Emergency Funds: You Don’t Need As Much As You Think
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


