Although job loss is the “killer ap” for an emergency fund, there are plenty of other kinds of emergencies. In the aftermath of Katrina, for example, lots of people had to deal with closed banks, non-functioning ATM machines (power and telecommunications were out), and places that couldn’t take credit cards (ditto). Having some actual paper money was really handy (although admittedly not as handy as having gotten out of town a couple days ahead of everyone else).

There are some emergencies that can be solved better with cash than with any other resource–and shares in an ETF are not cash.

I think the key factor in determining the size of emergency fund you need is your “minimum monthly expenses,” which is how much money you’re obliged to spend in an average month.

If your cost of living is very, very low–let’s say your minimum monthly expenses average $500 a month–then your emergency fund can be quite small as well–just $3000, if you go with a 6-month emergency fund.

I hate the “6 month” emergency fund concept too. Sure it’s a great idea to have some liquid resources available, but the amount is highly variable based on the individual. I keep a much longer term emergency fund due to the licensing requirements of my highly specialized profession (state licensing agencies can be notoriously slow even if you have found a replacement job).

Also, part of the common advice is to build this 6 month fund by setting a small amount of money aside each month– say 10% of your monthly pay. The problem with this method is that it takes years to accumulate the emergency fund. I think many people will find it hard to be motivated by a plan that, if followed properly for 4-5 years, provides only 6 months of security. It seems like this would require even more discipline than transitioning to a more “extreme” budget and saving a much higher percentage of income. If you save “only” 50%, for example, you will accumulate an emergency fund very quickly. The experience of success in financial planning has been very motivating for me, and I expect others feel the same way.

“Even better, if you save more than 50% and you have more than one income personally, and you can live on the smaller of those, you are even more safe.”

That’s true, *IF* spouse A losing their job, and spouse B losing their job, are independent events without a confounding factor. I know a few couples that can and do spend less than the smaller salary between them; all of them are pairs of engineers that work in the same industry, or even at the same company. It’s highly likely that if one loses their job, the other will too.

I’d venture that the filter of “couples that spend less than their least salary” introduces a selection bias towards couples that both earn healthy salaries and have similar personalities, e.g. career-focused introverts that met their partners in college classes or at their job, and hence share the same systemic risk w.r.t salary.

IMO this was the critical oversight in giving mortgage backed securities high credit ratings. All those borrowers were selected according to the same criteria, their home values are set in the same housing market, and their incomes come from the same job market. Bundling those mortgages did not provide a diversification benefit against default.

I posted more prosaically on the emergency fund this morning. I see it as valuable psychologically/emotionally–not just financially.

Also–re Philip Brewer above–in the real Katrina area (New Orleans area–New Orleans itself was, of course, another story), cash was without value for a while–there was no gas to buy, no stores were open, phones didn’t work. The Red Cross showed up within a few days with food and ice.

If you left the area–as we did for a few days–if you were without cash, hotels were paid for and food stamps were handed out, no questions asked. We did not avail ourselves, but many did.

In general, I agree with Jacob, with a few modifiers:
1) There are times when markets are closed (e.g. week of Sep 11, 2001) and/or some stocks have halted trading, so having all your investments in stocks can be perilous if there aren’t adequate cash reserves. It is unclear to me how unanticipated bank holidays, trading vacations, and downed electronic communications affect automatic payments.
2) US savings bonds in paper form can be used when natural disaster strikes, but you still need an institution (e.g. FEMA, Federal Reserve, or bank… not a credit union!) to cash them. They might serve as collateral for a short term loan. I have a month’s expenses in this form, but have troubles recommending them today since the base rate, like CDs, is next to zero.
3) Cash in a can isn’t so bad when interest rates are next to zero! Personally, I find it handy to keep up to $300-1,000 in cash, but be careful that you don’t build up such a reserve that the police think you’re dealing in drugs.
4) Short of insurrection or outrageous inflation, it seems that most difficult times last less than a month before normal trading venues are open. The first two can last years and the best strategy seems to be to get the hell out of there.

True financial freedom in life means living an active life, instead of a reactive one. As an example of this supose you buy a new car financed by the bank for 60 months. You are now forcing yourself into a “Reactive” life, as you must for the next five years react to the payment on the vehicle. In order to react to that note on the car, you face an obligation to earn the money to pay the monthly payment. You took on the obligation to not only repay the amount you borrowed to purchase the vehicle, but you also agreed to pay a certain amount to the lender for use of the money. You are therefore obligated to the lender and must react or lose the purchased vehicle.

If your living an “active” financial life, you own the vehicle, and incur no obligation to be reactive to anything save normal upkeep and fuel and taxes and insurance, of which you will hopefully have built into your monthly budget, and through financial independance, your monthly cash flow will automatically cope with those expenses.

For the burned out transmission that may come, you pull that from your emergency fund, as you were wise in your budgeting, thinking the worst that could happen, and your cash flow, from not being Reactive/Obligated to payments on the car has allowed you to build up the repair cost.

Active Financial Life
vs
Reactive Financial Life

This applies across the board in personal finances.

I agree with Sam. I keep a small amount (about $1,500-$2,000) in my local bank’s checking account to satisfy minimum balance requirements and as a cushion to cover any small, unforeseen expenses which may arise in a given month, whether they are an extra bill or trip to the ATM. This account generates no interest but that is fine. All of my day-to-day inflows and outflows come from this hub account.

But my next layer of funds is in an intermediate-term muni bond fund. It has much more than what I keep in the local bank but it is slightly less accessible (I have checkwriting privileges and can transfer money to my bank’s checking account which takes a day or two). However, it generates tax-free dividends each month (slightly less than 4% annually) although its value fluctuates a bit (but not a lot). I rarely have to tap into this account.

Then I have stock mutual funds and an IRA which are less readily accessible and whose value fluctuates more. I leave those alone, very rarely accessing the former and never accessing (yet) the latter.

The idea of putting a big blob of money into some account which generates very little or zero interest is abhorrent to me. I understand others do not feel that way but I can tolerate the relatively small risk with an intermediate-term muni bond fund while getting a decent, tax-free dividend each month.

Emergency Supplies goes hand in hand with Emergency Fund. Security first with A pistol and ammo can cost $400+. 10 2 liter bottles of Water with a small drop of clorine is free and 4 small 30oz bottles, takes space, and water weighs a ton, but is the most essential element besides space and oxygen. Food (mobile and long term), Medical kits, Fire starters (flint and steel, not matches!), A mechete or big knife comes in very handy for many survival reasons. Solar powered Cell phone is of least concerns, but not better than a hand cranked tranciever (both could be useless if the towers have no power)!

Prepare yourself by thinking about all the angles and worst case scenario directions to take for you and your family.

If your house is gone, you must find secured shelter eventually, so keep all emergency emergency supplies in a backpack per person by your bed. Keep other shelter readt emergency supplies in a safe location, preferably away from unneeded possesions/obstacles.

If you haven’t emergency supplies yet, then you need to Prepare for the Worst Today! But only for extreme-mobile-case what you need items that fit in a backpack first. You can then gradually think/decide finding more emergency supplies for your emergency shelter.

And then decide upon your Emegency Funds. Money won’t save you in a tsunami, earthquake, hurricane fallout, nuclear fallout, or when the grocery stores/emergency stores are raided.

But it will come in handy if you lose your meaningless job!

“The more you know the less you need”

One of the truest things I have ever heard; however a little cash is a handy thing. Furthermore if you need something NOW, just paying for a solution is usually fastest.