I recently received an unwanted reminder how important an emergency fund is to financial well being. If not for my emergency fund I would have been forced to take on either unwanted debt, and if that wasn’t available then I am not exactly sure what I would have done. If you don’t have a dedicated, liquid, emergency fund – then please stop reading and figure out a way to fund one right now.
My Recent Story of PayPal Purgatory
In addition to this site, I own about 10 other websites with a business partner, who oddly enough I have only met once in real life. These other sites produce what most would consider a pretty good side hustle income. All of the income comes through PayPal. The income, at this point is pretty steady and over the past 8 years has been integrated into my cash flow. Put another way, to a certain extent this money is necessary given my current savings rate as well as discretionary and non-discretionary spending.
To say I wasn’t pleased when PayPal let me know that my account was “under review” and during the review period is an understatement. Nonetheless, I figured how long could it possibly take to remove the account restriction given I sent them my filed tax return from last year and my New York Department of State Corporation paperwork? I mean it is a multi-billion dollar company, right?
Well, one day passes, then 5 days, and now I am getting pissed and stressed. From that point on I called and tweeted every single day. Each day I talk to someone new and they give me a different answer. Two weeks in and they are still, happily, accepting money that is being sent me but won’t let me withdraw it or pay bills! This is when I get a terrible, awful, customer service manager who informed me that my PayPal account could be locked up for a period of up to 90 days. 3 FREAKING MONTHS?! What’s worse? I couldn’t actually call the elusive compliance department I could only send snail mail.
On the same day, I posted on PayPal’s forum and finally got a hold of a helpful Customer Service Rep on Twitter – so I am not sure which actually freed my account from its restricted status, but I was grateful nonetheless. If you find your business account restricted, do not give up, keep calling, tweeting and absolutely write on the forum you are not alone.
During those 3 weeks I was forced to withdraw from my emergency fund and it gave me a new found respect for the account. I should mention that the above wasn’t even that big of a deal as compared to an unexpected death or disability.
What should an Emergency Fund Look Like
I don’t pretend to run this blog from some sort of authoritative position. I have a ton of personal finance flaws – I have some debt, I don’t save enough, my budget is no where near streamlined, etc. etc. Notwithstanding, I continue to espouse opinions that are sometimes right and sometimes (alright often) wrong.
Either way here are what I think an emergency fund should look like:
Your Emergency Fund Should be Kept in Cash
We have all heard it before, cash is king. This becomes much more prevalent when you are in an emergency situation. Some bloggers and authors are of the opinion that you can rely on debt or selling securities, but for me, that is way too risky for this type of account. Whoever lived through 2007 and 2008 is well aware that debt can be cut almost at anytime.
Securities worry me, because the emergency you are faced with could be at the exact same time there is a market downturn. Now you are selling securities exactly when you shouldn’t be. Also, given the fact that most people don’t have any assets outside of their home and qualified account, you could be getting destroyed in taxes and penalties to bridge the gap during the emergency situation.
Your Emergency Fund Should be an Amount You are Comfortable With
I don’t think it is useful to say that the account should be 1, 3 or 6 months of expenses. Rather, it should be large enough to allow you to sleep at night. For me and The Wife, that number is large enough to cover almost any non-dire emergency. Anything above our “number” would likely be covered by an insurance company – death, disability, real housing issue, etc.
Your Emergency Fund Should be Separate Account
In my opinion, your emergency fund should be in a separate and marked account that is not your main savings or checking account. The reason is that it is too easy to have a couple of down months (or bad spending months) where you don’t even notice that your emergency fund is actually being actively destroyed.