The bulk of this article is inspired by and based on Radical Personal Finance episode 481 – “Where Should I Keep My Emergency Fund?”
The Radical Personal Finance podcast is produced with high-income earners in mind, so some of the advice in the episode is not directly applicable to most of us. The mindset and reasoning behind that advice is valuable for anyone and I recommend both this episode and the podcast in general.
An emergency fund is money — in varying forms — set aside to protect against unforseen negative events.
An appropriately-sized, easily-accessible emergency fund can turn an emergency into an inconvenience or a disaster into a mere problem. Knowing this leads to two questions: how much money should we have in our emergency funds, and how should we store it?
Basic Emergency Fund
At the bare minimum, everyone should have about a thousand dollars immediately available. This is enough to buy a new tire or a beater vehicle or cover an emergency cross-country trip.
Beyond that, a man should have about $10,000 quickly retrievable from institutions.
A thousand dollars on hand will get you out of most simple crises, and ten thousand in the bank will be enough to cover a more-expensive problem. Between the two of them most acute problems can be solved or largely mitigated.
These are rough numbers and different people will have different abilities to save. None-the-less this is a good rule of thumb for the beginning of your emergency fund.
Note that I say “beginning.” A comprehensive emergency fund should be larger and more varied for nearly every man who has been working for a while.
Protect Against Unemployment
As a rule of thumb, a man should have six months’ of expenses saved up for emergencies. If you have been recording your expenses and constructing a budget you will know what this number looks like. If not, it’s a good idea to get started.
If both the man and his wife works and have an equal annual income, three months’ expenses should be sufficient because only half the income is threatened by a single job loss. If one spouse earns more then the amount of savings should be adjusted accordingly.
Storing Your Emergency Fund
Storing all your emergency money in a single method exposes you to risks that diversification will mitigate. Money can be storred physically or digitally, and some can be storred in non-financial ways altogether.
Cash on Hand is excellent for solving problems that need to be solved immediately, but is a risk for theft. Making large purchases in cash will invite scrutiny from humorless men with badges.
Checking / Savings accounts are good for making larger purchases on short notices but yield poor interest and require the institution and the power grid to be working, which can be a problem during natural disasters.
Safe Deposit Boxes can be used to store cash and other valuable items without their value being recorded in a banking system.
Credit Cards do have use for emergencies, especially if you can pay them off with existing funds that simply take longer to move. Without those existing funds using a credit card may just exchange one problem for another. Not all cards are accepted everywhere so consider multiple cards from multiple providers.
Banks and Credit Unions come in a variety of types and locations; local vs. international, brick-and-mortar vs. online. Each has benefits and drawbacks. Having a savings account in more than one bank will partially protect you from services outages or fraud at a single institution.
Certificates of Deposit provide higher interest than regular checking accounts but are locked in by time, which makes them far more useful for unemployement-type emergencies than short-term crises.
Precious Metals are useful for storing wealth in ways that are accepted by merchants “in the know” the world over, but their value fluctuates against the dollar and transportation can be physically and legally difficult in large amounts.
Supplies (such as bottled water and canned food) are a good way to store wealth in your home that don’t require access to merchants, but they are not able to go with you if you need to leave. Excellent if you need to shelter in place, useless in you need to evacuate. Sometimes it’s better to have what you need money to buy instead of the money itself.
Conventional Insurance is a good tool for protecting expensive and important items. Insurance claims can take a long time to process, but insurance is still a valuable tool in the chest.
Priority of Fund Types
We all want a good return on our investments, but emergency fund money exists primarily as a form of insurance for your protection.
With that in mind, the most important consideration for your emergency fund is Access – can you access the money in a timely manner under a variety of circumstances? The second consideration is Safety – is your emergency fund in forms that are resistant to theft, loss, or lock-down? The last consideration is Return – will the money you set aside for emergencies be able to keep up with inflation? If not that’s probably okay, but if two options differ only by rate of return, the choice is obvious.
An emergency fund is a form of insurance you use to protect your family and yourself against the unexpected negative events that always eventually pop up. Every responsible man should consider how this protection should look like for him and how to make it happen.
The podcast upon which this article is based has more and deeper content and would be a good next step for the man interested in starting his emergency fund. Visit Radical Personal Finance Episode 481 to listen to this information (be sure to read the comments), and explore the main site for a variety of well-presented financial topics.