Q: Personal emergency funds — how much is enough?
A: In these tough economic times, many are concerned about their job security. As economic pundits discuss the prospects for a “jobless recovery,” individuals think about their personal financial situation and ponder how long their families could survive without a steady paycheck.
Many recently unemployed individuals were caught unprepared, with inadequate (if any) emergency funds set to sustain them and their families until new employment was found.
So how much should you sock away for a rainy day? Opinions and circumstances vary, but a six-month cushion is a respectable goal. It’s important to get a realistic understanding of your monthly expenses, which include your monthly debt payments. Determine the minimum debt payment you can make each month and still be current. Then take a look at your monthly expenses and decide what you could live without — restaurants, shopping, etc. The sum of the two numbers will give you a monthly cash requirement for your household.
Keep in mind that once you find a new job, it will take a few weeks to get your first full paycheck. If you fell behind on some of your expenses in the interim, it could take time to get caught up. In addition, the higher your salary requirement, the longer it will take to find a position, in general. So for high-income earners, it may be prudent to save enough to carry the household for eight to twelve months.
The prospect of saving six months of expenses may sound intimidating. However, just getting started is half the battle. So open an account and make a deposit, even if it is a small amount. Set up an account that is harder to access than your regular checking account — perhaps a separate savings account that is not tied to your checking account. If you’re married, make sure your spouse is aware of the savings plan and is on board. Then make a commitment to add to the account each paycheck.
Since this money usually sits on the sidelines, it makes sense to think about how it’s invested. You want to retain some earnings potential, without losing sight of the purpose of the funds in the first place. Your overall investment portfolio will help guide you, but generally these funds should be in highly liquid, short-term securities.
Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. John C. DeMoss, CFA, serves as president of DeMoss Capital. Submit questions to his attention by writing to Business Editor John Vass Jr., Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by e-mailing him at jvass@timesfreepress.com.