Liz Pulliam Weston On Planning For Emergencies

I like to emphasize financial flexibility, rather than dictate a set dollar amount. I think you should look at all your available resources, including cash in the bank, available credit and your “Plan B” options. Is there another earner in your household? How secure are his/her job prospects? Do you have friends or family who could help you out if your back was really up against the wall?

You also need to look at your overhead and how easily you could cut back if necessary. If you’ve got huge mortgage and car payments, for example, you have less flexibility than if you would if your “must have” expenses-shelter, food, utilities, insurance, child care, minimum loan payments-total 50% or less of your after tax income.

The people who are most vulnerable right now are the ones who spend every dime they make on their overhead and who really don’t have a Plan B. There’s just no wiggle room. If you’re a dual-income household and both work in the same troubled industry, or for the same firm, heaven forbid, you’re really on the edge unless you have a fat wad of cash in the bank.

Personally, I’m most comfortable when I have access to cash and credit that equals at least a year’s worth of must-have expenses. I think most people should try to shoot for at least three months’ expenses in cash alone, but unless you’ve already lost your job I wouldn’t stop saving for retirement or paying down credit card debt just to boost that emergency fund.