In the past I have recommended that you keep three months of living expenses in cash on hand in case of an emergency. Now I am increasing that to six months.
We may be on the cusp on the most severe recession since 1980-1982 when unemployment hit 10%. Although most of you will keep your jobs during a recession it is important to be prepared for the worst. If you do lose your job finding a new one will take longer, and other sources of credit (Home Equity, Credit Cards) are reduced due to the financial crisis.
How do you get there? If you already have three months stashed away then start cutting back on some of your extras (entertainment, vacations, dining out) with the goal of saving an additional one week’s worth of living expenses each month. Over the course of a year you will have six months of living expenses saved. If your living expenses are $6,000 per month then you would need to save an additional $1,400 per month.
If this seems to daunting to you, you could save ½ that amount each month and then add any “extra” money you receive to your cash stash. (e.g. tax refunds, bonuses, etc.)
This exercise will also prepare you for living on less should you lose your job. (See “Could you live on less”).