The great thing about personal finance blogs
is that you can find all kinds of personalized advice for a wide variety of scenarios.
Unfortunately the line between personal advice and general advice often gets blurred.
Some advice gets repeated over and over so much that people just start to assume that it is one size fits all advice. They forget that everyone has a unique situation. Not everyone should be following Dave Ramsey’s plan.
Usually it is the ‘rules’ about credit card usage that I have the biggest beef with. In my opinion another major offense is pushing everyone to maintain a large emergency fund. I just can’t wrap my head around the concept that apparently everyone should tie up a large sum of money in a low interest savings account.
While it does make sense for people with debt problems, it just doesn’t seem logical for anyone with decent credit. In such cases a small emergency fund should be adequate.
Why It Is Necessary For People In Debt
For people with debt problems, they usually have limited options to find cash to pay for various emergencies that arise. A lot of the time those emergencies would need to be covered by credit cards, payday loans or other high interest options.
Obviously this would put them further into debt and would be a psychological punch to the gut. They would feel like so much of their progress had been wiped out. It would get very discouraging knowing that there might be more emergencies around the corner putting them back to square one.
An emergency fund would ease a lot of that concern and give them some breathing room. With emergencies taken care of, paying off their debt seems like a much more attainable goal.
Low Interest Options Available With Good Credit
When you have decent credit, you do have a lot more options to come up with some cash. You’re not stuck paying high interest if some emergency occurs and you don’t have cash in your bank account.
The easiest option for me would be my line of credit at my bank. I’ve been gradually negotiating a lower interest rate on this line of credit as my credit rating keeps improving. At any time I could transfer over a sizable amount of cash without paying massive interest on it.
Through my bank I would also be able to apply for a personal loan at any time. By providing collateral I would be able to get an even lower interest rate than my line of credit.
Then there’s my personal favorite option…credit card balance transfer offers. There are countless credit cards that I could apply for and get 0% interest for up to 15 months. Or my existing credit cards frequently offer 1.99% or 2.99% deals. Basically an emergency could be covered with minimal interest.
Of course each of these options would take a different length of time, but it would be easy enough to bounce the balance around until the lowest interest option is available. I could even put the initial charges on my high interest credit card for the remainder of the billing period. That way I’d also get some cash back rebates.
Using Investments Instead of Savings Accounts
The investment side of this equation is something I am still working on. I’ve been blowing money on mutual fund fees for a long time. My investment portfolio is finally getting to the point where I can switch to self managed investing and save on the fees.
I am confident that I should get much better returns than the best bank savings account. If I can’t manage that, I’ll just have to barter SEO tips for additional investing tips from some of my investment blogger friends.
Once that gets rolling, I just couldn’t imagine keeping more than a few thousand dollars in a savings account earning significantly lower interest. The difference in ROI would be huge if we’re talking an emergency fund equivalent to 3 to 6+ months living expenses. The key is that some of those investments can be liquidated if absolutely necessary.
So why would I leave money in the bank for so called peace of mind? The logical side of my brain would be pretty pissed off at the emotional side.
What If Something Really Bad Happens
Personally there are very few emergencies that I wouldn’t be able to cover with my small emergency fund and credit. It could be done in such a way to avoid most interest charges. The bit of interest could be offset by the higher investment returns.
Worst case scenario, the emergency was so dire that I couldn’t pay off my balance transfer before the 0% offer expires. In that case I would either transfer the balance somewhere else or resort to selling off some of my investments. That would depend on how much longer I needed to pay it back.
In my situation I do happen to have online income to fall back upon if I were to lose my job. So I do have extra cushion there. I also have other assets that I could sell off if it ever came to that. Plus I’m Canadian. So most potential medical expenses would be covered.
What About During a Recession
When reading up on other bloggers’ take on not having an emergency fund, one of the better arguments I came across was on Twenty Something Money. He described his approach as being an emergency plan instead of a traditional emergency fund. I completely agree with him.
One comment on that post got me thinking a bit more though. He brought up the possibility of a big emergency fund being very beneficial during a recession. He reasoned that it could be used to buy up low priced assets. The problem is that the people who feel the need to have a big emergency fund aren’t likely to part with it so easily. Also, are those potential gains bigger than all the interest they missed out on prior to that? Honestly, I don’t know. Do you?
During a recession this emergency plan would be more susceptible since selling off investments would likely be at a loss. For me personally I feel that the risk is worthwhile. Chances of a major emergency affecting me during a recession is rather slim.
Conclusion
Obviously this strategy isn’t right for everyone. If I didn’t have good credit, I wouldn’t take this approach. If I had kids to take care of, I’d probably take a more liquid approach. Not having investments to fall back upon would change things too.
I just don’t feel the need to follow advice just because lots of people repeat it, especially when the advice doesn’t seem logical to me.
What about you? Who else out there doesn’t have a traditional emergency fund? For the people with tens of thousands sitting in an emergency fund, do you ever get tempted to invest it instead? Does anyone completely disagree with my approach?
I’ve also maintained a small emergency fund, mainly because I have access to credit, and in a worst case scenario, I could pull money out of a pension fund. Now that I will be transitioning to a new career, I’ll likely try to save at least 3 months of living expenses in case the jump doesn’t happen quickly enough. I agree that one size doesn’t fit all.
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That makes sense to save more during a career transition. If it’s the career I’m thinking of, you might want even more than 3 months. With any luck your blog income will pick up in the meantime making the transition a little easier.
We don’t have a huge emergency fund yet but my eventual goal is to have $15,000 or so sitting in a CD or money market account. While the interest rates aren’t anything to brag about, I’d much rather have that money protected as opposed to having it at risk in the market.
While I believe the math would work out in your favor with the 0% interest credit card, I’d still have a problem going into debt if an emergency were to arise. If you were just going to sell off investments to pay off the credit card (once you use it for an emergency) then what is the point? You’re basically using your investment as the indirect emergency fund in that scenario.
If that’s the case then I’m fine with it, but I couldn’t stomach having credit card payments for numerous months because I didn’t have cash to pay for an emergency when it came up.
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Well with the 0% balance transfer technically I wouldn’t have big credit card payments. Selling off the investments to cover emergencies would be a last resort, but the point is I would be making good returns on that money in the meantime. The time that the balance transfer would buy would hopefully allow me to time the sale of any investments if that looked necessary. I do intend to have a diversified investment portfolio where there are some investments that I could sell off easier and with less risk of losing money.
I think being able to have money somewhere you can access is key. The problem with credit is if they find out you lost your job or the economy stinks they can close your account or significantly cut your limit. I don’t have a problem keeping it in investments if you are OK selling at a loss when recession hits and you lose your job. Personal finance is personal so you have to do what works for you. I think many people have access to money in emergencies but they don’t call it an emergency fund. As long as you aren’t raiding your retirement account you should hopefully make it out OK.
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Why would it matter if it were my retirement account? Ultimately it’s still a part of my overall net worth. I don’t see why it would matter if the account was designated for retirement purposes or not. Aren’t most investments really just retirement accounts?
And I have good enough credit that the banks would not just close my accounts when I don’t have a job. They wouldn’t touch my limit either. Since I have side income coming in through my websites, I can always claim that as my job.
This is a really good point. I’m a 28-year-old with about $40k in a roth 401k. My husband has significantly less, but also in a roth. We recently bought a house and we’ve been anxiously socking money away into an “emergency fund.” At the same time, we work hard and would like to meet our lifelong dream of going to Europe (nothing ridiculously extravagant- we’re planning for 2 cities in 10 days or so). Is it wildly irresponsible for us to pause in our emergency-funding to add a little to our vacation fund? We work hard and both have job stability. In addition, we live in the same city and are on great terms with our families, so it’s not as if we’d ever go homeless or hungry even in the worst case of scenarios. Or maybe I’m being naive.
If you have job security and money in investments, I don’t see why you couldn’t pursue other financial goals rather than building up a massive safety net. I would base that decision on how much is currently in your emergency fund. Having recently bought a house does add the possibility of bigger random expenses popping up. It all comes down to what you are comfortable with. Some people just worry more and need that big EF for psychological reasons.
We have talked about using a TFSA for our emergency fund. We have a savings fund right now but there are definite advantages to using investment accounts instead. I think the best strategy is a balance of both. Have a small savings account for emergencies and also have an investment account that you can pull from if needed.
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Yes that is essentially what I have setup, but with also credit card balance transfers and my line of credit as an extra layer of protection. It is a lot more convenient to have some super accessible cash for smaller emergencies. I just don’t see much benefit in leaving a large amount of cash in such a position.
You know my stance on this! Though, I do wonder what I’ll do once I am making enough money to cover the bills and save. Honestly, the reason I have such a large EF right now is that my wife is now at home with our son, as well as I don’t quite make enough to cover everything. That EF serves to help us pay bills as my income increases over the next year. Once we’re on stable ground, though, I would like the idea of putting some of that money to work.
Though it would have to be liquid, whatever I do with it.
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Your situation sounds like one where a decent emergency fund does make sense. Having a young son with your wife at home means you are a lot more likely to need quick access to that cash. Still, I would at least make sure that most of that EF is in some kind of investment besides a savings account. There should be a stable option that still allows you to quickly withdraw at any time.
An emergency fund is like insurance. You hope you never have to use it, you grumble about having it in the first place, but you’re unbelievably thankful its there when you need it. I keep one personally. I’ve never had to use it for an emergency thankfully, though I did use it to bankroll a vacation once (after which I quickly restored it)
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Doesn’t sound like a very official emergency fund if it was used for a vacation lol. Some insurance is good, but I just feel that insurance can be just as beneficial sitting in a good investment. Since I have good credit, I do have options to hold me over if I would lose money taking it out of my investments.
I plan to use credit cards in the future and have less of an emergency fund. I know using credit cards goes against a lot of financial advice but I know myself and I know I’m disciplined enough to set money aside and keep a good record of what I have spent. Thanks for bring up the point that financial advice isn’t one size fits all!
Chase
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Glad I’m not the only one here taking that route. I figured it would nothing but disagreements to my plan. As long as you are disciplined, I don’t see much wrong with the plan. It’s just not for everyone.
I prefer to put my money to work rather than leave it sat in a low interest savings account. There are many investments out there that can offer a decent rate of return and still keep your money available on demand if needed. I suppose this kind of thinking comes down to your attitude to risk though. I don’t mind calculated risks but I understand why people might be happier with a safer option.
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I think after the recent recession I think people are especially wary of putting their money where it might not seem as secure. Then add in people’s fears of credit card debt, and I can see why they feel a big emergency fund may be necessary. It just doesn’t seem logical to me for that money to be earning minimal interest.
I think that the EF argument has been so widely adopted in the PF blogosphere that it almost made me depressed when I didn’t have one 2 years ago. I thought that advice was solid though as it drove a competitive spirit in me and made me want to pay off my credit card as quickly as possible. It depends on one’s priorities and obligations though. Why let your money sit in a 1% interest savings acct if you have debt that is accruing interest at say 5%?
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Yes building a big emergency fund while in debt seems illogical to me too, but I understand that many of the people in debt may need psychological help to dig out of their hole. People are all different though. Even among people in debt, I’m sure there are some who don’t truly need a big emergency fund. There is often other options, or at least somewhere better to put that money.
I have a similar approach, borrow money if I’m ever in a pickle, or sell stocks if I can’t borrow any more. It’s natural for me because I already take on debt to buy investments so why not go into debt for emergency situations too. A part of it is psychology for me. I’m more motivated to work harder if I know I don’t have a soft cushion to fall back on. Like you say, the situation is different for everyone. I think emergencies for healthy, young individuals are more rare compared to a family of 4. Having money in a traditional emergency fund means safety and the money will always be there. So that’s good too, but people should also remember that cash loses purchasing power over the long term, but a balanced investment portfolio generally wont. It’s all about opportunity cost and what people are willing to risk for stability
.
Great point about how the lack of a soft cushion motivates you more. I meant to add in something about that. I faced that exact scenario when I lost my job last year. I did happen to have a decent emergency fund. So do you think I was in any rush to find a new job? Hell no! I had money to survive for a while. It wasn’t until I had burned through most of that money that I became motivated to find a job. Also with a very accessible emergency fund I’d think it would be way more tempting to dip into it or mislabel things as emergencies.
I have a big EF, mainly because I am an extreme worry-wort. I’m always afraid of something coming up, and it gives me an ease of mind.
I think some people just need to understand what other options are available to them. There is being prepared and then there is being obsessive and wasteful. I doubt I’d ever keep a 5 figure emergency fund…well not just sitting in a low interest investment or savings account anyway.
This is something I have been thinking a lot about lately. Mostly due to me wanting to agressively pay down debt. I kind of agree with you on it though because I love to invest. I think a very large EF would be better off in some type of investment, although not high risk. I’m not sure on the exact amount we want yet, but maybe a smaller 3 month EF instead of the 6 month until we are out of debt. Paying off that debt will automatically give us a better return than we would be making in a savings account, but I know making money is not the point of an EF. It’s hard to find the balance and I don’t think its a one size fits all type of thing.
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Yeah I wouldn’t bother with more than a 3 month emergency fund when paying off debt. People also need to adjust their thinking based on what kind of debt they are dealing with. Someone who has had long term credit card debt is going to need a lot more psychological help than someone who is just paying off a student loan or a car. People generally turn to Dave Ramsey’s advice when really struggling with debt, but then the people who are doing just fine paying off their debt think they have to adopt all those same practices.
The only one I don’t get is using a line of credit. While it’s true that your savings account would be yielding a VERY low interest rate, it would still be earning SOMETHING, whereas taking out a line of credit, regardless of how low the interest rate is (unless it is 0% and you’re able to pay it off before the promotional rate expires,) will be charging you money.
I’m bringing this up not to argue it, but simply because I don’t understand the benefit and I’d like to.
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The line of credit is just a backup option. My thinking there is that with how rarely I would need to use it, the overall interest paid there would still be much less than what I’d be losing overall by using a savings account or whatever. That would be for maybe during a recession when it makes less sense to sell off investments and the banks may be more stingy about 0% balance transfers and low rate personal loans. It is very easily accessible at any time though.
The EF issue does depend a lot on your individual circumstances. For me, we’re a one income household, so building a large EF is a priority to us. For others I can see the logic in using alternate methods. I’m willing to accept low returns on my EF in exchange for peace of mind, knowing we could get by if I lost my job for a few months.
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If I was in your shoes I’d probably take the same approach. A single income household with a child is a completely different case than a single guy with minimal responsibilities. I’d certainly have more flexibility in using different options, even ones that may include some degree of risk. The individual circumstances is really the whole point of this post. Not everyone has to fit in a specific mold, especially one laid out largely by debt specialists.
You make a good point here, but I’m in deep student debt so I would rather play it safe and build up a savings account. At the same time I advocate young adults (in the current economy) buy their first house instead of saving an emergency, fund so what do I know ; )
DC @ Young Adult Money recently posted..3 Ways My Wife and I Save Money
lol that sounds a bit hypocritical. I think if I were a homeowner my view would actually change. I’d want to take extra precautions to ensure I would never be in a situation where I might lose my home. One thing to remember about student loan debt is that you can usually request temporary relief from payments when in tough circumstances. So you have some extra breathing room you can take advantage of absolutely necessary.
Just like anything else, it’s not black and white. And you know what? We’re supposedly doing it wrong, because we only have $1,000 saved up. We also have debt, though, and a grand should cover *most* emergencies. The driveway that we need isn’t an emergency…sigh. ;o)
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Only a grand saved up with 3 kids would make me a bit anxious. I assume you have some kind of backup options if something really bad happened. I think you do have to consider the type of emergencies that you’d likely face. In an extreme case, you probably have some investments or other assets which could be liquidated. Or sometimes wealthy parents act as another backup layer, although I’ve done what I could to avoid that route over the years.
I’m in debt and still building up my emergency fund. Of which I do actually need! When I’m out of debt, I haven’t given much thought as to how big of a one I’ll need. I know right now $1000 is my first goal but that would cover (barely) a month of bills/rent/food but not much else. So I would like to have a little more until I’m out of debt. However, I do have saving funds that can be considered small efunds. (car fund, medical fund, etc). That helps me not need quite as big of a efund right now.
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I have no problem with that size of emergency fund, especially when dealing with debt. It is the ones over 3 months living expenses that make me scratch my head a bit. It’s those larger emergency funds that just seem overly paranoid. I just don’t think people need enough cash to cover every possible emergency. Sometimes it’s perfectly fine to resort to selling off investments or taking out a loan. To me it’s all about the long term finances of it all.
I guess it really depends on a few things. First off, my emergency fund is really just a set amount of money put aside in case of a health emergency, unexpected unemployment, and unforeseen but important expenses (IE. new computer). But it’s also sort of a down payment fund at the same time. It’s kind of multi-purpose because I hate the idea of money just sitting idly in the bank waiting for something bad to happen so I can dip in.
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My future home down payment is what I would dip into if absolutely necessary, but it’s sitting in my RRSP right now. It’s not an option I would like to use, but having it there gives me the peace of mind that people seem to get from an emergency fund.
One thing I’ve enjoyed with Financial bloggers is the variety and vast amounts of advice and opinions. I can pick and choose what appies to me and what I can learn from. The useful outweights the rest and makes following worth it.
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Yep, the wide variety of finance bloggers out there allows you to find the advice that most applies to your situation. Unfortunately a lot of finance bloggers are not taking that approach themselves. They think that if some financial expert gives out specific advice, it must apply to most people. Personally I like to challenge the norms and do things my way.
I think that a major point that big emergency fund proponents miss is the existence of security nets like unemployment. They greatly reduce the need to dip into personal savings in the event of job loss (and what other cause would there be to have 3,6,12, as high as 36 months of expenses socked away?)
Long before I ever read his book, I did institute Dave Ramsey’s $1000 starter emergency fund, in the form of a checking account buffer to ensure I never come up short on funds, like I did Christmas 2008 when I over-drafted 5 debit card transactions because of a cleared check that I wrote 6 months previously.
A checking account buffer makes sense to avoid overdraft fees and cover short term expenses that pop up. I think the other big reason people keep a big emergency fund is possible medical emergencies. Since you guys have to pay so much for healthcare down in the US, I could see why it would be comforting to have access to a lot of money in a situation like that. Some investments can be accessed almost as easily though.
I believe a balance is needed but, emergency fund is necessary to me and I advice for that. Don’t build too huge of an emergency fund. you can also build tired fund if you will. Where some part stays in savings, some in longer term CD , with minimum penalty. and some stays in an index fund.
Not having an emergency fund is I can’t think of
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For sure, those other investments can pretty much act as your emergency fund. If you didn’t have any investments or if those investments were untouchable then it would change things a lot. Then a bigger emergency fund makes some sense, but then you’d still be best off putting it somewhere that is making more than 2%.
My emergency fund consists of my brokerage account in which I actively trade. I too, cannot let thousands sit in an account paying less than 1%. I trade pretty actively in my account and by not holding overnight, I’m limiting much of my risk. So far this year, I’ve gained 12%, which is not bad considering how volatile the market has been.
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12% is pretty awesome return in my opinion. It sure beats what that money would make in a savings account or very low risk investment. Hopefully as I get more involved with investing I can someday get those kinds of returns.
We tend to use a hybrid approach. We try to keep $5,000-$10,000 in our “savings account” at all times in order to deal with unexpected expenses, however we also have credit cards (with zero balance) that we can rely on, and investments that we can cash out if need be. I don’t see the point of keeping a six month emergency fund in the bank, earning 1%, when our money can earn much more elsewhere. They key is that the money can be accessed if need be.
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Sounds pretty similar to my approach, but I don’t think I’d be willing to keep $10k outside of my better investments. Even $5k may be too much for me. It all depends on a person’s situation though. Some people have less stability in their finances or career.
Emergency fund is good for those unexpected emergencies. If you don’t have the liquid cash, you’ll surely put it on your credit card. I agree with you though that personal finance is personal, and it’s never a one size fits all.
At least by putting it on your credit card, you get the grace period until the next payment is due. That gives you the time to get the cash from somewhere with lower interest.
I like how you use those credit cards- wisely. That is exactly how I would do it. I prefer an emergency fund to cover exactly those sudden/random expenses which may cut a big hole in our pockets, while saving for tomorrow’s retirement in stocks which could yield better gains than a savings account.
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Yes credit cards can be used to our advantage if we are smart about it. They’re not just about getting dinged with big interest charges. There are all kinds of loopholes to use them without getting charged lots of money.
An emergency fund is that keeps me on budget each and every month. When I have an unexpected expense, I pay for it from my emergency fund instead of ruining that month’s budget.
Then the next month, I replace the amount that I have to remove from my emergency fund.
Good article!
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I don’t do any actual budgeting. So that’s not really a problem for me. If you are dipping into your emergency fund for any unexpected expenses, I’m not sure how effective that budgeting really is. I’ve always read that an emergency fund should be used for true emergencies. I do keep a small amount of savings to cover stuff like that.
Love this! One of the great things about this blog is that you challenge the norms of personal finance, you don’t just go with the flow.
For me, I’d like to have a $5,000 EF, but I won’t do that until I’m debt free (due to my inability to ignore logic). Anything more than that and I think I’d just put it into fairly liquid investments like you mentioned.
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That’s one advantage to being a personal finance blogger without any actual financial education. I haven’t been trained to think a certain way and instead base decisions on logic. For some people the psychological side is even more important than logic though. So I wouldn’t recommend everyone follow this route, but people on the fence who don’t see the point shouldn’t force themselves to build an emergency fund when it doesn’t seem necessary to them. If they have somewhere else to turn for cash during an emergency, who’s to say what is the best strategy. It’s all personal.
While I don’t disagree with your approach entirely, I do have an emergency fund and don’t think I would want to ever not have one. While it might not be necessary I like the sense of protection.
I don’t disagree with that either. If it gives you that sense of protection, that works for you. I just find that sense of protection in my other investments and assets. So my emergency fund will stay rather limited for the time being.
I was beginning to think I was the only one that felt this way. Thanks for bringing it up! Its probably controversial for me to say, but I think having an emergency fund is lame. Saving money isn’t lame, but having a money just sitting there for an emergency is. I am all for saving and investing your money, but like you said, why not invest it? A TFSA is very liquid as far as I know and you can still pull money out should you need it. On the slim chance I need it, I am willing to pay the low interest on my LOC if it means the rest of my money is earning higher interest elsewhere. To each their own I guess!
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Yeah by reading other finance blogs, you’d think that every single one of them had an emergency fund. I guess some wouldn’t want to openly cover that on their own blogs knowing that it goes against the general financial advice that people just seem to accept as a given.
It’s good to see some people taking the same approach as me though It makes me feel less guilty about not having a big emergency fund.
It’s definitely different for everybody. Some people have very little and think it’s sufficient (which it’s not) and others have a ton and think they don’t have enough (so they avoid investing). You just have to factor in your monthly (mandatory) expenses and figure out what you’ll need to cover – or – have the insurance to cover any gaps. On average, people don’t have enough saved so if you’re going to err, I would rather have too much.
For a lot of people, it is better to have more than enough, but if you have other solid backup options that is less important. Just be sure to thoroughly examine how strong those backup options are.
“If I can’t manage that, I’ll just have to barter SEO tips for additional investing tips from some of my investment blogger friends.”
Count me in
Kidding aside, an EF largely depends on where you’re at in life. As a 20-something, with few assets, you likely don’t need it. In your 30′s, most people find they need it. In your 40′s, depending upon your debt load and liabilities, it can be essential.
We keep a few thousand in an EF, and probably always will.
I wrote a post about that:
http://www.myownadvisor.ca/2012/05/why-we-want-a-10000-emergency-fund/
The thing about emergencies is this, you never know when they will happen and why liquidate assets if you don’t have to?
Mark
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lmao…yes Mark you’re one of those investment blogging friends that I intend to hit up for some tips
Well I’m my early 30s but my financial position makes me feel like I’m still in my 20s. So I guess I don’t quite need it yet lol.
Liquidating any investments would be a worst case scenario. I would use my other available options first. My small emergency fund would handle most emergencies though.
Maybe it’s because I have kids, or because I have lots of debt, but not having a decent EF makes me nervous. By decent, I mean at least 2 months expenses. My husband is happy to adopt your approach and believes our available credit is fine for emergencies. We compromise for now.
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It must be interesting when a married couple has different philosophies about stuff like that. I completely agree that having kids would make an emergency fund so much more important. I may be willing to risk my own finances a bit, but when there are other people involved I’d be a lot less likely to take chances.
I think everybody’s situation is different and their plans and approaches should reflect that.
Personally, we have a small emergency fund in a traditional savings. It’s not small on purpose though.
Ideally, I would feel comfortable to have around $5k in our emergency fund.
I don’t think I would want to put more than $5k into a emergency fund though, I’d feel like I was missing out on bigger and better returns.
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I think a lot of people are in a situation where they just can’t afford to save much money in an emergency fund. While that might be risky for some people, I think the important thing is that they have something to fall back upon if they need it.
My emergency fund is in high interest savings and some “steady” investments it’s not too hard to access. For the most part, we could live ok on one salary so that helps too.
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Having 2 strong incomes does add a lot of extra stability. In that case I would probably limit my emergency fund even further.
my husband and i keep about $25K in an emergency fund, and we have seperate “long term savings” which is for cars, a home or a really really big travel adventure (usually vacations come out of short term savings). I get what you are saying about other options, but I personally wouldn’t want to take money out my retirement accounts (hard to get it back in there, and I’ll need it when I’m old). And I just am not personally comfortable with using 0% CC’s, because it is inherently short term and depends on a company offering (or continuing to offer) me the deal.
The other thought is, we will have kids some day (maybe 2 years?) and it isn’t like we can just suddenly decide we want an emergency fund at that point and create it once we have the (expense generating!) baby. It took a heck of a lot of time to save up $25k.
I like that you are questioning the norm and telling others they should consider the options, but I think the norms do make sense for a lot of people. If saving up for an EF was holding me back from a lot of other stuff, then maybe I’d sing a different tune.
In your case maybe you just need to find a good secure investment to keep your EF fund invested in. It is unlikely that you would need $25k all at once for any emergency. Just make sure that chunk of money isn’t sitting in a savings account collecting minimal interest. That minimal interest would be below the rate of inflation which means that money is essentially shrinking over time.
Crikey! The subject of emergency funds really gets the blogosphere going. It took a while to scroll to the bottom of this page. PF blog catnip, I think (do you know what I mean by that, or am I being parochial English?).
I agree with you that it’s not wise to tie-up your “emergency fund” in low-interest bank deposit accounts. I also really like the idea of thinking about it as an “emergency plan” rather than a pot of cash.
However, I’m more cautious with respect to the amount of money that I put aside for an emergency. I’d always ensure that I have enough cash to survive for at least six months.
Also, I would not include bank borrowing facilites in my emergency plan (unless I was sure that it is a contractually guaranteed facility as opposed to an ‘on demand’ facility).
Here in the UK, I’ve seen instances where a bank has been willing to extend an overdraft to a customer whilst they remain a top-notch credit risk, but as soon as they stop paying a regular monthly salary into their bank current account, the bank automatically identifies this and withdraws the overdraft facility.
lol about PF blog catnip. I can relate to that with the way my cats react to catnip. One of them turns into a total crackhead.
I really should look into my line of credit terms to see if they can just take it away if my credit goes sour. I couldn’t imagine having 6 months worth of expenses sitting in an emergency fund though. You’d just lose too much potential interest and lose value to inflation. Instead I’d rather have that money in investment that could be sold off in the worst case scenario.
Great Article! I think for people in debt one of the challenges is whether to pay off the cards or build an emergency reserve when you have a finite amount of cash flow. I always recommend putting something in the win (cash) column when you are paying off debt so you feel like you are making ground. A minimum of 3 months emergency fund, but with today’s unsteady job market more like 6 to 12 months!
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I don’t really agree with building that big an emergency fund when paying off debt. That is unless it’s going to take a long time to pay of that debt. That emergency fund money is just less money you are putting towards your debt. It’s not really the ‘win column’ if it’s slowing down your debt payoff.
I have to say it depends. Go figure, another it depends answer in the world of PF. I personally have a very secure job so I choose to have my emergency fund with a little risk in a Vanguard Retirement Income fund. This might not be good for most people, but since I know I will not lose my job anytime soon I am willing to take a little extra risk.
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Yes perceived job security should play a big role in how you plan your emergency fund. The more at risk your job is, the more you need to prepare for that possibility. If your job is quite secure, you can get away with having less cash at hand.
This is all well and good, but you’re forgetting about the real world.
How on earth do you think people get ‘bad credit’?
Virtually everyone with bad credit can barely keep their heads above water, let alone build up a sizeable crisis fund.
Your credit card balance transfer advice is equally appalling, do you work for a bank?
Credit cards are just plain evil, so is absolutely ANY form of credit which is not absolutely essential.
Buy now pay later – everyone wants everything NOW, that’s why the world is in such a financial mess.
All forms of unsecured loans should be outlawed worldwide. Loans against collateral, including mortgages, should be strictly controlled and only offered to people who can prove, by way of at least 12 months bank statements, that they can afford the repayments. Incidentally, the bank statements, and written proof should also be forwarded to the states tax collection system, to ensure all due taxes have been paid.
If people can’t learn to control their greed, then it will end up being controlled for them. I don’t want to live in that world!
Sounds like someone is a little biased. I have personally used credit card balance transfers to my advantage. I know some people may not be disciplined enough to make that work for them, but it is something worth considering. You may think credit cards are evil, but that is just saying that people should not be accountable for their actions. I use my credit card for almost all of my purchases and pay off my balance in full each month. So with this so called ‘evil’ product, I am saving money on every card purchase I make. Doesn’t seem too evil to me.
This is a very interesting article. I have been asking myself lately if I should do something with my EF. I have about $60k sitting in very savings accounts and some physical gold, that is doing nothing. I also maintain about $5k in my primary savings account to handle surprise car repairs, home repairs, etc…. Since I funded the EF several years ago, I now have trading accounts that are funded well above the EF. Those funds are non-qualifying but allocated to my retirement.
Should I just roll the EF $ into my non-qualifying trading accounts and call it a day??
Thanks again for writing this article.
Sorry for the delay in responding . Wow that is a substantial emergency fund. I’d be very tempted to get some kind of return on it, but I can’t say what the best move definitely is. Only you can really answer that. Think about your situation and the realistic likelihood of needing that kind of money right away. Most likely you can get by on a much smaller emergency fund if that money is mostly in an easily liquidated investment.
Jeremy, Good post. It puts a different perspective on having an emergency fund. I think you’re 100% right in that advice that is taken as a given in reality varies depending on the individual and their circumstances. My emergency fund isn’t where it should be by everyday standards. But after reading your post I don’t feel as uncomfortable with that as before since I have good credit and a decent amount in investments. -J-
It is something to think about. While an emergency fund may be very important to some people, that need might decrease with time. At some point it might make complete sense to put most of that money into a better investment. The key is making sure you still have investments that are not committed long term.
I have an emergency fund of 15K. It is in a mutual fund account as opposed to a regular savings account so that it is a little more difficult for me to get to. I like the idea of having this extra cash cushion because at one time I was up to 30K in debt and that was not fun. I do not ever want to be a slave to my credit cards, not even for an emergency. Currently, I use credit cards to reap the benefits of cash and travel rewards only, but they are paid off immediately. I have excellent credit, so I could use credit cards as an option for paying for an emergency if I wanted to, but I don’t like having something to ‘pay off’. That’s just me.
I figured 15K is a good amount because it’s enough to cover just about any emergency, OR if I’m ever out of a job, I could easily move to Thailand and live on the beach for a year:) Heck, maybe I’ll just quit my job and move to the beach right now!
At least that $15k is likely earning better interest than a savings account. Having credit card leverage does make up for the cash being a little less accessible. If you really needed it, you could sell that investment off fairly quickly. That’s probably a good balance, especially if that money is sitting in a mutual fund that isn’t very volatile. Then you don’t have to worry about losing a big chunk of change if that emergency hits while the prices are low.
i dont have an emergency fund but i will use a low intrest line of credit if something should arise. if i loose my job as a municipal level government employee, i would currently get 7 months of severance and i carry over my max vacation days, which total 4 weeks. so if i loose my job, i would get 8 months of payments…just need to make sure i dont loose my job by illegal activity, then i would be flushing my severance down the toilet…and pension.
Sounds like you have pretty good job security. Still a small emergency fund might be a good idea for smaller emergencies like car repairs, medical bills, etc.