8 rules of thumb on saving and retirement
Have an emergency fund for hard times
The rule: Your emergency fund should equal six months' worth of household expenses.
Why it works: When misfortune strikes in the form of a job loss or illness, having a financial cushion is key. As this down economy has proven, unemployment can last an unexpectedly long time, and having a six-month cushion can allow you to keep bad financial outcomes such as a drained retirement account or foreclosure at bay until you can find a new job.
Grain of salt: For many people, setting aside six months' of living expenses isn't really feasible, and for those who can set aside that much, keeping that large an amount of money set aside in an environment where they're earning little to no interest isn't an attractive option.
Your emergency fund shouldn't be some arbitrary number but should be tied to your risk of extended unemployment. In a tough job market, people should have a larger rainy-day fund to cover a lengthier period to find a new job.