Last year, I wrote this post on how to structure your finances. This is basic information taught by financial professionals. One of the steps is to have somewhere from 3 to 6 months of your paycheck in liquid cash (checking or savings) in case of an emergency such as loss of job, medical expenses, home repairs, or car maintenance. However, I feel this recommendation is a little bit dated.
This information probably doesn't take into account the current state of our economy. I remember the financial meltdown of 2008. I also remember my job search at the end of 2012. It took 7 months and 16 interviews to make it to the next job in May 2013.
It is for this reason I would encourage everyone to keep more than 6 months of paychecks in checking or savings accounts. I'd recommend holding on to at least a year to two years of your living expenses in checking or savings.
There are advantages and disadvantages to doing this. In doing this, you have extra security in the case finding a new source of income takes longer than 6 months. Also, in the case of emergencies, you have cash to pay for unexpected expenses and don't have to borrow money. Since you don't have to borrow money, you don't need to pay interest.
The disadvantages include the following. In the case of losing a job, you might get a little lazy in finding a new job because you have money you can live off of. The other major disadvantage is that in keeping money liquid, that money probably isn't being invested and making a return.
Decide how much risk you are willing to bear. You can then decide how much emergency fund you want to have.
What if you're an unmarried guy with a minimalist lifestyle? For me, $2000/month is living lavish. Surely unemployment payments and a 6 month fund of $12000 in a money market account would be enough to last me longer if I needed?
ReplyDeleteThat sounds like a pretty good amount for your lifestyle. $12,000 can be a year of living expenses for a minimalist.
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