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.
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.
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.
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.
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.
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!
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.
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.
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.
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! :)
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)
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.