Emergency Fund vs. Job Loss Fund

[corn18]

Now that my income exceeds my expenses (thanks to the people here), I have an EF ($8,000) And now that I have an EF, I am using it for emergencies:

1. Plane ticket to visit father who had emergency surgery for brain cancer ($461)
2. Vet bill for dog that nearly died of something ($2,400)
3. Duck committing suicide on Jeep windshield ($509)
4. Air conditioner died ($2,200)

I had enough in the EF to cover all of these and replenished it ASAP. I kind of view this as an accumulator in a well designed hydraulic system: sometimes there is unpredicted demand and the EF keeps things from going negative. So I am now comfortable managing my EF as it relates to emergency expenses.

But I think we all know there is more to it than just emergency expenses. I need another fund to cover an income loss. This is new for me and I have not started this fund yet. I am going to make it separate from my emergency expense fund and it will be off limits, even for expense emergencies. Just sits there as insurance against unexpected loss of income.

I need a goal and this is where I am soliciting your input. My goal right now is 6 months of frugal expenses. I chose this goal because it is the lowest of these three (numbers are changed but show relative value in my situation):

1. $50,000 = 6 x Net monthly incom (same as what I bring home now, including all savings and wants but no 401k)
2. $42,000 = 6 x Regular monthly expenses (live like I have been but no savings)
3. $30,500 = 6 x Frugal expenses (tighten the belt and cut out most of the wants and no savings)

#3 cuts out kid's allowance, dining out, gifts and entertainment. #3 reduces other want categories by 50%. #3 is actually what I would like to get to now but I'm having trouble convincing my family. Regardless, we could live off of the monthly amount of #3 indefinitely.

So, I am planning to start with a goal of #3. Just because I can achieve that within 6 months and have a good EF and LIF (Lose Income Fund). Then if it makes sense, I can up the goal to #2 to even #1.

The reason I am looking at the lower amount is I am also trying to fill up the college, new car, IRA and vacation funds at the same time. Too many darn funds to feed.

Appreciate your thoughts as always,

Tom

[disneysteve]

Too many darn funds to feed.

Ain't that the truth.

I think #3 certainly should be your first goal. Your kids definitely need to understand that if you lose your job, they lose their allowances and that the family will not be going out to eat as much if at all during that time.

Taking a more long term view, though, there is nothing wrong with having a larger EF that can fund something closer to your regular lifestyle if that's what you want to do.

I have only had one period of unemployment in my career back in 2000. During the 3 months that I wasn't working, we took an already planned trip to Las Vegas for a week to attend a professional conference. We also took an impromptu 10 or 12 day trip to Disney World since we suddenly had the free time and had sufficient savings to cover the costs. Those things wouldn't have been possible without a big pile of cash on hand.

[snafu]

Everyone seems to have their own definition of EF, how much, instrument used and what it's meant to cover. I like to believe we are committed enough to avoid unnecessary spending if bad things happen.

I've named set-aside funds a bit differently and shifted sums as appropriate, it's not written in stone. We've a 'Home Maintenance' fund [which until the recent, incomprehensible home value increase] was 1 % of value since this is an older complex. We use it for repair, fix-up, updates, appliances, and oops it broke. Our true EF for income loss will cover between 6-7 months basic expenses, [condo fees, food, utilities, transportation, insurance] is currently in a MF bought in the depth of the recession. We feel the risk is tolerable for our circumstances [no mortgage, both vehicles are paid] different tax funded medical system with no premiums, no co pay etc and while insurances are paid in full annually, it's accumulated with a set-aside each month. I recently changed the set aside for auto maintenance to cash flow it. I'm reluctant to say it because that's when it goes awry.

[Permanent Temp]

I've actually done the same thing. I have an Emergency fund currently at 4K as I had to pay out 1.5K for one emergency and 2.5 for another. And I have a job loss fund which currently has 5 months worth of bill money in it. I have another small fund for basic necessities like groceries and gas.

Since my work is intermittent its always been pretty important to have a back up stash of money. Before I had always had a month for a cushion but I was lucky enough to be able to save 5 months this time.

I say go ahead and start with the lowest amount since you have to start somewhere! You'll be amazed how quickly it accumulates when your doing it on autopilot. While I was building mine, I paid off credit cards and my car in that time which meant my pile could cover more months than it could previously.

Starting is the hard part. Keeping it going is easy.