By Mark Scheinbaum
MIAMI —How much do you really need in emergency funds for yourself or your family?
It is the time of New Year’s resolutions, so let’s resolve to step back and take a rational look at cash hoarding…huge amounts of money earning no interest, and antiquated views of what we really need for a sudden emergency.
All of these ideas are mine and mine alone. The internet is replete with actuarial and accounting formulae and helpful hints. Enjoy them.
This is my admittedly biased view from the perch of more than three decades observing individuals and families in a financial pinch.
First, for most people, huge catastrophic illnesses and accidents are not often covered by any “emergency fund.” Most people have no insurance, comprehensive insurance, or something in between. Thus, gigantic co-payments, deductibles, exotic prescriptions, and hundreds of thousands of dollars in mounting bills are likely never to be covered by your “emergency fund.”
Second, and important to many families (depending on ethnic, religious, or national customs, crises, and history), are things I do not include: gold coins, packs of hundred dollar bills, or uncut diamonds in your sock drawer as your emergency fund.
These are political statements, often illiquid or used as barter, which are not easily evaluated by financial professionals.
If you go along with the two exclusions above, then ask, “What is an emergency fund?”
An emergency fund, for most people, is the balance in your money market fund, checking or savings account, debit card account, or instantly available line of credit, available late at night, on a weekend, on vacation, or when other investments and resources cannot easily be liquidated for sudden expenses.
Sudden Expenses ?
It seems simplistic and perhaps silly, but I have truly come to believe that there are two areas which always must be covered in our modern society, and are the key to how much money you need in these accounts:
- How much do you need for an immediate first class plane ticket to a loved one or friend with emergency personal or health needs? (Expensive First Class seats are sometimes the only last minute tickets available). If you live in Buenos Aires, and your grandkids are in Paris, this might be a $6,000 ticket. If you live in Miami and your kids are in Dallas, it might be $1,500.
- If you are a couple, double the number. If you will need a quick rental car and hotel, add a thousand bucks. In most cases this number will not exceed $5,000 per person.
- How much is the new transmission for the car? (The “transmission test” is my shorthand surrogate for mechanical and personal needs) If you have no car, or a new car, or a plutonium super-duper extended warranty, maybe you can forget this one, but for an old junker this could be $1,900.
- For a computerized newer car this could be $3,500. For a larger bill, the solution might be trading it in and dumping the $3,000 or $10,000 into a new car or a lease.
- Again, in most cases the Transmission Replacement Test will be well under $5,000
Of course, there are as many variables as there are college tuitions, lost jobs, damaged roof tiles, and overdue income tax bills. But these “emergencies” will need larger liquidations of assets, or sadly, the inability to meet these costs in any case. The challenge here is to know what is REALLY needed in an account paying zero or one or two percent interest, or in some countries, accounts with NEGATIVE interest, where you pay THEM to keep track of your money.
Again, every case is different, but in a household where bills are paid, income is steady, and reserve assets could be tapped in a few weeks, the true “emergency fund” often needs only $15,000, more or less, to allow you to sleep well at night, and react to the horrible phone call that comes in the middle of the night, that we hope you never receive in the year ahead.
Happy New Year!
Mark Scheinbaum is a frequent contributor and is Managing Director of Shearson Financial LLC, Boca Raton, FL. His opinions are his own.