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 I want to talk about. I want to talk about the non-traditional emergency fund - the one that 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.
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 the 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 save closer to six months of living expenses.
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 turn-off for some, it’s a great idea for an emergency fund. 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 3 to 6 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 . . .
1. A Stash Of Cash
Having cash on hand is important because there is 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 is 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. 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.
2. An Emergency Fund At Your Local Bank
You need to hold some of these funds in a bank that is close to your home. It doesn’t need to be as much as the traditional fund - 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. 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 is 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.
3. Credit Cards
Now, this is going to be a controversial one, but hear me out! 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.
4. Someone Who Has Your Back
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 you are 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. 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. 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 also maintaining these four alternative funds/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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