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Is it Time to Rethink the Conventional Wisdom on Emergency Funds?

Federal employees, disabled veterans and scores of others continue to breathe a sigh of relief, albeit a cautious one, now that the recent government shutdown has come and gone. But the specter of another still looms, and with it the possibility of delayed payments that could lead to missed mortgage payments, unpaid credit card bills and other financial headaches.

That frightening potential has spurred a renewed focus on the importance of emergency funds. Conventional wisdom has dictated that consumers have three to six months' worth of cash reserves on hand to cover expenses in the event of financial upheaval. In the wake of a government shutdown and a slow-moving economic recovery, some personal finance experts are saying it's time to stockpile even more for a rainy day.

But it's a continued struggle to get Americans to set aside any cash, let alone enough to cover more than half a year's expenses. Today, the need may be greater than ever. The key is to find the right balance given your specific expenses and economic circumstances.

Start Saving

Less than a quarter of consumers have an emergency fund that can cover at least six months' expenses, and nearly 30 percent have no reserves at all, according to a June survey from Princeton Survey Research Associates.

"Emergency savings remains a problem area for many Americans, which leaves them only one unplanned expense away from having high-cost debt," Greg McBride,'s senior financial analyst, said earlier this year. "Long-term unemployment, stagnant wage growth and rising household expenses are all contributing to this trend. As difficult as it may be to boost savings, having an adequate emergency savings cushion is critical to maintaining financial stability, and Americans need to find ways to sock away more cash for a rainy day."

How much to have in reserves remains a point of debate.

Karen Lee, an Atlanta-based certified financial planner, said the global financial meltdown of 2008-09 signaled a shift in preparation for economic catastrophe.

"At that time, the conventional wisdom that all people should maintain at least three to six months of cash needed to pay bills actually changed to six to 12 months," said Lee, who's also the author of It's Just Money, So Why Does It Cause So Many Problems? "What has changed since the government shutdown is the realization that even government workers are not immune. There is a myth that if you work for the government, you are somehow more secure than in the private sector, and that simply is no longer the truth."

A six- to nine-month emergency fund is the recommendation customers now get from financial planners at oXYGen Financial, said co-CEO and founder Ted Jenkin.

David Zavarelli, a certified financial planner with Raymond James Financial, suggests self-employed clients keep six to 12 months of reserves in either a savings account or 90-day or less Certificates of Deposit (CD).

"The common rule of thumb for your level of cash in your emergency fund used to be three to six months worth of expenses," said Andrew Schrage of personal finance hub Money Crashers. "But with the financial crisis of a few years ago and more recently with the government shutdown, it's now recommended that you shoot for living expenses for at least nine months, with the ultimate goal being enough to live on for one year."

Chart Your Course

While a rule of thumb can be helpful, there's also an understanding that a three-month emergency fund might be plenty for some people. Even with the recent financial tumult, building reserves is also still an individualized process, said personal finance expert Andrea Travillian.

"I always recommend you determine your emergency fund based on the stability of your situation and not a generalized recommendation," Travillian said. "I keep a year because I am self-employed and my husband's income is variable. So where it might change is that a government employee or a veteran may increase their personal funds from three to six months or more due to realizing their income source is not quite as stable as they once believed."

For many consumers, especially service members and veterans, getting started is often the toughest part.

Personal finance expert Mary Kelly, a Navy veteran herself, recommends people take a few key steps to prepare for a loss of income. Among them are to:

  • Ruthlessly analyze expenses and sketch out a savings and spending plan based on absolute needs
  • Reconsider potential long-term expenses like vacations and big purchases
  • Contact your credit card companies and ask for a lower annual percentage rate (APR)

Economic and political uncertainty aren't likely to fade anytime soon. The bottom line is it's critical to prepare as much as possible for financial crises that you hope never strike. Finding a solution that fits your lifestyle and needs will continue to be the key.