How Much Cash You Really Need

In this economy, a plump cushion is crucial.

No matter what stage of life you’re in-just starting out, living off your retirement assets or somewhere in between” building a cash reserve for emergencies will help you breathe a little easier. The old rule of thumb called for enough easy-to-access savings to cover three to six months” worth of expenses. But the rules have changed. With the economy limping along and companies still cutting jobs, you should sock away more if you really want to relieve financial stress.

How much should you put aside? “Emergency funds are no longer one-size-fits-all,” says Ann Minnium, of Concierge Financial Planning in Scotch Plains, N.J. To find your number, answer two key questions: First, how long would it take you to land a new job if you lost your current one? If it would take you six months, then you need to have cash on hand equal to at least six months” worth of expenses. But if you’re a senior executive, bigger is better because it could take 12 months or longer to find a new job after a layoff.

Second, how financially secure do you feel? If you’d sleep easier knowing you have a large buffer, build up your stash to your own comfort level. (You may also have a fat home-equity line you could draw on in a pinch.) A lot also depends on your total household income and where you are in life. If you’re married and both you and your spouse work, you need a minimum of six months’ worth of expenses. If you’re single or only one partner works and you have kids, you may need a year’s worth.

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If you’re near or in retirement, shoot for at least two or three years’ worth of cash in a liquid account. That way, when a bear market comes growling, you’ll have enough on hand to pay your bills without selling deflated assets.

Personalize the numbers.

To hone the numbers further, figure out how much income you would need to replace each month if you lost your job. Cynthia Freedman, owner of Freedman Financial Planning, in San Jose, Cal., recommends you start by adding up what you spend on basics such as housing, food, health insurance and cell-phone service. Also, make sure you count costs that may not come up each month, such as your property-tax bill, your car-insurance payments and essential household repairs.

You may be able to cut out some work-related costs-for example, what you pay to commute, eat lunch out or dry-clean your clothes. And you may choose to cut such items as sporting-events tickets or the weekly manicure appointment. But don’t cut out all the fun. Budget some money for the movies or a restaurant meal.

Where to put it.

Stash your cash in a liquid, interest-bearing account. Among online savings accounts, Ally Bank recently yielded 1.55% . If you have a big stash of extra cash, use a multi-tiered approach, putting three months’ worth of expenses into a savings account and the rest into a ladder of certificates of deposit that mature on a staggered basis (for a list of top-yielding CDs, see page 65). No matter where you put your emergency money, set up an automatic transfer so you don’t have to think about it each month. And try putting aside more than you think you can-you can always cut back.

One final word: A little emergency money is better than none. And if you start now, your fund will grow, probably faster than you think. To see how the interest can add up over time, check out the compounding calculator at

Associate Editor, Kiplinger's Personal Finance