Thought about an Emergency Fund?
Where is your emergency cash stashed?
At the beginning of September, the unemployment numbers for August were released. The number of people in the nation that were unemployed and actively seeking work was 6.1% up from 5.7% in the previous month. This level hasn’t been reached in 5 years (since 2003) and in my opinion the outlook isn’t very positive.
Considering the current economic situation of the nation, I got to thinking about my own emergency fund and the proper amount that should be stashed away. The first idea that comes to mind is my company’s severance package will take care of me.
Many of my peers across industries have been hit hard by corporate layoffs, finding that severance packages can drastically vary from one company to another. Young professionals who have been in the workforce for the least amount of time are hit hardest when it comes to weaker severance packages, and less time overall to have emergency cash sitting in the bank.
How much should I have saved up?
My opinion: 3 months of expenses in liquid accessible cash.
I understand that some people recommend savings of up to 6 months or even 1 year. But I also like to take into account other factors that will help extend the 3 months of cash.
The trick to saving up the 3 months of expenses is to have little opportunity cost with the money set aside. What I’m saying is, this saved money should not prevent you from making regular 401k contributions or an annual IRA contribution. The easiest way to build an emergency fund is to use unexpected income, like the federal stimulus package, or rebates from large purchases, or a bonus from work.
I also don’t think that all three months of expenses need to be sitting in a savings account. I prefer to have one month worth in my direct savings account and the rest in other accessible places like a bond/CD ladder, mutual funds or other liquid investments.
What are the other factors that help in an employment emergency?
1. Company Severance: According to discussions I have had, my peers from different companies have all continued to be paid their regular salary for at least one month from the day notice of a layoff was given. In some cases it was longer, but I like to make a conservative estimate.
2. State Unemployment Benefits: Every state has some type of unemployment program in place. The amount that is paid out and eligibility time period differs from state to state. Keep in mind that this is taxable income, so Uncle Sam will still get his portion.
- Most of my readers are in New York where the seasonally adjusted July 2008 unemployment rate for the state was 5.2% (August state numbers will be released on Sept 19th), so I did some additional research in what the state offers its residents. You can find the breakdown of benefits at the state’s website, it says if you make more than $42,200 a year, then the maximum an individual can receive is $405 a week for 26 weeks (6 months). This 26 week period was extended by Governor Paterson in July for an additional 13 weeks (3 months) in 2008 benefits.
- In the state of California where the rate was an amazing 7.3% in July, unemployment claimants can receive up to $450 a week for 12-26 weeks according to income level. The state has not mentioned if there will be any extensions in benefits CA like in NY.
- The state of Illinois reported an unemployment rate of 5.5% in the month of August. Maximum benefits are $369 for single individuals and the period is up to 26 weeks, currently this is no extension similar to NY.
In the scenario presented above, 3 months of saved expenses, at least a month of company severance, along with state unemployment should add up to 5 months of independent survival, if not longer.
Other Important Reasons for an Emergency Fund
Its easiest to associate an emergency fund with an unemployment situation, but the fact is, many different types of emergencies can happen. Its always a good idea to have at least the minimum deductible for your health insurance policy on hand in case something happened. This also applies to home owner’s/renter’s insurance and car insurance.
Lastly, don’t stress yourself out. Its a lot to save up, but with focus the goal can gradually be achieved.
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