With the economy the way it is, is the 3-6 month Emergency Fund enough?  Is 3 months now the absolutely bottom of the barrel?  Or is it enough?  What factors are involved in deciding?

First off, I think a 3 month EF can be more than adequate for some people.  A single person with few expenses and responsibilities who can live lean?  Will get unemployment and probably work a part-time job while looking?  It might be able to stretch for 6 months.

But for a one income family?  Maybe not.  A two income family?  Maybe it works because the salaries are equal, so one person being laid off still allows the family to make ends meet, but the second income was all gravy.  It depends on how many children or if it’s a DINK couple as well.

Second, it depends on what you build into your EF.  Is it 3 months of bare bones expenses?  Or 3 months of living the lifestyle you are used to?  Is it 3 months including extra medical premiums or unexpected expenses?  For us it’s a luxurious 3 months of everything.  There is a ton of fat in the budget with eating out, cable, cell phones, etc.  So theoretically it could stretch out maybe 5-6 months if we went bare bones.

Third, do you have other savings?  Do you save for things like property taxes, annual insurance, vacations, home repairs, car repairs, pets, gifts, etc?  We do, thus we have quite a little pot outside our emergency fund in cash for known and budgeted annual expenses.

However if we were laid off, I wouldn’t hesitate to use some of these pots of money for living.  I doubt we’d be going on vacation or paying someone to do home repairs.  We might have to put off known medical expenses until we get another job and regular health insurance versus COBRA which might not cover as much.  We probably would send a card instead of a birthday gift or attending a wedding.  While I wouldn’t touch property taxes or car insurance, I would definitely do minimal car maintenance and pet maintenance unless absolutely necessary.

This would easily add another 2-3 months cash to our emergency fund because we save so much for home repairs and vacations annually!  And that’s our “fat” emergency fund, not the bare bones, pared down budget.

So I think a 3 month EF could be enough for many people, depending on their budgets and lifestyle. I also believe it’s better to stockpile cash if you are worried.  But it’s better to pay off debts first, before building a larger EF than 3 months. I think 3 months an absolute minimum, 6 months better, then after that start investing in taxable accounts.

Why taxable accounts?  Because if you run through your 6 month EF, it doesn’t matter if your investments dropped, you REALLY need the money, so why cry over the loss?  It’ll go to your expenses anyway.

How big is your EF?  What does it include?  How much do you think people should save?  Is 3 months enough?  Should people just keep building a 1 year EF then pay off debt?