A stressed young woman is looking out the window.

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This is an aggressive stance, but one that is understandable.

Key Point

  • It’s important to have savings for unplanned expenses and situations.
  • Eight months of emergency funding may seem excessive, but there’s a reason one financial expert recommends it.
  • The pandemic has shown the economic impact of the crisis, with many people being adversely affected by not having enough savings.

For years, financial experts have said it’s important to keep money in your savings account for emergencies. That way, if you lose your job or encounter an unexpected and costly situation, such as sudden home repairs, you’ll have money available. And you don’t have to go into huge amounts of debt to cover the costs and scenarios you face.

Until the pandemic hit, the general consensus was that everyone should aim to have an emergency fund with enough cash to cover three to six months of living expenses. And so did financial guru Suze Oman.

But Orman has since changed her tune on the emergency savings front.

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Why You Need More Emergency Savings

The logic behind the 3- to 6-month emergency fund was to have enough money to survive a period of unemployment. But in the wake of the pandemic, Orman saw how long some people were out of work in 2020, and he upped the recommendation to 8-12 months of emergency funding.

Indeed, the COVID-19 pandemic was an extreme situation as the country (and the world) grappled with an unprecedented health crisis. But it’s not unreasonable to think that a similar situation could arise again. So eight months of emergency funding may seem excessive, but the reality is that it can be very helpful during a major crisis.

Let me be clear, the crisis does not have to be national or global. It can also be personal.

Suppose you become ill and are unable to work for eight months before recovering from surgery or treatment. If you’re the sole breadwinner of your household, you may need to deposit eight months’ worth of living expenses in the bank to get through the period debt-free.

How to increase your emergency fund

Maybe you thought you had six months of living expenses in the bank to set up emergency savings. The thought of having to save another few months of bills can seem daunting.

But just as you didn’t build your original emergency fund overnight, remember that you can also build up your cash reserves over time. If you have in hand, the pressure will be greatly relieved and you should be able to slowly and steadily increase your balance.

As for strategy, take a look at your current spending and see what you can cut most easily. If you really don’t want to cut back on your spending, find another job for a few months and bank the extra wages you’ve earned.

An eight-month emergency fund may seem like a lot of cash to keep in the bank. But anyone affected by the COVID-19 crisis will tell you that with this much cash saved, it would have been much easier to deal with the situation. So if you want true protection, I recommend listening to Orman’s advice.

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