The 4 Types of Emergency Funds

Greetings soldiers! We’re going talk strategy and tactics when it comes to saving money for the purpose of buffering against guerilla warfare (aka emergencies). The two missions on your Jericho Conquest that involve saving money directly related to emergencies are Mission #1: Expect the unexpected and Mission #3: Build reinforcements. As a reminder, Mission #1 of the Jericho Conquest involves saving $1,000. Mission #3 is to save for 3 to 6 months of expenses. It may come to your surprise soldiers, that there are actually 4 kinds of emergency funds that you can apply as part of your arsenal. We’ve discussed 2 of the 4 already, but there are strong use cases for the others. Every family situation is unique, and so I want us to explore additional ideas that help lead a life of stewardship. We’ll classify the 4 types of emergency funds as Beginner, Intermediate, Advanced, and Expert.

A Beginner Emergency Fund: Save $1,000 ($500 if income less than $20,000 annually)

When it comes to saving money, everybody needs a starting point. The statistics show that Americans just simply aren’t prepared when it comes to handling emergencies. According to a 2017 study by CareerBuilder, a whopping 66% of Americans cannot cover a $1,000 emergency. That’s alarming! Soldier, in order to put yourself in a better position financially, you’ve got to take action. That first action is to save $1,000 as quickly as possible. If you make less than $20,000 per year, save $500 as quickly as possible.┬áPut the money into a savings or money market account away from your checking account where all the daily transactions occur. This establishes a boundary and provides access to cash when necessary within 24 to 72 hours. This is Mission #1 of the Jericho Conquest. Do this before you begin paying off all non-mortgage debt. Having a Beginner Emergency Fund will a) position you better to handle life’s curveballs and b) give you a level of peace that most people don’t have.

An Intermediate Emergency Fund: Save $3,000-$4,000

An Intermediate Emergency Fund may come as a surprise to many of you. My wife and I learned to implement this through the school of hard knocks. So back in 1999, $1,000 was a lot of money. With prices generally rising over time because of inflation, $1,000 is beginning to cover less and less. Especially in the realm of auto and home repairs. We went through several stretches of $500-$1,000 expenses. My wife and I don’t use credit to buffer anything. We budget, save, and pay cash for large purchases and expenses. Doing simple math, notice a $500-$1,000 expense would completely wipe out a Beginner Emergency Fund. We got tired of the constant stopping and starting and realized we needed to stash away more cash. We began putting away as much as possible. We noticed once we saved around the $3,000-$4,000 range, that those $500-$1,000 hits weren’t nearly as hard of a blow mentally and emotionally. An Intermediate Emergency Fund of $3,000-$4,000 by no means undoes the validity of a Beginner Emergency Fund. Remember, 66% of the country can’t handle a $1,000 emergency. $1,000 in savings will still be a milestone for most people. This is just another strategy you can use if you find yourself in a season of high unexpected expenses.

An Advanced Emergency Fund: Save 3-6 Months of Expenses

An Advanced Emergency Fund, or Fully Funded Emergency Fund, is setting aside money to cover expenses for 3 to 6 months. This is Mission #3 of the Jericho Conquest. There are 2 strategies you can use to accomplish this mission. The first is to add up the household monthly total of the 4 Essentials and multiply them by either 3 or 6 to get a 3-month or 6-month emergency fund. Remember, the 4 Essentials are 1) Food 2) Shelter/Utilities 3) Clothing 4) Transportation. Let’s use data to help us with the second strategy. According to the Bureau of Labor Statistics in 2016, annual household spending in the U.S. is $57,311. Half of $57,311 or 6 months of spending is $28,656. 3 months of spending based on the same data is $14,328. As a target (using rounded whole numbers), aim to save either $15,000 for a 3 month emergency fund or save $30,000 for a 6 month emergency fund.

An Expert Emergency Fund: Save 2 Years of Expenses

You’ve probably never heard of this one (neither had I), but the most intriguing strategy is an Expert Emergency Fund going into retirement. An Expert Emergency Fund consists of stashing away 2 years’ worth of expenses pre-retirement. In Nick Murray’s book Simple Wealth Inevitable Wealth, he describes this concept as follows: “Keep two years’ living expenses in a money market fund so you can turn your systematic withdrawal plan off for a couple of years during a major market decline.” Mic drop from Nick Murray.

Soldiers, by now you’ve learned both how important emergency savings is and some different strategies to go about improving your cash reserves. What type of emergency fund do you have in place currently? How do you plan to protect yourself in the future based on what you now know?

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