Strange Change, Rainy Days and Big Emergencies

You know you need emergency money, right? But what does that actually mean? Here are the three kinds of “emergency” money I counsel my clients to have.

One is what I call “strange change”. You should have some cash in the house that you can use if you need to Get Out Of Dodge right this minute: no standing in line at the (probably empty) ATM, just get in your car and drive. For this, the best idea are rolls of $1 coins. You can get a $25 roll each time you go to the bank until you sock away enough. One little old lady I know told me she literally keeps it in a sock: it’s a home-made cash cosh by her bedside!

Why rolls of coins?  When Hurricane Katrina hit New Orleans, one of the things people leaving complained about was that they couldn’t get any change for their ATM-issued $20 bills along the way: they’d stop for a hotdog and have to spend $20, since everyone was out of change. That was the first time I thought about rolls of $1 coins, but later I realized that I’m far less likely to loot my stash of emergency money if it’s in rolls of coins instead of a pile of $20 bills. I also like that you can build it up in $25 increments. If you prefer 50¢ coin rolls, you can get those in $10 increments!

How much? I suggest you figure out what you’d need to pay for gas and groceries and necessary meds if the cash machines and credit cards went down for a week (whether from a foreign attack, earthquake, hurricane or ice storm). Alternatively, what would do you think you would need to travel from where you live to where you’d go in a huge emergency: what would you want for hotels/food/gas along the way? I’m thinking around $500 in rolled coins in the house.

The second kind of “emergency” money isn’t really for emergencies: it’s for “rainy days”. Rainy day money is for the stuff that is GOING to happen, you just don’t know when. But if you think about it, you can make a guess what you’ll probably need. You’ll need to brakes and exhaust for your 9 year old car. Your 30 year roof will need replacing every 30 years. Summer camp will come again next summer. I even know when Christmas will be this year! These are the intermittent costs that are mostly uncertain about when they’ll fall. If you’re unlucky they can bunch up one upon another. I like people to keep a base in their bank of something like 1/4 of their annual spending on these unusual items. Vacations, gifts you’ll give over the course of a year, week-end reunion trips, that sort of thing: having a pad in your account for this sort of thing makes a bumpy road much smoother. This isn’t virtuous saving, this is just *sane* saving. These aren’t things that you *may* spend money on, these are things that you *will* spend money on, you just don’t know when.

The third kind of “emergency” is for BIG emergencies, things we simply cannot foresee. Job losses, house fires, or sometimes wonderful things: the chance to buy out your boss and take over a business, the chance to abandon your life for a year (and write a bestseller about it!) If none of those happen, the big emergency becomes old age. For this type of Emergency Savings, I highly recommend people save in a Roth IRA if they’re eligible. You can have more than one Roth IRA, too: the Emergency Money one might be held in a savings account until you gather 3 to 6 month’s living expenses into it, at which point any additional savings can be more clearly earmarked for old age (and invested to grow.) Why Roth IRAs are so wonderful is a topic for another day.