Dave Says: Build emergency funding for tough times

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 toward 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