One of the national discussions on Marketplace Money is the desire to build up a larger emergency fund. With good reason, as this chart from McKinsey & Co. makes clear.
From 1946 to the 1980s jobs typically rebounded in about 6 months after the economy started improving. The standard advice to set aside 3 to 6 months in savings to meet expenses made sense.
Yet it takes longer and longer for the job market to revive ever since the early ’90s. The consultants at McKinsey project that the lag in job creation this time around could be as much as 60 months—or 5 years. Little wonder a year’s worth of expenses is the savings rule of thumb these days.
But how realistic is it? I don’t think most people on their own can save enough in emergency savings to tide them through long spells of unemployment and weak job growth. Especially not when we’re also expected to save for retirement, our children’s college education, and pay a bigger portion of our health care bill — and real household incomes fell by 7 percent over the past decade.
Hopefully, the unemployment system gets a major overhaul before the next downturn strikes. Meanwhile, all we can do is to try and steadily save more.
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