If you read SMI very long, you'll soon encounter our repeated emphasis on getting debt-free and establishing an emergency savings fund before putting your money at risk in the markets. This solid foundation provides you with the ability to weather bear markets like we've seen recently without being forced by unexpected circumstances to sell long-term investments when they're down.

But just how much is enough for an adequate emergency savings reserve? Most financial planners recommend having between three and six months living expenses in an emergency fund. SMI has long suggested a generic $10,000 as a goal. But clearly, $10,000 means different things to different people. With that in mind, let's look at some government statistics to determine how close that $10,000 is to reality.

According to U.S Census data for 2000, the average household had income of $42,148. However, the figure we're interested in is the after-tax income — after all, the savings reserve is designed to cover living expenses in the event of a loss of income. You don't have to worry about paying taxes if there's no income coming in. So after pulling 17.8% out for payroll, federal, and state taxes, the average household was left with $34,646. That translates to $2,887 per month of spendable income. In a true emergency, some spending can be postponed (entertainment, vacations, 401k contributions, etc.). That's why, based on government data, I've estimated that only 75% of spendable income would need to be replaced. Therefore, a three month savings reserve for the average U.S. household would amount to roughly $6,500 ($2,887 x 75% x 3), while a six month reserve would total $13,000.

The table shows the low and high ranges for three- and six-month savings reserves at various income levels. If your gross income is significantly higher than the average household's $42,148, the table somewhat overstates your savings targets, as it is not adjusted for a lower level of spendable income as a result of higher tax rates being applied.

Do you need to keep all of your emergency savings in a money market fund? Not necessarily. It's probably wise to keep at least a couple month's worth of living expenses in a money market fund, simply for liquidity. But beyond that, it's okay to branch out into other conservative bond investments. There are a number of ways to combine bond funds of various types to increase return without adding much additional risk. In the case of a fully funded emergency reserve, it's an acceptable risk to take part of the money and go in search of slightly higher yields. Just recognize that in the unlikely event that you would need to tap the entire account at once, you might have to sell your bond funds while their prices are temporarily depressed.

Ultimately, the size and composition of your emergency fund will depend on your personal needs and preferences. Just don't make the mistake of thinking the need for a well-funded reserve doesn't apply to you. Take a cue from the dozens of subscribers who have called SMI to tell their stories over the years: emergencies come when you least expect them. And as the table shows, it usually takes more than a token effort to be truly prepared.