I hope it's okay to pop in with some questions for the Dave Ramsey followers..
With regard to the 3-6 months worth of expenses, what exactly is that for? Is it for when you are suddenly out of a job?
My questions are:
What if you have $ sitting in your leave pay (for us, this is payable upon being made redundant or leaving on your own accord)?
What if you have salary continuance insurance set up.. Do you still need to save those 3-6 months worth?
The 3 to 6 months, or 8 months income equivalent if you listen to Suzy Orman, or one full year according to others, is just a general rubric about how much to aim for in cash accounts to help you through an emergency when one should arise. The emergency could be anything: a period of unemployment (the average length of which is longer now than it used to be), a major car repair, a large medical bill, a short or longer term disability, funeral expenses, etc. Homeowners may want a larger cushion than renters. In the northeast this year, many people missed one or even two weeks of paid work due to the impact of the hurricane. For many Americans, missing even a couple of days work creates a financial crisis because they don't have a cushion. On the other hand, too much cash sitting in a bank account isn't working for you in terms of earning interest. In general, you have to look at your own life to decide what your goal is. For me, as a single mother with no prospect of any one else to pitch in if I should have an emergency, I am shooting for a solid year of basic expenses before I meet other goals: that is about 25000 and I am almost half way there. If I didn't have any children, I wouldn't be so concerned. I would imagine that if a person knows that their health is questionable, they might go for more as protection against disability. A single young person living with a parent would have very different concerns and may only need a few months.
The other part of this equation is insurance, which can protect against many of the same things as an emergency fund. Disability insurance, life insurance, health insurance, home and property insurance, renter's insurance, ynemployment insurance, etc. These all cost money but provide different kinds of protection. I think these things can be factored in to an emergency fund when you are planning, as can banked sick days, etc. But, really, the whole point of the emergency fund is that you need to keep adding to it as your expenses and your income increase. The percentage of what you save or invest may change, but you should plan on saving money in some form for all of your life to ensure your security and possibly that of your descendents.