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How much emergency funds should you save for a rainy day?

April 10th, 2013 · No Comments

When I graduated from college fifteen years ago, the advice I received was that I should save three months of living expenses as my emergency funds. At that time, I was single with a good salary. The economy was at the height of the dotcom bubble. In the Silicon Valley it seemed that there was unlimited number of opportunities to get rich.

Things turned sour very quickly. I knew a lot of young professionals who were out of work in late 2000, 2001 and 2002. It was truly a very difficult time for a lot of people. Many young professionals chose to move home to save money, or go back to graduate school to get their MBA, JD, or other graduate degrees. For folks who didn’t have a family to support, it’s relatively easier to survive the downturn. Even for these folks, three months of living expenses was NOT whole lot of money as they struggled to find jobs and had to look for other options. If I’m a young professional today, I would suggest that you should  save at least 6 months of living expenses as your emergency fund. I believe the optimal emergency funds is 12 months of living expenses.

If you have a family to support, I would suggest that you should have a minimum of 12 months of living expenses as your emergency fund. Ideally, you should save 24 months of living expenses as your emergency fund. You might think I’m being too conservative. But, in this economy, if you lose your job, it could take a while to find another job. While you are unemployed, you still need to find ways to pay for medical insurance in addition to your living expenses. In the United States, we simply don’t have the social welfare infrastructure to support a family for an extended period of time while the primary bread earner is out of job.

Where should you put your emergency funds? It should be kept in a saving or CD or money market account – please do NOT put your emergency funds in the stock market!

Also, smaller banks and/or online banks tend to have better rate for saving or CD or money market account. For example, Everbank’s Yield Pledge Money Market and Interest Checking account both offer 1.25% APY guaranteed for the first 6 months for new accounts. Because the interest rate is fixed for the first 6 months, this is essentially a 6-month CD with a higher rate than most 6-month CD rate out there. It only takes $1,500 to open. No monthly fee. IRA eligible. It also promises to keep the yield on the account in the top 5% of Competitive Accounts. Because there is no early withdraw penalty, if you find better rate else where in six months, you can always move your money to somewhere else.

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