Are Emergency Savings Really Enough?

July 07, 2011

We often hear that we should keep at least 3 – 6 months of expenses in savings for emergencies. Some experts suggest increasing it to 6 – 12 months or more because of the economy. The main reason usually given for emergency funds is to have something in case we lose our job. But is that the only emergency we should be prepared for?

Let me give you some examples. I used to live in both NYC and DC, where people were always worried about a future terrorist attack. NYC also had a major blackout a few years ago. Now I live in San Diego and spend a lot of time in LA, both places that are susceptible to natural disasters like earthquakes and forest fires. We’ve also seen the devastating effects of hurricanes, tsunamis, and tornados in the news. My point isn’t that we should hide under a rock but that savings in the bank may not be enough when the ATMs don’t work or when we may not even be able to leave our homes.

So what to do? Just like we diversify our retirement accounts (you do, don’t you?) we can diversify our emergency funds to prepare for different types of emergencies. You can start by keeping a few hundred to even a few thousand dollars of your savings in good old-fashioned paper cash (preferably in a hidden safe).  This could come in very handy if banks are closed and ATM and credit card machines are down.

You can then take it a step further and have part of your emergency funds in a food reserve. If you lose your job, you can still eat from the food supply but if you’re caught in a worse emergency that makes it tough to buy food, you can’t eat your savings (or at least you wouldn’t want to). There’s also a peace of mind that comes from knowing that you at least have what it takes to sustain your life for a period of weeks or even months.

I bought specialized food rations for this purpose but you can just buy non-perishable foods in bulk that you would eat anyway and then replace items as you use them. This way you won’t be spending any additional money and would probably save money by buying in bulk.  You can learn more about  emergency food storage here.

So what’s the downside? Other than perhaps feeling like a crazy survivalist, you would miss out on that ½ of a percent (minus taxes) you’d otherwise be earning with that money in your savings account. But wait! How much do you save buying food now rather than in say 6 – 12 months from now? Well, the inflation rate of food over the last 12 months was a little over 3% so you’d actually be saving more than what you would have earned keeping that money in the bank and that doesn’t even include the money you save by buying in bulk.

Of course, this doesn’t mean ALL your emergency savings should be used to buy food. Remember, the point is to diversify. You’ll want enough in savings to pay your bills (especially your rent or mortgage and car payment) for 3 – 12 months in case you do lose your job. But if disaster strikes, you could be glad that your emergency fund wasn’t all in the bank.