. That, I think, you should be saving 15-20% average for.
At the moment, I have about 6 months specifically for emergency savings, plus my auto, renter’s, and health insurance deductibles. My goal is to have a 12 month emergency fund before I buy a house. A “full” 12 month emergency fund for me would be about $36,000, which is a huge amount since my job is fairly stable. So I’m probably insane for building it up that high, but I figure that when I leave my current job, I’ll take a few months off before looking for another job and that fund will be my “income” throughout that time period.
$36K seems like a lot. How big is your family?
Just me – but if I own a house and I get laid off, then I would have to leave the country, so I’d prefer to have enough savings to pay the mortgage if it takes a year to sell the house.
I have only been working for 1 year and I have 4 months saved so far with the absolute minimum goal of 6 months, but since I will reach that pretty soon the minimum will be 1 year. At that point I will put about 8 month’s worth into cds while leaving the rest in the money market account that it is currently in.
Excellent savings track record thus far, keep it up!
You’ll definitely need a year’s worth of expenses saved up. I’ve been unemployed for 8 months now, and no indication of it improving any time soon. It’s been so tough, living off just my husband’s income, and now there’s a possibility he might get laid off as well. It’s really scary. There’s no way we can even build an emergency fund at this point either.
Sorry to hear that. Keep your head up, I’m sure things will turn around.
I simply can’t envision an emergency where I’d need to come up with more than 6 months pay over a few days, so that stays my guideline- although I do hedge my bets!
Every month, 5% of my pay goes into a savings account. Every year, anything above 6 months worth of pay goes into a taxable index fund. The potential for sacrifice(that I might have to sell at a loss when my emergency and the markets coincide) is outweighed by the potential benefits. If I’d have had to dip into it in the worst of 2008, I still would have had over a year’s worth bills covered, so I feel pretty comfortable.
General guidelines are interesting, but the individual’s total financial picture can be a game changer.
I’ve struggled with this question myself – coming from a publishing background which has not been kind to those looking for (or retaining) work, I’d say it’s probably important to have six months at the absolute least.
I keep six months’ worth of living expenses in my savings account, have three months’ worth in my checking account, and I also have a “slush fund” of cash in savings that isn’t earmarked toward any particular goals at this time and could be tapped to help if necessary. That’s probably not optimized for interest-earning purposes, but it helps me sleep at night and that’s what matters most to me. There’s also shares of stock I own (that are not tied to my retirement accounts) that I could use to cover expenses essentially as a last resort.
I also agree with Eddie that the individual’s total financial picture should really be taken into account. It also plays into what Ginger noted regarding multiple revenue streams. If you have dividend paying stocks, that’s revenue, for example. If you have a side business, that’s something else to take into account.
Like anything else, it’s hard to really put a hard-and-fast number on how many months you should have. It’s also important to have an overall savings plan in place – so if God forbid you had something happen and you’ve already eaten through your emergency fund, maybe savings earmarked for that really awesome summer vacation could be used next before falling into credit card debt.
GE – This is one article where I have to disagree, simply because I think it leaves out some important data. Wouldn’t a more valid number be the median number of weeks of unemployment (or even the mode, if you have 6 months in saving and some in other easily accessible investments)? With the current circumstances the small number of people that have been unemployed going on two to three years might really throw off the averages.
Median data was not available, but I’m not sure that it would have changed my opinion much. 44% of respondents were unemployed for over 27 weeks (6 months). So just the fact that you have almost half over the 6 month mark already is reason enough to believe that 6 months is no longer good enough to be the standard.
In that context, it certainly makes sense.
What’s your opinion about forgoing 401(k) contributions with a employer match to build a proper emergency fund?
My wife and I have an amount equal to 18 months of expenses in the Ally Bank 5 year CD which is earning 2.4%. I guess that is a lot of money to have in an emergency fund, but I don’t really know what else I could do with the extra money since it is already in a high yield CD.
Why not just NOT buy a house that you cant get by on one income if your spouse lost their job?
Having that much money for just emergency funds is ridiculous. But it’s your money. I totally disagree with this blog though. found it by chance from another blog.
I’m thinking of starting out on my own and i’m taking the next 6 mths to get to the my 1 year emergency fund target plus a separate pool to cover the fixed costs that is required to run the household. Even though we have two income in the household, it’s gives me great comfort to know that things will be taken care of at home while i venture out.
Where do you think that six months of expenses should be? Longer term investments?
What if one spouse stays at home with children? Is it still ridiculous to have 6 months of expenses in place?
Still I think you bring up a good point in suggesting people shouldn’t buy more house than they can afford. In fact, I like the idea of buying less house than you can “technically” afford.
I agree that a year minimum is necessary these days. Im curious though, what do you think about housing your emergency fund in your ROTH IRA? Once it’s been open for 5 years and is usable without a penalty, it seems like a good idea to me.
Is this 12 months based off keeping the same lifestyle? Or would you consider cutting back on some discretionary spends if you got laid off, thereby reducing the amount needed?
Even if you are on Social Security, or any pension, pre funded or not, you still need at least 3-years of living expenses, or 1.5 year if you are not the only income earner in your household.
Pension plans are defaulting everyday.
Remember last year when Social Security almost didn’t make payments due to the lack of a budget being signed.
Younger working couples need to consider relocating cost to move in order to find work.
Money needs to be saved for car repairs or a roof repair on your house. Even money to help pay for a childs funeral or your sister dies and you are expected to help.
An engine or transmission can easily be $2500.
Pets may need an emergency $2500 surgery at anytime.
Your sewer line can collapse at anytime and cost $5,000 to fix.
Your furnance or A/C system can fail at anytime and cost $4500 to fix.
You may have to help pay for medical expenses for yourself, a child, or family member. 80/20% with a max of $5000 a year of out of pocket is the norm on most health insurace plans today.
It just goes on and on.
I’d say any person living in the US, who is buying a house or owns a house needs at least $15,000 in saving.
Renters need maybe $2,000. A friend of mine was put out on the street when several people in her comples came down with C02 sickness. The city shut down the whole comples for 37-days and the complex didn’t give anyone any money. She had to find another place to rent along with deposits and first and last months rent. She had to have $2000 to move.
Families need $25,000 in savings.
It is amazing how fast you can spiral down finanically in the event of 1 or 2 life events.
I am saving up $100,000 due to the fact that I want to have at least 5-years of living cost in the bank. $1500 a month x 5-years with a little extra built in.
You can never be too safe.
That’s seems a little too conservative. $100,000 in the bank is way too lofty of a goal for most to accomplish. Addionally, the statistical odds of having several such catastrophies occur in the same year is not that probable.