The WSJ writes:
Twenty thousand Americans are losing their jobs every day. This slump could be much worse, and last much longer, than most of us expect. No wonder families are being advised to keep six months', or even nine months', worth of expenses in an emergency fund they can tap if they end up out of work for a long time.
That's a fine idea in theory. In practice, it's not so easy.
According to federal data, a typical middle-class family spends about $42,000 annually. Six months of expenses is $21,000, and nine months is $31,500. A lot of people don't have that much on hand. And for many others, that would be pretty much all their retirement savings.
Sallie's Niece was curious about my EF since I expect to be laid off some time soon. I guess it's a good time to look at the state of my preparedness (or lack thereof) in the event of a layoff:
MY MINIMUM MONTHLY PAYMENTS
In my current budget, I pay extra towards my debts and set aside money for savings and earmarks. However, in the event of a layoff, I plan only to pay the bare minimum owed on my debts and I won't be saving. So the following are my expected bare minimum expenses:
Rent: $1,275/month. (This will likely go up in July.)
Electricity: Approximately $37/month.
Student Loans: I expect to be able obtain a temporary forbearance on my student loans while I am laid off. But unlike before, I will NOT allow my student loans to negatively amortize. By paying the interest only, I won't be paying down the balance, but atleast I'm not letting it grow again. I estimate my monthly interest on my student loans are $500/month (*eep*).
My cable/internet/land line: $152/month.
My cell phone: $53/month.
Minimum credit card: Approximately $240/month.
Insurance (car and renter's): Approximately $120/month.
GRAND TOTAL: $2,725
MY EMERGENCY FUND
Liquid Savings: Not taking into account the bonus I have yet to receive, I currently have $6,166.37 saved, or 2.26 months.
Taxable Investment Account: If necessary, I can also liquidate my taxable investment account that was valued at $4,500 on Monday (i.e., before the recent 2-day market rally). If I were to anticipate a scenario that my account will go down an additional 20%, I'll have an additional $3,600 (or, 1.32 months) that I can tap. The good news in selling my stocks at a loss is that at least I won't owe any taxes. :-P
So, essentially, I have about 3.58 months worth of my expenses in my emergency fund.
Worse comes to worst, I can also liquidate my meager Roth IRA account (value: $1,000). Since again, I'm liquidating at a loss (i.e., my withdrawal is below my post-tax contributions), I won't owe any penalties or taxes.
The aforementioned bonus will help somewhat, but I was hoping to use some of it towards my long term savings like a CD ladder or Roth IRA.
Basically, I'm like most people - - my EF is not bad, but it is sorely inadequate to weather this current economic crisis.