The Writers Coin

How much money should I have in my ING account if I lost my job?

Most people will just take their take-home salary and multiply it by three or six months or whatever—and that number is usually pretty high. Do you really need that much money? The number seems so big, lots of people just don’t want to think about it, especially if they’re also trying to pay down their debt.

Bear with me as I get through the math—it’ll prove you don’t need as much money as you’d think to get through a job loss.

First Month

Boom—you’ve lost your job. The first month is going to be an adjustment because you’ll probably have to pay all the bills you usually have to pay, regardless of any cost cutting you might want to do. But you can cut your savings and the formula for the first month is pretty simple:

SALARY – SAVINGS = MONTH1

So let’s say you take home $1,000 every month and save $100. You will need to have $900 saved up to comfortably get you through that first month.

Every Month After

Now you can play a little bit with your budget. I would cut out things like my Netflix membership, my cable (though my wife might fight me on that one), the convenience of parking in our building, and maybe even shave a little bit off the top of my normal spending. I’m calling this “recession mode.”

MONTH1 – RECESSION MODE SAVINGS = MONTHS2

Let’s assume the worst and cut out as many things as we can as quickly as we can just for the sake of being cautious. But before we tally MONTHS2 in our ledger, there’s one more thing we have to consider.

Unemployment Check

Let’s not forget about this variable. If you file for unemployment right away, it’ll still take a month or so to start collecting. So it doesn’t come into play until after the first month.

MONTHS2 – UNEMPLOYMENT = MONTHSAFTER

How do you calculate unemployment income? Check out this PDF by the Department of Labor to find out how much you would get in your state (the average is around $1,300/month). Another good bit of news: while the average length of unemployment is high right now (20 weeks), unemployment typically lasts around 27 weeks. So if you’re in the average you should have a new job by then. “Should” isn’t very comforting though.

And if MONTHSAFTER turns out to be negative, then good job! You’ve reduced your expenses to the point that unemployment is covering all of them and then some.

The Bad News

Two words: health insurance. You have to have it, and the average monthly cost for family health benefits under COBRA is around $1,100. That’s pretty much most of the average unemployment check right there. So let’s say we’ll be paying COBRA for six months at $1,100—that’s $6,600 in insurance money alone if you don’t have a spouse’s plan to go on.

The Last Formula

Now we have all the numbers we need to get to that last, scary amount: your grand total should be able to tide you over a job loss for up to six months:

MONTH1 + (MONTHSAFTER x 5 MONTHS) + COBRA ($6,600) = EM FUND

For the really conservative folks out there, I know you’re looking at this and thinking, “Sounds great, but what if my car breaks down while I’m job hunting? I’ll need some money for that too.” And it’s true, you’ll still need to have an emergency fund during your job-loss emergency. My suggestion? Have an additional $1,000 for every month you want to cover. So for me, it would look like this:

EM FUND + $6,000 = EXTREMELY COMFY EM FUND

Some Thoughts

Now, I’ll be honest: I thought this number was going to be much higher than this. Why? Because the only math I had ever done was to multiply M’s and my take-home pay times six and that looked like a pretty scary number. This new number is still high, but it’s a lot better than the one I had in my head before.

The reason I did all this is because, while I’m a firm believer in emergency funds and the peace of mind they provide, I don’t think it’s a good idea to over save because there’s other stuff your money should be doing: paying down debt, letting you live your life, etc.

I hope this little exercise has given you a lower number than you thought so you can get closer to saving for that elusive emergency fund without feeling guilty for not having $50,000 sitting in the bank “just in case.”

Image by dumbledad

I was reading a post by JD over at Get Rich Slowly yesterday that got me thinking about the way I build my savings. Right now I put in a monthly amount into a general savings pile in my ING account. Any extra money laying around goes into that pile, and I’m hoping that soon it’ll grow and grow because that will determine what kind of a place M and I can afford in a year.

“Saving is only one smart thing you can do with your money.” —JD

I’ve been on such a savings binge for such a long time (some exceptions notwithstanding), that I’ve assumed that every penny I can squeeze must go into savings. But JD writes that education is a way of investing in ourselves that will pay off in the future.

I agree.

I got an MA in Writing a couple of years back and even though it hasn’t directly resulted in a higher paycheck (not that I’m aware of, anyway), but it’s made me a good editor and given me confidence that I can do that job in any capacity. Not only that, it pushed me to write more fiction and without getting that degree I wouldn’t have learned a lot of stuff I now take for granted.

So it got me thinking about what else I could spend on in terms of education for myself that might be as beneficial down the line as my MA degree.

First of all, I could buy books. Books on investing, books on finance, books on accounting, etc. The laundry list of stuff I don’t know is long and I could always stand to learn more about these topics. This is something I do anyway, only I check them out at the library. This to me is the quick and dirty version of taking an actual, formal class.

I could take an editing class. The University of Chicago has a great editing certificate that is widely recognized in the business world. As a writer, this would prove invaluable not only for improving my abilities as a writer (which is important), but also because it’s so well known beyond writing circles (which can be even more important). This is something my work might chip in on—I’m not sure. I had a chance to take just one of their courses at my previous job but I never did.

Taking an accounting class. Yeah it might be boring but I really need to be able to read financial statements. Maybe a class on reading financial statements for non-accountants would be a better fit. Being more familiar with this will only make me better at my current job (which I should really write a whole post on, the interest in it has been very high). Not only that, it would make me a savvier, better educated investor. A win-win if there ever was one. Plus, I work closely with an accountant and know several people in the industry—they tell me this is a no-brainer.

I could get an MBA. Here’s the thing about the MBA: it opens tons of doors in the future but it puts you in debt and takes you out of the workforce for at least two years (unless you want to have no life for those two years and work full time at the same time). I really haven’t considered this option seriously enough. Part of me wants to learn all this stuff but part of me wonders when I will find time to write, to live, to enjoy my life. And I have no idea how I would pay for it, either. Maybe down the line if my job would be willing to chip in I would consider it. For now, this one isn’t an immediate option.

I could keep saving like crazy so when I buy a place I don’t go into THAT much debt.  

Obviously, I’m obsessed with savings. I just have to remind myself that there are other, more productive ways to spend it besides dropping it in the ever-deteriorating ING account. Some habits are just too hard to break.

Or: How I boosted my monthly savings from $150 to $200

You hear a lot of personal-finance sites telling you to revisit your monthly bills regularly to make sure that you’ve minimized each one so you aren’t paying for something you aren’t using. I always kind of glossed over that advice, like many other people, because I couldn’t imagine living even further below my means. I mean come on, how much more can I deprive myself?

I figured: I write about personal finance and I’m super frugal, so no way I’m paying more than I have to.

This is the very reason the advice is out there.

I had made the decision to change my 401(k) contributions so I decided to revisit my whole budget and, at the end, realized I had an extra $50 a month to throw into my ING account.

Let’s see how that happened:

Lowered my 401(k) contribution from 6% to 4%
This was something I had thought about for a while. Like most employer plans, mine isn’t very good: their options are limited and their expenses are way too high. It was an easy decision to go from 6% to 4%. Besides, since then I’ve read numerous articles repeating the same thing: for most people it doesn’t pay to contribute beyond the match (which for me is 4%) because of the high expense ratios these companies have.

Savings: $33/month

Revisited my Netflix plan
M and I recently moved in and we don’t seem to watch as many movies. One of us is busy and it feels like we are always doing laundry, which I hate. Either way, we were no longer watching two movies a week, which was what I calculated we needed to do to “get our money’s worth.” I noticed we were almost forcing ourselves to watch movies just to get what we were paying for—that wasn’t worth it either. So I changed our plan from two at a time to one at a time. And if you still haven’t gotten on the bandwagon, click here to try Netflix for free.

Savings: $6/month

Cell phone
I tried every which way to get myself under the $50 (with tax) plan that I have, but I just couldn’t find a way. I didn’t want to worry about going over my minutes and there seem to be a lot of convenient features that you don’t get once you downgrade from the plan I have. So I kept this the way it is, knowing that it’s as low as I can go.

Savings: $0

Budget
After going over everything I ran the numbers on my brand-new budget and realized that I had left myself a little wiggle room when I originally set it up: there were about $5-$6 left over from every paycheck (I get paid once every two weeks) “just in case.” I have no idea why I did that, probably so I wasn’t depositing $156.39 in my ING account every month (what’s wrong with a funky number?). It was a welcome surprise though, and it gave me some more money to put away.

Savings: $11/month

Total savings: $50

Over a year that amounts to $600: not bad.

One more thing: I am obsessive about my bank accounts, my ING accounts, and my credit-card accounts. I check them at least once a day (which is probably not healthy) and so I was surprised that I still had some excess fat to trim. It doesn’t matter who you are, it pays to revisit your whole financial process every now and then to see if you can’t save yourself some extra money.

How much money have you saved by revisiting your budget?