I've generally followed the rule-of-thumb of keeping an emergency fund stocked with 6 months of post-layoff expenses (which would include COBRA payments for health insurance). With that set aside, the rest of my savings went first into tax-favored retirement accounts, then toward any specific savings goals (home down payment, new car, etc.), and finally toward taxable long-term investments.
During this recession, I've read a good deal of advice that (wisely) suggested a larger 12-month emergency fund is a good idea in the economic environment due to the potential for a lengthy period of unemployment. Back in the fall I had reached pretty much the same conclusion after reading about continuing job loss in my field, so I beefed up the emergency fund to 12 months.
In the back of my mind, I had sort of assumed that at some point I would reduce my emergency fund to 6 months of living expenses again, once the economy improved. But thinking about it last night, I realized that it's better for me to keep my emergency fund at a level that I would need it to be at when a true economic emergency hits -- like this recession. For me this means keeping a 12 month emergency fund at all times.
While part of me doesn't like this much cash sitting on the sidelines, I think the benefit of keeping the emergency fund at "crisis level" is that, well, for starters I'll be prepared when/if the next economic crisis hits.
Also, I think it's a pretty good bet that future period of high-risk for unemployment will coincide with general problems in the economy, which typically go hand-in-hand with stock market crashes. During the next crash (which may be around the corner or a decade from now, who knows) I want to be able to take more advantage of the opportunity to buy low. I can't do that if I'm silmutaneously diverting investment dollars to beefing up my emergency fund in times of economic stress. During the past 9 months, I've continued maxing out my tax-favored options, but I have had the extra savings each month to do as much taxable long-term investment as I would have liked, because of the diversion to increase the emergency fund.
So, I'm looking at keeping my emergency fund at "crisis level" from now on, which for me is 12 months. I'm going to resist the temptation to trim back my emergency fund when the good times roll again.
During this recession, I've read a good deal of advice that (wisely) suggested a larger 12-month emergency fund is a good idea in the economic environment due to the potential for a lengthy period of unemployment. Back in the fall I had reached pretty much the same conclusion after reading about continuing job loss in my field, so I beefed up the emergency fund to 12 months.
In the back of my mind, I had sort of assumed that at some point I would reduce my emergency fund to 6 months of living expenses again, once the economy improved. But thinking about it last night, I realized that it's better for me to keep my emergency fund at a level that I would need it to be at when a true economic emergency hits -- like this recession. For me this means keeping a 12 month emergency fund at all times.
While part of me doesn't like this much cash sitting on the sidelines, I think the benefit of keeping the emergency fund at "crisis level" is that, well, for starters I'll be prepared when/if the next economic crisis hits.
Also, I think it's a pretty good bet that future period of high-risk for unemployment will coincide with general problems in the economy, which typically go hand-in-hand with stock market crashes. During the next crash (which may be around the corner or a decade from now, who knows) I want to be able to take more advantage of the opportunity to buy low. I can't do that if I'm silmutaneously diverting investment dollars to beefing up my emergency fund in times of economic stress. During the past 9 months, I've continued maxing out my tax-favored options, but I have had the extra savings each month to do as much taxable long-term investment as I would have liked, because of the diversion to increase the emergency fund.
So, I'm looking at keeping my emergency fund at "crisis level" from now on, which for me is 12 months. I'm going to resist the temptation to trim back my emergency fund when the good times roll again.