a blog about money and the business of life

The following is a guest post.

Today’s low interest rates make opening a savings account about as appealing as stashing your cash under a mattress. However, you need to have money set aside for major emergencies, such as job loss, health emergencies or other unforeseen crises. So how big should your emergency fund be? Popular financial experts offer different opinions.

Dave Ramsey: Start With $1,000

Personal finance guru Dave Ramsey, author of “Total Money Makeover,” suggests that families stash away $1,000 and then use any extra cash to pay down their debts. Ramsey’s plan could work for you if you meet the following criteria:

Your debt is crushing your spirit. People don’t always appreciate the psychic weight that debt carries in their minds. If your debts consume your thoughts, then prioritize paying off debt over saving. Also, consider working with a credit counselor to negotiate high-interest debt down to a manageable interest rate.

You have enough insurance. Make sure that you have a term life insurance policy so that if something happened to you, the death benefit would pay for funeral expenses and provide for your family. Also, purchase long-term disability insurance before starting your debt payoff plan.

You have a secure job. If you have a recession-proof job or you’re part of a two-income household, then saving just $1,000 isn’t as risky. However, if you own your own business, you run the risk not only of an economic downturn but also of becoming a fraud victim (to learn more about fraud risks from a university that offers an MBA in Fraud Management, click this link). For small business owners, $1,000 might not be enough.

Mary Hunt: $10,000 Is the Golden Number

Mary Hunt, author of “Debt-Proof Living,” suggests saving $10,000 in an emergency fund. She suggests shoring this up by creating a separate “contingency fund,” in which you save a little bit of money each month for occasional expenses, like car registration or property tax. Hunt’s $10,000 might be a good starting place, however, if this sounds like you:

Your income fluctuates. If your income is project-based and not salary or wage-based, then you need a bigger cushion for those months when you’re between projects.

You have the right debt mix. If you have more low-interest debt, like auto loans or student loans, than high-interest consumer debt, then devoting some money to saving and some to paying down debt makes good financial sense. If you have a large credit card balance with double-digit rates, then you might start with Ramsey’s plan, pay off these expensive debts and then start saving toward your $10,000 goal.

You have other sources of funds. No one wants to drain their 401k or other retirement funds, but if you do have these available in case of a dire emergency, then setting aside just $10,000 while paying down debt is a reasonable option.

Suze Orman: Eight Months of Living Expenses

Suze Orman, host of CNBC’s “Suze Orman Show,” says that an emergency fund should be no less than eight months’ worth of living expenses. Orman chooses this figure because on average, it takes eight months to find a new job after sudden unemployment. Orman argues that in today’s economic climate, having a substantial emergency fund makes good sense. Her advice is right for you if:

You’re terrified of not having enough in savings. If the idea of not having enough money saved keeps you up at night and neither Ramsey’s nor Hunt’s totals calm your anxiety, then build up that emergency fund to the eight-month mark.

You don’t want to tap assets. Someone with a lot of assets might be unwilling to sell in case of an emergency. If tapping into your 401k is anathema, then build a big emergency fund.

Your job isn’t stable. Artists, entrepreneurs or others who don’t work traditional jobs might find themselves without income for long periods of time. In these cases, an eight-month fund provides major peace of mind and allows other investments, like retirement accounts, to remain undisturbed.

Final Thoughts to Take to the Bank

When saving to cover your expenses, don’t just think of big ticket items, like the mortgage. Save enough to cover all non-luxury expenses so that you’re sure to have enough set aside. Finally, no financial planning expert has all of the right answers. Choose ideas that work for you and your family, create a plan and stick to it.

Dave Ramsey image by Jessica Adkins from Flickr Creative Commons.

Suze Orman image by mefam from Flickr Creative Commons.

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