Emergency fund opinions

1. 2 months

2. 4-6 months

3. 6-8 months

4. one year

The answer totally depends on what cash you can access and how easily you can do it. Liquidity is key.

Generally speaking you don't want to have lots of cash just lying around uninvested. So an ideal solution would be to have an untapped home equity line for emergencies so you can invest cash elsewhere. If you suddenly need a couple of grand just write yourself a check on the equity line and pay it back over the year.

Another choice is to sock away as much as you can in your Roth and withdraw from it for emergencies. It's easy to do and there are no penalties, plus you should be putting money in your Roth anyway to get the tax-free returns. This is my second choice.

But having a dedicated taxable savings account for this is not necessary nor is it particularly desirable. What you want is the ability to get cash in a hurry when you need it, but otherwise have investments working for you to the maximum extent possible during normal times. Both a HELOC and a Roth do this much better than a savings account.

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4. Overkill (i.e., use some of it on other things such as paying down debt)

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Debt isn't necessarily bad if the rate is low enough. Occasionally I will hear of someone who doesn't pay down credit card debt for fear of not having a sufficient emergency fund. This is a bad idea.

Always pay down the credit card to the maximum unless you have one of those special "teaser" rates. If you need money suddenly you can always charge it to the card, but in the meantime pay it down ASAP.

But if you are only paying, say, 2% interest there is no hurry. That's the rate of inflation and there is no financial need to pay it down unless you just feel like it.