Emergency Funds
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.
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
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
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.
Emergencies that Collapse the Dollar
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.