Preparing for Emergencies

(This post was originally shared with Scott Oeth’s private wealth management clients in 2021, and as such the interest rates referenced reflect that time period.)

The importance of having a liquid emergency savings fund is a cornerstone financial planning concept I discuss with my clients. This isn’t a new idea; for years, experts from all corners of the financial world have weighed in with emergency fund recommendations that often range from keeping between three months of living expenses to one year’s worth of income as cash in the bank.

Cash is king during market drops and times of personal economic crises, such as a job loss, but is it the only way to prepare? Is it always the best way?

Keep Household Goods on Hand for Emergency Purposes

Keeping your household well provisioned with essential everyday consumables and doing so well ahead of an emergency or shortage, instead of following the average American’s “just in time” shopping system, can make life easier when times are tough. It could also reap a financial win—particularly during tough economic conditions, such as times of low interest rates, high inflation, and supply shortages.

These days, due to a global pandemic, the idea of a suddenly losing a job, experiencing a serious illness, or having your business frozen is all too real for many people. Even if you didn’t personally experience any of those issues, you have probably experienced product shortages and bare store shelves caused by the crises or a supply chain breakdown. Now, add on the prices of necessary goods soaring in a bout of heated inflation.

Emergency cash in the bank is important during tough times, but physically having stockpiled the goods you intend to buy with those dollars could prove to be more valuable.

Having a few months’ worth of food on hand to feed your family could provide security when inflation is eroding your bank deposit’s purchasing power—and there may be precious little on hand to buy with that cash anyway!

Preparing for Emergencies is Prudent

“Preppers” are often the butt of many jokes, but a crisis is no joke and being prudently prepared to weather that storm is a smart and calculated move. It could bring you peace of mind, and I’m convinced that in many ways it could be a financially savvy approach.

Utah State University offers a wealth of information for anyone interested in preserving food for their pantry.

Long-term thinking isn’t paranoia, it’s prudent. It’s the way our ancestors thought before such times of consumer abundance and one-click shopping. It was also the mindset of many people during the last time our country faced a significant inflation shock.

But isn’t hoarding bad? Hoarding massive amounts of product that you’ll never use is different than preparing yourself for a crisis. Pre-buying items your household will use well in advance is simply planning. Buying ahead in bulk can ease the strain on the system during shortages because you represent one less household scrambling to find food and supplies during tough times—you’re already prepared! Buying ahead when items are on sale and easily available will also be one less household putting upward pressure on prices during inflationary times.

Four Financial Benefits of Stocking up for an Emergency

Here are a few of the potential financial advantages to allocating a portion of your emergency fund to toothpaste, canned tuna, and yes, maybe even some extra rolls of 2020’s “white gold”—toilet paper!

1. Interest Near Zero

How much interest is your bank account earning? Zilch. Nada. Zippo. Darn-near nothing. In 2021, you’re likely being paid a hair over 0% on bank savings. Maybe 1% on limited allowed balances if you’ve been a savvy online bank shopper.

Now, just because you’re not earning any interest on your bank savings doesn’t mean you should empty your bank savings account. Emergency funds on hand—readily available cash in the bank—is important, regardless of interest rate. Return of your money may be more important than return on your money when an emergency hits.

However, today’s rock bottom interest rates offer little incentive to keep extra funds in the bank and can make alternative emergency planning options more attractive knowing there is little “opportunity cost" (you’re not losing much in terms of interest on your bank savings account).

[As a side note, you may want to consider Series I Savings Bonds for a portion of your emergency cash holdings. At this point these bonds are also offering a fixed 0% interest rate, however, they are currently being issued with a 7.12% inflation rate adjustment! Be sure to evaluate the holding period requirements and understand that the inflation rate component of the Series I Bond is subject to change.]

2. Your Time and Energy are Precious. Conserve them!

During the initial stages of the Covid-19 pandemic, most grocery delivery services were suspended, Amazon inventory was wiped out, and deliveries from everywhere were delayed. A successful insurance agent told me he waited in line for more than an hour before a store opening to buy toilet paper when his family was down to their last roll.

Is strolling store aisles or clicking through online shopping lists the highest and best use of your time? Even if you don’t get trapped waiting in lines during a shortage or rationing situation, weekly store runs are a time suck and distraction. How much is your time worth? We only get so much of this precious, non-renewable resource, so it’s important to batch your efforts and buying in large quantities can help. You’ll save time, energy, focus, possibly even money (see #3 below!), and have the benefit of being well-prepared.

3. Bulk savings.

“Hopefully we’re all using toothpaste every day. A couple times a day, we’re going to go through toothpaste every month. You’re better off buying two years’ worth of toothpaste when it’s on 50% discount, that’s an immediate return on your money…chances are their prices are going to go up, but that’s a real savings that you get to put in your pocket.” -Mark Cuban, billionaire.

While the interest rate earned on bank savings barely registers, the volume discount from buying in bulk can easily be in the double digits! If you’re going to use it anyway, why not stretch your dollars by going big? Combine saving your hard-earned cash by buying in bulk with thoughtful and less frequent shopping trips (where you may be more likely to blow dollars on impulse purchases) with regular pop-in trips to the store), and you can see your savings take shape rather quickly.

4. Hedge against inflation!

With inflation currently running over 7%, your emergency funds could sit in a bank account “safely” losing purchasing power due to the impact of inflation and able to buy fewer cans of tuna and rolls of toilet paper in a time of need, OR some of those funds could be used to purchase these valuable household commodities now—at today’s prices—where you could expect them to effectively increase in value with inflation.

While this could potentially provide a modest financial benefit over bank savings in “normal times,” the psychological and financial benefits could be great during times of true crisis when shortages and worries are on high.

A Balanced Approach

“If it were possible to create a perfect savings account, it would consist of a lifetime supply of every item you’ll ever use—food, shelter, clothing, transportation, recreation, medical care—everything. With such a stockpile, you would have reached financial independence and eliminated forever the risks of external economic forces, such as inflation or recession.” John A. Pugsley, The Alpha Strategy (p. 153)

John Pugsley wrote the above piece in 1980 with years of high inflation, poor investment returns, and a struggling economy painfully front and center in people’s minds. Even with this advice, Pugsley admits that achieving his perfect savings account is essentially impossible due to shelf-life limitations, as well as functional and design limitations.

Not many of us would be perfectly content with vehicles, shoes, TVs, smartphones (oh, wait…) from 40 years ago, but on a shorter time horizon, it’s easy to see how having a well-stocked pantry and storage closet with regularly used household commodities could be a valuable compliment to your cash savings!

If you’d like more information about preparing your household for an emergency, check out these recent “Money Matters” segments, where I spoke with WTIP radio about how people can better prepare themselves for an emergency: