The Spooky Truth About “Emergency Funds”
Happy Halloween, everyone! Okay, I admit it: I published this today mostly so I could use “spooky” in the title.
If you’re just here to find out what we keep in cash in our emergency fund: it’s $22,635.00. You may now go back to eating all the good candy out of the stash your kids brought home. But if you’re interested in more information on this topic, read on.
Here’s the truly scary part about this topic: recent research and polls are telling us that most Americans couldn’t come up with $1k in cash to pay for an emergency. Meanwhile, average household expenditures as of 2018 were over $5k per month… meaning the average person couldn’t cover a week of their average household spending using their savings. You may have also read that many financial gurus recommend having 6 to 9 months’ spending in a cash emergency fund, which would be $30k to $45k using those averages.
July 2020 update: in the interest of being transparent, our EF is now up to $30.9k from regular contributions and dividends.
How We Arrived at Our Number
We’re somewhere in between those extremes in terms of our comfort level, and that $22.5k above represents 3-4 months of our spending needs and wants (ie, what we would need to spend without significant change to our quality of life). You can see that we did the math in detail using all of our 2018 spending.
Note that $22.5k is not everything we keep in cash – that is just what’s set aside in the “emergency fund” which is completely separate from checking, savings, etc. We actually rarely look at it.
If we really needed to go “bare bones” on our spending, we could make that last 6 months. It’s unlikely we’ll ever need to go that extreme with our emergency money thanks to that ever-present necessary evil: insurance.
The Importance of Insurance
I don’t by any means advocate for over-insuring, since many insurance policies may in fact just be tax on people who are bad at math. But I absolutely want my family buffered against the “what-ifs” that could really derail us and our financial plan in this season of life.
We have solid medical, life, disability, car, home, and umbrella insurance policies for our family. For the time being, this is enough to make us feel comfortable. Of course our business is also very carefully insured, but that’s a separate discussion.
We also have an HSA through our medical insurance company accumulating money for future medical needs. Our insurance has a high deductible and an annual maximum out of pocket. This set-up is not for everyone, but it’s working for us.
Because our kids were both adopted from foster care in Arizona, their medical needs are covered 100% by the State until they are adults. This does not prevent them from being on our private insurance and it does have significant limitations when we travel, but it certainly is a nice perk to have as foster/adoptive parents.
The Worst-Case Scenarios
The worst-case scenario for us financially would be my spouse or I (or both) getting permanently injured or chronically ill and being unable to work. That would mean cashing in our disability policies, which would pay out monthly until we turn 70, tax free.
We pay quite a bit for these policies, since we would need to care for ourselves and two kids for another 16+ years with that income. They would kick in 90 days after an injury/illness, and our emergency fund would more than cover us until then.
In addition, we already have one investment property going and another being built, plus some solid equity in our business (which would have to be sold if I were permanently injured, giving us enough cash to buy 1 or 2 more investment properties outright).
The Plan for the Future
As time goes on and we remain alive and relatively healthy, each year sees us needing less and less insurance. Our debts are decreasing, our net worth is creeping up, and our kids are getting closer to adulthood (and we have no intention of bankrolling our adult children).
In the future, we’ll decrease our disability benefit and eventually drop it. We’ll get rid of life insurance once we’re confident our surviving spouse and/or kids can do well without that pay-out. By the time we’re “retirement” age, we’ll only have medical and liability-type insurance policies.
Our emergency fund will remain relatively small, since we’ll have a bunch of sale-able assets and no debts. Currently it is set up to auto-draft $1k per month from our checking account and it earns a small amount of interest. It’s growing more than enough to keep pace with inflation, which is all we really need it to do. We don’t want it in any more heavy-duty investment vehicles, because we want it liquid at all times.
Staying Optimistic While Contemplating Disaster
I don’t like thinking about or planning for tragic scenarios, but this is part of adult life. There are so many sob stories out there (see: all crowdsourcing sites ever) that could have been prevented if the adults involved had a reasonable emergency fund and proper insurance. Maybe emergency funds and insurance should be required before anyone buys a smart phone or leases a car.
Anyway, my husband and I are both logical people and optimists. Our optimistic selves plan to hike and ski together until we are well past 90 and our kids and grandkids are grown and doing fabulously. All our business ventures will be successful, and then we’ll die in our sleep on a vacation in the Maldives.
The logical side of us says that while some of that may be possible given our age and life choices so far, we are also likely to have some ups and downs financially and health-wise. We don’t have to spend too much time thinking about the the downs in order to plan well for them and insulate our family from their harshest consequences.
There’s a lot of wisdom in the famous cliché: Hope for the best and plan for the worst.
And remember that the Reese’s “ghosts” are not as tasty as you want them to be. Go for the “pumpkins”. Your kids will never miss them.