I was reading some blog posts recently arguing you don't really need an emergency fund and I realized I have never written a post about emergency funds. So this post will serve not only as a “back to basics” post about emergency funds, but also a sophisticated argument that they probably still have a place for most people, but that you don't have to be dogmatic about it.
Dave Ramsey Dogma
Let's start with the dogma. Perhaps the best way to summarize it is to use Dave Ramsey's well-known emergency fund recommendation. Dave recommends you save up a $1000 “baby emergency fund” before doing anything else financially. This can be used for a minor medical bill, a minor car repair, a broken appliance etc rather than forcing you to take on more debt. Then Dave recommends you pay off all your non-mortgage debt. Then he recommends you save up a “real emergency fund” of 3-6 months of expenses. THEN (and only then) you can start saving for retirement.
Do some people need that much structure? Yup, they sure do. But those are also people who actually use credit cards for credit, so it may not necessarily apply to you. Be aware that nobody recommends you save up 3-6 months of income, it's EXPENSES, and only required expenses at that.
The Purpose of an Emergency Fund
In my view, an emergency fund has several purposes.
- Actually save
- Avoid selling investments in a down market
- Avoid liquidating illiquid investments
- Avoid going into debt for an expense
- Allow you to take more risk elsewhere in your life
Don't be weak-minded, the droids will get away
If you have a net worth of zero or worse, saving up an emergency fund, even a $1000 one, is a useful exercise. You get to learn to not spend everything you make and to actually have savings you don't touch except for the reason why you saved it. I think that develops some useful financial muscles.
One of the tenets of successful investing is to avoid buying high and selling low. If you have a major expense come up in your life, it is possible it will coincide with a down market, forcing you to sell low. If you have an emergency fund to tap, you don't have to sell that investment low to get cash. If you don't think that ever happens, I would recommend a book called The Great Depression- A Diary, which is a real-time diary written by an attorney throughout the 1930s. One of the recurring themes of the book is people selling stuff for far less than it was worth and how much the attorney wished he had some cash to buy up some very appealing stock and real estate deals.
Some investments aren't very liquid. Perhaps they can be made liquid, but only at significant loss. Having emergency cash allows you to avoid having to fire-sale illiquid investments, assuming they can be sold at all.
Another purpose of an emergency fund, at least for me, is to avoid having to borrow money in the event of an emergency.
Finally, the psychological backstop of an emergency fund allows for more risk to be taken elsewhere in your financial life. For example, you can raise all your insurance deductibles and save on premiums. You can worry less about a bear market because at a minimum you know you can live for 3-6 months without touching your investments. You can take more risk with your career knowing you've got “Walking Money” in your pocket.
Why Borrowing and Future Earnings Aren't an Emergency Fund
The Early Retirement Now blog is not afraid to get up on a soapbox and preach against a traditional emergency fund, and to be fair, I agree with much of what ERN says. Basically, his emergency fund/plan is:
- The float on his credit cards
- His next paycheck
- A HELOC
- Tapping his investments
The problem with this plan is that it doesn't line up well with what I view as the purposes of an emergency fund. For example, if the purpose of your emergency fund is to avoid selling investments in a down market, then your investments don't make for a very good emergency fund. Again, if the purpose of an emergency fund is to avoid going into debt, then going into debt isn't a very good emergency fund. The other problem with this plan is that when everything goes bad in life, it tends to go bad all at once. For example, imagine getting a cancer diagnosis. Right when you need extra cash for medical bills you also lose your income. Sure, you've got disability insurance, but that doesn't kick in for three months. What do you use for those three months? The emergency fund. In addition, many times when people lose their income they also lose their ability to borrow. Who wants to lend to a guy without any income? Not very many people unless you can hide that fact from them.
And future earnings? One of the main emergencies people have is losing future earnings. ERN basically doesn't have an emergency fund. Luckily, he's wealthy. And when you're wealthy, well, you have much less need for an emergency fund. For example, I'm quite confident my family could live just fine for 20 years off what we have saved right now given our relatively low fixed expenses. Do I REALLY need an emergency fund? Probably not. Does a typical retiree? Not really. His entire nest egg is an emergency fund.
An Emergency Fund is Like Insurance
In many ways, an emergency fund is a lot like insurance. It allows you to take risks that you otherwise could not take. But also like term life and disability insurance, if you have strong financial muscles and are a good saver and investor, eventually you grow out of it and can “self-insure” against the risks it was meant to cover. Since an emergency fund is insurance, the return OF your principle matters a lot more than the return ON your principle. Like buying term life insurance, it isn't about the return on your money. You're supposed to lose money on insurance because it costs something.
How to Invest an Emergency Fund
A frequently asked question is how to invest your emergency fund. There is no right answer, but again, go back to the purposes of an emergency fund for YOU. If one of the purposes for your fund is to avoid selling risky investments when they're down, then you can't invest the emergency fund in risky investments. The very best emergency fund is probably stored water, canned food, plenty of gasoline, some camping gear, an AK-47, and plenty of bullets. After that, a big stack of cash kept in a safe or hidden location in your home is probably best. If you're really extreme, you might even want that cash in multiple different currencies. I certainly don't advocate your entire emergency fund be kept in your house, but remember that one of the emergencies you are insuring against with an emergency fund is a bank closure. Now that's a lot less likely with the FDIC than it was in the 30s, but being able to get at least some cash when banks are closed and ATMs aren't working is useful.
Our emergency fund, until recently, was invested in the Ally Bank high-yield savings account paying 1%, but as rates rose we recently moved it to the Vanguard Tax-Exempt MMF for a higher after-tax rate and a similar level of safety and convenience. A long time ago, it was in the Vanguard Prime MMF. It seems like forever ago, but prior to 2008, we were earning 5.25% in that fund.
How Health Savings Accounts Tie-In
A lot of people wonder whether their HSA should be part of their emergency fund. HSAs are great. I fully fund mine. But the problem with an HSA as part of your emergency fund is that it can really only be used for one type of emergency unless you want to pay taxes and penalties on the withdrawal. I suppose if you've been doing the “saving receipts” strategy (paying for health care with taxable dollars, while saving receipts for future tax and penalty free HSA withdrawals) then at least you can access some of it tax and penalty free, but if you're trying to keep money in your HSA, you probably have it invested aggressively, defeating one purpose of an emergency fund. Bottom line, an HSA isn't an emergency fund.
The Problems With an Emergency Fund
So with all these great benefits of an emergency fund, why is anyone against them? It basically boils down to opportunity cost. Very safe investments don't pay much. Guns and ammo might keep up with inflation, but cash in a safe doesn't. Your checking account probably doesn't pay interest at all. Even if you're wise, your savings account is probably only paying 1%, less than inflation. Meanwhile, that money could have been invested in real estate or equities and be earning 6, 8, 10% or more! There's a very real cost there.
There is another opportunity cost too. Every dollar not placed into a tax-advantaged account is tax-advantaged space lost forever. Especially if you're not much of a saver, maybe it takes you two years to save up 6 months of expenses of an emergency fund. You just missed out on all kinds of tax-deferred, tax-free, or maybe even triple-tax-free space like an HSA.
My Own Emergency Fund History
It is a terrible truth that the poorer you are, the more you need an emergency fund, the harder it is to accumulate, and the higher its opportunity cost. By the time you're rich and it is easy to acquire it and the opportunity cost is no big deal, you don't even really need it.
Back when I was poor (or perhaps better stated, not rich yet) we tried to acquire an emergency fund. We usually had a few thousand sitting around somewhere. But every January, we raided it to max out our Roth IRAs. I think I tried to justify it by pointing out that we could always withdraw Roth IRA contributions tax and penalty free. But I wasn't leaving that Roth money in a safe investment. It was mostly in equities. So that kind of defeated at least one purpose of an emergency fund. It was just too painful for me to pay that opportunity cost. So our true emergency fund throughout residency and at least the first 5 years of attendinghood was less than 3 months of expenses. But throughout that period we were becoming wealthier and had more and more resources each year to tap in the event of an emergency. So the risk we were actually running was rapidly going down. By the time we were 7 years out of residency and actually had a “6 months of expenses” emergency fund, there were a million dollars worth of resources somewhere else in our life and our need for an emergency fund was dramatically lower.
There you have it. Everything you ever wanted to know about emergency funds in general and my emergency fund in particular.
What do you think? Do you believe in the concept of an emergency fund? Why or why not? How do you invest yours? What have you had to use it for? Comment below!
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Nice cover photo…
I just happened to write about the same thing this past week and came to a very similar conclusion as ERN. Every situation is different, but I don’t have an emergency fund because my backup plan is:
1) 2 months of lagging paychecks (enough buffer beyond expenses)
2) Wife’s lagging paychecks
3) Credit Cards
4) HELOC
5) Disability Insurance (with Partial Disability coverage)
6) Sell wife’s purses (notice this is #6, hahah)
Does wife know about #6?
I might’ve mentioned it jokingly before and it didn’t go over well. Jk, she’s reasonable and hopefully it’ll never come to that haha…
A biweekly paycheck (or two) is an excellent supplement or replacement for most of an emergency fund. Most physician families will have $5,000 to $15,000 in takehome pay a couple times a month. As long as your expenses don’t have you living paycheck to paycheck, many financial emergencies can be cash-flowed.
Best,
-PoF
Shoot, most vacations, automobiles, college educations, and home upgrades can be cashflowed on a physician income if they keep their ducks lined up. Forget a car repair or new A/C unit.
Absolutely, the buffer is the key. However, I do realize that it’s easier to say that as anesthesiologists and ER docs.
As you alluded to, an emergency fund is much more critical for those who have more difficult creating one. My parents were such people.
Growing up, credit cards and second mortgages were our emergency fund, leading to a cycle of high-interest debt that they have only just emerged from in their 60s. I like to think my hounding them about their debt and too many credit cards played some part in it, but in truth it was mostly time and increases in their salaries.
Personally, I have found keeping ~20K in a savings account linked to my checking works well for most “emergencies” that need an extra few thousand of cash flow in a given month. In a true emergency, I would use credit and then tap into my taxable account if needed.
Wow, the “emergency fund” of stored water, food, and guns sounds more like an “apocalypse fund”! At least you could barter your emergency medicine skills in a situation like that. My MRI-reading skills won’t do me much good in the wilderness.
Assuming you have a fixed income position within your asset allocation, “cash equivilencies” are really the only place in your investment portfolio where you’re able to add sweat equity. With very little effort (no more effort than identifying a tax lot, setting a limit order, waiting for the cash to settle, and transferring the cash from brokerage to checking), my emergency fund easily out performs my fixed income (certainly on a risk adjusted basis but also in absolute terms given the low rate environment). The returns can’t be scaled up, which is why many folks don’t bother (within the context of a larger portfolio, out performing on $20k – $30k is of little significance). However, it isn’t at all true that having an emergency fund = sacrificing returns.
Excellent point. If you’re willing to hassle with it, you can get a halfway decent return from brokerage bonuses and high-yield checking.
Glad I’m not the only one that does this. Makes some sense to me as a fellow when I’m not drinking from the firehose of knowledge, but as an attending I’m less convinced that spending a few hours trying to make a few hundred dollars on bank bonuses is worth my time. Am I wrong?
I would suggest reason #6, although it is more about having cash than being ready for an emergency:
#6. Having cash available to pounce on an investment opportunity.
That cash has a cost. The larger the opportunity you can take advantage of, the higher the cost. Give how quickly mutual funds can be liquidated, it’s hard to justify carrying much cash for this purpose.
I don’t necessarily disagree with you. At least as general advice. I remember having an opportunity to buy into a commercial real estate opportunity. It came after the GFC. Although I had plenty of money in the market, I didn’t want to sell shares after a 50% drawdown since I would have to sell A LOT of shares (as opposed to at a market peak). I paid cash for the investment and it returned >25% consistently. There can be danger in making rash investment decisions, but if you have studied the opportunity sometimes you do need to act fast. I’m just sharing my experience: not necessarily giving advice for others here.
Call me crazy but I’ve used my HELOC for the chance to pounce on an investment as well. I was short the cash but I knew I needed to act quickly. I hate having cash sitting around and I didn’t want to liquidate any other investments so my only option was to borrow from the HELOC. I did, and made sure I was disciplined to pay off that HELOC asap. I was able to pay it off in 3 months and so far that investment has yielded an amazing return. In this case, using leverage worked out for me and I wouldn’t hesitate to do it again if the right situation arose.
Crazy like a fox….. I like that idea!
I didn’t use to have a HELOC, but now I have one. I think that is a reasonable substitute for an emergency fund. Or supplement to one. Again there is risk but for prudent physicians they can cash flow their way out of most any mess. It is more about timing of things than lack of cash. I may not want to sell in a down market or sell stocks and create a taxable capital gain etc. HELOC may be one way of accessing funds quickly at a fairly low rate and then paying it back at a time that makes sense.
I like the Vanguard Short Term Investment Grade fund as a cash depository. It’s up 3% (annualized) so far this year, and is very liquid. Vanguard has an ever shorter bond fund that won’t fluctuate as much, but pays less interest.
Hi Jim & fellow WCI readers – enjoyed the post and the layered approach to the ever-famous emergency fund. We’ve followed a similar strategy. Including some tangible resources around the house, some currency, some “high-yield” savings accounts and some short-duration bond funds. The only thing I’d add, and you may have covered it elsewhere, if your income has some volatility and you’re making charitable gifts or accelerating state income tax payments, you can use a big cash-cushion to manage the timing of your taxable income and your bracket. Thanks again!!
Back in 2010 before I knew this site or bogleheads existed, I bought 10 ounces of gold and 100 ounces of silver. I wonder if that serves at all as some form of emergency fund.
One of the keys to an emergency fund is that it can be liquidated and available to you quickly if needed. Gold and silver sitting in a safe deposit box would probably take longer than stock investments to liquidate into cash that can be spent.
Not to mention that negative return after a 7 year investment… ouch.
I actually think Dave Ramsey is pretty good on this. Gold and other precious metal is total BS. As he points out we have several relatively modern examples of collapsed society/economy/govt such as Iraq. At no point did those places turn to an economy based on precious metal.
Quite frankly while I’m not in any way a doomsday prepper so I don’t worry about this, if you are buying gold to insure against total meltdown you should stop and buy firearms, sealed cartons of cigarettes, plastic bottles of grain alcohol, and ammunition in common calibers such as .223, .22, and 9mm.
Again, this is not my plan, but it’s far more logical than buying gold.
Remember Y2K? We had friends stockpiling gasoline and dollars not to mention ammo. So we joined the craze: lots of vitamins, motrin, cheapest highest proof alcohol in glass bottles (we feared deterioration over breakage), and coffee. We drew the line at tobacco. Coffee and alcohol were for trading and sterilizing stuff (and being able to stand coffee drinking relatives who might descend on us if their cities no longer supported them); we don’t drink either. Had a neighbor who was going to ride over and give me a horse to do doctor’s rounds on before she took off into the desert with her other horses if it all collapsed. That summer we gave away bottles of liquor as tips to our moving guys and sold our car to friends- they paid with their cash stockpile.
The horse had me cracking up!
As we get wealthier and our income diversified like you our emergency fund needs decrease (as do the amounts). Honestly I believe you must have an emergency fund but the type is dependent on you and your situation. Take ERN for example. He has an emergency fund in the helloc. A set of cash flow he can get to in an emergency that will likely be there. The fact that it creates debt is inconsequential to the question of whether he has the cash flow to cover his day to day. It’s the cash flow and not needing to sell depressed assets to create it that makes the emergency fund. The rest is a question of your position and risk tolerance.
Good article.
After about two decades of not having an emergency fund (or having an ERN style emergency fund, depending on your perspective) we now have an emergency fund of 12 months of expenses. This seemed the prudent move as at age 52 I have decided to make a career change, abandon my 6-figure salary, and open my own business. My wife’s salary and bonuses should be sufficient, but her field is economically sensitive and you never know what will happen.
I think the problems start when people have emergency funds that are *too big*. There’s no right number as far as what you should have in your emergency fund, but if it goes beyond six months’ worth of expenses, it might be too big. At that point you would lose the opportunity to better invest that money elsewhere so it could grow.
The part about the emergency fund being more important when you’re broke is an unfortunate reality.
A lot of docs, like me, have a delay in income due to billing. I would get a full paycheck for two months after I stopped working and then a partial check for another two months the way we have our pay system set up.
That is kinda a built-in emergency fund.
I wrote about it a couple weeks ago too and I came to the conclusion now I don’t really need a dedicated cash account for emergency funds with my passive income streams and income delay. Everyone has to weigh their own priorities though.
Since I am approaching total retirement I am trying build a cash cushion to protect against a bear market. This is likely overkill in my case since my portfolio is throwing off 150-200k in income per year. I have $120k in checking, mmf, short term bond funds, and cash hidden. I keep about 3k hidden in my house because I live in a tornado prone area. Nothing works if the power fails so cash is handy. I too have guns and ammo since I live in the South. No stored gasoline or canned goods.
Gas is hard to store…but we have spare propane and firewood however and a backpacking solar panel that can charge small appliances. Plenty of calories between the pantry and freeze-dried backpacking food (that actually gets eaten) in addition to a bunch of rice and beans et al that I hope to never use. A water cistern. A bunch of other necessities/luxuries. Hatton, it’s funny that you and Jim mention this (albeit briefly), because when I hear “emergency fund” these things are what I immediately consider…primarily because we’ve been blessed with no money issues that we can’t cashflow or buffer with a modest MMF…but have had to deal with two wildfire scares and several incapacitating storms!
We have our emergency fund in Ally savings at 1.05%. Looks like year to date VMSXX is returning .54%. Could you expand a bit on your reasoning to move your funds from Alley to Vanguard? How much do you expect it to return? Thanks.
Vanguard Tax Exempt MMF yields 0.67%. My federal marginal tax rate is 41%. 1.05% * (1-41%)= 0.62%. 0.62% < 0.67%. It's not much difference, but since I already have both accounts, it's easy to do.
So it’s clear that the difference in returns, while not zero, is also not that great between the two–we’re talking $50/year on a 100K balance. But MMFs, as far as I know, are not FDIC insured, while savings accounts of course are. I’d welcome your opinions on this, but I feel that the added risk really isn’t worth the 0.05% benefit. Granted Vanguard has a very low probability of failing, but if we’re talking about worst case scenarios (which is what an emergency fund is meant to address), then this should probably be part of the equation.
If Vanguard goes down I’ve got much bigger problems than the emergency fund!
Agreed. Lets hope Valley Forge, Pa is not on a nuclear targeting list.
Vanguard has thought of that and prepared as best they can for redundancy and multiple off site processing and backups etc. JL Collins has written about this too.
http://jlcollinsnh.com/2012/09/07/stocks-part-x-what-if-vanguard-gets-nuked/
Good to know wealthy Doc.
Solid point!
What about the 0.15% expense ratio of the Vanguard MMF funds?
What about it? You know the yield is after-fee, right?
I was considering moving my EF from my savings account that is earning 1.25%. (Christianinvestors.org) Don’t you need to factor in Vanguard’s fees in your calculation of .15?
Thanks,
Seth
The yield includes the expense ratio. This is nice so that you can make an apples to apples comparison between funds and accounts.
No, the yield is after expense ratio. It’s net.
By the way, do what you want with your money, but if you’re only getting 1.25% from a demand certificate (i.e. 20 basis points more than you’d get from an FDIC insured high yield savings rate) I don’t think you’re being paid adequately for the risk you’re running with a christianinvestors.org demand certificate.
I currently keep my emergency fund with CIT bank with a 1.3% yield. I’m in the 39.6% federal bracket and have no state income tax liability. I would yield .7852% after taxes. I believe this is compounded monthly.
I am wondering if the money market fund is compunded more frequently as to yield slightly more. It would be nice to have my accounts consolidated in one place for easy book keeping.
No, I think you’ve chosen a great place for your emergency fund. I got junk mail from CIT Bank today noting that 1.3% yield, but only on up to $100K. Not sure what it is above that.
Hi WCI!
Thanks for the mention! The more I think about the Emergency Fund (EF) the less I like it. The Dave Ramsey advice of saving $1,000 before even paying down high-interest credit card debt is certifiable, mathematically suboptimal.
But I don’t even like the argument of holding an EF for fear of selling stocks at an inopportune time. Opportunity costs! Stocks generate about 5% p.a. in extra returns over a money market account. Over the length of a business cycle (8-10 years) you lose a whopping 40-50% in opportunity costs. And remember: even during the 2008/9 crisis you wouldn’t have sold all equities all at the bottom, but gradually during the drawdown. Sure, you can always point a situation where having an EF in 2007 you would have fared better. But if you had held that cash since 2003 you wouldn’t.
Also, young investors who are just starting with their investments tend to be underinvested in stocks. Holding them back by recommending an EF would only aggravate the dreaded sequence of return risk (see my post https://earlyretirementnow.com/2017/05/24/the-ultimate-guide-to-safe-withdrawal-rates-part-15-sequence-of-return-risk-part2/).
So, the argument “forgoing an EF is OK when you are rich” should be exactly reversed from the perspective of Sequence of Return Risk: Once you are rich you can more afford the derisking. If you are young and have low you have the most to lose foregoing equity investments.
Sure, the math works out. But it’s the intersection of math and behavior (i.e. life) that that makes it personal finance. It’s both personal AND finance.
Remember the math also works out on maximally leveraging your life at all times to invest the money in risky assets. Still doesn’t make it the smartest thing to do.
Analytical types tend to poo-poo the psychological benefits of having some cash on the side, but they’re hardly insignificant:
1) Help you stay the course in a bear market
2) Give you confidence when negotiating for a job
3) Give you FU money to walk away from a job
4) More ability to focus on your long-term financial situation since you know with certainty that the short term is taken care of
5) Better sleep
If we’re talking about losing out on 5% of $20K, that’s $1000 a year. Pretty cheap “insurance.” That $1000 probably isn’t going to change anyone’s retirement date by any significant amount, especially a high earner.
RE: loss of electricity.
Preparedness for apocalyptic events and short term financial loss are both are worthy of preparedness. The regional or widespread loss of electricity is the most likely potential that we should be prepared for. I read that our electric grids are vulnerable. In 2005 our city (pop 150k) experienced a microburst with 5 days of electricity loss. The ghetto side of town was restored first while the employed side of town waited.
Land line phones. Gas-fueled generators. Cash.
I’m a first year attending and my wife is finishing up fellowship. We are expecting a new baby in the next 1-2 months and will be moving cross country closer to home in the next 6 months where my wife will return to work. Together we have 650K in debt and are religiously making payments towards PSLF. I’ve saved ~100K into an ally 1% account while maxing out my 403b & roth IRA. I’ve put about 30K into a taxable vanguard account (while I’ll do yearly) and though I feel a bit apprehensive about the 100K of “lost opportunity” in my ally account – I’ve been reassuring myself for the following reasons
(1) We’ve been in the third longest bull in history and as already mentioned, the idea of investing now only to sell off during the very real chance of a market pullback in the near future when I need liquid cash doesn’t feel good
(2) we’re saving for an eventual downpayment on a home in the next 1-2 years, and I’d like to maximize equity by placing >20% down so utilizing a vanguard account to aggressively save doesn’t make sense given what I said above (1)
(3) With significant liquid cash, I am in a much better position to pounce on opportunities than if i were tied up in the market
(4) With the unpredictable nature of a new baby, new jobs with two new attendings in a new city, having a large liquid component of my portfolio seems to make sense at this point in my life. Surly when I’m in a more stabe position – shifting my portfolio with less liquidity is reasonable
Would love to know people’s thoughts especially because it seems like most comments thus far are from well established, financially settled individuals and less so the newbie starting off
Now is the time to save for retirement. The younger you are the worse it is. By the time you feel comfortable, you will have already lost a lot of gains that can never be recouped. If you’re a two doctor family that doesnt live exceedingly extravagantly, there is nothing you shouldnt be able to cash flow.
So where are you saving your money for large lump sums like a house downpayment? Are you stocking this away in a taxable account?
Currently at around 3 months of ‘core’ expenses (mortgage, student loans, car payment), mostly because we use our e-fund more as a slush fund for various big ticket expenditures – home repairs, auto down payments, and such. My wife feels pretty strongly about the 6-month rule though, and we’re working to get back to that point. Personally, given that we have pretty stable jobs and live below our means already, I’d be fine with 3 months… but, happy wife, etc.
You know all those “core expenses” can be eliminated, right?
Oh, they are – refi’d to a 5-year loan, 15-year mortgage, auto loan @ 1.5% with additional principle monthly. Perhaps I should’ve stated it as we have a single high-yield account to hold both our e-fund and our general ‘save up for big ticket items’ fund.
Although I get your point that having money left at the end of the month to put in savings means you’re not paying off debt aggressively enough.
I’m just saying if I had a car loan and student loans I’d have a very small e-fund. If the purpose of the e-fund is to keep you from going into debt, and you’re already there, well, you already had the emergency so use the emergency fund to pay for as much of it as you can.
+1 WCI. Auto down payments (cringe) aren’t really emergencies, right? I would encourage you to put on your “White Mustachian Coat” and rethink the car loans.
Down payments? I was talking the whole payment. You do down payments on houses, not cars.
I was too 😉
I find it odd to see someone in debt with an emergency fund sometimes, especially a 6 month one. Discussed here:
https://www.whitecoatinvestor.com/your-debt-emergency/
Another +1. Totally agree.
I had a bit of a chuckle at the cash, AK47 and ammo. Keeping both cash and desirable guns on your property where I live (Jhb, South Africa) would be like advertising “please murder me for my resources”.
I stash my emergency fund in my homeloan account – basically works the same as a cash savings account except instead of earning interest on the principle I’m saving the interest I would be paying on that sum (which is around 2.5% higher than the interest my savings account pays).
I just don’t really care for the term “emergency fund.” Cash, slush, or perhaps “walking money” etc. works for me.
Money is fungible. Setting some aside and calling it something else doesn’t change that. It’s like finding a $20 bill, and someone asking how you’re going to spend it. The hell if I know, it’s just going to go in my wallet and eventually get spent with the rest of my money. Same thing with a raffle prize or the Christmas bonus check.
How often does someone truly experience an “emergency” where immediate cash or immediate access to cash is the solution? Unexpected repairs? The contractors I use send me a bill that I can pay at my leisure. Car repairs? Everybody takes a credit card. Medical bills? Usually get at least 60 days to pay that, and usually you can put that on a card too. About the only time where I need *cash* *now* is when I need to buy something literally for cash where you can’t use electronic payment or when I need to actually debit my account to pay a bill or write a check.
Don’t get me wrong, I keep cash on hand and in the checking account. I might have a few months of slush at any given time, depending on when the last paycheck hit and when the last payments out cleared. But it’s just slush, not money specially designated for the apocalypse or for paying the EMTs cash to take me to the hospital.
I’ve considered going with Ally or Synchrony many times. And also considered VG MM tax exempt recently, but in the end I’ve stayed with:
1) Tier I: 1-2 month cash flow in BoA checking
2) Tier II: VG muni index ETF in Merrill Edge
3) Tier III: Main VG taxable account
Staying platinum honors with BoA gives sizable CC cash back bonuses. We put virtually ALL spending on CC (including daycare, property tax, etc…). This ends up netting us about another $5000/yr in CC cash back, and the best part is it is completely tax free!
Hmm….I wonder if I can pay my property tax with credit card…
It’s up to your town if they will accept CC for property tax, or if they charge an unreasonable CC convenience fee. I think it usually won’t work, but definitely worth a try.
I’m hoping a new company emerges that will let me indirectly charge mortgage payments for a lower fee than TIO or Plastiq. Then we’d really be in business.
Yea, bummer. Mine has a 2.25% fee, so until I can get that USAA 2.5% card, I’m out of luck.
Another beauty of the unlimited 2.625% cash back with BoA Travel Rewards card given as statement credit, if you are platinum honors.
I keep about 12 months of expenses in my bank account as an emergency fund
$50000 in checking
$50000 in savings
It’s a bit much and we certainly don’t need to do this but we like the peace of mind. We are fortunate to make a lot and are supersavers (40 – 50% of gross): maxing out all tax-advantaged accounts and funneling lots of extra money into a taxable account.
Between the rapidly rising income (and the tax bill that comes with it), suspected rising spending rates (with young kids), and the desire to pay off the mortgage early, we’ve decided to keep a little more in the emergency fund.
Would you mind explaining why the switch to the Vanguard MMF?
I think I did a few comments up. It’s just chasing yield. It yields more after-tax.
One advantage of a taxable account that no one mentions is the fact that you can borrow against it when needed. So if an emergency arises, rather than selling assets you can take out a small loan from yourself and pay it back when needed. The one caveat is that depending on what assets are held in the taxable account you can only borrow 60-70% of the value. I’m told the interest is also 100% deductible. I have yet to use this option, just what I’ve read and been told.
I think the interest is subject to the 2% floor and the Pease limitation on Schedule A.
Its not deductible unless used for purchase of equities. Even tax exempt muni bonds dont count.
Money is fungible, so I suppose if you own that amount of equities, you could argue it was used to purchase equities.
We have our emergency fund in a savings account with Synchrony at 1.15%. We actually made the switch from Ally recently because of a bad experience buying our most recent “new” car. (A CPO that we had a disagreement with the dealer on, and put a stop on the check we wrote for the whole price of the car. Ally “stopped” the check until the end of the business day only. We wrote a new check to the dealer, and both got cleared through Ally. Not good — it got sorted out, but from the end of the car dealership, not Ally and so we were left with a bad taste in our mouths resulting in the switch). Only time will tell whether the service at Synchrony is any better….
These brave souls with no cash in emergency fund almost gave me a heart attack.
Is this the new normal? Has it been like this always?
Does stock market exuberance have anything to do with it? Lots of questions.
Not at all. In reality, almost no one has an emergency fund. Like everything else in life, those that have it are the least in need of it.
Stock market exuberance has zero to do with it as well as again most people without one are also for the most part not participating in the market.
Most doctors and other professionals have an unnecessarily large e fund in regards to their other sources of quick cash, insurance, and likelihood of needing it to that extent.