Ramit Sethi says you need 12 month emergency fund. Is he right ?

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That’s a lot of money to set aside.

Key points

  • For years, financial experts have said that a solid emergency fund is one that covers three to six months of bills.
  • Now, some experts are increasing this recommendation, and it might be beneficial to follow their advice.

No matter your age or income level, having an emergency fund is absolutely imperative. You never know when life might throw a financial toll on you, so it’s important to have some money in savings to cover unexpected bills.

For many years, financial experts have said they aim for an emergency fund with enough cash to cover three to six months of essential expenses. The logic was that if you were to lose your job, this sum could allow you to get through a period of unemployment without having to go into debt or face other disastrous consequences (for example, losing your house due to your ability to pay your rent or mortgage).

But recently, some financial gurus have said that the old savings convention is not enough. And in a recent tweet, Ramit Sethi said you should always have a year’s worth of emergency cash on hand.

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Is this recommendation correct? Or is it too extreme?

Why a Year of Savings Could Benefit You

One of the main reasons why some financial experts have changed their minds on the emergency savings front is that they have witnessed the disastrous impact of the pandemic on many people. Some workers lost their jobs in the spring of 2020 and no longer had paid employment at the end of the year. And while the COVID-19 crisis has been quite extreme, the reality is that we can’t rule out the possibility of something similar happening again.

As such, Sethi’s 12-month emergency fund recommendation really isn’t that widespread. Admittedly, this can be a difficult amount of money to accumulate and keep in savings. But it’s a reasonable sum to keep on hand.

Even if a national or global crisis doesn’t happen again in your lifetime, you never know when a personal crisis might sideline you. You could end up getting sick, racking up thousands of dollars in medical bills, and being out of a job for six months while you recover. At this point, you may need a year of savings to cover your living expenses while you are unemployed, plus the cost of your care.

You might also encounter catastrophic cost home repairs. Suppose your house needs foundation work that will cost $30,000. Without a large emergency fund, you could easily get into debt in this situation.

Progress slowly

While Sethi’s advice to save 12 months of living expenses is pretty solid, it’s not so easy to follow for the typical worker. After all, we are talking about a lot of money to put away.

If you’re looking forward to amassing a year of savings, remember that you can slowly make progress towards that goal. It may take you two years, or three. But the more money you save, the more you will protect yourself.

And if you really want to boost your savings, try making a side hustle. Since the money from this gig won’t go toward bills, you should be able to take it all (minus what you owe in taxes) and put it in the bank.

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