It’s a long-standing rule of thumb: everyone should have a rainy-day fund, typically enough for six to 12 months’ expenses.
But what if you need it for much longer? Though the economy is showing signs of recovering, it also looks like many of the millions who lost jobs in the recession could be out of work for years, not just months. More than 6 million people have been out of work for longer than six months, a record.
Unemployment insurance helps, but not forever. The Labor Department says 2.7 million people will exhaust their unemployment benefits by the end of April. No one expects the unemployment rate, around 10%, to fall dramatically anytime soon. Normally, it’s about half that high.
The best way to handle a job loss is to prepare ahead of time. But many people, probably most, live their lives as usual until the pink slip arrives.
Unfortunately, some job-loss preparations conflict with other financial goals. People are often told to keep a good portion of their assets in stocks or stock funds, to get the growth they need to fund a 20- to 40-year retirement. But tying money up in stocks can be hazardous if your employment is shaky, as stocks could be down when you need cash.
On the other hand, building an oversized cash hoard could stunt your long-term investment gains, leaving you with too little in retirement.
There’s no easy way out of this dilemma. You must try to assess the odds of losing your job and prospects for finding a replacement, then decide whether to divert money from long-term investments to the emergency fund. The Emergency Savings Calculator will show how long it will take to build an adequate fund.