If the process of making money followed a Hollywood script, we would start our career at an entry-level job, then dazzle senior management and skyrocket straight up to the very top corporate ladder. There would be nothing but uninterrupted success along the way, and wealth would accumulate to give us the opportunity to live a dream life, and the prestige of being a true mover and shaker.
For a few folks, that does happen. But for the vast majority of people, the ascent up the corporate ladder stops at a certain high up rung. For others, they’re thrown off the ladder somewhere in the middle. Yet others don’t even get a chance to get on the ladder, while some have no interest or inclination to do so. Clearly, we all have different experiences and paths that we take. Often times, this happens no matter what the true intentions that people may originally have.
Life isn’t a linear path upward to superstardom for all – instead, it has its ups and downs. Hopefully the ups predominate, and we’re always pushing and striving to be trending upward! But we need to be prepared for at least the chance that something could happen, and this is especially important with our finances. Accordingly, it’s smart to have an emergency fund.
Of course, this isn’t news to you. The topic of having an emergency fund is one that’s very often discussed on personal finance blogs. People often make clear that it’s really important to have one, the consequences of not having one, how you’ll be thankful you did have one, and so on. Then there’s the question of how much to have in an emergency fund.
Yes, that’s talked about quite a bit too. Most of the opinions I’ve read have centered around making sure that you at least have something, and ideally 3 months of expenses. Maybe 3 to 6 months in some cases.
Well, I take a little bit more conservative view – in the sense of being careful to have more than that in an emergency fund. I think it’s a good idea to go for 6 to 9 months of expenses, and even up to 12 months in an emergency fund.
I think that most people might not really agree with this for a variety of reasons. One being the notion that financial emergencies won’t last that long, and that they’ll somehow be able to avoid being in distress for that long. Others might scoff at tying that much money in a low-interest vehicle, as the money could be invested elsewhere for a higher rate of return. Long-term stock market rates of return sure have been better than what people earn these days in savings accounts, so I can see that!
Nevertheless, I think it’s not a bad idea to at least work toward that 6 to 9 months amount. If you can cover that many months of expenses, your “sleep well at night” factor will be a lot higher. Let’s face it, things can and do happen to people. Jobs can be lost in a flash, but it can take quite a bit of time to find a new one. People get sick all of a sudden, get divorced, have emergencies, or simply find themselves facing unexpected home or car repairs. These costs can add up, but even if there is only one problem that occurs, it could be quite expensive.
What do you do if you had a modest emergency fund run out? Start charging more on a credit card? Frankly, having a solid emergency fund is a good step toward trying to avoid debt in life. Borrow from family or friends? Sell assets for less than value?
None of those sound like too much fun. Since we can’t really predict whether or not something will happen, and what it would entail if it did, why not protect ourselves with a bigger financial cushion?
My Questions for You
Is an emergency fund a priority for you?
What do you think is a good number of months of expenses to keep in an emergency fund?
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