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Do you really still need to keep an emergency fund?

It’s common sort of personal finance knowledge that we should all keep some semblance of an emergency fund.

OR IS IT!?

Anyway, some people will tell you $1000 (flat) while you’re in debt is enough, so you can funnel the rest of your savings and money into debt repayment.

Others say 3-6 months of living expenses is more conservative and ideal for living, so if you spend about $1000 a month, you need $3000 – $6000 saved in cash.

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If you’re a freelancer or if you have a job that is based on contract-work or is otherwise risky, you tend to worry a bit more and keep about 1-years worth of your living expenses in cash, because you need to wait out the (possibly) long months in between contracts.

It’s less an emergency fund in that case, and more of a just-in-case-of-living fund.

BUT DO YOU REALLY NEED AN EMERGENCY FUND?

It depends on how you look at it.

I see savings in 3 major buckets:

BUCKET #1: Your retirement funds that are tax-deferred:


  • RRSP for Canada
  • 401K (employer) and Traditional IRAs for U.S.
  • Pensions for the U.K.
  • Superannuations in Australia

BUCKET #2: Your other eligible retirement funds that are tax-sheltered:

  • TFSA for Canada
  • Roth IRA for U.S.
  • ISA for the U.K.
  • None available that I know of, for Australia

BUCKET #3: Your ineligible tax-sheltered or ineligible tax-deferred savings

  • Everything else, which includes savings accounts not under retirement plans
  • Non-registered-for-retirement savings accounts for Canada, U.S. and the U.K.
  • Investments outside the superannuation for Australia

In essence, if you’ve filled up Bucket #1 and Bucket #2, you can use Bucket #3 if you’re in a pinch without touching your retirement funds.

In that case, you don’t really NEED an emergency fund if you can raid Bucket #3, do you?

Or perhaps use a credit card in the interim while you pay off debt?

Sounds counter-intuitive, but it makes sense that you put as much money as you can towards the debt, and if you have to go back into it, you won’t really want to, AND it’s an easy line to draw from as you’ve paid it down.

Your money works harder paying off a credit card than sitting in a bank account, even if you have to dip back into it.

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LET’S IMAGINE I DON’T KEEP AN EMERGENCY FUND

So let’s say I subscribe to this idea that I can just use Bucket #3 if I’m in a pinch.

This means that if it takes me 6 months to get another contract, I need to sell my stocks or my index funds on a regular basis, and drain them even if they are NOT performing well or at their peak just to pay for my living expenses.

Plus, I’d be realizing that as an income and locking it in as a gain or a loss in the taxman’s eyes.

So let’s say I bought a stock at $10, and currently it’s hovering around $9 but I KNOW it has the potential to hit $15 and I’m just waiting for the time to sell.

If I sell it now, I’m out $1, just because I didn’t keep any extra cash lying around to help cover my basic human needs in the interim — shelter and food.

Or maybe I could start using my credit cards to pay for my living expenses so that I don’t touch my investments (how stupid does that sound!?)..

Or live like a hobo (sounds even dumber)!

Or think about how if I got a line of credit from the bank, the 5% in interest I’d be paying is less than how much I could (potentially) be making on the stock market.

O_o

SEE, THE PROBLEM LIES IN THE UNKNOWN

As a result, I tend to keep about 3-6 months of emergency funds lying around in my savings accounts.

When I get a contract for at least a month, I immediately plow those savings right into my non-registered investing accounts because I know that I only need about 2 weeks of income to build those 3-6 months back and be comfortable again.

I also tend to invest for the long-term.

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I don’t like touching money in Buckets #1, #2 OR #3, because I consider it “spent” money, or otherwise untouchable.

The money I have left in my savings or my chequing accounts, is what I have to live on.

If I get to the point where I absolutely need to go and think about touching my investments to pay for my living expenses, I get uncomfortable and feel like I’m essentially robbing myself.

This is of course, all psychological, but nevertheless, I feel badly.

THINK OF ALL THE MISSED OPPORTUNITIES

Remember 2008-2009 when everything just plunged into an abyss?

It was a great time for people sitting on a lot of cash (bond mutual funds, or emergency funds), to plow it into the stock market and wait for their money to grow as the stock market went up.

minimalist-zen-building-work-space

Now I’m not imagining the stock market will dive every 3-5 years, but it’s still food for thought, for those of you who think an emergency fund in a high-interest savings account is a complete waste of potential and time.

SO KEEP ONE IF YOU THINK YOU NEED ONE

Keeping an emergency fund is a personal choice in the end.

I am all right for people keeping one where they have about 3-6 months worth of cash to cover their mortgage and living expenses, especially if it buys the best thing of all: peace of mind.

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Just don’t do anything stupid and pay something like 30% in interest on your credit card debt while sitting on $20,000 of cash earning 1.8% in the bank.

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Sherry of Save. Spend. Splurge.

Millionaire at 36 after getting out of $60K of student debt in 18 months, a little over a decade earlier, using TheBudgetingTool.com. Since then, I have paid my $600K home in cash (my half was $300K), my $180K casr in cash, worked 50% of my career (taking 1-2 year breaks), and quadrupled my income within 2 years of graduating, going from $65K to $260K with an average lifetime savings rate of 50%. I could retire today if I wanted, but love my work-life balance as a freelancing consultant in STEM (Science, Technology, Engineering, Math). I am all about balance - between time and money, and also enjoying my money. I also post daily on Instagram @saverspender.

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6 Comments

  1. Revanche @ A Gai Shan Life

    We definitely keep an emergency fund.

    We also carry mortgage debt but it’s so massive I’m not prepared to give up all opportunity costs of investing our cash in order to kill it off. I’m juggling the unknowns of:1) maybe the stock market will take a dive so I want to keep that cash for buying at a discount or covering a job loss, 2) maybe it doesn’t take a dive and I’ll regret not continuing to invest long term.

    I don’t want to keep so much cash on hand that we lose growth opportunities there either so I’m trying to take a measured approach to cover all three contingencies.

    Reply
    1. Sherry of Save. Spend. Splurge.

      Ditto, I have enough cash for a comfortable year, and then after that if I start selling investments to live I start becoming VERY FRUGAL.

      Reply
  2. SarahN

    I keep my extra cash in my offset account to my mortgage. I want to pay that mortgage off, and I will by Easter 2019 I think, but I am scared if the payoff means no cash savings, so… it might be deferred so I have cash.

    Reply
    1. Sherry of Save. Spend. Splurge.

      For me, cash is important only if I foresee my contract ending. I was blindsided on my last contract (I wanted to leave anyway, in hindsight), so I was caught off guard when it was terminated and I had to sell investments to live which I hate.

      Reply
  3. Heidi P.

    Hubby and I had a discussion about this last week. We got a check for about $1000 out of the blue (it was from an insurance policy his father had when he died) and he wanted to save it, I wanted to use it to pay down a credit card. I used the interest rate argument – 0.9% on savings or 15% on the credit card. It went to the credit card.

    Reply

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