A lot of people, upon hearing that I was unemployed for seven months, are visibly frightened to hear how long I was out of work. They ask how I survived, assuming I lived off credit cards and, when I tell them that I am not in debt because I had an emergency fund, they are surprised.
The reason many of the people who inquired about my situation were frightened and surprised was because they had no savings to speak of. According to a 2009 Met Life survey, about 50% of Americans have less than one month's expenses saved for an emergency.
An emergency fund is about keeping you out of debt when shit hits the fan: You get laid off. You get sick or in an accident and can't work. You get smacked with huge medical bills even though you have insurance. This is what the fund is for. Emergencies. Not a vacation to Fiji.
So, how much should you have? It's a real personal decision, but it's an amount you're comfortable with. For me, that meant having 12 months worth of living expenses set aside (for me that's rent, food, utilities, pet care, medical care, and a small amount of entertainment money). But, Suze Orman says eight months worth of living expenses is a good amount. Like I said, if shit hits the fan, can you pay your rent? Buy food? Take care of any medical bills that come up? Do you have someone to take care of you? Are you going to end up homeless or have to move back in with your parents? All of these things should factor into the amount you set aside for your emergency fund.
How long did it take me to set aside an entire year's worth of living expenses? My initial e-fund back in 2001 was six months worth of living expenses and I've been contributing for years now. As my income and expenses grew, so did the amount that went in there. I'm a big believer in paying yourself first, so I always sent a little bit of money into this account. Also, while this money is liquid, it's an account not easily accessible, so I can't go to the ATM and withdraw money from it and take a vacation to Fiji. (I should, however, consider setting up a vacation fund!)
You don't have to be a financial wizard to accomplish this. I'm not. You don't have to be making a ton of money either. You start setting a bit of money aside. You can even set up a direct deposit from your paycheck right into this e-fund and not even think about it.
So, take what I've said here from the perspective that unexpected things can happen and start your own emergency fund and check out Suze Orman or another favorite of mine, Ramit Sethi of I Will Teach You To Be Rich if you need a little more guidance.
I'm employed again and what's the first thing I'm doing? Building up my emergency fund.