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You Don’t Need An Emergency Fund

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This is a Devil's Advocate post.

Today, I’m going to tackle one of the most seemingly unsurmountable pieces of personal finance advice out there: you should have an emergency fund. Before you read on further, this is a Devil’s Advocate post, which means I’m going to try to argue the other side even though I don’t believe it. So… before you read on, let me be absolutely clear … you should have an emergency fund, but if you want a few reasons why you shouldn’t… here they are.

First off, let me go over what I consider an emergency fund. It’s money you set aside for a real bad rainy day in a bank account, whether its a high yield online savings account or just a regular old savings account at your local bank; it must be in an account where the principal is protected. Putting it in a brokerage account, that’s not an emergency fund because the principal could evaporate on a really bad stock market day. So, why don’t you need an emergency fund…

Most Emergencies Are Small…

or if they’re big, they’re really really big. So, in most cases the emergency fund you have will either be way too much or not enough to handle the emergencies of life. If I were to guess the number one emergency that pushes someone to dip into their emergency fund, I’d say it would have to be for auto repair. Even if you follow the most aggressive recommendation of three months, a few hundred bucks for an auto repair probably won’t do too much damage to the emergency fund so your money would probably be better served in a brokerage earning market appreciation rates than whatever minimal rates you’d get in a savings account.

Credit Cards Can Get You By

If you go by the rule that you need 3/6/9/12 months of salary, you probably have that much on your credit cards. In fact, when you do face an emergency, it’s probably a good idea to pull out the plastic first even if you have the emergency funds because you can probably get at least 1% in points from it.

You Have Insurance

You probably pay hundreds of dollars a month in auto, home, life, and medical insurance; so why do you need thousands of dollars saved away for emergencies? Bust a tooth? Use dental insurance. Flooding in your house? Home insurance. Crash your car? Auto insurance. While it certainly makes sense to have a few dollars saved away, having a year of your salary sitting in an account earning a sad rate of return is simply not a strong financial decision.

Ultimately, what you want is to strike a balance between having no emergency fund and having too much earning a low rate. Certainly, since this is a Devil’s Advocate post, I think that having an emergency fund is a very strong financial decision (despite what I said in the last reason) and one that everyone should definitely start once you can.

{ 14 comments, please add your thoughts now! }

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14 Responses to “You Don’t Need An Emergency Fund”

  1. Chris says:

    Auto repairs are not always a few hundred bucks. Actually, they can easily be over a thousand. The whole point of an emergency fund is that it is money that is not included in your overall portfolio, so the argument that it can make more interest elsewhere is ridiculous. It’s not there to make money, its there to keep you from resorting to credit cards in the event an expense comes up that cannot be fit into your regular monthly spending.

    Putting it on plastic to earn 1%? Okay, but if you don’t have the money to cover it, you’re going to be charged interest when you roll your balance over to the next period. What is 1% back compared to 13% interest?

    Insurance is completely different, it is not an emergency fund. Your auto insurance will not pay out if your transmission dies.

    Finally, the whole purpose of having 6 months of expenses in an easily-accessible account (ie not long term investments or retirements, which may not be smart to withdrawal from when you unexpectedly need it) is to weather a job loss without touching your real assets. What if you are laid off during a temporary dip in the market? Are you supposed to pull out all your stocks to pay bills even if its selling low and you’re going to take a huge hit? That doesn’t make sense to me.

    Personally, I have 2 emergency funds. One is a thousand dollars in a low (practically zero) interest savings account that I can tap into immediately if I need to (direct transfers, I can have that money in a few minutes if needed) and a larger long-term emergency fund in a high yield savings account that would take me a few days to transfer something out of. Plus my regular investments and retirement investments.

  2. Kurt says:

    “Putting it in a brokerage account, that’s not an emergency fund because the principal could evaporate on a really bad stock market day.”
    Uh, that would be the worst day in history. We’ve never seen one thus far (100% decline) and I’d be surprised if we ever do…

  3. cami says:

    “it’s probably a good idea to pull out the plastic first even if you have the emergency funds because you can probably get at least 1% in points from it.”

    Actually I would say that it is a good deal to pull out the credit card first, because it is good to have all the expenses consolidated. Plus, in the terms of car repairs, if you’re out somewhere, there’s a good chance that you’re not carrying around an extra $700 bucks in your wallet. But you better have the money to pay it off once the bill comes due.

  4. Fred says:

    Interesting post! I would like to point out, however, that homeowner’s insurance does not cover flooding. That’s why we have FEMA ;P

  5. Hmmm, no mention of an Home Equity Line of Credit…

    “While it certainly makes sense to have a few dollars saved away, having a year of your salary sitting in an account earning a sad rate of return is simply not a strong financial decision.”

    It’s worth noting that such a sum earning a good rate (say 10% in a mutual fund) of return each year, could cover you from several emergencies using just the interest.

    If you have 30K and are not making interest on it, you can sustain 3K of emergencies for 10 years. If you have 30 and are making 10% interest on it, you can sustain 3K of emergencies for an infinite number of years. I’d much rather have the later, even if there’s a small chance of loss in the short term.

  6. plonkee says:

    I can see why its so difficult to write this devil’s advocate article, as most of the reasons are really to do with having a smaller emergency fund rather than no fund at all.

    Wrt emergency funds, I think they are a case where there is one set of advice for high net worth individuals, and another for low net worth individuals. And that is the higher your net worth, the lower your emergency fund needs to be.

    • jim says:

      It’s hard to argue a lot of them because there’s a reason why they’re considered “common sense advice.” I mean seriously, how can you legitimately argue against having an emergency fund at all? I doubt it…

  7. zen says:

    Don’t forget – most people optimize their insurance. The “little” expense could balloon if they don’t have full coverage, or if you don’t have “under-insured motorist coverage.” Basically – insurance is only good insurance if you pay out for it.

    Emergency funds, IMO (and plonkee’s, evidently), are good for low-income people who live paycheck to paycheck. If you get your emergency fund by forgoing a week of splurging I’d say you don’t really need one – but their is always unemployment fears as well…

  8. broknowrchlatr says:

    I agree that a balance is very important. The location of your emergency fund also makes a big difference. There are a few other ways you can weasle your out of paying things for a while so you can incure no interest for months after even a large unexpected expense.

  9. Scott says:

    ah the ole emergency fund……….

    well, there is also commercial paper linked to your checking account. pays about 5.09% for 30 day paper, costs nothing to buy, nothing to sell and is rated the same as the issuer. no early redemption fees either. and you can have your cash same day.

    pretty cool. no fees, no hit to your credit, liquid, great interest, no stock market exposure, no bond market exposure.

    ssm

  10. sandy says:

    I have an emergency fund in a savings account with USAA that pays 4.28%. They call it Performance First Index. The only problem is that it requires a $10,000 minimum. I’m at the place in my life now where I’m getting a life-long pension, so no worry about a job lay-off. And so I’ve been wondering then if I even need to have that amount in there? As a home owner, we might need a new roof, new paint on the outside, water heater replacement, plumbing problem, and yes car bills can be more than a thousand, especially w/transmission problems, so I think one should have something set aside. I’d be interested in hearing what your advice is. It seems like $3,000 might be a better number for me, and then where would I put it and the rest because I wouldn’t qualify for the 4.28 any longer.

    As far as a MMDA, the 7 day lag doesn’t seem like a problem because you could use a credit card for the emergency, and then 7 days later pay off the credit card before any interest accrued.

  11. Dave Snowden says:

    Hi, I’m Dave Snowden. I work at USAA.

    At USAA, we believe that having an emergency fund equivalent to 3-6 months expenses is a cornerstone of your overall financial game plan. However, this fund is not just for emergencies. We like to call it an “emergency/opportunity” fund. Since you’re retired and receiving a pension you may not need to worry about a lay-off, but an emergency fund is a great place to stash funds for planned or unplanned “big ticket” expenditures—emergency or not! This fund could provide the flexibility to use YOUR money for a vacation, investment opportunity, or other expenses like replacing a furnace. The high-yielding, FDIC insured, Performance First Index Account is ideal for this purpose, but USAA has a host of other options that might be suitable for you. If you need help navigating strategies and/or specific options call the USAA Financial Advice Center at 800-472-8722 (or send them an e-mail through usaa.com). Thanks for your membership!

  12. Tom says:

    I only keep between $31,000 and $40,000 in a cash account for emergencies. I have a 457 and other plans pluse a very large public employee pension fund that will pay me 99% of my income for life with cola’s and full paid medical insurance for the wife and I. I don’t think having 30-40k in a low interest account is bad when we have the other funds saved up and doing very well.


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