If you listen to most personal finance experts, an emergency fund is a necessity. Some recommend at least three months worth of expenses in a liquid savings account, but many go even farther, saying six months worth of savings is ideal.
I struggle with this topic all the time. There’s little doubt that people should have a little cash on hand to deal with emergencies. But I think for many people, three months worth of expenses is too much. And six months is overkill for almost everybody.
A number of factors should be weighed when thinking about the size of an emergency fund. One example is a teacher who has a continuing contract. There’s an almost zero chance that person is going to lose their job. It’s silly for someone with that much job security to put aside six months of expenses.
Somebody who’s working on a temporary construction project should be far more aggressive putting money away for lean times. There is no one-size-fits-all solution.
Getting up to a full emergency fund is also cumbersome for someone just starting out. You’d have to save 50% of your take home pay for a whole year to have saved six months worth of expenses. That’s too much for many people.
And then it creates a situation where somebody has 100% of their assets in cash, rather than investing for the future.
Rules of thumb are a good start, but remember that things are a little more complex sometimes. Consider these other factors before blindly doing what the experts say.
