3038: 4 Emergency Funds You Need Not Including The Traditional Emergency Fund by Christina Browning of Our Rich Journey

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[00:00:49] This is Optimal Finance Daily, 4 Emergency Funds You Need Not Including The Traditional Emergency Fund by Christina Browning of OurRichJourney.com.

[00:01:03] When most people think of emergency funds, it's usually one single pot of money that's kept aside in case of an unexpected crisis or emergency. Maybe you keep it in a CD ladder, a money market account, or in an online high-interest savings account. But that's not the type of emergency fund you need.

[00:01:20] I want to talk about the non-traditional emergency fund. I want to talk about the non-traditional emergency fund, the one you store non-traditionally. So I'm going to share exactly what those funds are so you can have extra protection while pursuing financial independence. But first, let's dig a little deeper into the basics of emergency funds. Emergency funds.

[00:01:42] Emergency funds. Most people have a very traditional idea of what an emergency fund is. It means saving anywhere from three to six months worth of income in case of an emergency. For a dual-income family, the general rule of thumb is that the family should have around three months of savings as an emergency fund. For a single-income family, the general rule of thumb is that they should have closer to six months of living expenses.

[00:02:06] This three to six-month fund is generally placed in a bank with a high yield or interest rate on the deposit. Storing an emergency fund in a savings account with an online bank typically involves a stricter process for withdrawing the funds. While a stricter withdrawal process can be a turnoff for some, it's a great idea for an emergency fund.

[00:02:29] If it's too easy to withdraw your money, then it's likely you'll mix your funds with your spending money or withdraw it for non-emergency purposes. While this kind of traditional emergency fund is essential to have, it can take a long time to save three to six months worth of paychecks. That's why you need other types of emergency funds in the meantime. This brings us to our four alternate emergency funds. Number one, a stash of cash.

[00:02:58] Having cash on hand is important because there's a daily limit on how much money you can withdraw from an ATM. It's especially tricky if your bank branch is far away, making it harder to visit the bank and withdraw everything. Having a stack of cash that's greater than the amount you can withdraw from an ATM is vital if you need a large amount of money immediately in an emergency situation. This type of stash of cash fund is particularly useful during power outages or natural disasters.

[00:03:28] It's also incredibly useful if you have your identity stolen and can't access any of your accounts. For the average American family, one or two thousand dollars should be fine. Keep this in a waterproof or fireproof container in an easily accessible place so the rest of your family knows where to find it. Number two, an emergency fund at your local bank. You need to hold some of these funds in a bank that's close to your home. It doesn't need to be as much as the traditional fund.

[00:03:57] One month's worth of expenses should be fine. The most important thing is to have a fund that is easily accessible. Make sure the account is with a different bank than your normal financial accounts. This will make it more difficult for you to access the funds. Let's say you have a big emergency that takes time to unfold fully, like losing your job. You won't need all of your emergency funds at once, so you'll likely transfer money from your online bank to your local bank.

[00:04:24] The smaller amount of money in your local bank acts as a buffer while you transfer money. But it's also useful if you have an immediate and unpredictable emergency. Maybe there's a crisis that affects you or a loved one, such as an abusive relationship. Emergency funds in a local bank mean you can withdraw them as quickly as possible to deal with the situation. Number three, credit cards. Now this is going to be a controversial one, but hear me out.

[00:04:52] Now, I'm not talking about a credit card you can abuse every time there's a sale at Macy's. I'm talking about having three separate cards with healthy credit limits that you can use in an emergency when you don't have access to cash. I say three cards because there are three major credit card companies, American Express, MasterCard, and Visa. Having one card of all three means you know at least one will be accepted when you need to spend or withdraw that money. Number four, someone who has your back.

[00:05:23] This last one isn't a fund, but a person. This person is someone who can help you when you don't have access to cash, credit cards, or other emergency funds. It's someone who will pick up the phone and come to your aid when you need them. If you don't have that person, you'll need to find them eventually. That's because it's very likely that you're going to need this person at some point in your life. And you're going to need to talk to this person and officially establish an exchange of reliance.

[00:05:50] This means that you know without doubt that you can rely on this person in the case of an emergency and vice versa. This person can be a partner, friend, or family member. But the most important thing is that they live close to you. This should be someone who can get to you if your house burns down and worst case scenario, get to you at a police station or hospital in the shortest possible time. So, hospitals, police stations, and your house burning down, that's not the best mental picture.

[00:06:19] But we are talking about emergency funds, and you have to be prepared. My recommendation to you is to build your traditional emergency fund, but also think about maintaining these four alternative funds or options. Having these alternative funds is an even better way to safeguard yourself in the event of an unforeseen emergency. It's always important to be prepared, and financial preparedness is a must.

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[00:08:09] I appreciated these thoughts on emergency funds, and it had me reflecting on my own personal setup. I keep it pretty simple. I've got an online savings account for most of my liquid savings, and I keep a nice buffer in my checking account. I also have a pretty large amount of credit available to me through credit cards. The idea here is that it does take some time to move money from my savings to my checking. So if I had a real emergency that I needed to pay for today,

[00:08:37] I'd put it on a credit card, move the money, and pay off the credit card before I was charged any interest. You usually have about a month buffer from when you're issued your credit card statement and when your payments do. If you pay it off in full, you're not charged any interest. Now, while your readiness for an emergency is your responsibility, the reality is that sometimes things happen that you may not have anticipated. So I actually think finding someone that has your back is the most compelling advice in this article.

[00:09:06] It reminds me of a time I found myself in a real bind. When I was walking the Camino, which is a 500-mile track across northern Spain, I mostly needed to pay for things like food and cash. So I would typically carry around 200 euro on me. Well, one day, I lost my money somewhere. It was a total accident. It probably fell out of my bag while I was digging around for something else. I was on a pretty remote part of the trail, and the next ATM was two towns away.

[00:09:37] Luckily, I had made a friend, just some random dude I met on the first day of the trip, and we had spent the last two weeks walking 20 miles a day together. He ended up spotting me money until I could get to an ATM and pay him back, and I would have done the same thing for him if the roles were reversed. The idea that you're totally on your own can be anxiety-provoking, regardless of how financially responsible you are. I'm a huge believer in investing as much in social capital

[00:10:05] as you do in your own financial health. The reality is that we all need each other. And that should do it for today. Have a happy rest of your day, and I'll see you on the Thursday show tomorrow, where your optimal life awaits.