I like the concept on living on exactly half of what you do now. It will, of course, require deep, deep cuts in the household budget. It will also cushion the fall, financially and psychologically, of a total job loss.

We are working towards this objective. We ditched the second car. We sold the dryer on Craigslist. We don’t have cell phones, cable or high speed internet. No dishwasher. No microwave. Beans & rice. Heat with wood.

We adopted a “if you don’t want the bill, don’t use the service” mentality. It isn’t easy, but it is empowering.

We apply the savings towards debt and savings.

I was just laid off again last week as a result of my former company cutting 40% of its workforce. How long will I be out of work? No clue. Am I paying down debt right now? Yeah – right… I am doing what I can to keep my expenses as low as possible so the $1 over minimum is great for credit but that’s all I can afford.

My confidence level is still high about finding a replacement position, but I have little doubt that my next position will be a good 20% less than my prior position in today’s market. How big is my emergency fund now? Three months. Do I feel confident with that much in reserve? No.

Evaluating Suzie’s advice, I agree with the essence of what she was saying. Any time you’re in a position where there’s a high probability of an extended time out of income, there needs to be a real cash reserve to fall back on. Relying on credit as an emergency fund is about as bad as relying on a job to provide income – you don’t always control its availability.

How much savings should a person keep in an emergency fund? That depends on the individual and that person’s needs along with the needs of those that depend on him/her. Everyone talks about having an emergency fund for when you’re out of work. What about for when you’re “under-employed?” Under employment can be worse in some ways than being out of a job because you’re not making enough to sustain a lifestyle you’re used to while expecting to be able to find a replacement position soon that will pick up the slack. The problem is – the longer you’re under-employed, the harder it is to find employment at the level you’re accustomed to. In the meantime, you’re burning up your emergency fund maintaining a lifestyle your income doesn’t support – hence, you’re outspending your income.

I agree with Trent in many ways, but I believe the essence of what Suzie was saying is this – the old idea of having three to six months of income stored up in ready reserve is no longer enough. With the current economic situation, we should reconsider having larger reserves if possible. She’s not saying stop paying down debt, but asking us to make sure our reserve pool is large enough to support us should we loose some or all of our income for an extended period of time.

The best advice continues to remain the same – spend less than you make and save or invest what you don’t spend. The reason for having an emergency fund is so you have something that will replace lost income temporarily and so we don’t have to tap into investment for retirement.

My favorite financial advisor – Robert Kiyosaki (Rich Dad, Poor Dad) talks about this too. Paraphrasing, He underscores that an emergency fund isn’t there to keep up with inflation or make us money. An emergency fund is there like a safety net like that of a trapeze artist. It’s there to prevent financial injury. The size and strength of the net depends on the area of risk and the potential height of fall. The same is true of an emergency fund – the bigger the area of risk (how long will the fund be expected to last) as well as the strength of that net (how high of an income can it replace for that period) should be how we determine the size of our emergency fund.

We’ve all heard – it’s not the jump that hurts, it’s the sudden stop at the end. An emergency fund takes out some of the sudden in that stop.

Jobs are iffy.

And many creditors are about to find out exactly what “unsecured” means.

In this economic crisis, tens or even hundreds of billions of dollars in unsecured debt will soon disappear without the lender receiving one thin dime.

No matter how many calls the collection agencies make.

If the economy improves in 12 months, you can pay down some of your mortgage (better yet, more expensive credit card debt) or, even better, put the money towards a long-term investment.

The total ‘cost’ of this peace of mind is just 12 to 24 months interest on 8 months living expenses … a lot easier/quicker than saving it up (and, what happens if you lose your job before you do manage to save all that money?) …

I am fairly relaxed about my financial situation. All my bills are paid on time and I pay just barely about the minimum on my debts. It’s a bit dissapointing not to see the balances falling like the did last year, but they are not rising either. I am collecting UI, and with my emergency fund, I know that I could survive at least a year or more without a job. And the sad truth is that it could take that long (or longer) to find one. The peace of mind is priceless.

In this economy, it’s crucial to have cash in reserve. It’s different for each person’s situation, so they will have to figure out their comfort zone on their own.

Good luck everyone =)

great post :)

I don’t think saving up a small emergency fund is unreasonable but I would put paying off the high interest debt before such as large amount.

-Rick Francis

Suze’s advice to shift your focus to stacking your cash makes absolute sense, the key is finding your sweet spot (which for most of us ISN’T eight months). Being debt free yet broke is quite a dangerous predicament in this day and age.

Her advice for a 8-month emergency fund is not new; she has been advising that for a while. Obviously no one will build their 8-month fund overnight; it takes some time but it is not impossible. I think it would be a mistake to dismiss that idea simply saying it would take too long to save.

But after having read Suze rationale above, I think she has a point. The logic of repaying everything immediately even with the last pennies you have to save money on interest works if you can borrow again in an emergency. But what if you can’t? With credit cards being closed, this may be a problem. This is why she changed her advice, and I think she may be right. Ideally, one would transfer to 0% so that one could keep money on savings yet not waste money on interest. If you cannot do that then, yes, you’ll waste money by not repaying the debt. But there is a risk of staying without cash nowadays too. BTW – I’ve never had consumer debt personally, so I normally always think about the bottom line. But in this case, I think it really depends on individual situation.

As to when economy starts to recover. Nobody knows. One thing for certain – the employment recovers last. So even if the economy starts to recover in 2010, it may be a while before unemployment bottoms out.

Those who worked in IT or software R&D back during the internet days remember that it took a very long time, longer than even 8 months for most of those laid off to find another job. So economy is an important consideration.

“Ugh, my company used the scapegoat of the Economy to only give hourly employees 40% of the typical raise (these people only make $9-$12 an hour). We experienced double-digit growth last year. How does that add up?”
Be happy you have a job. My company is profitable too, yet they laid off a bunch of people last month and will lay off more in June. Every company is cutting costs – keep in mind that past profits are in the past. Currently most companies don’t see the future clearly, so they prepare themselves. Plus, the credit is still tight, so companies hoard cash. Those companies who have cash also see opportunities of buying other companies, they need cash for it too. Bottom line – be thankful you have a job. I’d be surprised if I get any raise at all this year.