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.