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One Size Doesn’t Fit All When It Comes to An Emergency Fund

Every personal finance expert recommends having three to six months of living expenses socked away in an emergency fund to cover a medical crisis or job loss.  Makes sense, especially now since many think a recession might be right around the corner.

But the one-size-fits-all advice of three to six months just isn’t sufficient for some people.  I was a very senior bond analyst on Wall Street when the Great Recession started in 2008.  When I lost my job, I had two and a half years of savings in my emergency fund; but it was just barely enough.  So, here are some things to consider when deciding how much to put away in case you lose your job.

  • How long did it take you to find your current job? The length of your job hunt usually depends on what you do for a living and the supply versus demand for labor in that industry.  If you found your current job while the economy was strong, remember that it will take longer to find a job during a recession.
  • How senior are you? More experience should make it easier to find a job. Unfortunately, the more senior you are and the more money you make, the longer it takes to find a job.  Most corporations are like a pyramid, with fewer jobs the higher you go.  And employers won’t hire you for more junior spots because they assume you will leave as soon as you find something better.  Bottom line, if you had a senior position, it may take you six to twelve months to find a new job.
  • Is your industry undergoing changes? New regulations in the late 2000’s changed the banking industry, making it harder for me to find a job. In addition, the number of available jobs shrank when firms like Lehman and Bear Stearns shut down. Stay on top of what is happening in your industry. If companies are merging and regulations are changing, you may want to have six to nine months of expenses in the bank.
  • Do you have any new expenses starting soon? Student loan payments? Having to buy medical insurance because you’re turning 26 and can no longer be covered by your parents? Don’t forget to factor that in when you add up your monthly expenses. 
  • Can you supplement your emergency fund with unemployment benefits? Find out what you might be eligible for in your state. Amounts vary widely, for example New York state provides a maximum benefit of $430 a week while the maximum benefit in New Jersey is $600 a week. Both states let you collect for 26 weeks; but in Georgia, you can only collect for 14 weeks. You can subtract your estimated unemployment benefits from the amount you need in your emergency fund.
  • If you’re a freelancer in the gig economy, you won’t get any severance from an employer and you probably aren’t eligible for unemployment benefits. So, stock your emergency fund accordingly.
  • And don't forget to replenish your emergency fund once you find a job.