Wednesday, March 12, 2008

Enhancing the Emergency Fund

Flexo at Consumerism Commentary wrote earlier this year about a five-point emergency plan, which takes the concept of the Emergency Fund beyond a simple cash balance in an online savings account. Flexo's emergency plan consists of the following:
  • "Under the mattress" cash

  • Liquid savings

  • Investments

  • Credit

  • Loans/gifts from friends and family

  • Frugality (bonus item)
The idea is to diversify your emergency portfolio, so that you have different sources of protection, as well as a defined "order of operations" for getting at your money. The list above is roughly in order of increasing desperation, similar to Mighty Bargain Hunter's rating of piggy bank strength. It's a good idea to have these levels of severity defined before you're actually facing an emergency.

This has got me thinking about my own Emergency Fund, currently a $1,270 balance in an online savings account (actually spread across four separate institutions). If I had to, I could get at this money within 24 hours by transferring it into my primary chequing account, and I have immediate ABM access to a portion of this amount via my HSBC access card. However, I like the idea of a more diversified approach to preparing for emergencies, and this has me thinking of ways I could spread out my funds a little more. I won't be pursuing the investment avenue (beyond my retirement savings) until my revolving debt is paid off, but there are a couple of ideas I'd like to explore in the short term.

The "under the mattress" cash is an idea that appeals to me. In the event of a power outage or natural disaster, it would be good to have a couple hundred dollars in cold, hard cash that I can grab at a moment's notice. Trent at The Simple Dollar has written about doing exactly this, and I think it's a smart move. With this in mind, I plan to pull $200 out of my Emergency Fund this week, and stash it at home. A year ago, I would have been hesitant to do this, not trusting myself actually to keep the money "for emergencies only". However, I feel that I've successfully cordoned off my Emergency Fund from my other finances, and I'll be able to use this cash responsibly.

I've also been thinking about other forms of currency, like stamps and public transit tokens. Now that we can buy "permanent" postage, both of these items are essentially protected against inflation. A stamp will always be good for mailing a letter, and a token will always be good for one ride on the TTC. Having a handful of stamps and tokens set aside (with the emergency cash?) could make things easier in the event we had to get out of town quickly.

Another emergency investment recommended by Flexo is to use your pantry as part of your Emergency Fund. Just keep a stockpile of staples on hand, and you know you won't have to worry about groceries during a temporary emergency. This could also apply to other non-edible staples, such as shampoo, deodorant, etc. Another twist on this is to redeem rewards points for grocery or pharmacy gift certificates, and keep these for use in an emergency. For example, I can redeem 1,400 Air Miles for $200 worth of gift cards at Dominion. That's a handy weapon to have in the emergency planning arsenal.

These ideas, along with building a chequing cushion, are things that I can act on in the short term, with minimal impact on my debt reduction progress.

What other elements do you have in your emergency plan?


Looby said...

I keep some cash in the house (small bills) as well as the emergency fund in a savings account. I also keep a small ziploc bag with one weeks worth of my prescription meds so that I can grab it and go if needed. I use them and replace them every 6 months or so. I really need to keep some bottled water and canned goods though, we don't normally have those in our house and they could be useful.

Anonymous said...

I am only 28 so have lived in a pretty electronic work where I am used to banking online or through debit cards. My emergency account consists of around $10,000 in a bank account which I figure through a debit card I can access in the event of an emergency such as losing my job or hospitalization, etc.

Now as a regular joe-guy Canadian that might be adequate but I am currently living 2 years in Japan where there are different rules that I am getting used to. Here people are more worried about big earthquakes which might knock out water service, electricity, electronic banking ATM networks for days or even weeks. My boss who is also a Canadian but has nearly 20 years living in Japan, advises me to consider another emergency account of cold-hard cash that you store in your house. $1000 minimum because you want to be able to travel outside of the city into an unaffected part of the country in the event of a really big emergency like an earthquake, tsunami, typhoon or other act of god.

It certainly made me think.