Deciding on the size of your emergency fund

  • Bigger envelope? the size of your emergency fund should be between three and six months’ of income, depending on the stability of your employment situation

    Bigger envelope? the size of your emergency fund should be between three and six months’ of income, depending on the stability of your employment situation


Dear Dave,

My wife and I are following your plan, and we just paid off all our debt except for the house. Since we work for the same company, do you think we should have an emergency fund that is larger than you normally recommend?

DON

Dear Don,

That’s great news! You’ve finished Baby Step 2, and now you’re ready for Baby Step 3, which is fully-funding your emergency fund.

I don’t see a reason to set aside more than six months of expenses. My recommended range for an emergency fund is three to six months of expenses. If your employment situation is one where there’s more risk of something going wrong, you should lean towards saving six months’ worth. If your employment outlook is really stable, you can go with setting aside three or four months of expenses in an emergency fund.

I look at your situation as being more high-risk. You each have jobs, so that’s the good news. But if the company went down, or experienced layoffs, you could find yourselves unemployed at the same time. My advice would be to save up six months of expenses for your emergency fund. With that kind of cash just sitting there, you should be able to make an easier and less stressful transition in almost any kind of unemployment scenario or other emergency.

—DAVE

Dear Dave,

What exactly is unsecured debt, and how is it different from secured debt?

RICH

Dear Rich,

“Unsecured” debt generally means someone loaned you money, but they don’t have a lien on anything. Credit cards and student loans are examples of unsecured debt, because there’s nothing they can directly repossess if the borrower doesn’t pay. However, they can sue you if you don’t pay, and get a lien against something after they sue you. In some cases, this is done against your income by garnishing your wages.

Some examples of “secured” debt would be things like a home mortgage or car loan. A home mortgage is secured by the home. If you don’t pay, they can foreclose and take the house. The same is true with a car loan. If you don’t make the payments, they can take the car.

Typically, unsecured debts will be the last debts you pay if you’re in financial trouble. You’d make the car payment before paying on your student loan, and you’d make your house payment before paying on a credit card.

Hope this helps, Rich

—DAVE

Dave Ramsey is CEO of Ramsey Solutions. He has authored seven bestselling books, including The Total Money Makeover. The Dave Ramsey Show is heard by more than 14 million listeners each week on 600 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.

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Published Aug 25, 2018 at 8:00 am (Updated Aug 24, 2018 at 11:46 pm)

Deciding on the size of your emergency fund

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