Emergency Fund for Single Income Household

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mlipps
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Emergency Fund for Single Income Household

Post by mlipps » Wed Jun 19, 2013 10:57 am

My husband & I are thinking through our short term goals as we consider a home purchase. One of them is that we would like to have a baby in the end of 2015 or 2016. By that time, we would like to have achieved a few goals, including paying off my last student loan & increasing our emergency fund. I wanted some input specifically from those who have gone to a single income household on how many months expenses an emergency fund might need to be in that case. I of course understand that this is situation specific, but it'd be good to consider.

Right now, we could pay all of our necessary expenses (about $3k/month) on just my income if we stopped contributing to my 401k temporarily, with a shortfall of about $750. So, we try to keep an emergency fund around $12-$15k. Of course, we don't own a home now either, so the potential "worst case" isn't so bad. My husband works in IT & the last two times he's sought a new job, it's taken him 3 weeks. However, we all know it's easier to get a job when you already have one. We will purchase disability insurance for him & a small life insurance for each of us when we buy the house, and increase the life insurance policies when we have kids.

If I quit my job to have kids, I imagine the worst case scenario could be the roof sustains massive damage in a storm, the car breaks down and needs a repair in the ballpark of $5k, and my husband loses his job all in 6 months of each other. My other concern is that now, we have about $2500 surplus a month, so we could rebuild our emergency fund rather quickly. Once we buy a house & I quit my job, this surplus might only be $600-$1000, more if we decreased his 401k contributions.

So what have you done to mitigate these risks? What factors did you consider in deciding the size of your own emergency fund under similar circumstances?

allsop
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Re: Emergency Fund for Single Income Household

Post by allsop » Wed Jun 19, 2013 11:13 am

Having a baby and you exiting the paid workforce could be quite a strain on the personal finances.

As I understand, you are currently renting, so why not continue renting for a while after the baby is born so that you can more properly assess your expenses?

Also, when renting it is much easier to move if the sole income earner loses his/her employment, and when the child is very small it is much less of an issue to move for the child's sake.

sport
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Re: Emergency Fund for Single Income Household

Post by sport » Wed Jun 19, 2013 11:25 am

The major need for an emergency fund is for periods of unemployment. If the roof blows off the house, your homeowners insurance will pay for most of the repair. You only need to come up with the deductible, maybe $1000. The length of time to find a new job can vary considerably. Unfortunately, the time when people get laid off (bad economy) is the time when it takes longer to find a job. In addition, as your husband progresses in his career, and gets promoted to positions of more responsibility, the number of equivalent available jobs decreases. In other words, it takes longer to find a new job. In bad times, it could take 6 to 8 months to find a job. All other needs for an emergency fund are probably small compared to this. The other possible large need for money would be medical expenses. So, be sure you have good medical insurance.
Jeff

mlipps
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Re: Emergency Fund for Single Income Household

Post by mlipps » Wed Jun 19, 2013 11:33 am

allsop wrote:Having a baby and you exiting the paid workforce could be quite a strain on the personal finances.

As I understand, you are currently renting, so why not continue renting for a while after the baby is born so that you can more properly assess your expenses?

Also, when renting it is much easier to move if the sole income earner loses his/her employment, and when the child is very small it is much less of an issue to move for the child's sake.
What's the deal with this forum & people giving unsolicited advice? Please, just once, let's stick to the question.

allsop
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Re: Emergency Fund for Single Income Household

Post by allsop » Wed Jun 19, 2013 12:43 pm

mlipps wrote:
allsop wrote:Having a baby and you exiting the paid workforce could be quite a strain on the personal finances.

As I understand, you are currently renting, so why not continue renting for a while after the baby is born so that you can more properly assess your expenses?

Also, when renting it is much easier to move if the sole income earner loses his/her employment, and when the child is very small it is much less of an issue to move for the child's sake.
What's the deal with this forum & people giving unsolicited advice? Please, just once, let's stick to the question.
[Snarky comment removed by admin LadyGeek]

You might have noticed that sometimes "unsolicited" advice is given as a reminder that your assumptions are 1) not valid, 2) incomplete, 3) very optimistic or 4) all of the above and more.

[Snarky comment removed by admin LadyGeek] I suggest that you Google for confirmation bias and EM and home owner [Snarky links modified by admin LadyGeek].

ieee488
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Re: Emergency Fund for Single Income Household

Post by ieee488 » Wed Jun 19, 2013 1:48 pm

allsop wrote: You might have noticed that sometimes "unsolicited" advice is given as a reminder that your assumptions are 1) not valid, 2) incomplete, 3) very optimistic or 4) all of the above and more.
+1000%

I have posted on here precisely to see if there is anything I am overlooking.
I have sometimes thought - aha, why didn't I think of that?
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tyrion
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Re: Emergency Fund for Single Income Household

Post by tyrion » Wed Jun 19, 2013 2:14 pm

I will try to answer the questions.

We are primarily a one income family. Two young kids and my wife works a little bit part time as a 1099 employee.

I don't think home ownership has much to do with EF needs, other than it 'fixes' your housing cost. But renting or owning you will still have housing costs. Renting it's a lot easier to decrease your costs in a time of need, especially if you have family you could move in with. That doesn't apply to me, but it may to you.

What have we done to mitigate? Well, we have an emergency fund. I have parents who would be more than willing to help out in times of need. I imagine I could find temp work if necessary. My wife could possibly find full time work and we could switch roles. I have taxable stock funds I could liquidate that would keep us in business for a year or so (beyond the EF).

What other factors did we consider? Mostly the above. Buy a sensible house if possible, so your one income can cover costs and you are in a position to have someone stay home with the kids when the time comes. If you are worried about this (and it kind of sounds like you are) then increase your emergency fund.

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mhc
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Re: Emergency Fund for Single Income Household

Post by mhc » Wed Jun 19, 2013 2:16 pm

Keep in mind that if a person is laid off, there is usually a severance package and unemployment money. This would impact the size of the necessary emergency fund. Also, if the company pays out unused vacation, this would also soften the blow of being laid off.

An emergency fund is very personal due to individual circumstances. It seems like you are going through the correct thought process.

Another thing to consider is if things got really tough, how much do you have in assets (e.g. 401k, IRA, HSA) that could be used.

Also, if you are both unemployed, how much do your expenses change due to belt tightening? (e.g., no vacations, stop eating out)

I think you would want to be able to cover 6-9 months of expenses after accounting for the severance package and unemployment insurance before you would have to start using retirement savings. Maybe you would want to add in an additional $5k in case your car broke down during this time period.

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Re: Emergency Fund for Single Income Household

Post by IlliniDave » Wed Jun 19, 2013 3:12 pm

Just listening to your description, I would go with 6 months gross income of the single income in question (or more if it would help you sleep at night). That should see you through for a little more than 6 months in the face of income loss.

That might seem conservative, but if you're hoping to add a new child to the mix, there's upward uncertainties in your expenses. Another thing that should go along with that (for helping withstand financial setbacks) is a good review of your insurance. Homeowners obviously if you buy, and your life insurance needs will change with a child. Not exactly emergency fund, but they dovetail together. Disability insurance is something else to consider. By making sure you have all-around coverage and a good understanding of the details, you'll have a more refined idea of what the emergency fund has to be sized for.

Back to the E/F itself, I think a minimum would be 6-months essential living expenses. An important thing to consider is how stable/certain that one income is. If a large part of it is variable (commissions, bonuses, etc.), you might consider leaning towards a higher number. Same could be said if his seniority is low or his line of work is one that depends benign economic conditions. If he's a tenured professor or in a highly recession-proof industry, you could lean back the other way.

My kids were raised for the most part on a single income, part of the time with me as a single parent. When that transition occurred I went to a 1-year of expenses emergency fund. Prior to that it varied between 3-6 months of actual expenses. At times the cortisol ran thick in my blood, I would have preferred it stay at 6 or somewhat higher. I've got a lot of my grandma in me, I admit. Being so conservative might not be the best approach for everyone.
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FNK
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Re: Emergency Fund for Single Income Household

Post by FNK » Wed Jun 19, 2013 3:32 pm

mlipps wrote:What's the deal with this forum & people giving unsolicited advice? Please, just once, let's stick to the question.
"Doctor, if I want to nail my foot to the wall, should I use alcohol or peroxide?"

We gravitate to the big picture. Sorry.

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Re: Emergency Fund for Single Income Household

Post by mlipps » Wed Jun 19, 2013 3:45 pm

FNK wrote:
mlipps wrote:What's the deal with this forum & people giving unsolicited advice? Please, just once, let's stick to the question.
"Doctor, if I want to nail my foot to the wall, should I use alcohol or peroxide?"

We gravitate to the big picture. Sorry.
I hardly thinking making the choice to buy a house after careful consideration, while maxing out our IRA's & 401k's, then planning ahead to ensure we can afford in it in 3 years when we have children, is comparable to nailing my foot to a wall.

Look, I read this forum every day. I've seen all the warnings about buying, read the endless threads of the debate of "Is housing an investment or a consumption item?" I posted my own thread two weeks ago to ask if we're being too conservative because the ratio of the cost of the house vs. our annual income is something around 1.6:1, and was almost unanimously told that yes, we should consider spending more on a house. Instead, we're going to go for the 15 year mortgage to save on interest. I explicitly said that after we buy a house & I quit my job, we'll have $600-$1000/month in surplus, while maxing out all retirement vehicles available. This is assuming that over the course of the next three years, my husband receives no raises, when in fact he's been averaging something around 20% annually & is studying for the CFA exam.

If you feel inclined to provide input on the question I posed, I would greatly appreciate it. To those who have done so already, my sincerest thank you.

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Meg77
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Re: Emergency Fund for Single Income Household

Post by Meg77 » Wed Jun 19, 2013 4:04 pm

To me this is more of a budget question than an EF question, but the two concepts are entwined. How much your fixed costs will be dictates how much of an EF you need. Right now with both of you working and with the flexibility of renting, your cash savings needs are minimal (since you say you can pretty much cover all bills on one salary even if there was a layoff - and that doesn't take into account severance or unemployment insurance).

The question you seem to be asking is how much of an EF you need to save for your future life - the one with a new house and a new baby in it, and the one in which you may or may not still be working. This is a giant unknown. It depends on how big of a house you buy for starters. It also depends on when you get pregnant (infertility issues could cost money but would also give you more time to work and save; an accidental early pregnancy could cut your savings ability). The biggest factor of course would be whether you decide to keep working. I'm kind of in the same boat, looking at getting married, buying a house, and getting pregnant in the next 3 years. I am not planning to quit working, but I know it's something I might want or need to do. So I'll share how I've approached our planning, which may (or may not!) give you some ideas.

I've drawn up 2 budgets for us as a couple. In the first, we are both still working and have bought a new house. This budget will kick in at the beginning of 2014. It has us maxing out retirement accounts, saving about $500 a month cash (presuming we start out with a fully funded EF), and paying enough on my future hubby's student loan in order to get it paid off within 3 years. I put those variables all in there first before figuring out how much house we can buy (we're going to go for a home about 60% as valuable as what we could qualify to buy based on our joint income).

In the second budget, I have us living off my future husband's income alone. In this version though we have also eliminated the student loan, both car loans, and the second mortgage we'll use to buy our home (instead of putting 20% down we are going to pad our EF and just put down 10% - 80% on a first mortgage to avoid PMI, 10% on a second mortgage). In other words, I am not going to quit working until we pay off all our debt with the exception of the primary mortgage. If we do that, then we can afford the same house and also afford to continue appropriate retirement contributions even if I quit working.

Now if we have a child in 2016, we won't be all the way debt free but we'll be rid of the big student loan - and the $1200 we used to pay on that each month can be redirected to child care costs instead. You've brought up an interesting point, but I haven't considered how our EF needs would change over these varios scenarios. In reality we don't need much of an EF now (and we won't have much of one left right after buying - and furnishing - the house) but if I DO quit working and have a baby of course we will need much more of one. I have a large Roth IRA so that can always be tapped in a true emergency, but I may need to rethink how much cash we put away versus putting it all toward accelerated debt repayment.
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Meg77
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Re: Emergency Fund for Single Income Household

Post by Meg77 » Wed Jun 19, 2013 4:11 pm

mlipps wrote:Instead, we're going to go for the 15 year mortgage to save on interest.
I am on board with paying the house off in 15 yrs to minimize interest, but in the context of this budget/EF discussion with so many variables up in the air, it might make sense to go for a 30 year loan and just make payments according to a 15 year schedule. Costs about the same in interest over the life of the loan, but you have the flexibility to reduce your payment to the minimum amount due each month if you a) want to boost EF, b) end up having multiple kids or a child with special needs or needing infertility treatments, or c) if hubby loses his job and it takes awhile to find a new one. I know a 30 year loan has a slightly higher interest rate, but I usually err on the side of having more flexibility these days. Just a thought - if you end up wanting to save more or have more room in the budget just in case.
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mlipps
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Re: Emergency Fund for Single Income Household

Post by mlipps » Wed Jun 19, 2013 4:13 pm

Meg, I'm laughing right now, because I think we could be the same person. Same name, and exact same approach to this puzzle it sounds like.

I also started with the assumption that we would pay off our last student loan, and pay enough towards the mortgage to remove PMI, before I quit my job, and made a budget to accommodate this. Like you, this was a big part of how we arrived at the budget for our home purchase. The reason I asked the question in the first place was because I wanted to make sure our E-Fund target (currently $20k), would be sufficient. We can hit that target by Dec. 2015 based on all my current plans and the house we are considering, and I wanted to think through whether that would be sufficient before we put an offer on a house. Obviously there are always unknowns like you point out, and also our goal of having a baby has some flexibility; if my husband lost his job tomorrow and we had to wait 6 months or a year longer to be financially stable, we would do so. I have to keep reminding myself of the Roth flexibility. I've just mentally always assumed it was off limits, but you make a good point that we could use it if circumstances were dire. Thanks for sharing. :happy

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Re: Emergency Fund for Single Income Household

Post by mlipps » Wed Jun 19, 2013 4:15 pm

Meg77 wrote:
mlipps wrote:Instead, we're going to go for the 15 year mortgage to save on interest.
I am on board with paying the house off in 15 yrs to minimize interest, but in the context of this budget/EF discussion with so many variables up in the air, it might make sense to go for a 30 year loan and just make payments according to a 15 year schedule. Costs about the same in interest over the life of the loan, but you have the flexibility to reduce your payment to the minimum amount due each month if you a) want to boost EF, b) end up having multiple kids or a child with special needs or needing infertility treatments, or c) if hubby loses his job and it takes awhile to find a new one. I know a 30 year loan has a slightly higher interest rate, but I usually err on the side of having more flexibility these days. Just a thought - if you end up wanting to save more or have more room in the budget just in case.
Had a two hour discussion about that one Tuesday night and went in circles thinking it all through, but I think we are happy with the choice of a 15 year. Thanks.

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Re: Emergency Fund for Single Income Household

Post by Meg77 » Wed Jun 19, 2013 4:36 pm

mlipps wrote:Meg, I'm laughing right now, because I think we could be the same person. Same name, and exact same approach to this puzzle it sounds like.

I also started with the assumption that we would pay off our last student loan, and pay enough towards the mortgage to remove PMI, before I quit my job, and made a budget to accommodate this. Like you, this was a big part of how we arrived at the budget for our home purchase. The reason I asked the question in the first place was because I wanted to make sure our E-Fund target (currently $20k), would be sufficient. We can hit that target by Dec. 2015 based on all my current plans and the house we are considering, and I wanted to think through whether that would be sufficient before we put an offer on a house. Obviously there are always unknowns like you point out, and also our goal of having a baby has some flexibility; if my husband lost his job tomorrow and we had to wait 6 months or a year longer to be financially stable, we would do so. I have to keep reminding myself of the Roth flexibility. I've just mentally always assumed it was off limits, but you make a good point that we could use it if circumstances were dire. Thanks for sharing. :happy
It is a puzzle isn't it!? One with pieces that continually change shape and color. Haha. Good thing I enjoy messing around with budget spreadsheets. It sounds like we both have options (which is sometimes the hardest part), and it sounds to me like having $20K in an emergency fund is probably sufficient - most people do just fine with much less, after all! I try to remind myself that in a true emergency I actually have other safety nets besides just my EF anyway. Besides insurance proceeds (disability or unemployment or otherwise) we can always temporarily reduce retirement contributions OR tap Roth IRA contributions OR take a loan or hardship withdrawal from a 401k OR (in my case at least) borrow from parents who would trip over themselves to help out.

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FNK
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Re: Emergency Fund for Single Income Household

Post by FNK » Wed Jun 19, 2013 4:47 pm

mlipps wrote:I hardly thinking making the choice to buy a house after careful consideration, while maxing out our IRA's & 401k's, then planning ahead to ensure we can afford in it in 3 years when we have children, is comparable to nailing my foot to a wall.
Of course not; I'm exaggerating.

The point is not that you're right or wrong, the point is that in any conversation, online or off, especially with limited background, people will gravitate to things they find interesting, not the things you want them to focus on. It's not productive to get angry about that. Just say "thank you for the input, my calculation shows that we can pull it off, look at that other thread, so now advise me how much EF we will need."

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Re: Emergency Fund for Single Income Household

Post by Quickfoot » Wed Jun 19, 2013 5:14 pm

In setting your emergency fund size you need to consider how quickly you could return to the workforce if needed. Also have an honest discussion about whether the husband wants to be the sole source of income (most don't but are afraid to tell their wife). I have absolutely NO desire to be the sole income source for our family (my ex wife unilaterally decided not to work and it led to our divorce within 18 months of her stopping work). I will say being a single income earner and having that responsibility put on you can VERY rapidly make you resent your wife and do a lot of damage to the marriage (experienced it and seen it a lot with friends). Additionally going down the single income route puts the wife at a huge disadvantage in the case of unexpected death of the husband or divorce (both happen way more than most people think).

As far as emergency fund don't touch it to make your down payment, if you can't buy without spending your emergency fund then you can't afford to buy. Since you are planning on having a single income eventually I'd work towards increasing your emergency fund by at least 1.5X and you also need to drastically cut your expenditures (no new car, or other debt) so that you get used to living on a single income now.

A useful tool is a spreadsheet that calculates how long your emergency fund would last with 4 different scenarios:

#1 Both husband and wife unemployed but collecting unemployment
#2 Husband employed while wife is collecting unemployment
#3 Wife employed while husband is collecting unemployment
#4 Both husband and wife unemployed, no unemployment.

In our situation the worst realistic situation is #3, as husband makes 75% of combined income but even in situation #3 we could go a year without touching the emergency fund due to almost no debt and low monthly expenses for our income level. Our emergency fund is 12K, half in cash and half in short term bonds. We may eventually increase it to 18K, 6K cash 12K short term bonds.

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