For EF "months", are we including unemployment benefits & stated severance policies? And both parts of a couple?

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corp_sharecropper
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For EF "months", are we including unemployment benefits & stated severance policies? And both parts of a couple?

Post by corp_sharecropper » Mon May 25, 2020 11:17 pm

As I look to improve my sleep factor, which has nothing at all to do with fixed income AA in my retirement accounts that I can't/won't be touching for 20+ years, it falls on the old EF, and "how many months".

I've been working on numbers based on both me & my wife instantaneously going to $0. As I think about that, it seems completely absurd, even in the depths of a COVID-19 situation. Don't get me wrong, I like building some conservative assumptions into my projections, but a scenario involving the household income instantly going to zero is the blackest swan painted in vantablack. We have problems requiring bullets, not dollars, at that point. We both work for megacorps (different ones), with on the books severance policies, and of course we both would be eligible for unemployment benefits.

I'm thinking I need to tone down my original goal in terms of "EF fund in # of months" as it is beyond overkill in my mind when I take these mitigating numbers into account. I'm guessing there will be some hardliners who want to warn me otherwise. I also imagine there will be the argument that this is basically a mental math thing, in the end you just have the EF that lets you sleep... But to that I say it matters whether I consider $##,### 4 months or 12 months, and it matters to me whether $##,#### in excess of what we need is rotting away to inflation in some HYS or MMF when it could be doing better elsewhere. So I'm curious, especially with regards to the dual income bogleheads with relatively close to even income (let's say +/- 30-40% income difference), and maybe even at companies with severance policies ( yes, I'm well aware that these can change at any moment). Just feels like the situation I've been working my numbers under (assumption of no unemployment benefits, no severance, no extended healthcare subsidy, no cobra beyond that, both me & wife going to $0 in an instant... It's just an absurd scenario the more I ponder it).

I say all this as someone who has been let go in a site closure before, so I don't think I'm being naive. We're running a pretty tight ledger also, but like pretty much everyone, there's still about 20% of degreasing that could be done to our budget if necessary. I'm thinking what I used to consider 3 months EF (basically total replacement of everything from the both of us), is more like 9-12+ months in reality.

Tell me how you do it. Tell me where I'm wrong. Where's my blind spot here?

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Re: For EF "months", are we including unemployment benefits & stated severance policies? And both parts of a couple?

Post by Tipro » Tue May 26, 2020 2:44 am

You're overthinking. Keep some cash on hand, then gradually get more aggressive. Don't sweat not making the best possible return. This is your insurance policy.

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Re: For EF "months", are we including unemployment benefits & stated severance policies? And both parts of a couple?

Post by Katietsu » Tue May 26, 2020 3:04 am

I have written many times about how I historically needed a much bigger emergency fund than even the 3-6 months to be comfortable. But I view the potential need to be for a lot more situations than just being laid off. If my DH was diagnosed with a life threatening illness, I did not want money to be a worry. I wanted both of us to be able to leave town and go to the best place for treatment if that was our choice. If damage to my home made it unlivable and my home owner’s insurance says that the cause is excluded from the policy, I did not want to be worried about having the money to pay the mortgage and pay for a rental at the same time. If a child was diagnosed with a learning disability, I would have wanted money to get the best help without delay. So when we first started working, we balanced investing and retirement accounts with building up a large emergency fund for several years. We then maintained the large emergency fund for those same reasons. Though, now that we are in our fifties with a decent taxable savings, those no penalty CDs have morphed into just part of the “safe” side of our asset allocation.

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Re: For EF "months", are we including unemployment benefits & stated severance policies? And both parts of a couple?

Post by teen persuasion » Tue May 26, 2020 7:23 am

An EF is for when things go wrong, sometimes very wrong. When things go wrong, you can't always count on safety nets working as planned. E.g., unemployment insurance - many people are STILL waiting to receive UI checks they are entitled to. Employers are hurting financially, too, and changing policies like matches/bonuses (or severance?). You might have an unexpected expense - international students could not fly to their home country when the quarantine hit because of outrageous airfares they couldn't afford and/or travel bans.

You need a cushion to get you thru a patch when everything goes bad. I'd want a minimum 3 months baseline expenses for something like is currently happening to many right now: both laid off, UI in limbo, possible healthcare expenses, etc. This could stretch on longer, so I really prefer 12+ months.

We have tiers of EF funds : checking, MM, unreimbursed medical expenses from our HSA, contributions to our Roth IRAs, CC (run a balance and pay minimum instead of paid in full every month).

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Re: For EF "months", are we including unemployment benefits & stated severance policies? And both parts of a couple?

Post by jm1495 » Tue May 26, 2020 7:27 am

That's the thing about EF, risk and insurance. The EF is a self insurance policy against liabilities that would need to be paid even in the event of a loss of income. That's why it is advisable to park it in a low risk (lower interest) liquid asset.

I look at it almost like a term life insurance policy. Term life covers a certain amount of liability i.e. a house for a certain amount of time, usually until that liability is no longer a liability in the event of an untimely death. A specific instrument for a specific reason.

If you feel like your EF can effectively be augmented by your partners income, unemployment etc then your need to hold a larger EF is reduced.
With the EF being reduced you could then pursue higher risk investments and potentially earn higher interest.

It depends on what your comfort level is.

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Re: For EF "months", are we including unemployment benefits & stated severance policies? And both parts of a couple?

Post by Jack FFR1846 » Tue May 26, 2020 7:40 am

There have been a number of threads recently where both earners are essentially zero'd. A megacorp will preserve itself however it decides to preserve itself. My employer has made a big deal about how our competitors are handling Covid. We all got 10% reductions in salary. Other companies (also megacorps in tech) have gone to various methods. 25% lay off. Forced unpaid time off (which can prevent collecting unemployment insurance....better for megacorp). Simple freezing of hiring and not replacing those who leave on their own. Sudden required moves from a regional office to the mother ship, thousands of miles away, with no relocation offered. All of these are going on. Thinking you can't be hit is "absurd".

The EF does not HAVE to be all sitting in an Ally account, getting low interest. Savings Bonds built up over years can be used as an emergency fund as they are easy to liquidate, once they're past the year long wait.

In the end, it's your choice. If you don't want to protect yourself, nobody's going to force you to save.

And no.....unemployment insurance isn't part of an EF and neither should be credit cards and such. Megacorp is very good with well researched methods to fire its employees for cause, which disqualifies the employee from any unemployment payments.
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Re: For EF "months", are we including unemployment benefits & stated severance policies? And both parts of a couple?

Post by JediMisty » Tue May 26, 2020 8:02 am

Jack FFR1846 wrote:
Tue May 26, 2020 7:40 am
There have been a number of threads recently where both earners are essentially zero'd. A megacorp will preserve itself however it decides to preserve itself. My employer has made a big deal about how our competitors are handling Covid. We all got 10% reductions in salary. Other companies (also megacorps in tech) have gone to various methods. 25% lay off. Forced unpaid time off (which can prevent collecting unemployment insurance....better for megacorp). Simple freezing of hiring and not replacing those who leave on their own. Sudden required moves from a regional office to the mother ship, thousands of miles away, with no relocation offered. All of these are going on. Thinking you can't be hit is "absurd".

The EF does not HAVE to be all sitting in an Ally account, getting low interest. Savings Bonds built up over years can be used as an emergency fund as they are easy to liquidate, once they're past the year long wait.

In the end, it's your choice. If you don't want to protect yourself, nobody's going to force you to save.

And no.....unemployment insurance isn't part of an EF and neither should be credit cards and such. Megacorp is very good with well researched methods to fire its employees for cause, which disqualifies the employee from any unemployment payments.
My fortune 400 company did away with severance 2 years ago. I have over 20 years accrued and would have been entitled to over six months severance. But, oh, well. I am still working (from home). My division is on a federal contract where we are PROHIBITED from going to the site. Those who cannot work from home are SOL. Support people at corporate who aren't on direct bill to a contract are forced to use up PTO taking one day every two weeks. See how that effectively makes them ineligible for unemployment? If I were let go, I'd have to pay my COBRA using my unemployment benefits. Of course, I am single. My sister and her husband have been laid off at the same time more than once. Of course, they aren't highly paid and have no E.F. anyway. Factoring in unemployment and severance is up to you. But as an earlier post suggested, there are lots of situations that would leave you ineligible for unemployment. For example, when my mom was dying, I took two weeks off out of three for several months. And then there was the expenses for flights, car rental, meals, etc. More time off after her death for the funeral and to pack up her house and sell it. I'm glad I took the time off, but severance and unemployment weren't in the picture. My modest inheritance didn't cover my expenses and lost income during the time. Your EF is about YOUR comfort and well being, so do what makes sense to you. Of course, I'm over 59.5, so the cash I have on hand is for moving expenses or a new roof or a new/used car or.... Most of my taxable assets are invested, BTW.

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Re: For EF "months", are we including unemployment benefits & stated severance policies? And both parts of a couple?

Post by Nate79 » Tue May 26, 2020 8:31 am

You need an emergency plan, not just an emergency fund. This plan should cover a number of different scenarios and "what if's" and how you would pay for it. Emergencies are not just loss of jobs but new roof, replacement car (or fix), max out of pocket healthcare cost, etc as well as a few of these happening at the same time (for example loss of job and need a new roof or medical out of pocket max could be very likely to happen at the same time).

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Re: For EF "months", are we including unemployment benefits & stated severance policies? And both parts of a couple?

Post by WS1 » Tue May 26, 2020 8:46 am

Lol...I just spend most of Saturday obsessing about this after drinking way too much coffee; I also have the bad habit of reading most of the emergency fund posts..I guess I’m more uneasy than I thought. Whatever amount you choose it needs to wrapped into a compelling story so you can stick with it. I’m in a similar boat.

Household income is split 60/40. For years my story was to be able to live for 12 months on the smaller salary without reducing expenses, using unemployment and “emergency fund” to supplement. The required amount went in reward checking accounts, CDs and I bonds. Under normal layoff situations higher paid spouse would get a few months severance with medical and the family would eventually transition to other spouses’ employer insurance.

Recently I started thinking through what would happen if we both lost our jobs AND had to move.. That’s certainly possible but planning for that doesn’t mean needing $200,000 in a bank account. I realized there was no reason I couldn’t cover those expenses with fixed income from inside a 401k. If we got fired I would roll to an IRA, with zero $ income I wouldn’t pay much income tax on any needed distributions, and the 10% penalty doesn’t really concern me in this situation (it might even be waived like now). I’ve just covered my emergency with untaxed money.

Lots of folks tend to play fast and loose with terms like emergency fund, accessible funds, low risk funds, physical cash. At a certain point the amount of risk free assets you need will be a tiny portion of your portfolio. At the end of the day you need “safe amount” some of that should be very accessible some of that could be less accessible

This whole thought process is separate from something like an opportunity fund which is really just an argument for not having ALL of your money in workplace retirement plans.

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Re: For EF "months", are we including unemployment benefits & stated severance policies? And both parts of a couple?

Post by CurlyDave » Tue May 26, 2020 8:53 am

corp_sharecropper wrote:
Mon May 25, 2020 11:17 pm
As I look to improve my sleep factor, which has nothing at all to do with fixed income AA in my retirement accounts that I can't/won't be touching for 20+ years, it falls on the old EF, and "how many months".

I've been working on numbers based on both me & my wife instantaneously going to $0. As I think about that, it seems completely absurd, even in the depths of a COVID-19 situation. Don't get me wrong, I like building some conservative assumptions into my projections, but a scenario involving the household income instantly going to zero is the blackest swan painted in vantablack. We have problems requiring bullets, not dollars, at that point. We both work for megacorps (different ones), with on the books severance policies, and of course we both would be eligible for unemployment benefits.

I'm thinking I need to tone down my original goal in terms of "EF fund in # of months" as it is beyond overkill in my mind when I take these mitigating numbers into account. I'm guessing there will be some hardliners who want to warn me otherwise. I also imagine there will be the argument that this is basically a mental math thing, in the end you just have the EF that lets you sleep... But to that I say it matters whether I consider $##,### 4 months or 12 months, and it matters to me whether $##,#### in excess of what we need is rotting away to inflation in some HYS or MMF when it could be doing better elsewhere. So I'm curious, especially with regards to the dual income bogleheads with relatively close to even income (let's say +/- 30-40% income difference), and maybe even at companies with severance policies ( yes, I'm well aware that these can change at any moment). Just feels like the situation I've been working my numbers under (assumption of no unemployment benefits, no severance, no extended healthcare subsidy, no cobra beyond that, both me & wife going to $0 in an instant... It's just an absurd scenario the more I ponder it).

I say all this as someone who has been let go in a site closure before, so I don't think I'm being naive. We're running a pretty tight ledger also, but like pretty much everyone, there's still about 20% of degreasing that could be done to our budget if necessary. I'm thinking what I used to consider 3 months EF (basically total replacement of everything from the both of us), is more like 9-12+ months in reality.

Tell me how you do it. Tell me where I'm wrong. Where's my blind spot here?
Back before I retired, I always put a lot more faith in an Emergency Plan as opposed to an Emergency Fund. I always started with the premise that in a dire enough emergency the entire financial resources of the family would ultimately be available to address the emergency.

I would then rank our financial assets in approximately the order of pain that it would cause to access them. It is far less painful to access money in savings than money in a retirement account -- but if my daughter has just had a life-changing, disfiguring accident, that retirement money is on the table.

Then make another list of bad things that can happen. Job loss, accident, etc. The COVID crisis was not on my radar, and I suspect it wasn't really on anyone else's radar either, but job loss in a recession has always been on the the bad things. Guess how much they would cost, whether it is one-time or ongoing, and list from low to high.

Then think about how many of the items on the bad things list have to happen for the pain on the financial resources side to be acceptable. Also think about the timing of the requirements on resources. If am laid off and can't find a job for a year, I might need a bit less that one year's expenses. BUT, I don't need it all on day 1.

Last part of the plan. What is it really costing to keep money in savings as opposed to an 80/20 taxable brokerage account? Of course there is a risk of loss in the brokerage account, but think about the idea that if I am getting an 8% CAGR on the brokerage account and if I can go 3 years without having to take anything out, I can withstand a 20% market drop and still break even. So over the course of a lifetime, as your family income increases, consider keeping part of your savings in stocks. You may moan and wail about having to sell in a downturn, but actually the odds are with you.

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Re: For EF "months", are we including unemployment benefits & stated severance policies? And both parts of a couple?

Post by KlangFool » Tue May 26, 2020 9:06 am

corp_sharecropper wrote:
Mon May 25, 2020 11:17 pm

We both work for megacorps (different ones), with on the books severance policies, and of course we both would be eligible for unemployment benefits.
corp_sharecropper,

I was laid off and unemployed for more than 1 year a few years ago. And, we weren't in a recession during that time.

A) Yes, I had severance and unemployment benefits.

B) But, it turns out that both I and my wife need cataract eye surgeries. That immediately costs another 10K to 20K

C) The COBRA boasts the cost of insurance to another 10K per year.

D) My son was starting college while I was unemployed.

E) My daughter was starting college the following year.

I had 1 year of the emergency fund. It was almost used up before I found my current job.

The only reason why I can "Sleep Well At Night" (SWAN) is due to my emergency fund.

And, that was not in a recession.

At this moment, we have close to 40 million unemployed and counting. This number exceeds the unemployment percentage in the great depression.

I am laid off again this time. I am prepared for the recession to last 5 years. I know that I can SWAN.

What is the number that you can SWAN with? It will be too late to prepare when you are laid off.

KlangFool

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Re: For EF "months", are we including unemployment benefits & stated severance policies? And both parts of a couple?

Post by KlangFool » Tue May 26, 2020 9:11 am

OP,

The maximum unemployment benefit for my state is about 10K. COBRA will cost about 10K per year. So, essentially, the COBRA wiped out the unemployment benefits.

KlangFool

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teen persuasion
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Re: For EF "months", are we including unemployment benefits & stated severance policies? And both parts of a couple?

Post by teen persuasion » Tue May 26, 2020 9:49 am

Nate79 wrote:
Tue May 26, 2020 8:31 am
You need an emergency plan, not just an emergency fund. This plan should cover a number of different scenarios and "what if's" and how you would pay for it. Emergencies are not just loss of jobs but new roof, replacement car (or fix), max out of pocket healthcare cost, etc as well as a few of these happening at the same time (for example loss of job and need a new roof or medical out of pocket max could be very likely to happen at the same time).
A few years back there was a wind storm in my area. The wind blew down a tree, which hit my coworker's house, caved in part of the roof, and injured my coworker. She wasn't seriously injured, but had a concussion and other head wounds. Initially she said she'd be out 6 weeks recovering, but ultimately decided to retire because of the time demands managing the repairs to her house. Her HO insurance company was fantastic, rented them a place to stay while rebuilding sections, moving household goods, etc., but it was time consuming managing all the decisions (replacement items) and contractors for months on end.

So she was out of work, injured, and had a major house rebuilding project dumped on her all at once from a freak weather event.

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Re: For EF "months", are we including unemployment benefits & stated severance policies? And both parts of a couple?

Post by terran » Tue May 26, 2020 11:23 am

My take on this is that emergency funds are for more than just lost employment because there are emergencies other than lost employment. X months of expenses is a good rule of thumb because it accounts for lost employment situations and also scales with a persons other liabilities. Higher monthly expenses means more expensive houses, cars, and other lifestyle factors that could drive the cost of various emergencies. So no, I wouldn't account for other sources of income that might come into play with lost employment because you don't get them if your emergency doesn't involve job loss.

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Re: For EF "months", are we including unemployment benefits & stated severance policies? And both parts of a couple?

Post by gr7070 » Tue May 26, 2020 11:48 am

I completely despise the ubiquitous Boglehead's EF of 1-4+ years. It's insane overkill. Even for those with Boglehead high income and net worth.

And it's detrimental recommendation for the extreme majority of Americans.

3-6 months would work more than well enough for typical American, and even better here where so many have highly sought after skills.

3-6 months works quite well anecdotally and I suspect most here have seen the academic, mathematically-based study suggesting an EF of $1250 is enough for typical America.
corp_sharecropper wrote:
Mon May 25, 2020 11:17 pm
...based on both me & my wife instantaneously going to $0. As I think about that, it seems completely absurd...
I completely agree with the above. It's absurd and even more absurd for two skilled workers to both be unemployed for long segments of time concurrently.
corp_sharecropper wrote:
Mon May 25, 2020 11:17 pm
I'm thinking what I used to consider 3 months EF (basically total replacement of everything from the both of us), is more like 9-12+ months in reality.
Agreed on the 3 months is definitely far more than three months.

I was laid off during the great recession. I'm a higher earner and my wife makes "poor" money as a teacher in Texas. With unemployment and a reduced budget we were still able to live beneath our means.

Thus effectively an EF exponentially greater than the calculated 6 months.

Even with that I had a job offer within 2 months of selective looking, during the recession. It was certainly stressful, but in demand skills should not be discounted, as well.
corp_sharecropper wrote:
Mon May 25, 2020 11:17 pm
Tell me how you do it. Tell me where I'm wrong. Where's my blind spot here?
I do 6 months expenses. 3 cash, 3 taxable, balanced mutual funds.

3 months minimum is a reasonable, attainable amount for most American households. Though I'd be thrilled if most actually had 1 month instead of negative months.

For the calculation of months-expenses I ignore UI. I ignore precise monthly budget (I don't even have one), neither "bloated" nor bare bones. Very simple determination.

The Boglehead EF might just be the most overrated item in the forum, even more than liquidity - which kinda goes hand in hand.

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Re: For EF "months", are we including unemployment benefits & stated severance policies? And both parts of a couple?

Post by whodidntante » Tue May 26, 2020 12:05 pm

TL;DR: I think that some people make unnecessarily dark assumptions when deciding on their cash needs.

I don't have an "emergency fund" but I do have a plan for emergencies. I don't "budget" but I do keep an eye on my spending. My spending during blue skies is significantly higher than during a storm. I.e., I have several line items that I can reduce by a lot or eliminate. Since we are now all living in the least interesting episode of Black Mirror ever, I took a fresh look at my spending under both scenarios. You could do the same. I think storm spending is a lot more useful than just knowing your expenses during party time.

I agree that your household income going to zero and staying there is not likely. For myself, I am not the only breadwinner around here, and I have a strong work ethic and I'm entrepreneurial. I can find ways to create an income, though probably a lot less than during good times. And I can possibly get unemployment. I also have a yellow parachute if they decide to can me. It's like a golden parachute, but not as nice.

There is no sense planning for doomsday. Plan for realistically bad storms. Permanent, total disability is something that I can't ride through just yet. But I guess that's what retirement is if it's self imposed or if you're just too old to work.

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Re: For EF "months", are we including unemployment benefits & stated severance policies? And both parts of a couple?

Post by lstone19 » Tue May 26, 2020 1:17 pm

CurlyDave wrote:
Tue May 26, 2020 8:53 am
Back before I retired, I always put a lot more faith in an Emergency Plan as opposed to an Emergency Fund. I always started with the premise that in a dire enough emergency the entire financial resources of the family would ultimately be available to address the emergency.

I would then rank our financial assets in approximately the order of pain that it would cause to access them. It is far less painful to access money in savings than money in a retirement account -- but if my daughter has just had a life-changing, disfiguring accident, that retirement money is on the table.
...
This sums up my philosophy well. We've thought about how to structure our assets so that there is sum readily available cash and then some assets that can be converted to cash without taking too much of a hit, even during a down market. Right now, with cash yields practically zero, we've moved some what had been cash to short-term bonds. The return is better but at the risk of taking a capital loss if interest rates go up and we then need to convert that to cash.
BUT, I don't need it all on day 1.
Yep. Which is why part of how we've structured our assets so that some of our IRA funds is in a ladder of CDs with a few thousand maturing every month. Can't easily turn that into cash (without penalty) on day 1 but can over several months.

That all said, I get that some people lack the financial discipline to just think of some of their assets as their EF and instead need to actually segregate the funds in a separate account that they never touch until and unless an emergency (for some definition of emergency) occurs.

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Re: For EF "months", are we including unemployment benefits & stated severance policies? And both parts of a couple?

Post by cashisking500 » Tue May 26, 2020 3:23 pm

Coming at this as someone who was furloughed for 6 weeks during the pandemic (now happily back to work), we fortunately did not touch a dime of our emergency fund during my furlough. We have approximately $90,000 in cash savings ($60,000 represents one year of expenses) currently. Between unemployment and my wife continuing to work at 100% pay during the crisis, we were fine.

As others have pointed out, you must also consider long-term illness, etc. as other reasons why one may need to tap into the emergency fund. I would strive to have a solid 6 months saved and go from there. Keep in mind, while not ideal, you can also tap into Roth IRA contributions if things got really bad.


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Re: For EF "months", are we including unemployment benefits & stated severance policies? And both parts of a couple?

Post by petulant » Tue May 26, 2020 4:37 pm

Nate79 wrote:
Tue May 26, 2020 8:31 am
You need an emergency plan, not just an emergency fund. This plan should cover a number of different scenarios and "what if's" and how you would pay for it. Emergencies are not just loss of jobs but new roof, replacement car (or fix), max out of pocket healthcare cost, etc as well as a few of these happening at the same time (for example loss of job and need a new roof or medical out of pocket max could be very likely to happen at the same time).
Agreed. We didn't design our emergency fund based on "number of months," we designed it based on the risks of various events. We looked at insurance deductibles, layoff payments (if any), the HSA balance and assets, etc. The number right now would equate to about 4.5 months of my net take home pay, not including my wife's. I recognize worse could happen.

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