Emergency Funds 101

Here's a finance blogger confession: I (we) do not have an emergency fund per say

Gasp! Why?

I have a process for deciding how much to allocate for emergency funds in the case of job loss and it goes something like this:

Monthly Expenses
First step will be to actually have a budget and know what amounts go in and out of the household coffers every month. A simple spreadsheet or any of the well-known budgeting software can help with this.

The most critical step is looking at expenses and figuring out how each one will be dealt with in the case of a job loss. Which expenses remain unchanged and which can be reduced or totally eliminated? Specific to our situation, here's how I planned for the bigger items on our expenses list.

  • Housing: Our bank gives us the option of making additional principal payments on our mortgage. Down the line, we then have the option of deferring mortgage payments equal to the amount we've prepaid. So in our case, because I know that we've prepaid up to 6 months worth  of mortgage, we can defer monthly mortgage expense for 6 months if need be. That was the strategy. Another option a younger, single person can consider is moving in with family or taking on a renter. Bottom line is figure out what changes if any will be made to your housing expense and calculate what that change will mean in cold hard cash. 
  • Childcare: If one or both parents are home, then this (YUGE!) expense goes away.
  • Insurance: Car, home and life. These will remain unchanged so budget accordingly.
Monthly Income
What will the new monthly income be? This looks very different for single income households versus dual income. 

Include in this calculation things like what contributions an adult child living at home will make to paying household bills. How much more you can make from a side-hustle if you had more time? Will you tap into dividends and investments? Do you have rental or other income not tied to primary employment? Do you plan to tap into a line of credit?

Also important here is to evaluate the risk of losing 2 incomes at the same time. This can be the case if both partners work for the same employer or industry.

Personal Note: There was a time  my husband and I worked for the same employer. Though both jobs were good jobs, we felt that to reduce the financial risk to the family we had to leave that situation for a 2 job-2 employers situation. It was the right call!

This is the category that you can get very right or very wrong! Most popular personal finance writing advises 6 months as the time to use for calculating emergency funds. I beg to defer.

I say each household has to evaluate based on 3 factors
  • Job role: How much time does it take for people in your job role to get new jobs? Is there a shortage or surplus of people with similar job skills?  The bureau or department of labor for your province is a good source of this information. Here's Alberta's job market forecast website. Based on this and anecdotes from friends, an Anesthesiologist will get a new job in 2 months while an administrator will have a longer unemployment period between jobs.  
  • Job Industry: Is the industry experiencing a recession? How long do the recession cycles last historically? The travel, restaurant and entertainment industries are all experiencing a Covid19 induced recession. Most people in those industries are on track for period of unemployment longer than 6 months.  
  • Cultural factors: This is a catchall category for those un-quantifiable things that will affect how soon an immigrant can get back into the workforce. These include the quality of your network, knowledge of local recruitment best practices, your name, personality etc. 
So that's my 1-2-3 of emergency fund planning. 

Why didn't we have an emergency fund with 2 jobs? Because we planned for our basic expenses to always be covered by one person's income so loss of one job did not have a material impact on the family. 

And now that I don't have a job? I'll be aggressively building up what amounts to a 12 month emergency fund for our family.