Emergency Fund: A Top 5 Critical Prep

Having an emergency fund of ready cash at hand is a top 5 critical prep that every prepper needs to have. Why top 5? Because chances are early on in an emergency, it can help you get water, food, shelter and transportation.

As we will explain, despite what a lot of people assume, cash will matter… A LOT… early on in any emergency, and throughout a shorter term, regional or limited disaster situation.

This article is a joint venture by Salty and Paranoid Prepper who wrote an article on Emergency Funds in our Preppernomics 107 series. It’s a great topic, and a super critical one, so we thought we would expand up on it some. For clarity’s sake, anything in italics was written by Paranoid Prepper and the rest is Salty’s work.

First let’s take a look at emergency funds, what they are and what they are meant to do.

Emergency Fund

Basically, emergency funds are ready cash kept either at home or in a bank account that is easily accessible. 

Spice and I personally keep $1,000 in cash on hand at all times, plus an emergency fund of six-months expenses in the bank at all times (ours is split about evenly between two banks, in case something bad should happen to one of the banks).

Why cash? Because most Stuff Hits The Fan (SHTF) events are not The End Of The World As We Know It (TEOTWAWKI), but rather they are personal crisis situations and local / regional disasters. 

Most emergencies are NOT TEOTWAWKI

Here’s how Paranoid Prepper puts it: 

Many emergencies are personal in nature and there is a perpetual concern among preppers that during a SHTF event bank cards and checks won’t work and only cash will do.  The truly concerned will worry that even cash won’t function, so they want to hold precious metals.

As a result, there is a question of not only how much should one have in emergency funds, but also in what form it should be held, i.e. bank deposits vs. cash vs. precious metals.

If you are worried about job loss, a bank savings account works great.  Worried about a long term power outage, such as we saw last year in Puerto Rico, cash would be better than a bank account.  If you are worried about TEOTWAWKI with collapse of the US government and the US dollar, then precious metals might be a consideration.

Cash will be king in an emergency… for a while…

One of the biggest myths that Paranoid Prepper and I both agree that we see in the prepping community is the thought that cash will be come “instantly worthless” in a SHTF or even a TEOTWAWKI event.

There’s just too much normalcy bias out there, there are too many people who expect things to immediately return to normal for it to lose value right away.

If the situation starts going longer term, or if there’s a societal collapse, then cash will become worthless over time.

This transition from “valuable to worthless” if/when we have a bad SHTF event, we want to be spending cash not spending our preps.

Personal emergencies

Let’s take a look at personal emergencies.

The largest personal problem for most of us would be prolonged unemployment.  It takes time to find a new job and you don’t want to lose your house, preps, or anything else in the interim.  Fortunately, there is a rule of thumb for this circumstance that is worth knowing. It assumes that you may need up to a month of job search for each $10,000 of pay, so if you make $50,000 per year pre-tax, you may need five months to find an equivalent job.  If you spend $5,000 per month on normal living expenses, you need a $25,000 emergency fund to be ready.

For this sort of emergency, you can keep the fund in the bank.  We aren’t talking about SHTF, just about you needing a job.  On the other hand, you don’t want to put this fund in the stock market or other risk assets.  There is too much risk that the market will drop at the same time you lose your job.  Remember the great recession?  Safety against loss is paramount in emergency funds.

Emergencies that close banks

So, Salty, if you are so smart, what happens if the bank closes? Lay that on me, big boy, what are you gonna do if you can’t get your money?

Well, for one thing, I’ve got my cash in hand, and for another I’ve got my preps. If I see an event coming, my plan is to go into my local banks and pull out my big emergency funds (i.e. there’s a hurricane coming (which would be really odd in Missouri, but roll with it, you get my point). 

Do banks really close a lot? 

Banks are not easy to close, despite what you may have read in prepper circles.  Starting with 9/11 banks were closed for four days, which turned out to be a record for the longest stretch of consecutive business days US banks have ever been closed.  ATMs still worked throughout the US.

Conversely, Puerto Rico showed that it is possible to shut down ATM machines and retailer’s payment machines simply by shutting off the power, but the banks themselves opened relatively quickly, the reverse of the 9/11 situation.  Cash was flown in to stock up the banks as the island reverted to a cash economy in some places.  If you could get to your bank, you could make a cash withdrawal.

Banks have some of the most robust disaster recovery plans of any industry.  The rest of us should prep so well.  Like most things we discuss here, bank closures are low probability events.  We need to prepare because they might happen, not because they are likely.  If you are concerned about a Puerto Rico scale disaster closing banks in your area, then you want some cash on hand.

House

Cash on hand can be dangerous for many reasons.  As Paranoid Prepper explained in his original article (which this now supersedes):

Unfortunately, your house is more likely to get burned down, or knocked down, than the local bank branch, so keeping a large cash hoard in your home is ill advised.  By all means keep some cash on hand, say a month’s expenses, but don’t go overboard.  In addition, keeping cash, as opposed to a savings account, will cause you to lose value to inflation over long periods of time.

If you do decide to keep a large amount of cash in your home, secure it with a fireproof safe.  One large financial institution had its vault in the World Trade Center prior to 9/11.  It took several months to get the debris removed to be able to access the vault, but once access was restored it turned out the vault had protected the contents, which was mostly paper.  Note fire ratings when purchasing a vault.  Most people tend to think of vaults as protecting against theft, but fire is just as important.  A good vault can really make a difference.

I’m all for keeping my cash in a fireproof vault, absolutely. Forgive me if I don’t share the details of how/where I store my cash.

Emergencies that Collapse the Dollar

Ah, the dreaded collapse. We look to Venezuela (which Paranoid Prepper has written about HERE) as a recent example of an economy gone mad. In the USA? Could it happen? 

Certainly it could, but…

The emergency that most prepper fiction is aimed at is collapse of the dollar, where cash becomes worthless and we are into full TEOTWAWKI mode.  This has not occurred in the US in living memory, but has occurred in other countries.  Venezuela is currently living with a monetary collapse.  If monetary collapse happens, a large emergency fund will only be useful in the short run, until people figure out the nature of the problem.  This is where your preps really come into play.

Your emergency fund may become valuable again when normalcy returns, so I wouldn’t recommend using cash for toilet paper, as I have heard people are currently doing in Venezuela.    On the other hand, we have really gotten beyond where an emergency fund is the solution.  Full bore prepping is the answer to a disaster of this magnitude.

Summary

Most emergencies are limited in their scope, i.e. they are not nationwide disasters, and they are typically limited in duration.  In most of these situations a cash emergency fund can be extremely valuable.  You should create and maintain an emergency fund for these short-term problems before you attempt to prepare for longer term events that may never occur.  Short term events do occur to people every day.  People lose jobs, wreck cars, and suffer house fires.  You need to prepare for common events before you prepare for truly rare events.