Emergency Funds - Do You Really Need One?

Photo by Nieve44/La Luz

Photo by Nieve44/La Luz

Many of the gurus of personal finance list the concept of emergency funds high on their list of “to-do” in the early stages of getting your financial house in order. But do you really need one?

Honestly the thought of saving a thousand or more dollars just didn’t come to mind, it wasn’t even discussed. How realistic is that anyway? We obviously had not had the discipline before to acquire and hold any money. If we had discipline, would we have been in debt?

Now that I think back, the saying “six of one, half dozen of the other” comes to mind.

When my wife and I finally came to terms with the need to take control of our finances an emergency fund was never on the table. Every penny went to pay off a debt until it was eliminated. This was not so much by design as it just happened to be the life we were accustomed to living. Like so many others we had been swinging from paycheck to paycheck for years as the credit card balances and other debts continued to grow.

If you are living paycheck to paycheck already, how do you deal with a $1000 emergency if it crops up? For most there are only a handful of options; you can borrow the money from somewhere, steal from Peter to pay Paul, use available credit cards, borrow from family or sell something. It will set you back on your plans but is it really any worse than the conventional guidance? 

If you build an emergency fund of a thousand dollars while in debt; that’s a thousand dollars that you don’t have pay against your current debts. If you get hit with some $1000 emergency you may have the cash to pay for it but you are still in the same position; in debt and set back on your plans.

From my perspective, when you are already in debt, a $1000 pile of cash is simply a wasted opportunity. In many cases, $1000 may be able to eliminate one of your credit cards or smaller debt obligations. Once gone, using a snowball method, the money that was used for the first debt can be redirected elsewhere.

My approach may not be for everyone and it certainly appears to go against the advice of the “professionals.” Some people really need the psychological comfort of having a few dollars under the mattress. When we faced our challenges of debt, progress on the goal of debt freedom was my only realm of comfort. After years of being broke, I had no problem remaining so, as long as I saw consistent progress on elimination of our debt. Heck, we were already use to it!

Once the joyous day of debt freedom arrived (except the mortgage) we then began focusing on saving some cash. With no debt it was accomplished quickly. It was after this that we were introduced to Dave Ramsey and the concept of Emergency Funds.

Eventually we not only had money readily available in savings, we also had money to begin investing. We have been taking advantage of our retirement account options maxing out my 401K and our IRA’s. We have even had the opportunity to invest in a taxable account of index funds and a handful of stocks. All the while we held 6 months of reserves in a savings accounts and CDs.

Then earlier this year it dawned on me that our money in the taxable trading account is quite liquid. Within a day, if necessary, I could sell much if not all of our holdings. Within two days time this money could be wired from our trading account into our bank. If money is this easily obtained, why did we need to keep so much in a savings account/CD’s earning little return?

As a result, when our most recent CD matured, we broke up these funds and distributed them to complete this year’s funding of our children’s college funds, topped off the IRAs and even sent a nice chunk of it off to reduce our mortgage principle.

We do continue to keep some money in a local back for easy access just in case Murphy’s Law lands on our doorstep.

I have concluded however that when your debt an emergency fund is no more than a psychological buffer and after years of making good decisions and handling your money properly, once you have maximized tax-exempt or tax-deferred retirement options, any taxable investing account can serve as your emergency fund.

As most blogger’s I claim no expertise, but am I crazy for trying to take advantage of virtually all our assets?

 

Carnivals that have featured Eliminate The Muda posts this week include:

  • Carnival of Debt Reduction – Please take a look for some great material on getting out of debt and staying there!
  • Carnival of Personal Finance – Hosted by the Well-Heeled Blog, you have to see this wonderful weave of personal finance links and Disney.
  • Money Hacks Carnival – Hosted by Len Penzo dot Com and he definitely has an “off beat” personal finance carnival featuring none other than, the man himself, Tiger “much poorer when its all over” Woods. Len highlighted 5 excellent editors picks.

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4 comments to Emergency Funds – Do You Really Need One?

  • Do you prepare for the bad things that happen at all? I try to understand your point of view. You really don’t need it in cash and technically you might even be able to argue that your index fund is more liquid than your CD. The CD probably has a surrender charge. I’d rather have the index fund. The problem with the index fund is 2008. The problem is when you think you have $10 or $20 grand available and you then 2008 hits and you really only have $5 grand. That could be a problem. Why not head that problem off at the pass? I’m just wondering, do you carry insurances?
    .-= Evolution Of Wealth´s last blog ..FiLife Experiment =-.

  • The LeanLifeCoach

    Evolution
    As I eluded, we had an emergency fund and continue to hold a small amount in cash, but in retrospect we held the fund too long. The amount of money necessary for one to feel comfortable will vary from one person to the other, but at some point even with a 2008 event you still have enough to deal with the majority of risks.

    To use your own post as an example; If I don’t die, have insurance and I have prepared a major medical issue is really the only risk that almost no amount of money would be able to fix.

    In retrospect, I think I would have liked to phase out our emergency fund somewhere around $50-$60K. To your point, only having 10K and risking half may not leave you in a comfortable zone. Worst case $25K would leave us with several months worth of routine expenses.

    As for insurance, yes I carry a lot. My wife and children will not have to worry about finances if I were to pass away or become disabled.

  • Then I think you are right on. The way I read your post made me feel as though you were talking about keeping very little liquid. $25k could definitely be enough for you. As long as you have access to more money if need be it might not need to be as liquid as sitting at the local bank. Cash erodes, so it could very well be in your best interest not to keep too much cash. You said it best when you talk about each person’s situation and comfort levels.
    .-= Evolution Of Wealth´s last blog ..FiLife Experiment =-.

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