Is A 3-Month Emergency Fund Enough?

For years you have likely heard that you should have an emergency fund equal to three months of expenses. But in 2020, is that enough?

There are two reasons why it may not be:

First, the country has entered a recession of unknown depth and length. But one thing that we do know is that in a recession, it is harder to find a job if you experience a layoff. According to the U.S. Bureau of Labor Statistics, during the Great Recession the median length of unemployment increased from two months in 2007 to six months in 2010. After an initial leveling off, public sector employment proceeded to fall further than private sector employment and recovered more slowly.

Second, your ability to make big changes in your life may be limited. If you have few constraints (perhaps only a fur baby at home), you may have the ability to make bold moves to right your ship if your emergency fund starts to run dry. You may be able to easily pick up and move, to a new less expensive home or even a new city. You may be able to give up your car with only a modicum of pain. You may be able to lower your daily expenses enough to allow you to thrive on a much lower salary. But if you have a family, your practical options are likely more constrained and dramatic moves — selling your home, moving to a new town, materially reducing education or transportation expenses — may be more difficult and time-consuming to execute. You must take into consideration the disruption to not just your life, but that of a spouse and possibly children. Taking on a lower-paying job is less likely to be adequate to meet your “must-have” needs in the short to medium term. In short, you need a much bigger nest egg to tide you over.

Now is the time to think very creatively about how you could possibly be impacted by current economic conditions. And think even more creatively about how you would manage if you or your spouse lost their job for an extended period of time. But don’t just think...take action.