I often talk about emergency funds and how useful they are here on The Simple Dollar. Here’s a quick summary of them, for people new to the site.
An emergency fund is a pool of money you can easily access to take care of short-term problems in your life, such as a car repair or paying bills during a short unemployment period. A good emergency fund is one that’s liquid (meaning you can easily withdraw the cash when you need it) and doesn’t put the balance at risk, while returns on that money aren’t as important. Thus, a savings account is a great place for an emergency fund. Everyone should have an emergency fund of $1,000 in place, and that should be the top financial priority if you don’t have one. If you don’t have any outstanding high interest debt (anything above, say, 8%), build your emergency fund so that you have at least a month’s worth of living expenses for your family for each dependent you have. So, if you have five dependents (you, a spouse, and three kids) and no high-interest debt, you should start building up an emergency fund equal to five months of living expenses.
However, I’ve come to realize that cash is just one small part of a successful emergency fund. A true emergency fund is broader than just cash. It’s any resource that helps you survive an unexpected event in your life.
Here are some tools everyone should have in their “emergency fund.”
Life skills Can you change a flat tire? Can you fix a broken toilet? Can you grow your own food? Can you prepare a decent meal at home? The more skills you have along these lines, the easier it is to survive during an economic downturn or a natural disaster.
Professional skills Are you an effective public speaker? Are you a good time manager? Are you good at managing information? Do you have marketable skills, like the ability to rebuild an engine? These will all help you if you’re trying to put a career back on track after a job loss.
Completed work Many times, an emergency has come up – a sick child, for one – and I’ve had to rely on already-completed articles when I can’t write for a few days. At my previous job, I had many scripts and other tools set up so that, if an emergency occurred, some of the key parts of my job could easily be handled remotely. What things do you have in the bank in case of an emergency? Do you have a day or two worth of emergency materials in place at your workplace?
Relationships Do you have good relationships with a lot of people in your field, particularly those that work for other employers? Do you have a wide array of friendships in your community and in other areas? These relationships will provide a safety net for you when you stumble – and eventually, you will stumble.
Insurance Do you have health insurance? Do your family members? Do you and your family members have life insurance? If you’re well off, have you considered long term care and disability insurance? If you’re very well off, what about umbrella insurance? When things go wrong, insurance can take the venom right out of a snakebite.
Reserves We buy in bulk, not just so that we’ll save money on each item, but so that we’ll have items in reserve in case something happens, like a severe financial shortfall or a natural disaster. What do you have on reserve in your basement?
Energy I learned long ago that robbing Peter to pay Paul via not sleeping enough almost always leads to regret. I work with less quality, I’m more cranky, and I don’t handle crises well. Simply sleeping well at night and getting adequate well-balanced nutrition contributes to an emergency fund of your health, alertness, and well-being.
Every day, we’re given many chances to prepare for whatever may come in the future, good or bad. A little bit of preparation now can make the future a lot less painful without sacrificing any of the opportunities of today.
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