Q: Can you remind me please how much money should be in my emergency fund? I can’t remember if it’s two or three months of expenses. And are the expenses just bills?
A: Typically I advise people to aim to save at least three months worth of living expenses. However, if you are a highly paid individual or you think it will take you a long time to find employment should you be laid off, shoot for six months to a year worth of living expenses for your emergency fund.
And by living expenses, I mean save up what it takes you to run your house for three months. That would include not just rent or your mortgage payment, but utility costs. Include your cable cost, cell phone expenses, food, entertainment, insurance—everything.
For example, if your monthly expenses run about $3,000 a month, you should aim at a minimum to save $9,000.
You should keep this money liquid. This isn’t cash you should worry about investing. You don’t want to put this money at risk. Instead, look for the highest yielding savings account you can find. For some of the best savings rates, check out bankrate.com. Also consider federally-insured Internet-only banks, which often have better savings rates because they don’t have brick and mortar costs.
And if you’re wondering why include cable and entertainment expenses in your emergency build-up fund, here’s why. It often takes people a few months before they make drastic cuts in their budget following a disruption in their income.