Or, “Unemployment Benefits: Family Style”
O.K., you need an emergency fund — let’s get that out of the way. Having cash for minor catastrophes, like a catalytic converter that goes kaput or the high deductible on a medical bill, is essential. This story isn’t about that.
But lately, I’ve been questioning the conventional wisdom as to how big the fund should be. Emergency funds are a hot topic right now. Companies are still bleeding jobs, and the average length of unemployment hit 29 weeks in December. Unemployment insurance in many cases covers less than half of what you earn. And since the job market is so poor, personal finance pubs and blogs have recommended upping your emergency fund to a year’s worth of expenses. That’s tens of thousands of dollars sitting in a cash equivalent account.
I’m really lucky. I have a pretty tight-knit family, and each of us are financially solid. I know my parents have a significant emergency fund, I have a year saved up, and my brother—who just started work—is building his up. Between the four of us, that’s literally hundreds of thousands of dollars earning next to nothing.
I faced a minor emergency a few weeks ago that required dipping into my fund. But my parents also offered to help out. I know if my brother faced a problem, both my parents and I would be there to help. This doesn’t even account for the emergency funds of my grandmother or cousins. Just counting my immediate family, we probably have 24 months of living expenses saved (that’s if I became unemployed). My entire familial safety net could probably cover more than five years.
So are our emergency funds really too big?
The job market’s bad. But do we really think my dad, brother, and other relatives face a significant risk of losing our jobs at the same time? Pretty unlikely. So why not just ditch the pretense and establish a “family job insurance plan” that would cover any of us if we lost our jobs?
The concept is not so different from that of traditional, employer-based health insurance. Different parties pay different premiums based on their incomes. You establish a high deductible—say, above $2,000. So the collective fund only covers a huge emergency such as an extended job loss. You still keep your own, personal emergency fund for minor problems, like a blown tire.
For the sake of convenience, and since we all already have our own emergency funds, we’d probably just lump parts of our emergency fund together. Its total size would be a little larger than two-thirds our current total, with the goal being the ability to cover two of our incomes disappearing for a year. And the extra money that we save by not having as large an emergency fund as we used to have can go in a higher yielding, but more risky investment that wouldn’t have been appropriate if the funds were marked for an emergency.
I haven’t quite worked out how I’d structure “claims” once someone does need to draw on the fund. Like unemployment insurance or disability insurance, I’d probably want to make payouts that improved the unemployed family member’s standard of living but didn’t completely make up for their lost income. That would increase their incentive to keep looking for a job. Once they’re employed again, I’d probably also want to structure premiums that would return the emergency fund to full power quickly.
Anyway, this idea might seem out there, but it starts to paint a picture of emergency funds far different than the gigantic slush funds most personal finance press and blogs suggest you build up. Indirectly, it also makes you more accountable to keeping the emergency fund for emergencies only. I’m not going to let my parents or brother dip into the fund for a new car. They wouldn’t let me do that either. Whereas if I was in charge of my own fund, I’d be more likely to slip up now and then.
I’d be interested to hear if anyone else has considered how their “social” safety net makes the traditional emergency fund less important than at first blush, and if anyone’s tried different tactics to address it. WiseBread has other ideas as to why you might make you fund smaller.