Accordingly, while the standard approach is to hold 3-6 months of living expenses, Clements offered suggestions on alternative approaches to maintain the necessary emergency reserve, including:
- if you've ever made any prepayments on your mortgage, consider trying to have your mortgage recast for a lower payment, which reduces the amount of fixed costs to be emergency reserved in the first place;
- take a hard look at what truly are fixed costs, to make sure you're only emergency reserving what needs to be reserved against (and not holding reserves to cover discretionary payments that in practice would likely just be trimmed out if times were truly tough);
- remember that having a Home Equity Line Of Credit (HELOC) provides a pathway to borrow against home equity in an emergency (but otherwise doesn't have the opportunity cost of cash, since it's not tapped unless actually needed);
- be cognizant of other pathways to borrow if/when needed, including 401(k) loans or even borrowing on margin from an investment account (which again isn't ideal, but borrowing in an actual emergency is a reasonable course of action, because you're only borrowing when you really do need to);
- contribute to a Roth IRA, recognizing that after-tax contributions can be withdrawn tax- and penalty free if needed; and
- consider funding an HSA but then pay for medical expenses out of pocket on top (which can presumably be done if you had the extra cash to save in an emergency fund in the first place), and then keep your receipts and in an emergency, use your receipts to validate tax-free withdrawals from your HSA to cover the emergency