Ramit Sethi Says You Need a 12-Month Emergency Fund. Is He Right?

A man sitting late at night with a laptop and a notebook.

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That’s a lot of money to give away.

Important points

  • Financial experts have said for years that a solid emergency fund is one that covers bills for three to six months.
  • Now, some experts are stepping up that recommendation, and it might pay off to follow their advice.

Regardless of your age or income level, having an emergency fund is absolutely essential. You never know when life throws down a financial turning ball, so it’s important to have savings to cover unplanned bills.

For many years, financial experts talked about aiming for an emergency fund with enough cash to cover three to six months of essential expenses. The logic was that if you lost your job, that sum could get you through a period of unemployment without going into debt or suffering other dire consequences (e.g., losing your home due to being unable to pay your rent or to pay mortgage). ).

But lately, some finance gurus have said that the old austerity convention isn’t 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 spot on? Or is it too extreme?

Why you can benefit from a year’s worth of savings

A big reason why some financial pundits have changed their minds on the emergency savings front is that they have witnessed the dire impact of the pandemic on many people. Some workers lost their jobs in spring 2020 and were not back in the workforce by the end of the year. And while the COVID-19 crisis has been quite extreme, we cannot rule out the possibility of something similar happening again.

So Sethi’s 12-month emergency fund recommendation really isn’t that widespread. Admittedly, it can be a difficult sum to accumulate and hide in savings. But it’s a reasonable sum to have on hand.

Even if a national or global crisis doesn’t recur in your life, 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 unemployed for six months during your recovery. At this point, you may need a year’s worth of savings to cover your living expenses while you are unemployed, as well as the costs of your care.

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You might also stumble upon a disastrously expensive home repair. Suppose your home requires foundation work that will cost $30,000. Without a large emergency fund, you could easily find yourself in debt in this situation.

Work your way up slowly

While Sethi’s advice on saving 12 months on living expenses is pretty solid, it’s not that easy to follow even for the typical worker. After all, we’re talking about a lot of money to give away.

If you’re aiming to accumulate savings for a year, remember that you can work your way towards this goal slowly. It might take two or three years. But the more money you save, the more protection you buy.

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And if you really want to top up your savings, try getting a part-time job. Since the money from this gig isn’t going towards bills, you should be able to take it all (minus any taxes you owe) and put it in the bank.

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