How (and when) to think about Emergency Fund
Wow, I can't believe I am even posting something in a place called "Saving." Maybe this is more about debt but this feels like a more hopeful place to ask it. I am still in the paycheck-to-paycheck, trying to get to being a month ahead. Also trying to pay off debt. I have seen several threads where people mention Emergency Fund, and the Dave Ramsey strategy of having mini EF of $1000 while you are paying off debt. Sounds good, but even getting to $1000 is going to be hard for me. I'm not even fully funding my true expenses at this point...I guess my question is, is the Emergency Fund supposed to be in addition to all the future events you are predicting in True Expenses categories? Because I don't know who Dave Ramsey is so not sure if he is YNAB or not. Should I take care of those True Expenses categories before worrying about the Emergency Fund? I'm used to thinking of my computer breaking as an emergency, but now I am (sort of) preparing for that as a True Expense. I'm used to thinking of suddenly losing a job as an emergency, but now that's what I'm building my buffer/income for next month category for, right? So is the Emergency Fund for like...hurricanes? Or what? Thanks in advance for your help! 🙂
I think while people are in the debt payoff mode like you are, that basic $1000 emergency fund is a catch-all for when true expenses (especially unexpected ones) pop up before you have saved for them. Personally, I called them contingency expenses and worked to get about $1000 spread in categories like medical, car maintenance, home maintenance, dental, etc. Then as things popped up in one category, I'd move money among the contingency categories to cover it.
Some people outside of YNAB think of it as a Loss of Income Fund worth 3-8 months of expenses in case of job loss. YNABers will usually call it Income Replacement or something more specific. It took me a long time to get this one, and I attacked it after my debt.
Separate from that is the Buffer, or Income for Next Month category, whose sole purpose is to allow you to budget in month sized chunks, not tied to your paydays.
I think I would recommend working towards them in this order, but you do what gives you security.
1. Buffer (because it makes the rest easier!)
2. $1000 EFund/contingencies/including Stuff I Forgot to Budget For (so that when things come up, you don't go further in debt)
3. Debt paydown (because interest... And cash-flow)
4. Income Replacement (the long haul... Yay)
I'm sure other people have other ideas.
An Emergency fund is for UNANTICIPATED expenses. So no, I would not fund it before True Expenses. You definitely should be anticipating those -- at least the known amount/timeline ones. For example, non-monthly bills or Christmas or Birthdays. The unknown amount/timelines ones like Car Repair perhaps you might try to find an EF before then, with the expectation you'll have to dip into the EF to fix your car if that becomes necessary.
Aquamarine Thunder said:
losing a job as an emergency, but now that's what I'm building my buffer/income for next month category for, right?
Nope. Income for next month is to allow you to budget in month sized chunks on a schedule aligned with your expense recurrence timing. If you lose your job and don't have a separate Income Replacement category, you will lose those benefits. This is no different from reallocating from Vacation to cover expenses if you lose your job -- you obviously cannot go on vacation.
I have both INM and an Income Replacement category so I can continue to budget in month sized chunks even when I am unemployed. INM is one of the last things I would give up because it provides such clarity.
I'm about 2 years into my YNAB journey and I do still have a generic EF, called Extra Large Unexpected expenses (with about $3,000 in it. Well it did until last month and I'm building it back up now).
I keep about $2-3,000 in my Home Maintenance and Auto Maintenance funds and also contribute monthly to these so I typically have quite enough to cover even fairly large "normal" repairs.
However, last month our AC went out and it turned out we needed a whole new furnace and A/C ($6,000). Between the Home Maintenance budget and this fund we were able to pay for the entire expense up front. Last summer we had flash flooding and our entire basement flooded and we needed new everything (except the furnace, hah!) and we could pay for it. The year before my husband's car unexpectedly needed a new engine, same...
Now that I think about it I should just put $6,000 into it and call it Annual $6,000 Emergency Expense! Anyway, the point is I like having a fund the point of which is to supplement when another category actually does have a large unexpected expense.
Dave Ramsey is a popular personal finance author/personality who promotes 7 Baby Steps for getting your finances in order. He's not associated with YNAB; he actually has his own budgeting app called EveryDollar. The first baby step is building a $1000 starter emergency fund: "Your emergency fund will cover those unexpected life events you can't plan for. And there are plenty of them. You don’t want to dig a deeper hole while you’re trying to work your way out of debt!" Baby Step 2 is paying off your debt using the debt snowball method. Then, in Baby Step 3, you focus on saving "3-6 months of expenses in a fully funded emergency fund."
You obviously don't have to follow the $1,000 starter EF recommendation. If you get to the point where you've fully funded your True Expenses and you're "one-month ahead" and you don't mind the risk, you could focus on paying off your debt before building an EF. Or if you're risk averse, you could shoot for a starter EF greater than $1000. The problem with the $1,000 baby EF advice is that it's not scaled like the 3-6 months of expenses rule of thumb is. The higher your monthly expenses are, the less helpful that $1,000 becomes. Also, the 3-6 months of expenses in an EF is just meant to give people a general idea of how much they might need to have on hand in case of an emergency, and doesn't necessarily mean that the only purpose of an EF is to cover your expenses in case you lose your job. An emergency could be a hurricane or other natural disaster, hospital bills, a car accident, a house fire, funeral expenses etc.
True Expenses, the Buffer/INM, and an Emergency Fund are all different. How you prioritize funding them will be dependent on your personal circumstances (how much debt you have, the time it will take to pay off your debt, what your pay cycle is like, whether you have variable income, whether your job is secure, how risk averse you are, etc.). Since I am currently in a secure job that pays me the same amount monthly at the end of every month, I do not plan to utilize the Buffer/INM method at all. My plan for the next year or so is the following...
My goal is to pay off my credit card balance by February 1st, so I'll only be paying off debt for 5 months. While I'm paying off that debt, my priorities are Immediate Obligations and True Expenses that will come up in the next 12-months (like Medical and Car Maintenance). After I've paid off my debt, I'll start funding the long-term True Expenses (like Laptop Replacement, which I don't anticipate needing to do for another 4 years). Once I'm fully funding my True Expenses, I'll start building my EF. My personal EF goal is to have 6-months of expenses plus my health insurance plan's max out-of-pocket amount (minus my deductible, which I'm already budgeting for in my Medical category) set aside in a savings account. I'm okay with the risk of not having an EF right now, because my job is secure and I have family that would be more than willing to help me financially if I needed it in an emergency. It's all about weighing the risk-factors and your personal priorities and situation.