Comments on: Sumo-sized emergency funds: Are they necessary?

By: K Smith

K Smith — Sat, 10 Apr 2010 18:48:53 +0000

Promoting the idea of a family job insurance plan assumes that such arrangements do not already exist. They do. Growing numbers of families are already helping each other in every way they can, including using emergency funds. When they run out of money they are moving in with each other.

If your goal is to be debt free, it makes sense to have an emergency fund to cover not only loss of income during unemployment, but also unforeseen expenses such as high dollar car or home repair. And given the upcoming changes in credit card regs, when card issuers will be able to charge sky high rates, it seems foolish to plan to go into debt to cover these kinds of expenses. Having an emergency fund set aside to cover them makes much more sense.

I don’t view emergency funds as giant slush funds. I view them in much the same way as real estate investors set aside a portion of their operating budget for replacements and reserves. Even in the best of times, unforeseen things happen. Plumbing breaks. Transmissions die. Teeth decay and need root canals.

We are all now living in times of great uncertainty. During times of uncertainty, the likelihood of becoming a victim of unforeseen circumstance increases. Companies continue to announce layoffs. Last week our Treasury Secretary Mr. Geithner said, “The unemployment rate is still terribly high and it’s going to stay unacceptably high for a long period of time.”

In our current environment it seems foolish to advocate reducing an emergency fund. It seems to me that prudence in uncertain times of protracted high unemployment would dictate setting aside a bigger emergency fund, not a smaller one.

By: Pop

Pop — Mon, 08 Feb 2010 23:41:25 +0000

Hey, thanks for the comment. You’re right. If everybody loses their jobs at once, you’re in trouble–just the same way that if an insurance company insures a bunch of houses on the Florida coast and a hurricane comes, they’re in trouble. Just as an insurance company spreads out its risk across geographies, I’d want to make sure my family worked in diverse industries before setting something like this up.

You can “what if” yourself to death though. If I said, “Have a years worth of expenses saved up,” someone could respond, “But what if you’re unemployed for two years?” All we can do is set up an emergency fund that factors in the probabilities of unemployment length, and if it’s a family fund, the probabilities of people losing their jobs at the same time.

Thanks for making me think that through more! Good luck in your job search.

By: WellHeeledBlog

WellHeeledBlog — Mon, 08 Feb 2010 23:11:57 +0000

This is an interesting way of looking at unemployment insurance, but I’m not sure if it’d work. What happens if 2 people in your family loses their jobs at the same time? Or one after the other? In this economy, especially if they are in volatile industries, this scenario might not be so unlikely. I have a big emergency fund and I’m approaching 6 months unemployment. I wouldn’t do a family-style emergency fund just because there are too many land-mines dealing with family and money, especially during a stressful time such as unemployment.

By: Pop

Pop — Fri, 29 Jan 2010 05:01:19 +0000

Hey Moom,

Thanks so much for commenting. Yeah, I totally agree. And like I said, I’m lucky that my family is pretty well organized financially right now. Sometimes I wonder if there could be a service to formalize a family emergency fund somehow, much in the same way that Virginmoney tries to formalize loans that friends and family make to each other. I bet a lawyer could write it up, but the money spent on him would probably negate the benefits of pooling the emergency fund together in the first place.

By: Moom

Moom — Fri, 29 Jan 2010 02:57:29 +0000

Well I know I can borrow money from my mother as a last resort. I’ll never end up homeless. But it is the last resort usually. Whether your idea will work depends on how responsible/reliable family members are. Will they really pay back the money they took out? Or will they keep putting it off etc? In the latter case this will result in family disputes. It all depends on how much you trust each other or maybe not trust but knowledge about responsibility.