Every personal finance book I’ve read has a predictable set of recommendations in order of priority –
(1) Pay down debts
(2) Keep an emergency fund in your bank account – typically around 3-6 months of living expenses
(3) Save
(4) Invest said savings in index funds
In his book “Mindful Investing,” Jonathan shared a minor modification to this. He suggested changing our emergency fund buffer based on the stage of our life –
(1) Young adults (18-35 years) – 3-6 months of expenses
(2) Middle years (36-55) – 6-12 months of expenses
(3) Nearing retirement + in retirement – ~24 months of expenses
This minor modification resonated with me as the middle years are likely to bring with them kids/dependents and career pivots/changes/layoffs – all of which may require more of a financial buffer than we had prior.
At the end of the day, emergency funds are all about creating peace of mind. Everyone has a different threshold for this. Best to start with guidelines like this and modify as you see fit.