Emergency/Doomsday Budget?

I just read Kristin Wong's latest advice column for Joint Accounts, and she mentions that one way someone with an insecure job can alleviate anxiety about spending is to prepare an "emergency budget", which is, as she puts it, "a pared-down, bare-bones version of your usual budget that you’ll revert to in case you lose your job".

I've been budgeting with YNAB since September, so my budget is fairly well attuned to my current level of income and my current needs. Being able to create an alternate, back-up budget that I could basically flip on with a switch if I were to lose my job seems like an interesting next step that could give me some peace of mind. I imagine other people might have other scenarios for which they'd like to prepare ahead of time, too, because, if worst comes to worst, we might be too overwhelmed to budget.

I'm not sure how best to do this in YNAB now. It's not simply a matter of putting some expenses under an Emergency Budget heading, since the amounts budgeted in certain categories would also change in an emergency budget. Any ideas?

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  • I have a Loss of Income category that could cover me for 6-8 months based on a reduced but not draconian level of spending. I don't game it out or anything, it's just a single category. If it had to be used, I would just release the funds into TBB on a monthly basis and budget to the categories that require it - job or no job, I still have to pay the mortgage and utilities and eat food.

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      • Kamerlingh
      • Lavender_Display.9
      • 7 mths ago
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      jenmas I have an emergency fund category that could cover expenses, but I'd still cut my expenses down a lot if I were to lose my job, and I think it would be an interesting exercise to have a separate pared down budget to see how much.

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  • You don't need to have a separate budget. You need a plan for knowing what you can, and more importantly, will cut out in terms of expenses.
     

    Don't forget to account for contracts on expenses that you can't easily extricate yourself from or have early termination fees. Like if you're still in the middle of that 2 year cable contract, you can't just cut the cord for free.

    Like 2
  • I just went down the list of categories, adding up budget entries that I couldn't cut (i.e., hard expenses), including discretionary things at their current level (e.g., groceries). Multiply by 8 (i'm in a tough field) and that was my target Income Replacement category. If I happen to cut discretionary things, it'll go longer (or hopefully I'll just have some left over).

    As jenmas mentioned, I would simply move one month's worth of money out of the IR category each month and budget that as needed at that point.

    I suppose you could put a notation somewhere (category name or notes) on categories that would need to be funded regardless, but I think that's going to be pretty obvious.

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  • I saved 6 months of current expenses knowing that I could pare down my spending if I had to make it last even longer.

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  • The easiest computation is to just save X months of income. You know it should last at least X months and probably more if you do pare down spending. If you're confident of getting a job in X months, no need to pare spending down at all. (Perhaps you're already at the minimum, so your current budget is the emergency-mode budget.)

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  • If you want to be really prepared, you could start a new budget and set goals for what your budget would be if you pared it down to the lowest possible spending, then see how long your to be budgeted will last with your bare bones budget.  I might just do that myself...

    Like 2
      • PhysicsGal
      • Nerdy female homo sapien
      • physicsgal
      • 7 mths ago
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      PhysicsGal That was actually an illuminating budget nerd exercise that only took a little bit of time.  I used a fresh start budget and made new goals that were for a bare bones emergency fund budget level.  I didn't include Cobra, that would add to it quite a bit if I lost my job and had to pay for Cobra, to be quite honest.  But I was still shocked that with my cash on hand minus my current credit card debt I could live on my bare bones budget off of my account balances for 2.5 months.  Not bad!  I will work towards a designated emergency fund of $15k, which is more like 4-5 months, but it's good to know that if I emptied all my category balances today, I would survive for that long if I cut my spending on any discretionary items.

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 7 mths ago
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      PhysicsGal Just bear in mind that people don't often cut all their discretionary spending right away when facing an emergency. It's also important to keep in mind what really can be cut. If you are tied to a contract, it may have an early termination cost.

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      • Kamerlingh
      • Lavender_Display.9
      • 7 mths ago
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      PhysicsGal That sounds like a good way to do it, thanks for sharing!

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  • Kamerlingh  I just went through this in Jan. because my husband was given a terminal diagnosis. Within two weeks of that diagnosis he was no longer able to work. 

    One of the first things I did was set up a 2nd YNAB budget, with only my income. It forced me to take a hard look at what had to be cut. Because I budget a month ahead, Jan. was ok, but I knew moving forward that things would need to change. 

    I'm very grateful for YNAB. Looking at Feb and beyond was manageable because I was able to use my spending and budgeting history to create a plan with only one income. 

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      • Kamerlingh
      • Lavender_Display.9
      • 7 mths ago
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      B's Gambit I'm sorry you're going through all that :( It's nice that YNAB is proving helpful.

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      • PhysicsGal
      • Nerdy female homo sapien
      • physicsgal
      • 7 mths ago
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      B's Gambit That sounds horrible, I'm so sorry you're going through this.  At least Ynab helped you manage it somewhat.  Stay strong.

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  • I use YNAB’s default category structure so my doomsday budget is basically just the immediate obligations section, with the exceptoin that a few immediate obligations that are “must-haves” because I have a subscription would have their subscriptions cancelled, most likely. 

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  • I have an annual tradition (usually in December) of figuring out what 60% of my income is because my unemployment benefit is 60% of my income.  I do this before I set my financial goals and update my template for the upcoming new year.  I then run through a mock month (December or January) of filling out my budget using that 60% as my income for a month, just to see if I can make do. (I delete this afterwards if done in YNAB, or keep it if I do this in Excel.)

    It's part of my annual routine. It helps me address any categories that might be inflating due to lifestyle creep.  I also like to do this because I was traumatized by a 2-year unemployment after the world financial meltdown.  Knowing that I can easily deal with my necessary expenses with that 60% (and still have some left over for saving) gives me confidence.

    Like 7
      • ynaber2613
      • ynaber2613
      • 7 mths ago
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      HappyDance Being able to project a budget on 60% of you income is great.  My guess is that you would actually be better off than anticipated since at 60% salary you would probably be in a lower tax bracket which would mean more than 60% net.

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      • HappyDance
      • YNABing consistently since 2014
      • HappyDance
      • 7 mths ago
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      ynaber2613 

      You're right.  When it happened to me, the 60% unemployment benefit was more than I expected because I was used to looking at my NET income after pre-tax retirement contributions had been deducted.  In actuality, 60% of my true GROSS income was more than I needed to run my  essential expenses budget. It afforded me some quality-of-life and "want" spending, in moderation of course, and was enough to permit a modest remainder for savings.  That's why I go through the process of combing through my end-of-year pay stub to figure out my "true" GROSS, multiply it by 60%, divide by 12, and see if that amount can handle a month's worth of my current lifestyle.

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      • ynaber2613
      • ynaber2613
      • 7 mths ago
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      HappyDance What is interesting is that I just retired in June of last year and my net pay is actually more than when I was working, which was a pleasant surprise to me.  This is due to lower taxes for federal, no state tax on social security, a large retirement deduction for state, and the fact that I no longer have paycheck deductions for my life insurance, 401K or HSA.  The reason I mention these things is to help others be aware of how net pay could be better than anticipated in a lot of situations of reduced gross pay.

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