I apologize if my post topics are a week late, I am a bit late processing this stuff. Several bloggers have touched upon this subject, all making good points. In light of current events, you can see how emergency funds are important. What if your ‘really stable’ job turns into rubble? At the same time, your house is underwater, and your car is an aquarium. Your online savings account is going to be a bit hard to access without electricity. Even something in a safety deposit box isn’t so safe. I like to think of emergency funds as Real Life Insurance, protecting your current way of life, not protecting against your death. So I’d like to brainstorm different ways of having some backup money first. In no particular order (more like stream of consciousness):
1. Cash – I usually keep less than $200 of cash in the house, but I’m definitely going to put more in the house. No electricity = No ATMs and No credit card swiping machines.
2. Liquid Savings/Checking Accounts – Of course not all emergencies involve loss of power, and having thousands of dollars in cash under your mattress is not going to earn you any interest. And it’s FDIC/NCUA insured.
3. Credit Cards – Theoretically, I could buy an RV with the limit on my credit cards. Somehow Mr. Visa and Mrs. Mastercard trust me that much.
4. CD’s or Savings Bonds – You’ll lock up your money for a longer period of time, but you’ll earn more interest. With most CDs you can break the CD and just lose some interest, but with Savings Bonds you can’t cash them in for 12 months no matter what.
5. Home Equity Line of Credit – For those who own homes with some equity, you can take out a line of credit against your house with a pretty nice rate. The great thing about this is that most times if you don’t borrow anything, you don’t pay anything. Perfect as a backup for emergencies if you have self-control not to use it.
6. PayDay or Title Loans – I’d probably sell my car before getting a high-interest loan using my car as collateral, but it is an option. Same thing with the borrow-$100-today, pay-me-$125-next-week PayDay Loans.
7. Those credit card checks you get in the mail (and clog up my shredder) – These are treated basically as cash advances, but may be useful for places that don’t take credit cards. Maybe I should keep a couple…
8. Personal Property – You could always try to pawn or sell off your jewelry, electronics, or even furniture I suppose. I visited some pawn shops in Las Vegas a couple years ago and I saw a used hairdryer for sale. Sad.
Well I think that’s it for now. Gimme more ideas! Every time I see the people staying in stadiums, I feel sad. Although many of those people are so poor that they can’t even start an emergency fund, I’m sure some of them could have. I know I wouldn’t want my family to have to endure that.
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Um… you didn’t mention regular checks from checking accounts… but i bet few stores will take them without power…
those credit card checks (if not 0% APR) can drive ppl bankrupt with their super high cash advances rate…
btw, you haven’t mentioned the most important key of all: how much (6-9 months of monthly spendings)
Of all the talk on Emergency Funds lately your post is the first I’ve seen that considers using a line of credit as your emergency fund. I think it’s a great idea.
Emergency funds in a savings account when you are carrying debt will cost you money. My last post gives a couple of examples based on my circumstances. I think people need to look at the math and work out if they are better off a savings account or a line of credit for emergencies.
How about I/EE bonds ? They earn interest that beats inflation and the govt will not penalise you if you need to use it when you are in a disaster zone. Plus they are accepted in any bank and are completely replaceable if you know the numbers.
All great points guys,
Alan – yeah I meant Checking/Savings Bank accounts together.
Broke – I agree, if you already have high-interest debt using a line of credit as a backup may make even more sense
sid – I did put down Savings Bonds (#4). But beware, you can’t cash them in for the 1st 12 months.
How about gold (coins most likely). While I don’t hold any myself, my uncle swears by them. They have a decent chance of appreciating and should be spendable in case of emergency…
Great post. There are so many different thoughts behind emergency savings and it’s good that people are discussing them.
A line of credit or HELOC is a poor choice for emergency savings unless it’s part of a plan that includes other forms of savings. Most lines of credit and HELOCs can be shut down or frozen at anytime. If your house is severely damaged, the bank will freeze a HELOC faster than you can log onto your account. A bank line of credit can also be shut down if your credit begins to falter or if you miss a payment on a credit card, mortgage, or utility.
Also, you have to pay that money back. You are better off NOT GETTING INTO DEBT in the first place by having an emergency savings.
My, this has certainly been a popular topic lately! Thanks for the mention of our site in your post.
I wrote the majority of the below comments on savvy saver’s site while discussing the exact same subject. Please forgive, I did not feel like retyping all of it…
There are a lot of opinions on setting aside funds for emergencies. It’s another one of those risk vs rewards type situations – how much of a gambler are you?
Broke is most certainly a gambler from reading his blog – he is willing to take on more risk in order to pay down debt at a faster pace. There is certainly nothing wrong with this decision as long he is comfortable with that choice.
Everyone’s situation and risk tolerances are a bit different and unfortunately, there is not a one-size-fits-all approach even though having “3-6 months in monthly expenses invested in a safe, liquid account? seems to be the general rule. But that leads to all kinds of interpretations; you?ll just have to decide what makes you most comfortable.
Since the post above mine mentioned using a HELOC, I just want to make sure people are aware that HELOCs are secured debt, meaning you risk losing your home if you can’t pay what you owe. Seems counter-intuitive to me to borrow money from a lender to keep from falling into debt during an emergency.
You also run the risk of the HELOC being terminated which, however unlikely, in theory could happen. Therefore I would not recommend solely relying on a HELOC for emergency savings. However, HELOCs do make sense as a backup plan to an already established emergency fund because you never know how much you’ll actually need when emergency strikes and you could deplete your reserves. Kuddos to savvy saver for already mentioning this.
To me, the real value of an emergency fund is the fact that it is 100% liquid and secure. If I can’t get to it today, its value as an emergency fund is lowered.
Sid mentioned I bonds which is great as an investment, but a poor choice for an emergency account because you usually can’t get at your money for the first 6 months.
Correction to my above post – I bonds must be held for one year before they can be liquidated.
I’m thinking of more of a multi-pronged emergency fund, in order to balance risk and rewards. Who says you can’t have all 9? (8 above + gold)
I don’t think it’s possible to be ready for every contingency, and maybe having cash around isn’t the big goal. First, having water would be a priority. And never let the car sit with under a 1/2 a tank of gas in it, just in case you need to get away.
I have to disagree with using the HELOC as source of money for an emergency fund. Most people do not the self-disciplince to just not touch the money in case of a true emergency. You are putting your house at risk.
I know this is an old blog item, but there was an article in today’s Post where a CFA gives recommendations on the order in which you should draw from various types of accounts in the event of an emergency.
http://www.washingtonpost.com/wp-dyn/content/article/2006/01/18/AR2006011802334.html
(just in case you need a login and password:)
http://www.bugmenot.com/view.php?url=www.washingtonpost.com
(Jonathan – although your original post said “in no particular order”, you actually listed them pretty close to the CFA’s recommendations!)
The first thing you should do is stop using credit cards. Credit Cards are a snake and if you play with them you will get bitten at some point. The next think you should do is build up a $1,000.00 emergency fund. That will take care of most problems that come up. After that is done you should you attack your debt. List the smallest balance card first and attack it, paying the minimums on your other cards. Once you have the first one knocked out, you take that amount you were paying on it and add it to the second one. You continue this process until all your consumer debt is paid off, included cars, student loans, etc.
With no more debt to pay off you now can use your income for building wealth. Start by building a larger emergency fund of 3 to 6 months of expenses. You can then start to put 15% of your income into Roth IRA’s and your company 401K if you have it.
For more info about this you should look at Dave Ramsey.
Pete
I know this is an older post, but I had to make a comment. Having to evacuate with Rita, I can tell you, if something should really happen, $200 will be just enough to pay for gas to get the heck out of the area and maybe for one night in a cheap motel. I think you’d need a bit more than that. Consider how much a generator costs, a week worth of food and gas plus accessories like extra batteries, water and gas canisters, etc. If you can afford it, try to have “at the very least” $750 cash stacked somewhere in a safe place in your house.
Last year when Houston was hit by a hurricane scare, every ATM was out of money for several days. Even the high-fee ATMs were broke. Talk about an eye-opener. From now on, I’m going to keep more at home, and at the slightest hint of an emergency run down the street to my bank’s ATM. Cash is king in a natural disaster.