Today I was boxing up some old tax returns and sending them to the attic. Considering that I had some returns in my main “important things” paper box that dated back to 1989, it was definitely time to do this. On the new paper box that I had was printed in red:
“Use this box to make a family emergency kit today.”
Apparently the paper manufacturer felt it was important for people to make an emergency box for natural disasters. I admit that I don’t have one of these. I’ve tried in the past to gather things up, but then I couldn’t figure out for what sort of natural disaster I was preparing that I would need everything together in a box.
I mean, if there were an earthquake, we might be without power for several days, and it would be a good thing to have stuff like warm blankets, firewood, a propane stove, and so on around the house. I don’t think it would do any good to have everything in one box, however. Maybe a tornado would carry everything away, but then the box would probably get picked up too. I guess if there were a fire bearing down on our house and we had five minutes to grab something and run, the box would be useful. Still, it seems fairly unlikely and not really a good enough possibility to warrant getting a bunch of extra food, medicines, clothes, etc… in a special box and needing to remember to go into it every few months to throw things out that had expired. If there were a raging fire, I would grab my wallet and use some of the cash I had or a debit card to buy some new supplies, I suppose.
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But what about a different sort of emergency? A financial emergency? That is really something quite different. I mean, if you were in an emergency like a fire or an earthquake and needed to leave quickly, what if you didn’t have money in your account for a hotel for a week or two? What if there were a flood and your car were drowned, such that you needed both a place to live and a rental car for a month? What about a medical emergency where you’re suddenly living at a hotel near the hospital for a week or two while a family member is battling something and getting ready to face some hefty medical bills. Do you have a financial emergency kit to carry you through? Here are things I would have in my financial emergency kit:
1. Cash.
There are times when credit and debit cards won’t do and you need cold, hard cash. Unfortunately, a lot of people are deciding to go cash free: “I don’t know when I’ve carried cash.” It is a good idea to always have at least $50-$100 dollars with you in case you need to take a cab and they don’t take credit or walk into a restaurant that doesn’t take credit.
2. A bank account with $1000.
Dave Ramsey would call this a “baby emergency fund,” and is what he would advise people to gather together first when they’re working to get out of debt. This is enough money to pay for a hotel or a rental car for a week and will handle a lot of little emergencies. This money should be in a savings account, checking account, or money market, preferably with a debit card attached. You need ready access to this money, so it can’t be invested.
3. A full emergency fund with 3-6 month’s worth of expenses.
This is the fund you’ll rely on to support while you’re looking for work, should you lose your job. It is a lot easier to wait for the right job when you aren’t missing the mortgage payment next month. This is also the money you’ll use when you have something like a broken leg, a major car repair, or storm damage and trees down in your yard. Without this fund, you might run up a credit card bill, which then may be difficult to work your way out of. Note, however, that a vacation is not an emergency. Save this money for real emergencies since you’ll need it to be there when you need it.
4. $10,000 – $20,000 for home repairs and new used cars.
When the air conditioner goes or you get a big leak in the roof and realize that you need a new one, it can seem like an emergency, even though it was a predictable one. You need to always be putting money away for the next roof or the next used car. If you don’t, you’ll end up in debt, and debt means you’re paying interest instead of being to use all of your paycheck for important things. Because this need involves large amounts of money and because you’ll usually have a few weeks to months to gather the money to pay for these sorts of things, invest the money in stocks and bond mutual funds while you wait. When you think the need will arise for one of these items within a year or two, start shifting money over into cash. Remember that market returns over a year or two are very unpredictable, so move to cash if you really need the money to be there within that time frame.
Any one out there have a financial emergency fund? Let’s hear what you do to be ready for a financial emergency. Also, anyone have an emergency box? What are the advantages?
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
