Updated on 04.30.11

An Emergency Fund Is More Than Just Money

Trent Hamm

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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  1. marta says:

    “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.”

    This still doesn’t make sense. I’m single and I don’t have a partner to fall back on when something happens. And yet, according to this rule, I should have an EF of ONE month’s living expenses and that is it?

    It makes more sense to aim for X (X being whatever you are comfortable with) months of *household* living expenses, regardless of how many dependents you have!

  2. marta says:

    PS: I agree about the “tools” aspect of the post, though, even if a few things don’t apply to me. Not everyone has got a basement to store all that stuff bought in bulk…

  3. Cheryl says:

    Marta, Think about under the bed, under your shoes in the bottom of a closet. Do you have empty air space in a cupboard where you could add a shelf?

  4. valleycat1 says:

    We live in earthquake country, so we keep some extra supplies on hand, & could probably go for quite some time just living out of the pantry, but I don’t buy in bulk. The main thing I have stocked up on is bottled water (gallons, not individual sized) & some bleach (which can be used to make water safe to drink) – clean drinking water is always an issue in a disaster.

    For more individual emergencies, I’d never thought about these items as part of the emergency fund, so thanks Trent! We’re pretty well set in all these areas, and I know that when I was facing a series of medical treatments I was more concerned with getting some of these things in order than saving up cash (we fortunately have a great insurance plan).

    One thing I would add to Trent’s list for those with traditional jobs – don’t fritter away sick leave – let it build up, as it’s a huge part of what got us through my medical treatments without having to go without pay too. [I know some people who ‘earn’ a day’s sick leave every month who diligently ‘use’ that day each month as earned time off. Then when major medical issues come up, they have to go to other employees seeking donations of sick time, or take unpaid leave.

  5. marta says:

    Cheryl, I have got a well-stocked pantry, so that is not the issue. I don’t like “clutter”, and I have neither the space nor the will to buy in bulk. I prefer to have 3 different boxes of cereal than a dozen identical boxes. It makes more sense for me to just have some extra stuff on hand (food, batteries, soap, work supplies, etc) so that I can manage for a while in the event of, say, an earthquake or something that prevented me from running my usual shopping errands.

    If I lived in a 2000 sq foot house, as Trent does, maybe I would buy in bulk and keep the stuff in a basement or whatever. But I live in a “tiny” apartment, so I have to adapt. ;)

  6. rosa rugosa says:

    I never even thought about an emergency fund until I started reading TSD & GRS a couple of years ago. So I’m grateful to Trent, JD and some others for inspiring us to build up a respectable EF that helps us to sleep nights.

  7. Fiona says:

    That is a great list! This is the sort of ‘Life Skills’ I’d like my kids to know and have. Definitely going to become a ‘check-list’ for us to work through.

  8. Amy says:

    @Marta – I think the need for a smaller ER for singles is the assumption that you have more flexibility and therefore will not be in financial crisis as long. A single person would be more able to take a second job, or move to a cheaper living situation for example. Not saying that is always the case, but I think that is the thought process.

  9. Amanda says:

    I too think a single person or a one income source family should have a larger emergency fund.

    If one spouse loses their job but the other has one they can probably employ frugality tips and be fine with unemployment and food stamps. What’s a single person to do in the same event?!

    Since my spouse is the main “breadwinner” and I keep a part time, seasonal job just to keep my resume current we build up his leave like crazy in the event he loses his job (unlikely) or he needs to quit (most likely to leave town for volunteer work). He only works 3 days a week though so it’s not like he usually needs to take time off.

  10. marie says:

    I think that you should view your emergency fund as an amount that can sustain your family ‘unit’ (being 1 or 5 people) for x amounts of months you feel comfortable.

    In my situation, two months would probably be enough, but that is because I live about 45 minutes away from my parents, and that if I was really stuck, I could give my month’s notice, and have my parents come with the truck and pack up my entire apartment, and then live with them for a few months while I find something else.

    However, if I was hours from my family or knew I couldn’t count on them, then I would definitively want more like 6 months.

  11. Karen says:

    I am also a single woman living in a one bedroom apt. For the past 2 years I have been saving money with coupons (definately a skill, LOL)and stockpiling. I really appreciate the feeling that my emergency fund is not only in money. I don’t need to purchase any personal/home care items for at least a year and could be comfortable with my pantry for about 6 months, not really happy mind you, but livable, and that’s the point. Other than that, my relationships include a couple of men willing and able to take care of my car (Talk about a blessing!)and the ability to move into a roommate situation any time I need it.

    Thanks for the reminders that I have more than I tend to realize!

  12. Georgia says:

    Valleycat – I was so glad that I had not used all my sick leave when my husband came down with cancer. I had over 600 hours built up and was earning 120 a year through the next 6 1/2 years. I had about 99.75 hours left when I retired. That was a benefit I was so grateful for all those years. I was on FMLA and still able to be paid for my time off.

    I live alone now, since the death of my husband. I am out of debt, have an emergency fun to cover another car and any major upsets, and my small bedroom in my dbl wide trailer has been turned into a storage room for food and supplies. I have 4 shelf sets of 4-5 shelves each and they are set up per expiration dates. I have 8-10 containers of coffee I purchased at $5-6 each. I also have about 6 large containers of bleach, about 15-20 gallons of vinegar, 15-20 boxes of cereal and a large supply of personal items.

    I feel it is good to have this emergency stuff because if someone around me needs help, I am at the ready. I believe the Mormons are good at having stuff on hand and renewing it as they use it. I learned this from a coworker and have tried to follow it to some extent.

    Thanks Trent for reminding us of our needs. It is especially brought to mind this week, as my daughter and son live near and work in Huntsville, AL.

  13. Holly says:

    I didn’t think one needs to be considered ‘well off’ or ‘very well off’ to need things like disability insurance, long-term care insurance or umbrella insurance. I thought the idea of insurance was to protect the loved ones in your life (and yourself) from losing what you have worked hard for.

    Umbrella insurance would protect your assets (i.e. house, savings, and maybe even future earnings) from being wiped away by a lawsuit (as in, for example, if your teen gets into an awful driving accident and deaths, serious injury, and/or property damage results). Auto insurance will only protect up to a limit, whereas umbrella limits are set usually quite a bit higher).

  14. Kate says:

    #4 valleycat1:
    agree with this about sick leave. Too many people view it as extra vacation days. I would rather retire with unused sick days than be sick and not have enough.

  15. Jonathan says:

    @Marta (#1) – Here is my take on the emergency fund guidelines. 1 month for every person in the household is a good minimum to aim for, but is just a starting point. Some people will determine it is sufficient to meet their needs, other will determine that they need more. The point is, if you have no emergency fund, this guideline is good to get you started. Since you’re single, if you’ve achieved the one month’s EF and aren’t comfortable then you should certainly increase it to the point where you are comfortable. It would be silly for anyone to live with an EF that doesn’t make them comfortable just because it meets Trent’s guideline.

  16. littlepitcher says:

    Do have enough cash to survive the loss of any of these, if at all possible.
    If you doubt this, look at the tornado survivors. Paid off mobile homes–gone. Emergency supplies–gone. Autos–gone. Many, if not most, insurance companies refuse to insure mobile homes, and the rest insure them only if they are under five years old. These are low-income working people who tried to achieve financial independence, and everything they achieved is rubble.

  17. Tanya says:

    I had never thought of skills as “emergency” resources, but you’re right, they are resources. Thanks for expanding my view of what “being prepared” really means.

  18. eva says:

    Re: sick days, thankfully my employer has a “sick leave bank” of donated sick days from participants which one can borrow from once you run out.

    But that won’t help me if I lose my job.

  19. gail says:

    Be careful about saving vacation/sick hours. In NJ, your employer is not obligated to give you unused vacation/sick hours. If the company closes/goes bankrupt, you may be out of luck.

  20. Annie says:

    I think this is a good article and it was well put together.
    I am single and pay all my bills solo. I could never be comfortable with a 1000.00 emergency fund. I feel more comfortable if i have 20,000 to 30,000 as an emergency fund. What if I get laid off and i can’t find work for a year, do i want to depleat all my savings, this way i will have enough. As far as buying in bulk, I love BJ’s for laundry detergent, water, ketchup, oils, etc. when you buy those products in bulk, chances are it won’t go bad and it will last long.

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