The thought is that money in a savings account earning only 2-3% may be put to better use to pay down a debt at 12% (or higher).

But again, at least some savings should be considered a requirement before undertaking this movement of funds.

My debt is a line of credit. Let’s say I use my current emergency fund of $5000 to pay it down, then I’m saving on monthly interest and my net worth stays the same. Let’s say an emergency happens and I need that $5000 — it doesn’t matter whether it comes from the line of credit or the emergency fund. Either way, I’m left with nothing in the fund, and $5000 off my line of credit.

But it’s very hard for me to think like that. I like having savings, but I hate having debt.

I agree with posters above – it all depends on individual circumstances such as your job security, expected severance, etc. Keep in mind that even if a company paid a severance in the past, it will pay it again.

RE: excluding the unemployment comp. Better to be conservative and pleasantly surprised that you have enough in your E-fund than vice-versa.

Also, unfortunately, unemployment benefits are taxable income and normally taxes are not withheld. You’d then owe more on your tax return unless you were overwithheld from your prior employment withholding OR your 6.2% FICA started over w/Employer #2 and you ended up paying in more than the annual cap and would thus apply it to taxes paid in. Clear as mud?

So there is no free lunch once again, (unless you’re taking TARP money that is!)

Last year I thought I had a very conservative 2 years cushion, now I’m not so certain. As Amsalp says, COBRA ain’t cheap. I guess what I’m saying is that you want to have as much reserve as you can get, and not rely on things like unemployment to hold you over.

Also, 6 months may not be enough these days. If you can save more, do so. 8 months sounds better to me, but really it depends on how hard it will be to find another job that meets YOUR needs. That depends on what sort of work you can do, how much you need to make, if you can move, etc.

While you should plan to cut back expenses if you find yourself unemployed, take into account that you may actually have more expenses like job hunting expenses, moving expenses, paying for life insurance out of pocket, and losing any other employee discounts or reimbursements! Plus, human nature what it is, we aren’t usually our best about cutting back on wants when we’re stressed. After a long day of discouraging job hunting, are you always going to super frugal or are you going to say “Screw it!” and go join your friends for a night out.

If you work in a job where you are more likely to be laid off, or laid off more often than the average person, then you would need to up the amount in your emergency savings. If your line of work is such that it takes longer to find another equivalent position or you would be more likely to have to move somewhere else to get an equivalent position, then you would probably need more money in savings.

Likewise, if you are married and your spouse is in a more secure job or carries the health insurance, your need for savings may be less. Another possibility is that you are nearing retirement and could take an early out with no big impact to your finances. The whole point is not to stick with some predetermined number or percentage, but to take some time to figure out what you would need to live on until you could find another job.

And a fair amount of pessimism may be in order. If both husband and wife could get laid off at the same time (because you both work for the same company for instance), then you may want to figure it into your calculations.