Wednesday, September 3, 2008

Are you ready to lose your job?

This is one of those questions that nobody really likes to think about--but you must. Any number of things could happen to cause you to lose your job. You could get downsized, you might have a medical emergency or whatever. Of course it's best to be prepared for the unexpected. And maybe you have stashed away some funds just in case. But is it enough? The average job hunt takes six months. How long will your stash last?

Here's a way to calculate how much you'll need and how long your savings will last. But first remember that your cash reserve needs to be liquid. That excludes your 401(k) or IRA. It includes savings accounts, money market accounts and other savings that you can access quickly without penalty or loss.

#1 How much cash on hand do you have each month?
$________ Monthly income
(-)$________ Monthly savings
$________ Cash available for expenses

#2 Current emergency cash balance
$________ Liquid savings balance
(+)$________ Checking account balance
$________ Readily available funds

#3 What percentage of your monthly funds does your emergency reserve represent?
To figure this take your answer to #2 and divide by the #1. In other words your readily available funds divided by the net cash available for expenses. For example, (your answer to #2) #2,000 divided by (answer to #1) $3,500 = 57.1428571. And so your answer to #3 would be 57%.

#4 How long will it last?
Take the answer to #3 and multiply by the average days per month. That's 30. So, using the example above would be .57 x 30 =17.

That's how many days (17) the cash reserve of $2,000 would last if the person in our example had no income and no change in spending. That's an eye opener especially when you remember that it takes 6 months on average to find a job (yes I repeat myself). If you lose your job due to illness or injury you could be out of work for longer.

I have to give credit to Dave Ramsey for sharing this formula.

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