How Much Savings Should One Have in Case One Loses One's Job?
- Your current income gives you a guide for determining how much you need in savings. Instead of focusing on your gross salary, look at what you bring home each month. This is the amount you need to replace with your savings should you lose your job. Total up your paychecks over a one-month period to determine the amount your savings should cover.
- The expenses you have in the average month also help you estimate how much you need to save. Total up all of your regular expenses that aren't negotiable, such as the mortgage, loan payments, utilities and other fixed expenses. Calculate an average for the amount you spend on groceries, clothing and other consumable supplies you use. If your health insurance is through your employer, take into consideration you will need to either pay for COBRA insurance or your own individual policy until you find a new job. This adds to your expenses each month.
- When calculating how much to save for your emergency fund, consider areas that allow you to cut back in spending. After losing your job, making cuts allows you to survive for longer on the amount of money you have in savings. Consumable purchases and entertainment are two main areas that allow for cutbacks. Consider cutting extra services like cable or cell phones. More drastic measures like selling a vehicle also help to make your emergency fund stretch longer.
- The traditional recommendation is to save three to six months of income in case of emergencies. Due to increased difficulty in securing a job, a savings of six months to a year gives you a better cushion should the job search take longer than expected. You are able to continue comfortably living while looking for a new job and not accruing debt just to make ends meet. Calculate how many months of savings you have on hand to determine your baseline. If you are under three months' worth of expenses, set your first goal as reaching the three-month savings point. Once you reach this milestone, continue striving for six months and then one year of savings.
