The recent news emphasis on the swine influenza outbreak in Mexico has got me thinking again about the nature of emergencies in our lives. We often speak of setting up an emergency fund as a basic of financial planning – and I’m not disagreeing with that – but we also usually tend to lump a lot of things into that emergency fund that I’m going to suggest might be better separated out because the reasons for drawing on an emergency fund greatly differ.
So just as some of us like to set up multiple savings accounts for the different things we’re saving for, I’m going to suggest that we also need multiple emergency funds. I sat down and thought about it and I think there are good reasons for ideally having at least four (4) distinct emergency funds.
One of the things I run into alot with other financial bloggers is hearing that they’ve had to tap into their emergency fund for a while to cover some expense while they get back on their feet from a job loss, moving to one income in the family, or a new addition to the family, etc. That’s a lot better than having to take on new debt, but it’s still not ideal if you then encounter a life-threating illness or injury. Just when you would need the funds, you’re all out because you had to draw on them to cover Fido’s own medical bills.
So here are the accounts that I’d recommend having (we’ll get to how to fund them later):
1. Health and Medical Fund (Life-Threatening): This is the emergency fund you don’t want to mess with. Yes, maybe you have insurance that might cover your costs, but there could be complications and delays with that. If you’ve been shot, in a car accident, or an infectious disease hits you, you want to be able to just have quick access to the cash in case you need it. This is true no matter what medical system your country has in place – if you have the cash, you can always go somewhere that can treat you. It’s for reasons like this that you don’t want to come up empty-handed because you had to do some car repairs in order to keep going to work.
2. Health and Medical Fund (Non-Life-Threatening): Similar to the above, you never want to be without the money available for these needs. Unexpected dental work, medical tests, other non-life-threatening but still serious injuries, broken legs, etc. The difference here is that while you may draw on this for temporary medical issues, if something more serious comes up (to you or your loved ones, even), you will still have the funds in #1 available to draw on.
3. Large-scale Contingency Fund. There are more mundane contingencies, unexpected developments that you’ll want to feel secure you have the cash for. In this category I’d put such unexpected expenses as: an emergency flight home (or away), and it’s in this category that I’d put the infamous “6-12 months of salary replacement.” Face it, a job loss doesn’t happen everyday. Yet when it does, you’ll really want this money. That’s why I’d want you to keep it separate from emergency fund #4:
4. Small-scale Contingency Fund. This is what we’re going to be more familiar with on a day-to-day basis. This is the fund for less urgent but still unexpected costs such as: house/car repairs, a pet illness, or an unexpected death in the family (eg., a flight you need to take for non-emergency purposes), or if you need to make an urgently-needed loan to a family member.
Depending on the case, you might find that some of the items I’ve put in #4 would fit better in #3. But I think these general categories should be considered fundamentally different. For example, the small-scale contingency fund is one that we’d expect you might draw on once or twice (or more?) a year, and one that you’d expect to have to work at replenishing each time. But categories #1-3 are ones that will take longer to replenish and also ones that you want to be sure you have the money for.
Face it, you might lose your job AND run into a life-threatening injury while you’re out looking for work. Life won’t wait for us to top-up our emergency funds before it hits us with another setback.
Now even if you’re still reading at this point and agree with me, you still might be wondering how the heck you can save for four different funds when it’s already hard enough to save for even one emergency fund.
I’ll address a specific plan for this in another post, but here I’ll just say that you can either use a “snowball” method (build up the smaller-sized fund first), or you can use a hybrid snowball/ “percentage” method, where you work at saving for all four of them at once and dedicate a certain percentage of your contribution to each as you have more money available for it.
This plan might be too complicated for some, who prefer to keep their finances simple. Ultimately, if that works for you, then good. Personally, I like the idea of having dedicated accounts that line up with each of my goals. It helps me keep attentive to how much I still need to save and helps with the discipline required to not dip into one account just because I need the money for something much less important (while a job loss is serious, a health problem is even more so).
What do you think? I’d be curious to hear your thoughts as to whether you’ve got something similar in place or think this is too extravagant/difficult/unnecessary.
Related Posts - Have You Prepared a Swine Flu Pandemic Action Plan?
- Mexican Swine Flu Pandemic? Protecting Yourself In The Event of An Emergency
- Survival Skills To Barter With In Case of Financial Ruin, Unemployment, or Economic Collapse
- Don't Wait Until You're 50 To Start Preserving Your Wealth
- How Should You Spend Your Tax Refund?
Related Articles From Other Websites
{ 16 comments… read them below or add one }
My approach is simple. I have a rather large emergency fund, and I have very limited uses for it. Instead of four piles of money, it would seem easier to have one pile of money and limit it to only four uses.
Clair
I like the idea of several emergency funds, as you can rate the probablity of needing each and invest each fund differently. One may be just cash…one in money markets, one in ST Treasurys, silver, etc…
Does that make sense?
Actually having money saved up for unexpected expenses for health emergencies is something my friend mentioned to me. So I think this is quite important even if you don’t get sick as often.
@Clair – yes, if that works for you, great!
@Brandon – exactly, I hadn’t immediately thought of that, but I definitely agree.
@Tom – yep!
Great post MoneyEnergy!
I try to keep a handful of different emergency funds running but have been a little behind with saving to them lately.
I am lucky in the health department for large scale emergencies as my insurance covers 100% after the deductible is met. Of course that means I have a $2,000 deductible in network and $4,000 out though.
I do need to get better about a standard health savings plan just to keep up on proactive health appointments and trips to the doctor while sick.
Great post. I am sure it will make a lot of people think and review their funds.
I think putting these funds in securities, silver, money markets is a good idea but not very good.
Since these are the “emergency funds”, one should be able to access them at any time, at odd hours etc. Investing in such instruments will do good to the fund size but it may not be handy when one needs it most.
I think most of it should be cash, reserved for emergency needs and not to earn more profit.
I was brought up by frugal parents, so I always had extra money in my pocket for emergencies. I also had the mindset of “always save for a rainy day,” so this is nothing new to me. I’d prefer having these four emergency funds in my own safe though, rather than in a bank.
@InvestSound, @Imee – you raise good points that matter if one decides to invest the funds differently. Liquidity is obviously very important, and physical protection too. One could maybe rank the funds according to what you need most safe (indeed, willing to lose to inflation on) and what would still be ok for keeping in a money market fund at a bank (where it takes maybe two days to get your money).
eg., for a job loss situation, I’m guessing it’s probably OK to have your fund in the moneymarkets if you know it only takes 2-3 days to get the money out and back into your chequing account. For an emergency flight home, though, you’d want this in instant cash that one phone call could transfer back onto your credit card or chequing account.
Thanks for these extra points! I’ll have to incorporate them into my edit of the post.
Oh man… tell me about this! I am an independent social media consultant and speaker and I recent got injured, which has made it difficult to land new work. As soon as I heal and get some financial flow going again…I will definitely set up a combined health + contingency fund to start… and then separate them into different funds as my means increase.
Take this advice!
This is an interesting post. I’d like to have some idea of how you get this done on an automated basis. Do you do automatic debits into an account like ING?
Money,
As you said this is a “ideal” situation. Certainly, you give a great method to save and form in which to do it.
@Brett – sorry about the injury, nothing better than losing our normal abilities to make us appreciate our health. Judging by your site it looks like you’re well on your way to improved financial flow!:)
@Steve – ironically, right now I don’t do automated savings due to the sporadic nature of my income. But the above categorization is still something I’m working towards. When I move to a salary, I will automate.
@Rick – yes, ideal as in a goal to work towards. It will take some time to actualize it! I’ll start small and snowball my way up, like everyone else! I have the small fund started, anyway.
Wild! I *just* reviewed my own savings accounts tonight. I have an emergency fund but should define some parameters re: what constitutes an emergency.
I also have a separate “pet” emergency fund – I regularly contribute the equivalent of pet insurance, but prefer to have complete control over the fund (eg. not haggle about if my dog’s injuries are covered. Note to insurance companies! Lots of us feel that way!)
@Nancy – thanks for stopping by the blog! I think it’s great you have a fund just for your dog, very responsible. I’d do the same, I think, if I had a pet. I’d also want to be in control and not worry about what the insurance company will and won’t cover.
The first two can be covered in an HSA.
Great post. Do you have these emergency funds, and if so, how much money do you have in each one?
@Alex – I’m working towards them. I have at least two started, though one of those I might be changing into a specific savings account. As for amounts, it’s going to be different for everyone. Best to do up a budget, then factor in projected inflation to get the numbers.