We hear a lot of financial advisors talk about the importance of having an emergency fund. There is some disagreement about how large it needs to be, but most suggest stashing away three months of expenses, at minimum, for a rainy day.
My rainy day came Wednesday, when my full-time employer announced widespread layoffs. Suddenly, I went from having a steady paycheck to facing an uncertain professional future.
I am not stressed out about this—yet. That’s partially due to a severance package, but I also know that even after that money runs out, there’s still a good chunk left in the bank.
Now, my emergency fund isn’t as large as I’d like it to be. We have a new baby and just built an addition onto our house last year, so there’s been a lot of cash going out the door. But we’ve still been able to save about five months worth of expenses. And since I may not keep the baby in day care if I am home, our expenses may be lower than usual, so the money could go further.
How did my wife and I save five months of expenses? Well, I wish I could say I had some magic trick, but one simple thing we’ve always done is asked ourselves “can we buy a car with the amount of money we have in the bank?” If the answer is no, we take a hard look at our spending and see how much more we can save.
It’s a silly exercise, because we are not in the market for a new car. But in the back of our heads, we’ve always had this thought that we’ll need one eventually.
And the idea sort of works. After all, a new car will cost you about $20,000 or more. And that’s a decent-sized emergency fund for an average family.
I guess the bottom line is that I may be out of work, but we won’t be financially destitute right away. Unless we need to buy a car….