Does Unemployment Income Change How Much You Save for an Emergency?

by Kevin on April 14, 2009

We’ve talked a lot about unemployment and emergency fund lately. Today I’ll continue that trend and discuss your anticipated unemployment income. We’ll talk about Larry the cable installer.

Larry has worked for three years for the same company. He earns $14 per hour and if he works more than 40 hours per week he earns time and a half ($21/hour). Larry and his wife have saved diligently over the years and have a six month emergency fund in place. If both were to lose their incomes at the same time they could cover six consecutive months of their fixed expenses.

Larry is talking with a friend who knows a lot about finances. They get into discussions about emergency funds and unemployment. His friend points out that while he is unemployed, Larry and his wife would be able to bring in a little bit of income each week from unemployment benefits. His friend argues that because of this he should lower his emergency fund requirements and use that money for some other use.

Should You Change Your Emergency Fund Based on Anticipated Unemployment Income?

The question here is whether or not your anticipated unemployment income should affect the amount you save for emergencies.

Let’s say Larry’s barebone minimum monthly expenses come to $2,000 per month. A six month emergency fund would be $12,000. He and his wife have saved over the years and have that money sitting in the bank earning a smidgen of interest.

But if Larry were laid off he would be eligible for unemployment. Let’s say he would draw $200 per week in unemployment — that’s $800 per month. This additional income would reduce the amount he would draw from his emergency fund from $2,000 per month to $1,200. Suddenly that $12,000 emergency fund grows from six months to ten months.

A pretty significant difference, right?

How Your Emergency Fund Would Change

If Larry wanted to adjust his emergency fund to take unemployment income into account, he would need to do the following:

Original emergency fund: $2,000 x 6 months = $12,000

Unemployment income per month: $800

New emergency fund needed: ($2,000 – 800) = $1,200 x 6 = $7,200

Difference in emergency funds: $4,800

That’s a significant amount of cash that Larry and his could put toward debt or other saving goals. As tempting as that looks, I think it is a terrible idea.

Don’t Count on Unemployment Income

I am very hesitant to recommend anyone rely on unemployment income. There are too many variables and I think it adds a layer of risk. If you have a solid six month emergency fund saved up, you know you’ve got everything covered for that period of time.

Yes, you will most likely draw unemployment, but I’d rather know the money was in the bank rather than hoping the check comes on time.

As to the risks of filing unemployment: you have to be eligible. Each state has different eligbility requirements. Each state calculates your unemployment benefits (what you would get each week) differently. You might calculate incorrectly and come up short.

At the end of the day the unemployment income should be seen as a nice perk each month. I’d rather get a nice surprise with the unemployment money than relying on it to come in each week.

{ 10 comments… read them below or add one }

Cathy April 14, 2009 at 9:34 am

Relying on unemployment income is a bad bet. In Washington state, an employer can contest your unemployment benefits, which will delay your receiving a check. They are also an at-will state, which means you work for an employer at your own will. They also employ you at their own will. They can fire you at any time, with or without cause, and contest your unemployment benefits.

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Finance Nerd April 14, 2009 at 11:53 am

Another consideration is that he will now likely have to pay his own health insurance, which he can use the unemployment money to cover. Those expenses aren’t really included in his monthly minimum, so he really needs more than he thinks, and unemployment might cover that difference.

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Hot Money Mess April 14, 2009 at 3:05 pm

Hey I heard about your blog on Poorer Than You and decided to come check it out…I wish I could have been more like you about college money management!

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tom April 15, 2009 at 7:03 am

Even if you were to count on the umemployment income, what are you doing with the money that you could have saved? Are you just spending it on anything and throwing it away instead of putting it to good use.

I mean you can save, put into retirement savings, start a business, etc.

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Diane April 15, 2009 at 11:49 am

I mentioned this in a comment recently about having a 6 month e-fund, but considering the addition of unemployment benefits to your income.

I finally have a 6 month emergency fund in place and I intend to keep it there. However, it does offer me some relief to know that if I were unemployed I would very likely receive unemployment benefits, which would stretch my fund to several additional months.

I would not recommend spending down the e-fund in anticipation of unemployment benefits, but would regard the unemployment funds as a possible additional cushion.

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Golfing Girl April 15, 2009 at 12:58 pm

I totally agree. Unemployement is a chicken that hasn’t hatched. I apply this approach to my retirement goals as well and do not include my pension or social security–those will be the “perks” you mentioned or will cover unexpected expenses in my retirement.

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Kevin April 19, 2009 at 12:01 pm

A bit late in responding to these comments. My apologies — been quite busy!

@Cathy: You are spot on. There are many ways the unemployment benefits could be denied or slowed down. It isn’t a sure thing.

@Finance Nerd: Good point with the health insurance issue. Hopefully if you are married then you could switch to the spouse’s insurance, but of course that depends on the situation.

@Hot Money Mess: Thanks for stopping by! :)

@tom: Exactly. That’s why it helps to have a budget/plan.

@Diane: I agree — see the unemployment as additional cushion to help stretch that fund out as far as possible, but not seeing it as a sure thing.

@Golfing Girl: Great phrase! I completely agree about social security. Will be happy if it is there, but not relying on it at all.

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Roger April 21, 2009 at 10:52 pm

I’m going to play devil’s advocate here, and say that yes, unemployment income should affect how much you save for emergencies. An emergency fund is supposed to cover expenses above and beyond what can be covered by other income. If you were working two part-time jobs and lost one of them, the continued income from the other would still be incorporated into your budget. Having the second job would give you extra security, in much the same way as unemployment, and mean that you could lower the size of your emergency fund.

All of that said, I will admit to being rather biased: I don’t live in a right-to-work state, my former employer had no history of fighting employees seeking unemployment, and my current benefits more than cover my regular expenses (including health care) with enough left over to continue building up my emergency fund (in case I am still unemployed a year from now). Given different circumstances, I probably would have acted under the assumption that I wasn’t going to be getting any unemployment, as well.

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Kevin April 22, 2009 at 8:46 pm

@Roger: Wow, those are some awesome benefits. I wonder how many states are like that… the one I live in definitely is not.

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Roger April 22, 2009 at 11:03 pm

They’re not so much awesome benefits (they cover less than half of the gross salary I was making at my last position); I just live rather cheaply :)

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