Taxes: Uncle Sam won't care that you're unemployed -- you'll still have to pay income and property taxes. Here's some consolation, though: Your emergency fund also protects you from additional taxes. After all, your tax bill could be much stiffer if you had to sell profitable investments to cover your living expenses.
Finding a new job: It can cost money to make money -- finding a new job won't be free. Consider the cost of producing and sending out resumes. You might want to meet with a career consultant or take some kind of training. Take those possibilities into account.
How to estimate what you'll need
That's a long list to compile and come up with hard numbers for. The good news is that you don't have to try to brainstorm every conceivable expense.
Instead, track what you spend in the next few months and use that as your baseline. Then add in any other possible expenses, such as taxes or finding a job, that didn't pop up during those months.
If you spent money on movies or your health-club membership, include that. If you're out of work, taking in an occasional flick and working out may help relieve some of your stress.
How long should it last?
Most financial planners recommend setting aside six months' worth of living expenses in an emergency fund.
What if your "emergency" ends up lasting longer than six months? If you take the liberal view of living expenses that we've been taking so far, your emergency kitty likely will last a little longer. Further, we haven't included payments from unemployment insurance. If you do collect unemployment, your emergency fund should last longer, too.
Of course, you may not be able to pull all of your emergency-fund money together at once. Treat it as a goal. Maybe you can cover one or two months' expenses now. Add to that kitty over time. If you get a tax refund, put it in your emergency fund. A bonus at work? Sock at least part of that away.
But in general, don't invest elsewhere until you have a full emergency fund. (The exception to this may be your 401k plan. If your employer offers matching funds, you should strongly consider contributing at least enough to maximize your company's match. Otherwise, you are leaving money on the table with every paycheck.)
Where to put the emergency fund
Keep your emergency fund separate from your regular bank account. That way, you may feel less of an urge to tap into it in normal times. But thanks to automatic teller machines and online transfers, you'll have easy access to the money if you do need it.
A money-market fund is a great place for your emergency dollars. Money-market mutual funds invest in super-short-term, high-quality debt and are among the most conservative funds available. Their prices (or net asset values) don't move around much. In fact, because they invest in bonds issued by extremely stable debtors, such as the U.S. government and large, financially sound companies, money-market funds can maintain a steady $1 net asset value, making them ideal for investors who don't want to risk their principal.
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