Every single personal finance adviser/blogger encourages keeping an emergency fund. An emergency fund is just what the name implies – liquid savings (not tied up in investments) to cover you financially should you ever need to deal with an emergency like losing your job, needing a new engine/transmission for your car or incurring a huge medical bill. Not everyone agrees on the amount you should keep. Some say 3 months of net take home pay is plenty; others think that eight months to 1 year is ideal. Personally, I’ve always thought that keeping more than 3 months of take home pay wasn’t the smartest way to manage your money because the interest that most banks offer isn’t high enough to off-set inflation.
Until I was almost faced with losing my job and needing a cushion to cover my expenses.
Last week, several of my colleagues were let go due to the company not being able to support their salaries. Fortunately, I was not one of the people who was let go. But watching my former coworkers walk into the office with jobs and then by 10 a.m. leaving jobless with their possessions packed into boxes (they won’t even let you access any of your files on your computer so if you have anything personal/professional backed up on a work computer or saved in email files, you are SOL) was so scary. In the few years that I’ve been with this company, I’ve seen three rounds of layoffs. But the magnitude of people who were let go and the overall destitute feeling that was left caused me to rethink my emergency fund strategy.
Let’s be honest – corporate america (actually most businesses, small or large) do not have your best interests at heart. They don’t care that you just bought a new car or that you needed to pay $3000 for your dog’s surgery. For them, the health of the business is the bottom line. If that means getting rid of a few employees to cut costs for the year, then so be it.
That’s why having an emergency fund is so important. Because we are considered resources that can be acquired and disposed of, having a safety net in place is the surest way of keeping peace of mind.
By October 2014, I had about 3 months of take home pay saved and was starting to feel comfortable with my financial health. I felt like I had pretty good job security and that the only reason I needed an emergency fund was to cover any major repairs to my car or some other large unforeseen bill. But losing my job never crossed my mind. I falsely felt secure in my job and my company. I wonder how many others have those same thoughts and feelings. I’m willing to bet that losing your job isn’t something most people think would actually happen to them!
As it stands today, I now have a little over 6 months of take home pay saved. Before last week, I had planned to take about half of that savings to invest in the stock market. However, having seen with my own eyes that being laid off is a real possibility and could happen to anyone no matter how great of an employee you are, I think I’ll hold off on any investing opportunities until I’ve saved a bit more money. Likely closer to the end of the summer. Because, while I may potentially lose out on catching the hot new stock while its low, I’ve gained a little bit of peace that I’ll be covered for 6 months if I were to lose my job.
Let me know your thoughts below! Do you think 3 months is enough? Or, are you like me, more comfortable with having a more hefty liquid emergency fund?