Emergency Funds

In response to a comment from one of our readers, I wanted to take a moment to discuss the ins and outs of establishing an emergency fund.

The first thing is that emergency funds are unique to individual circumstances. Everyone has different needs in terms of their regular budgeted expenses, general financial solvency, and perhaps most important, comfort levels.

The reason for establishing the emergency fund also makes a difference. For instance, you might want a bit of liquid resources so that you have a bit to fall back on if an unplanned trip for family illness or the like comes up. Many people also establish emergency funds to ensure that you’ll have enough in case of job loss. For the sake of covering all of the bases, we’ll look at aspects related to emergency funds for a variety of reasons.

Regular Budgeted Expenses. Obviously you’ll have less of a need to dip into potential ‘emergency’ funds, if you have good control over your regular budget. This means budgeting for intermittent expenses such as property taxes, tires, insurance, etc. If you’ve already got these sorts of items built into you budget, then you’ll feel the crunch less when they arise.

Account Cushion. I’d also say that it matters on how much extra you keep in your account. James and I tend to save and invest any remaining funds in our checking accounts pretty regularly. This means that there is a less of a cushion for unexpected expenses. However, you might already have a bit of a cushion available for smaller emergencies without having a specific account for such occasions.

What you Actually Spend. Another thing to keep in mind is that when people say you might want six months of money to fall back on, in case of unemployment or illness, this means your actual expenses, not what you make. Thus, you should budget out what your minimum expenses are each month – not including investments or optional payments. You will obviously have to cut back and live much more frugal if you do find yourself out of work.

Probability of Finding a Job. This one may be harder to measure, but generally it isn’t hard to get a sense of what you might have to plan for in terms of finding a new job. This will depend on where you are looking, as well as the field you work in. For instance, in Portland, Oregon in a bad job market it took me three months to find a job. In DC, a year later, it took me a month. The general average that is suggested, is between three and six months to find a new job.

Financial Solvency. This factor also plays in heavily, because while you may not have liquid resources, you might not feel the need to have as much set aside if you know you have the option to sell stocks or dip into other means of savings in a relatively short period of time. For instance, for us we have enough in stocks to last us several years, thus not making this as much of an issue for us.

Comfort Level. This is also key, because you want to feel secure. For James, he would be fine with having nothing liquid, as well as not having a credit card. For me, however, I feel more of a need to have a bit of a reserve and definitely carry a credit card with all of my travel. When you travel as much as I do, it doesn’t take long to learn that one delay may cost you a bundle.

In establishing our emergency fund, we’ve mixed all of these factors to make a plan that works for us.

• Given our financial resources that we could tap into if needed, we don’t have a specific emergency fund in case of job loss or illness.
• We’ve established $5k as a good bench mark that most emergencies would fall under this threshold.

Once we have met our goal of establishing an emergency fund, we will divide up the funds where they make sense to us.

• We will put $500 in Miel’s Electric ING checking account so that this can be truly liquid. If the funds were elsewhere they couldn’t be accessed without logging on to the internet; not always an option while traveling overseas and in the case of an emergency. Credit cards will help as a cushion, but they don’t provide cash.
• We will put another $500 in a regular money market account in ING, making a bit higher interest rate than the checking account.
• Lastly, we will put the remaining $4k in an ING Money Market Fund, making just under 5% and still being easy to convert to cash when needed. This will make me feel better for having something specifically set aside, while at least beating inflation.

Overall it comes down to looking at these factors and seeing what makes sense for you. I wouldn’t blindly accept the advice of a financial advisor if you don’t feel that their suggestion is meeting your needs. I would however make sure that you’ve got enough of a safety net to make you feel safe.

Readers: We’d love to hear from you on how much you might keep in an emergency fund, how those funds are kept, and what you use them for.

Cheers,

Miel