Are Accrued Vacation Days a Form of an Emergency Fund?

For the past few years I have not used all of my vacation days. My company's policy is that I can roll these days over to the next year (unlimited), get paid for them, or any combination of rolling over and being paid. I've always rolled them over for a couple reasons:

• I have been planning on taking an extended vacation. I'll be using 16 days or so this year during my cruise to the Caribbean.


• IMO, having vacation accumulated is a form of an emergency fund.

My thinking on the second point is that we all have (or are supposed to have) X months' of living expenses saved in case something happens to our employment situation, right? Let's say it's six months (though I've posted that actual needs could be higher or lower than this based on your specific situation.) So you can literally have six months' of expenses saved OR you can have five months' of expenses saved plus one month of vacation days, right? Either way, you're covered for six months.

Is this a correct way of thinking of this or am I off my rocker? And does anyone really care or is it just me who thinks of these mundane personal finance topics? ;-)

Comments

[Kyle]

I've never really thought about it that way, but it does make sense so long as your employer has a policy of paying out for unused vacation time upon separation. I've worked for companies that didn't. Also, in the event your company goes bankrupt you might be out of luck as well. I'm not sure vacation time is quite cash in the bank.

[Jonathan]

" So you can literally have six months' of expenses saved OR you can have five months' of expenses saved plus one month of vacation days, right? Either way, you're covered for six months."

Don't confuse your income with your expenses...For you, me, and most FMF readers, one month of pay in the form of accrued vacation time is worth well over one month of expenses.

Anyway, I agree in concept so long as there is no way for the company to deny you the payout (presumably that's the law, but I honestly have no idea).

[Tyler S.]

As long as your company still will pay them once they have been rolled into the next year, which is what it sounds like from "any combination of rolling over and being paid", you've found a unique way to increase that emergency fund!

Like Kyle said though, there are still some details to look into to make sure. I'd be interested to find out just how well-covered you are with this if you were to dig into those details with your employer!

[G]

I used to consider my PTO this way, but now we've switched to vacation days and can only carry 5 over to the next year. Probably to prevent your diabolical plan:)

[jim]

Interesting way to go. I would say that there are probably some situations where you may have an emergency and not be able to cash out that money. You can really only cash out vacation days if you are no longer employed. You could get sick and end up on medical leave but not want to terminate your employment. But in general you can't plan for any and every possible emergency. Probably the largest financial setback most of us risk is losing our job outright and cashing out vacation then would certainly help.

[JimL]

I think it can be a partial offset. However, having funds set aside for other events, such as a roof replacement, etc is still needed. Our company has a severance plan that pays one year salary and target bonus if the company terminates employment. As such, I have less in cash versus what I would have if the severance plan was not in place.

[FMF]

Jonathan --

You are 100% correct! I hate it when people confuse income and expenses this way and I did it myself! Ugh!!!!

[JP]

For me, no. You can't use a vacation day to pay for a medical bill.

Also, I wouldn't trust my company to pay out upon termination. I view vacation as use it or lose it. 40 hours a week is already too much of my time as it is.

[Jeff]

Yes, those vacation days are an asset to you and a liability to your employer (I'm not an accountant). It's a bit of an illiquid asset, as pointed out by others.

Your company has quite a liberal vacation policy. A company I worked for many years ago changed their vacation policy because employee vacation days became too much of a liability on their books. They had infinite vacation accrual at the time but changed it to a vacation bank that maxed out at 150% of your yearly allotment. A number of employees with huge amounts of vacation saved up ultimately lost weeks and weeks of vacation (after a transition period) without being compensated. I'm guessing that the company effectively erased millions of dollars off of their books!

[Jo]

I agree with what has been said before...it will work if your company will allow it and actually pay it out. I'm quite surprised your company still allows unlimited vacation day accrual. I knew a guy (now retired) that worked for the state DOT for decades, when he retired he had like 6 months of vacation and sick leave accumulated...which is no longer allowed but he was grandfathered in.

For me, I save as many days as I can so that I can use them for maternity leave in the future.

[lincmercguy]

As others have said, as long as your company pays it out if you quit, get laid off, or fired. I believe this is required in most states. Just remember, it doesn't apply to sick, personal, floating holidays, or flex time in most companies. That's why I always took those types of days first (except sick) instead of vacation.

It's also nice to have vacation time that gets paid out when you quit to help pay COBRA expenses.

I usually had a lot of sick time and some vacation time built up in my last job (wasn't sick that much). It was nice to have all of them when my son was born, I was able to take almost a month off without any gap in pay.

In my new job, vacation days don't roll over, which is kind of a bummer. However, they combine sick and personal days into flex time, so I don't have to be sick to take it. Plus, I can work at home, so if I'm not that sick, but don't want to spread germs, I just work at home.

[Mark]

I have always thought about this the same as you. Also, there's a built in benefit in that year to year the value of a vacation day increases by any annual raise you recieved in pay. So it's not only an emergency fund, in some ways it's a savings account.

[Dan]

Good financial advice says that you shouldn't invest too much of your retirement savings in your company in the event an Enron type situation occurs (you lose your job AND your retirement investments take a big hit). Well, if part of your emergency fund is ALSO tied up in your company, you're risking even more...

I'm sure the risks are low but I'd rather have the money in a bank as opposed to an IOU.

[Mark]

@Jeff: Your accounting is correct, and my company also changed the rules midstream. They used to allow us to accumulate up to 50 days off, but cut that to 25 after the 2008 financial crisis. Also forced people to use various percentages of their balances in a short time - we were told in November to use half of current balance (whether 50 days or 5) by yearend or we would lose it. Gave them a nice boost to yearend results.

Also, if we are fired "for cause", then vacation is not paid out. So it can be close to an emergency fund but not quite.

On the plus side, employees with many years of seniority are eligible for 6 months salary as severance.

JimL's point above raises a question. Emergency funds are based on income (or expenses, as Jonathan pointed out to FMF) because most people assume they are to be used during unemployment. If not for that, then how much should they saved? The cost of a new roof? A new car? A million dollar lawsuit?

I have always assumed I need some sort of buffer for unscheduled one-off expenses. But how much?

[SF]

I say no for one key reason: What happens if your company goes under?

Yes, the vacation days are accrued and have to be paid out upon separation from the company. But if the company files for bankruptcy, then you have to go through the claim process as a creditor. You just lost your job AND your "emergency fund" all in one fell swoop and it'll be at least months, if not years, before you get paid out on your claim, assuming there's enough money in the bankruptcy estate to do so.

Maybe as a supplement to your actual emergency fund (the 5 months expenses, 1 month vacation) it'd work, but not as the primary emergency fund.

[PEG]

I try to save some PTO (paid time off—vacation, sick and holidays) every year for a couple of reasons. My company allows carryover of 320 hours every calendar year. So I think of it as a kind of saving account. I can use it for many things including paying health club dues,make up the difference between disability pay and full paid if needed, care for a sick family member, take an extended vacation or get paid out at termination of employment. Also, IMO it accrues interest because I have earned it at a lower pay and would cash it out at a higher pay.
Some of my coworkers burn through their PTO, like their money, and never seem to have enough

[Jessi]

IMO, in general if you can get paid for those vacations days then they can count as part of your emergency fund. But it depends on the rules about getting paid for those days...

Can you decide tomorrow you want to get paid, or do you have to decide at the end of the year? Can you get paid for some and roll others over? How quickly can your company turn around the payment for these days, will it take 6 months?

If you can't liquidate those vacation days pretty quickly then I'd say they can be a nice supplement to your emergency fund, but I wouldn't rely on them too much. They'd be useless if you need some of your emergency fund money for a busted water heater and you can only get paid for vacation days at the end of a year or only if your employment is terminated.

[Tato]

I view the unpaid days as part of my emergency fund. As having left a few different companies (both voluntarily and unvoluntarily) my accrued PTO has always been paid out with my last pay check. I didn't think employers had a choice to pay out accrued PTO (unless they specifically have that specified in the employment contract).

I second what PEG mentioned when she noted that the PTO in a sense accrues interest. I view it the same way. Since my salary increased 73% from when I first started with my current employer, I view my accured PTO balance from the first year as earning 73% return over the last 6 years. Not too bad in my book,

[Matt]

Depends on your severance package. If you were let go and you only get one week severance ( what I would get) than yes count it as part of and emergency fund but as a bonus.

In reality the only way to get that money is to actually use the vacation, leave or get let go.

What if the employer changes the policy and it becomes a use it or loose it policy. You could screw yourself by being forced to take that time.

[Bad_Brad]

In terms of the risk of losing your job, yes, I agree, vacation pay (plus whatever severance you would be legally entitled to) are valid parts of an emergency fund.

But keep in mind that an emergency fund is needed not just for the risk of losing your job. There is also risk of accident, serious medical issue, etc. Your vacation bank does not help you in those cases.

[Carol]

As a single person with no second income to fall back on, I definately count sick, vacation, and personal days (I work for local govt.) as part of my emergency fund (but not exclusively). Why wouldn't I?

[Kenny]

ABSOLUTELY. I am accumulating and staying close to the max allowed for almost 2 years now thinking that this slowing economy could call out my employee id at anytime. And, therefore, if that happens, I will have exactly 4.5weeks of pay coming to me to find a new job, pay for emergencies and also give me that feeling of 'having a buffer' to look for a good replacement job (not sure if that concept exists).

Of course, in the meantime my resume is updated, and am searching for a new job. So, not counting on using the 4.5weeks, but those 4.5weeks hopefully will become money that I will be able to invest towards retirement.

I am already sitting on 104 weeks of Emergency Funds, but, I want to have the feeling that if the company gives 8 weeks of severance and I have 4.5weeks, then I will have a good buffer to rev-up my job hunt and find a job within that time frame without fail.

Kenny

[JQ]

I would consider Vacation/PTO time as a fractional part of an EF. Cash is always king.

One thing I haven't seen anybody mention is the implication of taxes upon payout. You will be taxed at your nominal tax rate when you get paid out for vacation/PTO upon leaving (I believe it would be treated as normal income from your company).