Thursday, March 12, 2009

State of My Emergency Fund

With the economy cratering, everyone's job security is in jeopardy and the emergency fund is a hot topic. Even the Wall Street Journal is discussing it.

The WSJ writes:

Twenty thousand Americans are losing their jobs every day. This slump could be much worse, and last much longer, than most of us expect. No wonder families are being advised to keep six months', or even nine months', worth of expenses in an emergency fund they can tap if they end up out of work for a long time.

That's a fine idea in theory. In practice, it's not so easy.

According to federal data, a typical middle-class family spends about $42,000 annually. Six months of expenses is $21,000, and nine months is $31,500. A lot of people don't have that much on hand. And for many others, that would be pretty much all their retirement savings.

Sallie's Niece was curious about my EF since I expect to be laid off some time soon. I guess it's a good time to look at the state of my preparedness (or lack thereof) in the event of a layoff:

In my current budget, I pay extra towards my debts and set aside money for savings and earmarks. However, in the event of a layoff, I plan only to pay the bare minimum owed on my debts and I won't be saving. So the following are my expected bare minimum expenses:

Rent: $1,275/month. (This will likely go up in July.)

Electricity: Approximately $37/month.

Student Loans: I expect to be able obtain a temporary forbearance on my student loans while I am laid off. But unlike before, I will NOT allow my student loans to negatively amortize. By paying the interest only, I won't be paying down the balance, but atleast I'm not letting it grow again. I estimate my monthly interest on my student loans are $500/month (*eep*).

My cable/internet/land line: $152/month.

My cell phone: $53/month.

Minimum credit card: Approximately $240/month.

Insurance (car and renter's): Approximately $120/month.

Food/Incidentals: $500/month.



Liquid Savings: Not taking into account the bonus I have yet to receive, I currently have $6,166.37 saved, or 2.26 months.

Taxable Investment Account: If necessary, I can also liquidate my taxable investment account that was valued at $4,500 on Monday (i.e., before the recent 2-day market rally). If I were to anticipate a scenario that my account will go down an additional 20%, I'll have an additional $3,600 (or, 1.32 months) that I can tap. The good news in selling my stocks at a loss is that at least I won't owe any taxes. :-P

So, essentially, I have about 3.58 months worth of my expenses in my emergency fund.

Worse comes to worst, I can also liquidate my meager Roth IRA account (value: $1,000). Since again, I'm liquidating at a loss (i.e., my withdrawal is below my post-tax contributions), I won't owe any penalties or taxes.

The aforementioned bonus will help somewhat, but I was hoping to use some of it towards my long term savings like a CD ladder or Roth IRA.

Basically, I'm like most people - - my EF is not bad, but it is sorely inadequate to weather this current economic crisis.


Sharon Rose said...

Hi there-thats not bad going at all, I seriously need to replenish mine........

Sallie's Niece said...

Hey thanks for sharing this. I've totally failed at accumulating much of an Emergency Fund so I'm feeling a lot of pressure right now. I hope everything works out for you.

paranoidasteroid said...

Still, that's a lot better off than many, many people in this economy. And if you're laid off, you'll get unemployment & severance to help offset your living expenses as well.

I'd also drop the cable/internet/phone and find the nearest library with an internet connection.

It's weird that they're giving out bonuses if they're also planning on having layoffs, though...

Anonymous said...

I would make it about 2 weeks with my e-fund. I hope I still have a job this year!

Miss M said...

You are not in that bad of shape, you'll get unemployment if/when you get laid off. I take it you can go without health insurance or cobra in the meantime? Some people can't and it's one of the biggest expenses to hit the unemployed. They just raised the max unemployment slightly so you would get $475/week or ~$1900/mo. So you'd only burn $825/mo of your own money and that stretches you out to at least 7-8 months.

Saver Queen said...

Do you know what kind of package you would get for being laid off?

jpkittie said...

That really isn't a bad amount at all! I would love to get up to atleast one month for us... but little things first - we need to get to 1k ;) I am wondering this though... should you have an ef (with a value greater then $1k) like say a few months of expenses before you really working on paying off debt?

j9 said...

I was laid off in October and in December received a bonus from my old company which is still actively laying off a person or two a week (and is down to less than 1/3 of the people they used to have). I think they give out bonuses because it gives them a break on taxes but I'm not sure exactly how it works.

Don't forget that severence can be negotiated, I was able to get an extra week beyond what they wanted to give me with almost no resistance. I also got them to agree to cover my health insurance through the end of the month.

I don't know what state you are in but I get much more than $475 a month (I am in the state with the highest benefits) I moved in with family to save more money and so I haven't had to dip into my emergency fund yet.

You also may be able to work a part-time night/weekend job to supplement your unemployment while still leaving days open to look for a job, interview and network.

Good luck! I wish you the best and hope you are able to keep your job. It's really not fun being unemployed beyond the first week.
Sorry about the long comment but I hope there are helpful things somewhere in it for you.

GI Janes Finances said...

Avoid Japan and China during the last week of Apr (Japan) and first week of May (China). It is when everyone goes on Golden Week (holiday) and everything is expensive. I will be travelling during that time and it costed me a pretty penny. I will be staying at the Westin for 5 days for $1600 per person.