Emergency Funds vs. Income Replacement

I want to branch out from this thread: https://support.youneedabudget.com/t/x2hh7hr/calculating-emergency-fund-income-replacementexpenses

I keep emergency funds separate from income replacement. I view an emergency fund as cash that can be used for an emergency and IR as reserves for job loss or time off for illness (I don't get PTO or sick days). IR is easier to save for because it's equivalent to my paycheque × the number of months I feel I need to cover. 4-6 months would make me happy.

Emergency funds were depleted last year because I had a wasp hive in the roof above my bedroom (and they CHEWED through my ceiling) so that was a big repair. Income Replacement is a new idea for me but very appealing. 

I wonder if it would make sense to combine them or focus on building up one more than the other. I've been putting money aside for both, but I'm thinking I'd be better off focusing my efforts on one to build it up faster. 

Thoughts?

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  • I think it's easier to separate them. Especially if you can't fund them at the level you want, if you combine them it's easy to get wowed by a big number and forget how many (big) things that number is supposed to cover. 

    As always, if push comes to shove and there's a job loss without enough money in the category, you'll reassess your priorities and reallocate as needed.

    Like 7
  • When combined, you lose sight of what you can handle simultaneously. I have various categories that would be "emergencies" to most non-YNAB users. Car Repair, Home Repair, Roof Replacement, Auto Deductible, Medical Deductible, etc. I also have an income replacement fund.

    I don't have a generic emergency fund. However, all of this is merely my current plan based on what I feel are likely needs. If I completely missed the boat on something, I can always change the plan. As with all reallocations, I'd pick on the lowest priority category first. FWIW, that's not going to be the income replacement category. It may not even be any of these.

    Like 9
  • I agree with the idea that an emergency fund and income protection fund are separate. 

    Personally however I only have an income protection category + my other savings categories. If there is an emergency I would realistically draw funds from one of those. I am comfortable taking this risk only because I happen to have a reasonable amount in savings at any point to draw from. 

    I think it would be sensible to have both categories as you suggest because anyone could, god forbid, find themselves in a situation where they need both things and it will be challenging without anything held aside. 
     

    To your question on funding one or the other first. For me the more important question is how much you’re actually setting aside in total each month. Which category you put it into doesn’t matter all that much - the whole ‘roll with the punches’ philosophy would suggest that when you actually need the money you would take it from the other category if you needed to anyway.  

    Like 1
  • It's very common that new users will have a single EF category used for anything that might go wrong and they hope for the best. As their financial situation improves, they can afford to be better prepared and will break out the EF into multiple piles for better insight.

    You've hopefully seen the utility of breaking up your single checking account balance into various pieces. The EF is no different.

    Like 7
  • dakinemaui said:
    When combined, you lose sight of what you can handle simultaneously.

     Well said! It's brought me peace of mind to know that, in the worst case scenario—we have dollars for various deductibles, larger expenses, and replacements waiting to do their job.

    dangerosity Your priorities are to save up for both, and you'll get there. The method you choose depends on what motivates you right now. Is it preferable to see both categories grow simultaneously? Or would you prefer to see quicker progress in one?

    In the event that you need those funds for one or the other, you'll move money to adjust accordingly. Ashley's video on Budgeting in Uncertain Times  is a great resource for that!

    Like 2
  • I like to split them out and fund a little bit to all of them. Seeing the small-ish numbers helps me to remember that it's a priority, but I also know that if I did have a house emergency while my number is lower than my goal (let me take a moment to say WASPS CHEWED THROUGH YOUR CEILING AND I CAN'T THINK ABOUT THAT OR I WILL HAVE NIGHTMARES SO I'M GOING TO PRETEND I NEVER READ THAT SENTENCE TYVM), I can pull money from several categories and will have what I need.

    Like 5
      • dangerosity
      • Aquamarine_Piranha.9
      • 6 mths ago
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      Peppr2 it was crappy, to say the least, and sadly not the only animal/insect incident I've encountered. Maybe I need an Emergency Animal Removal line item...

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  • I don't have an Emergency Fund. I have Income Replacement that could cover 6-8 months depending on how frugal I am. I have a Car Repair category that could cover pretty much any repair that I would make rather than replacing my car. I have a Home Repair category that could cover anything except kitchen appliance replacements plus I've been saving up for a full Kitchen remodel and have saved enough in that category to cover all new appliances. My medical insurance plan year starts on October 1 and I start every October 1 with a full year's out of pocket max in a category.

    Like 5
      • dangerosity
      • Aquamarine_Piranha.9
      • 6 mths ago
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      jenmas so in case of a true surprise expense, you're covered! Can't wait for that blissful moment 👍🏻

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    • Melissa
    • Routinely questioning every assumption I have about my budget, my spending, and my savings habits.
    • todays_mel
    • 6 mths ago
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    I prefer having defined savings categories; it gives me much more clarity rather than having a lumped bucket of emergency funds (which I found way too tempting to dip into, personally). So aside from my other True Expenses, I have Loss of Income, Car Replacement/Repair, Major Home Repairs, and some other longer-term type stuff. All of them are grouped under a main “Reserved Savings” category. If I really had a situation that was just completely out of left field or is more than what I have set aside for it, then I’d decide how to reallocate my total reserved funds to cover it.

    As far as which gets funded first or how much…? That’s something I determine each paycheck once I have my basic necessities covered. I have a few different types of goals set up so I can track my overall progress within those categories. But I sometimes have to skip or reduce funding things; I’m hourly and also don’t get paid for sick time or holidays either so my paychecks can fluctuate a bit.

    YNAB is designed to be flexible so you can try different scenarios out, and if that turns out not to be the best fit, then you can re-evaluate the situation.

    Like 3
      • dangerosity
      • Aquamarine_Piranha.9
      • 6 mths ago
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      Melissa I dipped into it for an "emergency" that I should have seen coming, so defining it should take away the confusion of "where do I pull from?" 

      I think I'll stick to funding emergency and IR separately for now, but giving emergency a clearer definition.

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    • Superbone
    • YNAB convert since 2008
    • Superbone
    • 6 mths ago
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    My Emergency Fund IS my Income Replacement Fund but that's just a naming convention. Like Melissa above, I have defined savings categories for everything else.

    Like 1
      • dangerosity
      • Aquamarine_Piranha.9
      • 6 mths ago
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      Superbone I'm thinking that'd be the best way to go for emergencies; funding specific categories rather than lumping it under one Emergency umbrella. 

      Like 1
      • Superbone
      • YNAB convert since 2008
      • Superbone
      • 6 mths ago
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      dangerosity Agreed. Otherwise, you may be double-booking your emergency funds. Luckily, the chances of all the different emergencies happening at once are minimal but it's still good for peace of mind to know you're covered for almost anything.

      When I was first starting out, I did the Dave Ramsey thing and just saved up $1000 in my EF before funding other known categories like House Maintenence & Repair and Car Maintenance & Repair. Then when I was comfortable about how much I had set aside for these kinds of things, I went back to my EF and worked on building it up to 6 months of salary.

      At the beginning, it's hard to decide how to divide up your savings but over time, it all starts filling in and you get more comfortable. The great thing about YNAB is that with Rule 3 you can move funds from other emergency categories if necessary when still in the emergency funds accumulation phase. Eventually, your IR will be full and then you just have to keep up on your other ER funds. What I'm trying to say is that it gets easier in time. Best of luck on your journey!

      Like 3
      • dangerosity
      • Aquamarine_Piranha.9
      • 6 mths ago
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      Superbone thanks! 

      Like 1
    • Melissa
    • Routinely questioning every assumption I have about my budget, my spending, and my savings habits.
    • todays_mel
    • 6 mths ago
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    dangerosity said:
    I dipped into it for an "emergency" that I should have seen coming, so defining it should take away the confusion of "where do I pull from?" 

    Yes, exactly! That's a very common place to begin from because we're still trying to identify and cover all of our true expenses and when we haven't planned for it, it becomes an "emergency". 

    I'd dip into my EF to cover things like bi-annual car insurance or annual emissions/auto registration, or Christmas gifts! Those aren't emergencies, but I'd forget or ignore them before YNAB because I didn't have a forward-looking budget (even though they happened regularly - out of sight/out of mind). I'd have to cover the expenses from somewhere, which was the emergency fund. In a reality, I had an "I didn't set aside money for this expense I knew I'd eventually have to cover" fund that I raided frequently, which left me feeling deflated.

    And there's nothing wrong with having a EF category; our budgets are very personal things and we all get to decide how our's are set-up. But once we really ponder what we'd consider to be an emergency it's likely because we don't have that eventuality defined in our budget yet. And that takes time to identify and prioritize - and honestly can be more than a little overwhelming! :) 

    Like 2
  • I see absolutely no need to separate them out.

     

    A. I like to keep my categories simple.

    B. I don't want to have to play a game of shuffling money around in ynab in case of an emergency.  Well if I empty out my various insurance deductible categories and my my car decided to make me get its engine rebuilt category I can cover that home repair I have. Because I don't know what emergency is going to hit so I find no sense in trying to guess and decide my priorities to just reshuffle when something happens.

     

    That said I do have car and home repair categories but to me repairing my house or car isn't an emergency its an expectation, anything that would cost more than what's available there becomes an emergency. Loosing my job...yup emergency at least to the degree experience are greater than whatever income I do have (like unemployemnt).

    I mean just imagine with whats going on now...I don't imagine anyone had a pandemic category (I could be wrong)

    Like 1
      • dakinemaui
      • dakinemaui
      • 6 mths ago
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      Navy Blue Foal said:
      I don't imagine anyone had a pandemic category

      No, but hopefully people are prepared with a Income Replacement category, which is really the issue these people are facing now.

      Like 4
      • PhysicsGal
      • Nerdy female homo sapien
      • physicsgal
      • 6 mths ago
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      dakinemaui Indeed.  Right now most of the world is wishing they had an income replacement category...

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      • dangerosity
      • Aquamarine_Piranha.9
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      Navy Blue Foal said:
      Because I don't know what emergency is going to hit so I find no sense in trying to guess

       That's a valuable point, but it's the reason why I feel it may make sense to keep them separate: it would keep me from having to pull from other categories (especially from Income Replacement) and shorting myself elsewhere. The wasp incident was almost equal to one paycheque. If I had dipped into IR, I'd be down 2 weeks of coverage, which I find significant.

      All this being said, there's nothing against the idea of increasing the goal for IR to cover unfortunate life events as well as job loss. Definitely something for me to think about. 

      Like 2
      • dangerosity
      • Aquamarine_Piranha.9
      • 6 mths ago
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      PhysicsGal dakinemaui that's exactly it. 

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    • dakinemaui If they are lucky that's all they have to deal with.

      Like 1
    • dangerosity My point is you are still out that money.

      It doesn't matter if you have this:

      Income Replacement: 10
      Emergency Fund: 5k

      or

      Emergency Fund 15k

      The  only difference is if you have a 6k emergency you have to move extra funds around.

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      • dakinemaui
      • dakinemaui
      • 6 mths ago
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      Navy Blue Foal Not all "emergencies" are the same urgency, and seeing a single/combined EF balance may lead you to making a spending decision without adequately understanding the consequences.

      I mean, this EXACT same issue is why we use YNAB at all.

      Like 1
    • dakinemaui 👎

      Something that is not urgent by definition would not be an emergency.

      I'm not going to try to convince you any more. I've found that I have perfect visibility into what is happening in my budget as is without the need to add unnecessary categories.

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 6 mths ago
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      Navy Blue Foal Apparently you aren't familiar with the common reasonings for having separate categories in general. Part of it is knowing you are saving up for things at the correct pace, and being aware of when you might need to change the savings amount for a particular "emergency".

      Of course, engaging in this practice remove the need for a generic emergency fund, because you've already CYA'd yourself in all your categories.

      Like 2
    • nolesrule Familiar, just don't agree. I prefer the KISS principle when it comes to categories and find it works perfectly well for me.

      Ultimately an emergency is something that is not forseen, and therefore its not possible to precisely plan for it, if you are able to forsee it then its not an emergency its an expected expense.

      I've already shared this elsewhere but as you can see I keep my categories simple. specific enough to do the job of a category while broad enough to avoid category bloat.

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      • Wiecked
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      • Orchid_Tiger.5
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      Navy Blue Foal your emoji game is strong! 

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      • Wiecked
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      • Orchid_Tiger.5
      • 6 mths ago
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      PhysicsGal truth!

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    • Wiecked
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    • Orchid_Tiger.5
    • 6 mths ago
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    I've been thinking about this topic a lot. The emergency fund is a big point of discussion between my DH and I. We have trouble deciding on how much we need. We don't want to just sit on cash (even in a high yield savings account) when we could put it into our house or retirement. But we can't be so lean with it that we get smacked upside the head with an emergency we can't cover and then have to make financially lame decisions to get at cash. Every situation/family is going to be so different.

    Our main emergency concerns are a big daddy medical event and a job loss. Those are the two bigees. If both happened at the same time, that would be a doozy but we have short term disability and long term disability insurance, so I'm not sure the double whammy can actually hit us like that? For medical, we know that the bills of a big event would trickle in over time. So we could cash flow probably 10-12k or so over a 4 month trickle if we had to. Our medical plan out of pocket max is like 24k if the whole family got in one giant accident unless the bills spread over two annual coverage cycles. So my thought was that 10-12k should cover 95% of medical situations. 

    Then there is job loss for a non disability reason. How long would DH need to get a new job? Knowing him, about 3 days is the reality, but let's just say it involved a move and with the delay in pay checks, maybe 3-4 months. Comfortable expenses are around 6k.  So my though is that 24k would get us 4 months comfortably and could probably finance a move if needed. 

    With those two situations we have discussed 25k. But we have also discussed 18k and 30k too. How do we really make a final decision? I think we just have to make a decision, fund it, and move on with life. 

    Like 2
    • Wiecked You could also look into putting some but not all of it in somethign semi-liquid like a CD that might do a little better. And also figure unless the market happens to be really down theres cashing out non retirement investments.

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      • Wiecked
      • Happy Happy
      • Orchid_Tiger.5
      • 6 mths ago
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      Navy Blue Foal Very good point. What sort of rates do CDs even get? I've never explored one.

      Right now our Emergency fund is essentially sitting in some Restricted Stock Units that recently vested when the market was low and we are waiting for them to come back up so we can sell and diversify or put somewhere safer. So they are in a single stock which is bananas! 🍌

      It's interesting to think about COVID and how nobody could predict that they would lose their job AND the market crashed all at once. So if you had your emergency fund invested, you would be freaking out. It really hammers home why that fund needs to be hidden under the mattress tucked in a safe place. 

      Off to research CDs.... 🎱

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 6 mths ago
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      Wiecked Unless it's a really large amount of money, the interest rate advantage of CDs isn't really worth the effort. I have been unwinding CD ladders for about 3 years now and still have 2 years to go.

      Instead, I have found automated monthly I Bond purchases to make a better set it and forget it approach because they are indexed to inflation and tax deferred until you cash them in. The caveat is they are completely illiquid in the first year (which is why I buy monthly) and there is a 3 month EWP for the first 5 years.

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      • Wiecked
      • Happy Happy
      • Orchid_Tiger.5
      • 6 mths ago
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      nolesrule I just did a little research to educate myself on CDs. What about these 1.55-1.7% yield savings accounts I see out there too. They are online only, I can transfer out externally if needed. Do CDs and bonds do better than this? How do I get around the money being stuck in a cd? Just look for one with no penalty? If something big happened we would make one transfer out, in a large chunk to cover the current emergency. I'm looking at 25-30k to stash.

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    • Wiecked An online high-interest savings account is a great idea. I've come to the same conclusion as nolesrule : CD laddering isn't worth the trouble, and that's especially true when the yield curve is flat, as it is now. And you're not going to find a worthwhile CD without a withdrawal penalty.

      Here's how I'd think about it.

      Let's say you set aside your chunk of cash for a couple of years. At the end of that time, you look at the annualized interest rate you earned on the cash.

      No matter what, you'll find that there was some other choice you could have made to earn more interest than you did. There are tons of options, and you can't predict the future.

      However, you will almost certainly find that there wasn't a big difference between your choice and the best choice. Not enough to kick yourself over.

      To me, an online savings account that's always going to pay within a few tenths of a percent of the best rate out there is hard to beat. It's fully liquid and FDIC insured, and simple simple simple.

      Like 2
      • PhysicsGal
      • Nerdy female homo sapien
      • physicsgal
      • 6 mths ago
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      Wiecked These types of decisions are very personal.  I would go with the "whatever makes you both sleep well at night" answer, to be honest.  I don't have kids and my job is fairly secure, but I'm a homeowner who recently had to take a loan because I didn't have an emergency fund, so I'm aiming for $20k, which is enough for 6 months of expenses, including Cobra.

      Like 2
      • PhysicsGal
      • Nerdy female homo sapien
      • physicsgal
      • 6 mths ago
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      Wiecked I use Ally for my HYSA, the interest rate is currently 1.5% and I like them a lot.  I'm sure it will probably drop again, as will most online banks, now that the fed cut interest rates so much, but it's competitive rate with a bank that so far I'm happy with.

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 6 mths ago
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      Wiecked A decent online bank will get you about 1.5% interest. the best 1 year CD rate I could find will get you about 1.75% these days. The difference is $75/year on $30k.

      Seventy five dollars.

      But if you need the money inside of a year, there will be an early withdrawal penalty. How much the penalty is depends on the bank policy, but at those spreads you are likely to lose that $75 and then some to the EWP if you have to pull the money.

      So yeah, just stick with an online HYSA.

      I still like I bonds though. There is a fixed component and an inflation component, so while the bond's rate does fluctuate due to inflation every 6 months, the fixed component guarantees you are beating inflation.

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