In a recent article on her website, Suze Orman discusses a change in her recommended credit card strategy. This is one of the things I like about Suze Orman – her suggestions change based on the economic situation, and she understands that financial advice varies person to person. The meat of her article is about how people with high credit card debt and not much savings shouldn’t work on paying off the debt and instead should pay the minimum and make it “top priority” to build up as much savings as possible. Why? Because the credit card companies don’t care about you, and with unemployment rising, it’s important that you have a way to protect yourself. You could get your card paid off, and then the company could close your account for no reason. Should you then lose your job, you suddenly don’t have a way to pay your bills.
Of course, I’m a firm believer in emergency funds. But midway through, Suze drops a bit of a bombshell. She recommends a fund to cover 8 months worth of expenses. 8 months! I suppose I do have 8 months worth of expenses in savings, but that’s if I raid both the emergency fund and my savings account. Of course, I can’t say that this is a bad idea. A big emergency fund is never a bad idea. But I admit, I have to wonder. Just how long would it take to build up an 8 month emergency fund?
If I were starting from scratch, my first thought is that this would easily take over a year. After all, I don’t make two months worth of expenses in one month. But there are those three paycheck months that would help. And while I categorize my deposit into my long term savings account an expense, it wouldn’t be part of the expenses while using the fund, so I could cut that out while working to build an emergency fund. If I really had no savings at all, I guess I could also cut out my Roth IRA contributions. I can’t imagine dropping my TSP contribution though – my agency matches 5%, which is essentially free money. I don’t spend much on dining out, but cutting that down to one casual lunch a month would help, and cutting back to the bare minimum on groceries would certainly save money.
This has made me think again about my emergency fund. I know that it has between 5 and 6 months of expenses, but that’s a rough estimate based on my normal monthly spending. It’s probably closer to 7 months, if I think about the bare minimum of my expenses. So perhaps 8 months isn’t all that crazy. But it feels like a lot.
How’s your emergency fund? Closer to the standard 4-6 months? At Suze’s recommended 8 months? More?