Major emergencies, like losing a job, are rare. They occur on a much less regular basis than minor emergencies. But when they do hit, their punch can be devastating. Losing a job can take a significant emotional and financial toll. For some, losing a job means selling a house, finding a new school for the kids and, of course, finding a new job. Losing a job is stressful and exhausting.
And if you aren’t prepared, you can quickly find yourself with an empty bank account.
Well, it depends.
A job-loss emergency fund should have enough in it to cover three to six months of living expenses.
But where do you fall in that range?
To determine what this number is for you, take a look at your monthly bills. Identify your essential bills. How much do you pay for housing (monthly payment, utilities and insurance), food, health (including insurance) and necessary transportation? Certainly, items like cable television and your children’s sports are nice, but I would not classify them as essential. Identify what is essential. Of course, you can always include more bills if you desire. But at least include what is absolutely necessary.
Here is the “it depends” part. Whether you save three, four, five or six months worth of living expenses depends on your financial responsibility for others and how many wage-earners you have in the house. A single person can be more agile if they lose a job. So for a single person, my recommendation leans toward the three-month end of the spectrum.
But if you aren’t single, if you are financially responsible for your spouse and maybe children, I lean more toward the six-month end of the spectrum. If both you and your spouse work, you may be able to reduce this amount slightly.
And be sure to get your teammate’s thoughts on it. An emergency account can be surprisingly personal. My wife tends to like more in our emergency fund that I do. For her, it is more about a way to take care of our children. So we set aside whatever amount makes her feel comfortable. It is a simple sacrifice of preference on my part.
Remember, you and your teammate have different money personalities. Determining the amount you save for a job loss emergency is just one of the many places where your personalities will show up.
Determine how much you need to save together. Because if a job is lost, both will feel the impact.
Your minor emergency fund should be in a place where you can access it quickly, probably a checking or savings account. For your job-loss emergency fund, the options broaden.
Certainly, a checking or savings account will work. But you probably will not need three to six months of living expenses immediately if you lose a job. Usually, you have some time to transfer from a place that might not be as easily accessed to a checking or savings account.
Why is this important to consider? You get little to no financial gain when keeping money in a checking or savings account. Which is a shame if you have three to six months of living expenses—usually a good chunk of money—set aside.
Some options you and your teammate may want to consider are a money market account, online bank savings account or no-penalty certificate of deposit (CD). All of these options usually provide a higher interest rate than a traditional checking or savings account. You won’t get ridiculously wealthy using any of them, but, of course, that is not the point of an emergency fund.
Proverbs 30:24-25 says, “Four things on earth are small, yet they are extremely wise: ants are not a strong people, yet they store up their food in the summer.”
Ants leverage seasons of abundance for seasons of scarcity. We can learn a lot from this little bug.
Setting aside three to six months of living expenses is not a goal that’s easily accomplished. Like all financial goals, it takes time and persistence. The good news for those pursuing this milestone is that you have already rid yourself of all debt except a mortgage. So now you can shift the money you were spending on debt to your job-loss emergency fund.
Here are some thoughts on how to save money for this fund:
1. Monthly transfers.
Set up automatic transfers from your checking account to wherever you decide to put your emergency fund. Make sure you don’t forget to set aside money by making the transfers automatic. You can do this through your online bank account. Note, automatic transfers cannot go into a CD.
2. Occasional excess.
There will be times when you find yourself with excess money. And I am not referring to large sums of money. There will be times when you will find yourself with an extra $20 or $50. Don’t spend it. Instead, get it out of your hands and into your emergency fund. These small deposits will add up over time.
3. Tax returns.
If you get a tax return, don’t waste it. Many use their tax return as an excuse to splurge. Don’t do that. Use your tax return in a way that you won’t regret. Use the money to build up your emergency savings.
You work hard. And sometimes because of your excellent work, you receive a bonus. This probably means you won’t lose your job because of poor performance, but you can still lose your job for other reasons. Put work bonuses toward your emergency fund in case your company has to layoff even good employees.
You can set aside enough for your job loss emergency fund. Leverage seasons of abundance. Be persistent and you can have three to six months of living expenses saved.
Protect those who rely on you. And protect your ability to live with open hands.
Art Rainer is the author of The Marriage Challenge, The Money Challenge and the forthcoming kids series The Secret Slide Money Club. He also hosts a growing podcast called The Money Challenge.