Emergency Fund Primer

What is a personal finance site without content on emergency funds? I won’t confirm or deny that personal finance bloggers have to sign a contract that obligates us to write at least one post on this. The way I’ve decided to tackle this subject is to write multiple articles on it. In today’s BREAD talk, I will give a high level overview of emergency funds.

I’m sure that all my well-informed Duc-Hunters (yo, I just made that up!) have heard this stat: a whole grip of folks can’t afford a $400 emergency. We can debate all day on how capitalism and labor exploitation and suppressed wages contribute to that fact. Heck, we probably will get into that in a blog post. Whatever the cause may be, the fact still remains folks don’t have emergency funds.

I’m warning ya’ll right now. I am a bit of an outlaw when it comes to this subject. I diverge away from most of the personal finance bloggers on a few aspects. If you’re looking for the cookie cutter “3-8 months of expenses” emergency fund post, chief already phoned in to tell you this ain’t it.

What in tarnation is an emergency fund? What constitutes an emergency? How much should I really have? Where do I keep this money? Whoa whoa whoa. Slow down Kemosabe. Let’s take this one step at a time.

An emergency fund is exactly what is says. It’s a stash of ducats kept separate from your other ducats for life’s unexpected perils. You know those glass cases you see in buildings with a fire extinguisher or fire hose or something that says “In case of fire, please break”? Think of an emergency fund that way.

What is an emergency? Let me tell you what it’s not. Your old tv breaks down and you want a new one…nope! Your homie is selling her tickets to the sold out Beyonce concert…negatory! Your nephew dropped his Crayola marker on your brand new Concretes…nah fam! While every single example seems dire, emergencies they ain’t. I tend to view emergencies one of two ways: short term and long term.

Short term emergencies are things such as:

  • Unexpected car repairs – Not things like oil changes and routine maintenance. I’m talking the starter went out and the muffler fell off.
  • Unforeseen travel needs – Granny gets sick and you need to go visit her.
  • Deductibles or co-pays on health emergencies – Trips to the urgent care and such.

Long term emergencies are the big-uns such as:

  • Job loss –  No money, mo’ problems.
  • Long term illnesses – Ailments that won’t disable you, but can affect your earnings whilst you heal.

How much money should I have in my emergency fund? If you’re in serious debt or have a high expenditure to income ration, an emergency fund should be low priority. Mainly because very often you’ll end up raiding this stash to pay for other things.

The majority of us have the same biggest risk: job loss. Losing your job sucks for many reasons but the biggest one is the lack of income. Yes, an account stuffed with 6 months of expenses would be lovely. However, an unemployment insurance check comes in handy too. I am not saying count UI as a part of your emergency fund. A lot of experts do not even consider it. Most folks will be eligible for UI and if you are, be sure to file for it. Paring down expenses plus UI and even a modest amount of savings should be enough to get most of us through a bout of unemployment. “Heresy”, I hear the experts screaming in the background.

The small foxes usually destroy the vine, so you will need some coin socked away. A good goal to start out with is $400. You may be reading this post shaking your head, but you can save $400. A misconception about being broke is that it is a constant state of brokeness. Untrue! As a person who has been broke before, I know that broke includes periods of influxes of cash. Granny hit on a scratch off, so she breaks you off $100. Put it away! Tax refund came through. Put it away! You find $20 while walking down the sidewalk. Look around to make sure no one saw you then put it away! Saving may seem improbable but it is not impossible.

In Duc 101, the focus should be on getting that $400 saved.

In Duc 201, the focus should be not touching that $400.

In Duc 301, the focus should be on building on that $400.

In Duc 401, we are on track to graduate to that multiple months of expenses saved up life.

Where should I keep my emergency fund? In the advanced Duc courses, we’ll get into tiered emergency funds. Good news is all levels should have at least some of their emergency fund in a 100% liquid vehicle. What is that you might ask? That cold hard cash! A perfect place to stash it is at your bank or credit union. Be sure it is an account that can be accessed outside business hours via debit card or check writing.

I plan on writing much content on this subject and its complexities. Let’s put this baby to bed. Love it or hate it, the fact remains is that an emergency fund is needed. Life throws too many curveballs to not have one. It takes time and discipline to build it up. You can build an emergency fund even if you don’t make a lot of money. Develop a starting goal, trim expenses, allocate “extra” money, and get this fund up and running.

What’s keeping you from starting an emergency fund? What strategies are you using to build yours? Anything not clear? Hit the comment box.