How to Build a Family Emergency Fund

Where should one keep their family emergency fund? Is it best to have it liquid, in a checking account, a savings account, or elsewhere?
It’s best to keep these funds liquid. In the event of an emergency, you want to be able to turn these dollars into cash quickly, and you don’t want to worry about a sudden market downturn at the wrong time costing you precious resources just as an emergency confronts you or your family. So quick and easy access to cash is key, combined with limited, if any, risk to principal. I probably wouldn’t keep the money in a checking account. Psychologically, I think it’s best that if these dollars are being kept for a dedicated purpose, it’s best to keep them in a dedicated account like a savings account set aside for its specific purpose, like emergency use only. You know, “in case of emergency, break glass”. Keeping these dollars in checking makes them hard to separate from funds used for normal, everyday spending. I find that online banks are ideal for this purpose as long as they are FDIC insured. They have an advantage over their brick-and-mortar cousins. Their lower overhead allows them to offer higher interest rates to their depositors that the B&M banks often have trouble matching. Consumers should take advantage of that, provided that the FDIC insurance is still present.

How can one handle the impact of inflation on their family emergency fund?
Not by chasing returns. Returns and risk are positively related, so to match today’s higher inflation with equally high returns, you’d have to place your emergency fund balances at risk in investments expected to return at least 8% annually, if things don’t get any worse, and immediately you’re thinking and talking about stock market returns. That’s very clearly a grossly inappropriate place to hold emergency fund balances because those aren’t liquid; they fail the definition—too much risk to principal. So once your fund is set up, to maintain its purchasing power and protect it from inflation, you’ve got to keep it invested in safe and liquid assets that can be quickly turned into cash without loss of principal. If you cannot invest at a rate equal to inflation, then the difference is going to have to be made up by additional contributions. Emergency funds require constant and ongoing attention, like vegetable gardens. They require a certain amount of tending. You can’t simply plant them and forget them, or they’ll become overgrown with weeds and die.

If total expenses are not greater than income, then the portion of income that remains after expenses are paid can be directed toward the emergency fund. Families with fluctuating income streams (for example, self-employed business owners) may have to adjust the percentage saved on a month-to-month basis. As a general rule of thumb, savings of 10% to 15% of income make it likely the family will have enough for their emergency fund within a few months. However, don’t be discouraged if you are not able to save that much. Any portion of income helps, and there are strategies for families that do not have any income remaining after expenses.

If total expenses are greater than income, then there are two possible opportunities that will allow the family to continue to save for an emergency. The first is to seek areas in which to reduce expenses, whether temporarily or permanently. By reducing the amount of money spent on unnecessary expenses such as restaurants, subscriptions, or entertainment, for example, families can usually find a minimally disruptive way to curb expenses until the emergency fund goal is met. Once the goal is met, it will be important to continue to find means to bring expenses below income over the long term, to avoid the temptation to tap into the emergency fund in non-emergency situations. The second opportunity to allow for additional emergency fund savings is to earn additional income. There are two main ways to earn additional income: either seek out some part-time side work or sell some items that have been stored in the garage, attic, storage unit or basement that are no longer used or needed. Many families use a combination of these two methods to increase their income and build their emergency fund. Combining these with expense reductions will help a family achieve their emergency fund goal quickly.

Finally, it’s important to stay focused on achieving the savings goal you’ve set for the emergency fund. To stay true to achieving that goal, brainstorm all of the reasons why it’s important to have an emergency fund and hold on to that knowledge. Remind yourself of that ‘why’ as you continue to save. This technique will help you maintain savings momentum, even in months when it seems difficult to put anything aside.

Where should one keep their family emergency fund? Is it best to have it liquid, in a checking account, a savings account, or elsewhere?
An emergency fund should remain in a liquid investment since, by definition, an emergency is not something for which we can plan. If there’s an emergency tomorrow, you will need access to your emergency fund tomorrow, not in three months or six months. A tip for emergency fund savings is to house the funds in an account that is separate from all of the other family accounts, possibly in a different institution. The purpose of the separate account is to ensure the funds remain earmarked for emergencies only, yet accessible if and when an emergency does happen.

How can one handle the impact of inflation on their family emergency fund?
This is an interesting question because the existence of inflation, especially in times when inflation is high, makes it that much more important to have an emergency fund. An interest-bearing liquid investment such as a savings account will provide some protection against inflation while the funds are held in that investment account, yet it’s difficult to completely hedge against inflation with liquid investments. Although we know we might not be able to create a complete hedge against inflation, the alternative – not to have an emergency fund or to have too little saved in the emergency fund – is very risky, especially in a highly volatile market. It’s better to have a fully-funded emergency fund despite the inflation risk than to risk not having the funds to cover unexpected expenses and potentially end up in debt should an emergency occur.

First (if you don’t already have one), you need to make a budget. Assigning every dollar of your income a “job” will help you see how much you can put towards your emergency fund each month from your paycheck.

Second, you could work a side hustle to increase your income. Does your current job offer overtime? Do you have a hobby or skill that you can use to make some extra money? For example, can you deliver pizzas, groceries, or take-out?

Third, you could cut your expenses. Have you price-shopped your car or house insurance recently? Have you reviewed your debit/credit card statements looking for subscriptions you have that you don’t use? Is there an indulgence you are willing to forgo for a few months to save your emergency fund?

Fourth, you could sell stuff that you don’t want or need anymore. Go through the attic, the garage, and the basement. Do you have extra furniture, tools, dishes, or appliances? You could hold a yard sale or sell items individually through an online marketplace.

Once you know your goal, you can decide how much you are willing to sacrifice – not forever, just for a few months – to save up your family’s emergency fund faster. The deeper you sacrifice, the quicker you will achieve your goal and put a little bit of financial breathing room between your family and a financial disaster.

Where should one keep their family emergency fund? Is it best to have it liquid, in a checking account, a savings account, or elsewhere?
The point of your emergency fund is to have money easily available in the event of an emergency, so it should be kept very liquid and easy to access. By “liquid” I mean “not in an investment”. The job of your emergency fund is not to make you money; its job is to be available for you when an emergency happens! A high-interest savings account or a money market account at a local bank or credit union are good choices; you can make a little bit of interest on the balance while still having the funds easy to access. You may also want to keep some of your emergency funds physically in your home; just make sure you keep it far away from the “pizza” money (you don’t want to confuse the two).

How can one handle the impact of inflation on their family emergency fund?
Because you will keep your emergency fund very liquid and accessible, inflation will negatively affect its value. As a result, when inflation is high (like it is now), you should re-estimate the amount you need in your emergency fund to cover three to six months of your family’s expenses. You will probably find that you need to increase your emergency fund a little, but this is far better than discovering you have an inadequate emergency fund when an emergency happens.

• Involve the family in the process by discussing why a family emergency fund is a priority.
• Encourage everyone’s suggestions about ways to cut back on expenses.
• Include everyone in the goal-setting process and on progress updates.
• Although not quick, these steps are likely more effective at getting entire family buy-in and at helping kids to develop financial literacy skills.
• Once a goal is set, determine the dollar amount necessary to contribute from each pay period, then set-up automated deposits to the family emergency fund.

Where should one keep their family emergency fund? Is it best to have it liquid, in a checking account, a savings account, or elsewhere?
Ideally, the family emergency fund would be kept in an easily accessible account and, depending on the family’s discipline level, in an account that’s relatively inconvenient to access. This may seem like an oxymoron, but an emergency fund is useless if you can’t access it in an emergency. Likewise, if it’s too convenient to access, then those who are “discipline-challenged” might not have sufficient cash to access when an emergency arises. Striking the right balance of accessibility and inconvenience will vary among families.

Again, to live up to its name, an emergency fund should be liquid (either cash or convertible to cash on demand). Otherwise, you wouldn’t be able to easily access it in an emergency. For some families, a high-yield checking account or money market account with check writing privileges or debit card will work. For other families, it might be wise to house the emergency fund in a savings account that’s tied to a checking account for relatively easy access.

How can one handle the impact of inflation on their family emergency fund?

• Do your homework to find the type of account that works best for you.
• Look for an account that pays a relatively high interest rate and meets your family’s specialized needs.
• Avoid tapping the emergency fund unless there’s truly an emergency, and decide ahead of time what your family’s definition of a “true emergency” is.

Where should one keep their family emergency fund? Is it best to have it liquid, in a checking account, a savings account, or elsewhere?
I suggest a savings account. And even though it might be a bit inconvenient, put it in a savings account that is not at the same bank as your main checking account. Don’t make it too easy to raid the emergency fund for non-emergencies. Shop around for the best interest rate on your savings, including the online banks. But make sure the bank is FDIC insured. This is money that absolutely has to be there when you need it, so avoid the temptation of chasing stock market returns with your savings. Saving and investing are both important but distinctly different parts of your financial plan. Don’t mix them.

How can one handle the impact of inflation on their family emergency fund?
Every six months or so, shop around to make sure you are getting a competitive interest rate on your savings. But even that may not keep up with inflation. If your cost of living has increased by a measurable amount, you might have to accept the reality that the emergency fund you need now is higher than the emergency fund you needed a year ago. If that is the case, prioritize bumping the emergency fund up a little to keep up with inflation.

Where should one keep their family emergency fund? Is it best to have it liquid, in a checking account, a savings account, or elsewhere?
An emergency fund needs to be liquid to be accessible in the event of an emergency. Interest rates are still quite low, but individuals may be able to earn interest on their emergency funds by keeping them in a dedicated savings account or even a money market account. Having the funds separate from those that regularly go toward expenses can be key in maintaining such an account.

How can one handle the impact of inflation on their family emergency fund?
The inflation that we are seeing right now can certainly impact household spending and the choices that households make with their money. Inflation is a sustained increase in prices that may impact different households differently. This makes it even more important to budget so that scarce resources (income) can be put toward necessary expenses for today and saving for the future. As interest rates rise, there may be opportunities to earn more interest on those savings. Keeping some liquid funds in an emergency account likely entails sacrificing some of that additional return (i.e., more liquid accounts pay lower interest). But apportioning funds for different purposes can allow an individual to earn higher interest on less liquid, longer-term savings while keeping some funds available for emergencies.

Where should one keep their family emergency fund? Is it best to have it liquid, in a checking account, a savings account, or elsewhere?
Emergency fund assets should be safe and liquid. Therefore, the places to keep these funds are in demand deposit accounts like checking or saving accounts. The funds need to be available to you if needed, so liquidity is essential. You can also utilize a money market mutual fund or high yield savings accounts that have immediate availability if needed.

How can one handle the impact of inflation on their family emergency fund?
The high inflation that we are experiencing makes it exceedingly difficult for an emergency fund to maintain the same purchasing power. With annual inflation hovering around 8% and safe and liquid investments offering approximately 1% annually, keeping up with the rising prices is challenging.

Here are some ways to battle the inflation issue:

• If you have established a full emergency fund (3-6 months of annual expenses), make additional contributions to it of an additional 10% during these high inflationary times.
• Review all of your expenses and think about where you can cut to reduce your costs to keep in line with inflation. Most people can find ways to reduce their expenses by changing their behaviors a bit, which can help battle inflation.
• I Bonds issued by the US Treasury offer great inflation protection and are currently paying 9.62% for the next 6 months; and rates are tied to the Consumer Price Index (CPI-U). Your money is tied up for at least one year, and the most you can invest in I Bonds for a single year is $10,000, in most cases. If you feel you will not need your emergency fund for one year, I Bonds can offer inflation protection.

People may be inclined to take more investment risk with their emergency fund to combat inflation, but remember this additional return potential does come with added market risk. This is a risk that emergency funds should not be taking.

Where should one keep their family emergency fund? Is it best to have it liquid, in a checking account, a savings account, or elsewhere?
Emergency funds need to be of sufficient amount, liquid, low or zero risk and readily accessible. Emergency funds should cover anywhere from six months to one year’s worth of living expenses. The precise amount depends on the likelihood of unforeseen events such as loss of one’s job, medical expenses, sudden auto expenses or house repairs. A good place to park this money would be a savings account at a bank or a short-term government bond portfolio, or a high-quality short-term corporate bond portfolio at a mutual fund company.

How can one handle the impact of inflation on their family emergency fund?
While a savings account will not typically provide complete protection against inflation, government bonds and high-quality corporate bonds will do a better job of offering some degree of inflation protection. It is important that emergency funds be invested in short-term low-risk assets. The current yields on savings accounts are still less than 1%, while inflation is running over 8%. Short-term government bonds will offer about 2%, while high-quality short-term corporate bonds can yield around 3% at this time. Nevertheless, the first-order task of the emergency fund is not inflation protection but liquidity and protection from having to sell one’s long-term investments at an inconvenient time, such as in the middle of a deep recession. Consequently, one must be ready to accept some degree of loss of yield in order to gain timely liquidity convenience. My recently published book ‘Personal Finance for Everyday Challenges‘ provides additional strategies to deal with life’s curveballs.

Where should one keep their family emergency fund? Is it best to have it liquid, in a checking account, a savings account, or elsewhere?
Because the emergency fund may be needed at any time, it is best to keep it liquid in something like a savings or money market account where there is no risk of loss. A checking account is fine, too, except that it usually does not pay interest. Because of their inherent risk of loss, stocks and bonds are not appropriate places to hold such funds.

How can one handle the impact of inflation on their family emergency fund?
Because the emergency fund has to be liquid, there is not much one can do to combat the negative effect of inflation. That is because the more liquid a financial asset is, the less return (in the form of interest in this case) it provides.