Yesterday, in [part 1] of the “notes on the ‘emergency fund’” series, I touched on the $1,000 emergency fund; to be sure that you have evaluated your insurance deductibles, and any possibility for unemployment.

Today I want to talk with you a bit about the three-six month emergency fund, which happens once you have defeated debt [or immediately if unemployment is likely]. Once we defeated debt, we started discussing our three-six month emergency fund, immediately [if we hadn't... that money could have easily disappeared on some unnecessary items!]. We did loosen up the boot strings a bit on our budget and allow ourselves some more freedom & enjoyment with our money – but also decided on the monthly amount to be put toward the emergency fund. We also decided that our emergency fund would not all be in the form of cash in the bank.

When you sit down to evaluate your three-six month emergency fund, there are several circumstances and topics to consider & everyone’s “emergency fund” is going to look a bit different. Here are some items to consider:

Note 1: Look closely at what you consider to be an emergency. In our eyes, an emergency could take the form of:

1. needing to pay deductible amounts on our insurance [health, home & auto]
2. hospitalization of an immediate family member
3. death of an immediate family member [not trying to be morbid, just mature & realistic - I do realize that life insurance should cover this area, but hang with me, I have a reason for listing this]
4. loss of job / unemployment
5. natural disaster [I am not going down the doomsday prepper route, I have a reason for this, again hang with me]

Note 2: Examine your monthly expenses. I know that many of ours would be cut immediately if any of the above were to occur. So, while we have a bottom line number for our expenses each month, that really does not vary [after three years of being graduated from FPU, we have ours down to an almost-science], we know it could be much less. For example, we could:

• eliminate the luxuries that we did not allow ourselves when we were tackling our debt: cable, entertainment, kid’s activities & personal spending money
• cut back on some of the everyday categories like: groceries, gas [auto], personal care [hair cuts, etc], & clothing.

Figure out what you would need to keep a roof over your head, food in your belly, your utilities turned on, and a vehicle to get to work [depending on where you live, but here in the "suburbs" of the Quad Cities, public transportation is not an option]. This is the number to focus on for your three-six months total.

Note 3: Once we determined our number, we chose to “diversify” our emergency fund, a bit.

• Don’t keep it all in one place. Keep a very small portion on hand, save a portion in a bank located in another part of the state [with debit card access], and a portion in a local bank. In the rare case of #5, above, it would be nice to know that if your local bank is impacted you would still have access to your money. This may sound a bit off-the wall to you, but think about events like Hurricane Katrina and Hurricane Sandy. I personally know someone who lived in NYC when Sandy hit, and she did not have access to her bank for days, other than online. Having emergency cash on-hand will help mitigate that circumstance.
• Non-”cash” fund. Depending on your financial situation, consider funding a health savings account (“HSA”). Do not confuse an HSA with a Flexible Spending Account (“FSA”). While both have significant tax advantages, funds in an FSA must be used during the taxable year, HSA funds roll-forward to future years. The amount in your HSA can reduce the total amount of needed for the emergency fund you keep in savings. In the case of #1, 2, or 3, above, a fully funded HSA could cover your out-of-pocket maximum for medical emergencies; while earning interest and remaining easily accessible. I would also note here, that if you have known medical expenses pending, these should be a separate line item in your budget from the emergency fund – stay tuned, more to come on this topic!
• “Pre-pay” by preparing for true emergencies. Again, I am not talking apocalypse prep, here. I am talking about the events listed in #2-5, above. If you have defeated debt & have adequate storage space in your home, be diligent to stock your home with non-perishable essentials [toiletry items, paper goods, light bulbs, water, quinoa, sugar, rice, etc.] as well as those that can be frozen [meats, milk, fruit, vegetables, bread]. Clearly you cannot stock fresh produce, but consider investing time and money into gardening as the season approaches in order to be more self-sufficient with regards to fresh produce and food preservation. Your items on-hand will greatly reduce the amount of money needed in your grocery line-item, should an emergency situation occur [especially unemployment].

We believe that being prepared for true emergencies is part of taking the best care we can of our family. On the surface, it has relieved stress in the grocery shopping area of our [mostly my] lives. It is nice that when the little one is down to the last two or three diapers, I don’t have to make a special trip to the store. On a deeper level, it is also nice to know that if we were “stuck” in our home due to a blizzard [or whatever...] we would not be rushing to the store and fighting the crowd, or have to go without.

I also think about if I were to be hospitalized & my husband had to “run the show” at home, there is plenty of food in the home [even the deep freeze has milk] and the stress of finding time to go to the grocery store & feed the boys nutritiously is not a factor. I think about if one of my children were hospitalized, and how I would not want to be spending my time at Target. I think about if one of my family members were to pass away, and how it would be hard to get out of bed in the morning, let alone worry about the grocery list.

The LDS church* has a great resource for tips on Family Emergency Planning:

• three month supply of food that is part of your daily diet
• drinking water
• financial reserves
• long-term supply of basic foods
• medication & first-aid supplies
• important documents
• means of communication following natural disaster

[source] *we are not members of the LDS church, just referencing it for the source of information used

When we were tackling our debt, and our finances in general looked different than they do today, we lived off of one week of groceries at a time, and typically did not have any extra items on hand. We wanted to pour every extra cent in to our debt. The details, above, all began when we started the goal of a three-six month emergency fund. If you are on your journey to debt free, and you want to keep items on hand, perhaps set $30 of your grocery budget to “stock items”. Maybe one month, it is $30 of toilet paper, another month $30 of bottled water, etc.

Watch for a follow up post on how to keep track of your products & their expiration dates, the types of products to keep on hand, & how to budget for them. In the mean time, I would love to hear from you!

It seems that the nature of my blog is to discuss some topics that require enough detail & explanation that they begin as one post in my head, and end up becoming multiple posts on the screen. This is part 1 in a series of posts where I will discuss the “emergency fund” & hopefully share a fresh, or at least different, perspective on how the emergency fund works.

As many of you likely know, especially if you are reading this blog, the first baby step in the Financial Peace program is to establish a $500 [single] $1,000 [married / family] emergency fund [typically in an easy to access savings account, read: not in a CD or similar investment vehicle].

• If you have debt [other than your mortgage] & do not have $1,000 in a savings account: start selling your stuff or get a second job, but find a way to get it.
• If you have debt & more than $1,000 in a savings account, you would put anything above that $1,000 toward your smallest debt [read more about the debt snowball method]. I realize that if you have more than $1,000 in a savings account, it can be gut-wrenching to essentially drain your savings – but if you have truly evaluated your insurance deductibles [see Note 1, below], and your employment is secure [see Note 2, below], defeating debt IS your savings.
• If you have already defeated debt, then you are working toward establishing an emergency fund of three-six months of expenses [again, readily available savings account, the idea on this money is to access easily, not to earn gobs of interest].

Note 1:  $1,000 is the suggested amount by Dave Ramsey. I would tell my clients this: look at your insurance deductibles. If your auto-deductible is $1,500, you need enough in your emergency fund to cover that amount or you need to adjust your deductible. If you are on a high-deductible health insurance plan, you will want to check your emergency room co-pay &/or hospital stay co-pay.

Note 2: If unemployment is suspected, or you are certain of unemployment [e.g. seasonal work], tackle the three-six month emergency fund, rather than your debt [of course you will continue to make minimum payments, if possible].

Note 3: If you have to use your emergency fund, the first thing you should do once the emergency has passed, is to replenish that fund before returning back to your current baby step / savings goal. Stay tuned – more to come on this topic!

Once we became debt free, we started discussing our three-six month emergency fund, immediately [if we hadn't... that money could have easily disappeared on some unnecessary items!]. We did loosen up the boot strings a bit on our budget and allow ourselves some more freedom & enjoyment with our money – but also decided on the monthly amount to be put toward the emergency fund. We also decided that our emergency fund would not all be in the form of cash in the bank. Stay tuned – more to come on this topic!