You’ve probably heard time and again that it’s important to have a rainy-day fund set up “just in case” something unexpected were to happen. But we’re now at a time when having an emergency fund is more vital than ever.
The coronavirus pandemic has already had devastating effects on the economy at large and, on an individual level, it has led to job loss and reduction of hours for many workers around the world. Even if the coronavirus’ financial impacts haven’t hit you personally yet, here’s how to be prepared in case it does — plus how to set up a fund for unexpected future national emergencies.
Last updated: March 17, 2021
Why You Need a National Emergency Fund
Part of being prepared for any contingency, big or small, is having a reserve of emergency cash at your disposal at all times. When you can’t rely on accessing your funds electronically, you’ll need some legal tender to buy food, gas or other necessities.
“Whether it’s Mother Nature or some other disaster out of your control, you always want to be prepared by having some emergency cash on hand,” said Annalee Leonard, an investment advisor representative and president of Mainstay Financial Group. “Banks and ATMs may not be up and running for days after a strong storm. I recommend my clients have three to five days’ worth of spending money, just in case.”
How To Decide How Much To Save
To decide how much to save for an emergency fund, you’ll need to ask yourself a couple of questions:
How much will I need for an extreme catastrophic event?
How much can I afford to save?
“It’s wise to have a small amount of physical cash at home for the truest of emergencies when banks are not operating,” said Priyanka Prakash, managing editor at Fit Small Business, a company that finds the best small-business software, services and financing options.
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Aim To Save $2,000
“Individuals should be prepared to pay for essential or non-discretionary expenses out-of-pocket,” said Brett Tharp, CFP and financial planning education consultant at eMoney Advisor. “Temporary lodging or shelter, fuel, food, water and necessary medications fall into this category. This will differ for each person depending on their level of preparedness or perception of how likely a catastrophic event might be.”
Two-thousand dollars should cover those costs.
“The rule of thumb I advise my clients is to keep $1,000 to $2,000 in cash in case banking operations are shut down due to a national emergency or catastrophe,” said Gregory Brinkman, president of Brinkman Financial in Tulsa, Oklahoma.
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There's No 'Magic Number' for How Much To Save in Your Emergency Fund
Despite these suggestions and what some other experts might advise, though, there’s no magic amount you should have nestled away in your emergency fund. The answer for how much you should save for an emergency situation is that you should do what feels right to you. No matter the amount, an emergency fund is absolutely necessary — so make it a priority to build one.
Even if you can’t afford to save much, it’s better to save something rather than nothing, Prakash said. So if you can only afford to set aside $1,000 for an emergency fund, that’s better than not saving at all.
The Cost of Covering Necessities
Take into account that in a national emergency, inflation will rise, demand for necessities will increase and price gouging will likely ensue. With all that in mind, in addition to your regular emergency savings, you should prepare to have enough to cover the following costs in a national emergency situation:
Water — 10 gallons
Gas — 20 gallons
Portable solar generator
Emergency solar hand-crank radio
Prices for gas and water will likely be much higher in the event of an actual national state of emergency. Note that the items in the table are emergency purchases for one person.
The Cost of an Emergency Kit
You should already have some kind of emergency kit that includes these recommendations from Money.com:
Batteries and tools: $122
First aid supply kit: $48
Nonperishable food: $120
Spare clothing: $44
How Is a National Emergency Fund Different From Other Savings?
Unlike a regular emergency fund — which should be used to cover things like unemployment, medical or car emergencies, emergency home repairs or bereavement-related expenses — a national emergency fund should be reserved for catastrophes in which you cannot use credit cards.
Regular emergency savings should be stashed in some kind of savings, money market or certificate of deposit account. Your savings for a national emergency fund should be kept mostly in cash.
“Avoid the stock market because you can lose (your national emergency money) right when you need it the most,” Prakash said.
Neither type of emergency fund is meant to be dipped into or spent like disposable income, and creating one takes the same approach as that for a rainy-day fund, a nest egg or any other savings.
How To Start an Emergency Fund
The first step in saving for a national emergency fund is creating a budget, said Rachel Cruze, author and host of The Rachel Cruze Show and The Rachel Cruze Show podcast.
“A zero-based budget is best,” she said. “This is where your income minus expenses equals zero, so you are giving every dollar a name. Even if your income has changed or you’ve lost your job, list out any possible income you could have coming in and all your expenses. This will help you to see what can be cut from your budget so you can stretch your money further and find ways to save.”
Set Savings Goals
Once you set your budget and see how much money you can realistically dedicate toward savings, it’s time to start setting some goals. Financial author Dave Ramsey and many other experts suggest starting small. If you’re looking to set aside $3,000 in one year, that would mean you’ll have to save $250 per month over the next 12 months. Extend your savings goal to 18 months, and that’s $166 per month.
Or you can automate saving a percentage of your income. “Put aside about 10% of your monthly take-home income for your emergency fund,” Prakash said.
Make Saving For Your Emergency Fund a Priority
It’s especially vital right now to focus on saving, with job insecurity at a high and stock values plummeting.
“It’s important to not panic but to be proactive in planning your finances over the next few months, considering different strategies for saving more money and having cash on hand,” said Chalmers Brown, CTO and co-founder of Due. “I recommend doing a review of your new budget, considering your current job situation as well as accounting for reductions in spending. For example, since you are quarantined, you are most likely spending considerably less on gas, eating out and entertainment. Take that money out of your bank that you would have spent and put it in a lockbox as cash.”
Put Other Contributions on Hold While You Build Your Emergency Fund
When you’re in the process of building your emergency fund, limit other saving contributions or debt repayments to only the necessary amount, Tharp said.
“For example, contribute enough to your company’s 401(k) to get the full company match and allocate the additional funds to your emergency savings,” he said. “Additionally, maintain the minimum payments on outstanding debt to keep loan balances steady while directing additional money toward your emergency fund. Once you’ve built up enough savings, you can continue to contribute money to other longer-term goals.”
Should Your National Emergency Fund Be All Cash?
If you’ve managed to save up $15,000 in emergency funds over time, for example, it might not be a prudent idea to have all that money in cold hard cash sitting around your house. For one reason, it’s unsafe, and two, it might actually be more than you need.
“There is a price to putting away a large amount of money for a rainy day: That price is inflation, which has averaged about 1 to 2% per year in the last few years,” Prakash said. “To minimize loss from inflation, it’s wise to not keep too much of your emergency fund at home in physical cash. By keeping the bulk of the money in a savings account or a certificate of deposit, you can at least earn some interest on it to counteract inflation.”
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Consider Opening a Separate Savings Account To Serve as a National Emergency Fund
While it’s smart to have up to $2,000 in cash in case of a bank shutdown, the rest of your emergency fund should be kept in a bank. Depositing your savings into an interest-bearing checking account or high-yield savings account can help multiply your savings over time.
“When you set aside savings — whether for a vacation or for life’s emergencies — you want to be able to get to it quickly but not keep it somewhere that’s too easy to access,” said Chris Hogan, author, financial expert and host of The Chris Hogan Show. “Your money is safe inside a bank. Bank deposits are insured by the FDIC and are protected up to at least $250,000. The best place for your emergency fund is a money market account or savings account. If you want to keep some cash at home, that’s fine, but I don’t recommend cashing out your savings.”
Consider Having Some Cash Saved in the Form of Alternative Assets
“Cash is still king across all kinds of crises. Therefore, you want to ensure you have an amount on hand to help you in case it’s necessary for purchasing some necessities,” said Jason Powell, real estate and securities attorney at EstateInvesting.com. “However, you may also want to look into trading some of the cash you have for silver, gold and other assets that may be valuable in the coming year or near future.”
How To Hide Money at Home
Many people are reluctant to keep large amounts of money in their homes for fear of theft or misplacement. Keeping cash at home is risky, especially when it’s in large denominations. A home break-in is the type of emergency you won’t have money for if your cash supply is stolen — physical money isn’t insured and it’s unlikely to be recovered. Finding secure and clever places to hide your emergency fund can safeguard the security of your assets; think of it as making a bank within your home.
Common advice is to keep some cash at your house, but not too much. The $1,000 cash fund Prakash recommended for having at home should be kept in small denominations.
“Favor smaller bills like twenties because some retailers won’t accept larger notes,” she said.
However, when looking to store your money in a compact fashion, larger bills in fewer quantities take up less space — so it’s up to your discretion. Whatever you decide, stash your cash away in a practical, yet unorthodox way.
“If you’re going to have cash at home, make sure it’s in a quality, fireproof safe,” Hogan said. “This is more secure than the usual suspects — under the mattress or the coffee container! Be reasonable with how much you put in the safe. It’s OK to keep a couple thousand at home, but I want you to keep the bulk of your money secure and protected in a bank.”
Other Options for Hiding Your Cash Stash
More options for hiding your emergency cash funds include:
A bottle of aspirin in your medicine cabinet
A hollowed-out book
Between the cardboard backing of a framed picture and the photo itself
Encased in weatherproof material and buried in your backyard or the soil of a potted plant
Enclosed in a plastic sandwich bag and hidden in the freezer among frozen foods
Why It's a Good Idea To Have Cash on Hand During an Emergency
Cash can be your biggest protection against a national emergency or disaster if circumstances prevent you from withdrawing cash from the bank. It’s kind of like insurance — you pay for it hoping you will never need it. The suggested hiding places should keep your money safe just in case that emergency should unexpectedly pop up.
What To Do Right Now if You Don't Have a National Emergency Fund
For some people, this advice is coming a little too late. Many have already lost their jobs and are in a place where they are struggling to pay for necessary expenses. If this is the case for you and you don’t have a national emergency fund, it’s important to know how to best prioritize your spending.
“The expenses that should be your priority right now are the things you need to survive,” Cruze said. “Whatever money or income you have should be dedicated to paying for what I call the ‘four walls.’ This is your food, utilities, housing and transportation. If you’re struggling to put food on the table, cut anything that is not essential like subscriptions or cable. Right now, needs come first. But crisis or no crisis, do not use debt to cover emergencies! Debt will only add to your problems. If you’ve lost your job, find extra ways to earn cash. Amazon is hiring 100,000 people. Food delivery services, grocery shopping services, grocery stores and online learning are all industries that are in need of help right now.”
Talk To Your Lenders
If you have outstanding debts that you are now unable to pay because of job loss or a reduction in hours, and you don’t have an emergency fund to help fill in these gaps, call your lenders directly. The last thing you want to have to worry about is penalties and fees for missed or late payments on top of your other financial strains.
“Call lenders and ask them if they’ll let you miss payments without penalty,” Cruze said. “Lots of companies are giving grace periods. The President just suspended student loan payments for 60 days. Take advantage of these things if you’re struggling and save all the cash you can.”
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This article originally appeared on GOBankingRates.com: Here’s How Much Emergency Cash You Need Stashed If an Emergency Happens