piggy_bank.jpg
Having 3 to 6 months of expenses in an Emergency Fund is EXTREMELY important. It'll stop you from reaching for that credit card and going into debt during emergencies such as losing your job or your transmission blowing up. (a GREAT way to figure out your total needed monthly expenses is to use this category method in YNAB). But the question is... what is the best way to handle your emergency fund in YNAB?

YNAB is extremely customizable and there are many ways to have an emergency fund within the application. However, there are basically 3 methods and each have their own Pros and Cons.

ynab_off_budget_ef.jpg
Option 1: Off-Budget Tracking "Asset" Savings Account funded by an Emergency Fund category​

To do this method you simply create a Savings account at your bank for your emergency fund and add this account as a tracking account with the "Asset" type. You then fund this account every month with an "Emergency Fund" Savings category until it reaches the desired amount. Then when you have the desired amount in this savings account, whenever there's a true emergency you transfer money into your on-budget account to budget with.

Pros
  • It's hard to move money out so you're not tempted to use the money for things that aren't really emergencies
  • Keeps it off budget so you're not tempted to use it and you basically forget about it once it's full
Cons
  • Savings accounts only allow 3 transfers out a month usually (but again this may be a good thing as it discourages you from using it)
Basically, the whole idea of an emergency fund is to be there for actual emergencies. It's not to buy a new television or a new car (unless you need a new car because your car got totaled). The best way to do that is to make it harder to get to. BUT NOT TOO HARD. I'm against putting it in an investment account because you may be hesitant to take it out during an emergency and take on debt instead.

Option 2: Emergency Fund category within an On-Budget Checking or Savings Account​

ynab_ef_category.jpg
With this method, you use a category called "Emergency Fund" as your Emergency fund. The actual money will live in an on-budget checking or savings account -but the emergency fund is a category within your budget.

Simply create a budget category under your Category Group "SAVINGS" called "Emergency Fund". Then simply add to that category as you can each month until you reach your desired balance of 3 to 6 months of expenses. You can even create a "Goal" within YNAB to help you reach that desired level of funds.

Pros
  • Very easy to set up in YNAB
  • Very easy to move money out to other budget categories during emergencies
Cons
  • A little TOO easy to move money out to other budget categories during emergencies which means you'll be tempted to move money out when it's not really an emergency

Option 3: Many Emergency Fund Categories within an Emergency Fund Category Group​

ynab_ef_categories.jpg
One massive Emergency Fund category is a little too broad. There are many types of emergencies... loss of income, huge home repairs, and insurance deductibles. What happens if you lose your job and need money for that? And then your AC unit bites the dust? How do you know you have money set aside for each type of emergency? What's great about YNAB is that it's very customizable. There's no reason why you can't have an emergency fund CATEGORY for each TYPE of emergency.

Simply create a new Category Group called "EMERGENCY FUND" and create individual categories for each type of emergency under that. You can even set goals for each category as well.

Pros
  • Very easy to set up
  • You know exactly that you have money to cover each type of emergency
  • Taking money from one emergency fund doesn't make you less secure or another type of emergency
Cons
  • Similar to option 2, it's still a little TOO easy to move money out to other budget categories during emergencies which means you'll be tempted to move money out when it's not really an emergency
How do you like to handle your emergency fund in YNAB? Option 3 is the one I'm currently using as it gives me more peace of mind knowing exactly how much money I have for each event and not just one massive slush fund. Let me know in the comments how you are creating your emergency fund in YNAB. Happy budgeting!