You know the story; the grasshopper spends all summer long partying it up like a rock star while the ant prepares for the coming winter by building a shelter and storing food for the winter. Of course, winter eventually arrives and the industrious ant finds himself well-fed and toasty-warm while the improvident grasshopper simply ends up as, well, toast. The fable offers a terrific lesson for kids — and adults — on the importance of saving and hard work.
Why I’m Constantly Saving for Winter
Now, as an engineer, I occasionally have to endure business cycles where my employer has to layoff employees. It’s the nature of the industry and one that I have always taken very seriously, especially since I am the sole breadwinner for my family.
If I were laid off tomorrow I would be entitled to roughly three months of severance pay, after which I would be eligible to receive unemployment benefits of roughly $2000 per month (before taxes) — which on the surface would seem to pose a tremendous problem because our household expenses are currently, on average, more than $8100 per month.
Don’t Panic — This Is Only A Test
With that in mind, this week I decided to undergo a little layoff drill to try and ascertain exactly how much we’d have to cut back to make ends meet on unemployment benefits alone.
Luckily, the Honeybee and I have been meticulously tracking our monthly expenses since 1999, so we have an excellent handle on exactly where all our income is going.
Anyway, I asked the Honeybee to propose what cuts she would make to our household budget in the event that I was laid off.
For reasons which I will explain later, I purposely failed to give her a target figure to aim for. Meanwhile, I independently made my proposed cuts.
The results are shown in the figure below. As you can see, the Honeybee and I disagree somewhat — at least initially — on the scope and magnitude of the cost cutting. The Honeybee knocked down our budget by almost half, while I was a bit more draconian, slicing our spending plan by two-thirds.
Although we disagreed with our first pass on the size of the cuts, neither of us were able or willing to pare the budget to a degree that was sufficient to cover the paltry $2000 per month that I would be eligible to receive in unemployment benefits.
COBRA: Two Steps Forward One Step Back
For many people, one of the biggest impacts of getting laid off is the loss of employer-provided health benefits. The Consolidated Omnibus Budget Reconciliation Act (COBRA), passed way back in 1986, gives laid off employees the option of extending their employer’s health care benefits for a minimum of 18 months.
While that is good news, there’s a catch — COBRA can be extremely expensive. You not only have to pay the insurance premium that you paid before you were laid off, but you also have to come up with the amount your former employer was paying for you too, plus an administrative fee of up to 2%.
In my case, that means I’d need to come up with roughly $750 per month to maintain my benefits.
Back to the Ant and the Grasshopper
On the surface, it might seem like our family will be in a very tough predicament if I end up losing my job.
Fortunately, I’ve never forgotten the fable of The Ant and the Grasshopper. As such, even though I am very well-paid, I have always striven to live well below my means and save up for that dreaded “winter” when I may finally lose my job.
Right now I have over $50,000 in cash reserves. In the event I am laid off, those reserves will provide a lot of financial flexibility that our household wouldn’t have otherwise. (Which is why, for this drill, I was not interested in ever giving the Honeybee a cost bogey to shoot for.)
For the sake of argument, let’s assume the Honeybee and I agree to split the difference on our budget cuts — say, $3500 per month. Add another $750 per month for COBRA and that brings our total monthly expenses to $4250. So in order to pay all the bills we would need to draw down our savings by $2250, after drawing unemployment benefits of $2000 per month. At that rate, our emergency savings would last quite a long time, regardless of how long I was able to draw unemployment benefits — and those reserves would last even longer if the Honeybee took a temporary job.
The Moral of the Story
Don’t be a grasshopper and fool yourself into believing unemployment benefits will be sufficient to sustain you if you lose your job; for most households they won’t be.
I can’t imagine the upheaval that our family would face if I was laid off and we didn’t have a healthy emergency fund. By having one, though, we’ll be able to avoid — or at least postpone for a relatively long time — some extremely tough decisions that would have to be made if we were forced to rely on unemployment benefits alone.
I think every household should go through a layoff drill like this. It not only helps hone a plan of attack prior to facing a severe financial challenge like a layoff, but it is also a great indicator of how well you’re prepared should such a disaster strike right now.
Photo Credit: mickeymox