I waded through a wide variety of personal finance literature before writing All The Money In The World. One universal bit of advice was that a prudent household needed an emergency fund. With good reason. Your monthly income may cover your monthly expenses, but what if something goes wrong? Really wrong, like you lose your job or you have to take unpaid disability leave? The idea behind an emergency fund is that you would have the cash in a liquid account to cover those rainy months.
The more controversial question is how many months your emergency fund (or non-retirement savings in general) should cover.
Different gurus have different ideas, because these gurus are also generally addressing the question of how aggressively people should try to get out of debt. Should you build up an emergency fund before paying off your credit cards? If you’re paying 15% on a credit card, and would only get 1% on a bank account, this seems like a pretty easy call. And so Dave Ramsey suggests that people build up a $1000 emergency fund (so they won’t have to rely on loans for a small-ish emergency) and then focus on paying off debt. Suze Orman, on the other hand, has recently started saying that people should build up an 8-month emergency fund before paying off credit cards, since banks are restricting access to capital, and in a pinch, you might not be able to put emergency expenses on a credit card that you’ll pay off later. I learned about this controversy, by the way, by reading the Man v. Debt blog. Other people have other ideas (3 months, for instance, if you have a very secure job and aren’t the only person earning an income).
This whole argument reminds me of why I probably don’t have a future career as a personal finance guru. To my mind, sure, 3-6 months sounds good. 8 months is even better. What’s better than 8 months? 12 months. 18 months. How about two years? The point of having accessible savings is to buy you freedom, and more freedom is better than less freedom. Having two years of your family’s living expenses saved up is the ticket to being choosy in your career, to being able to quit a job if you want, to starting a business without stress. Trying to talk down the amount of months one should have stashed away misses the point. Saying you can build up a 3 month fund and then go back to break-even is like a dieter restricting calories until she gets to her goal weight and then eating like she did before. A better idea is to change your eating habits entirely to be something sustainable and healthy you can deal with your whole life.
Likewise, I think one’s savings should be growing every month, because you are constantly living on less than you bring in. You wouldn’t stop at 3 months, or 6 months. Sure, you’re saving up for retirement too. But if you’re saving 15% for that, then save 10% more for added wealth and security in the near term. If that’s impossible with a current level of spending, figure out how to make more money. And ultimately, make savings like paying taxes. It’s just what happens when money comes in. When people argue about how many months of expenses to save, it’s because they don’t really want to save. And that’s a different problem entirely.