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When should you really keep an emergency fund? Do we even need them?

When I was getting out of $60,000 of debt, my debt stood at 5% and 7% interest rates.

At the time, I had about $1000 in my savings account, and I funneled everything else into my student debt.

That $1000, was earning maybe 1% at best in my savings account, but I needed it there for 4 reasons, the most important being the first:

  1. To cover my daily bills before my next paycheque (all bills don’t all fall on payday)
  2. I needed a minimum in my bank account to avoid paying fees
  3. Psychological comfort – There’s no denying that it feels better to have some cash on hand
  4. Just-in-case money (which is what an EF is)

I didn’t have 15% – 30% credit card debt that would make absolutely NO SENSE at all if I kept that $1000 in my savings account but was losing 14% – 29% per month.

I was losing maybe 4% – 6% at best because of that $1000 cash buffer in my savings account, but I needed it there.

If I had a real emergency, I had my line of credit (my student loans) open that I could re-dip into (the bank’s student loans lets you do that, but not the government loans).

WHEN YOU SHOULD HAVE AN EMERGENCY FUND

  1. You don’t have a job, or your job is not steady enough to cover basic bills 
  2. You don’t have ANYONE to help you in the interim to eat – family, friends, partner
  3. You don’t have a line of credit open to you (I mean everything is MAXED OUT!)

The good thing about emergency funds is its liquidity, as in, you can just dip into the account and use the money right away.

Sometimes it saves your hide and saves you from having things like monthly bank fees (if you keep a minimum balance, they usually waive the fee), and those little $10 – $15 fees each month can add up and cause your whole cashflow cycle to get out of whack.

The problem with having an emergency fund, is you are foregoing the money going farther in the interim, either invested in index funds, or saving money on the debt itself.

So really, how big you want to keep it, is up to you.


Only you know what your bills are each month, and if you can survive on the bare necessities with just $500 – $1000 a month, then you have to consider an emergency fund of $1000 might only last you 2 months to a month to find another job.

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WHEN YOU SHOULD SERIOUSLY THINK ABOUT NOT HAVING AN EMERGENCY FUND

Proceed with caution (obviously), if you are someone who KNOWS they can’t handle their money.

  1. When you have a steady job — you know if your job is steady or not, you can feel it
  2. When you have a line of credit or sources of credit open to tide you over in the short-term while you hustle*

The problem with NOT keeping an emergency fund is you can easily fall back into the cycle of defeat:

“What’s the point of all of this if I am just going to go back into debt when I need to pay for my medical bills?”

Only you can decide for yourself, the psychological effects that having a $0 emergency fund can have on you, if you have to turn back to your credit sources to make ends meet.

WAIT WHAT? YOU’RE ADVOCATING THE USE OF CREDIT?

For one thing, I don’t think credit is evil.

I think people have low willpower against easy money and access to credit, but credit itself can be quite useful if you use it responsibly.

(Heck I’m partly using credit now, by not paying my income taxes immediately and waiting until THE LAST POSSIBLE DAY to file and pay them — I’m using the government’s money for free.)

For the other thing, this might sound like a very strange, non-PF thing to say, but think of it this way:

If your line of credit or credit card is at 15% interest but your emergency fund is earning 1% sitting in the bank, you’re losing 14% right off the bat.

Why not just clear your debt at 15%, “save” that 14%, and hustle to build back up your savings?

Currently, my emergency fund is whatever cash I have (about $4000 USD) that I’m waiting to convert to CAD.

I don’t sweat too much about having an EF because I just need enough cash flow to see me through the unpredictable length of time that it might take before I get a contract.

Once I get a contract and make money, I switch gears and plow my entire emergency fund into investing.

I don’t like touching my investments in my Canadian RRSP (like an American 401K or IRA), TFSA (like an American Roth IRA), or anything where it isn’t cash. I consider that money “spoken for”, and I am LOATHE to liquidate anything just because I don’t have enough cash to cover my bills for the month.

Sure, I can just pull out money in my TFSA without repercussions (tax-wise), but then I can’t re-contribute until the following calendar year.

Plus, I might have to sell at a low point and I’d rather not do that.

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Sherry of Save. Spend. Splurge.

Am my own Sugar Daddy. Am a millionaire at 36 after getting out of $60K of student debt in 18 months, a little over a decade earlier, using TheBudgetingTool.com. I have 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 have 11 side incomes that are on track in 2020 to make me $50K - $75K. 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

    Like YAPFB, because we’re in the US without a lot of safety nets and not a strong employment market, I hold a LOT of cash. Especially with my health being shaky, I’m not willing to just wing it on less cash and take any job that comes along if I lose this job. I AM willing to consider putting more of it into the market but I will always want about a year of expenses in cash to make sure we’re not in real trouble if one of us loses a job because I don’t want to be at the mercy of the markets and pull out my investments at a low point.

    The crappy thing is that we get great benefits through PiC’s job only and not mine so if HE were to lose a job, it would feel financially catastrophic: health (medical, dental, vision), childcare, STD and LTD, life insurance, etc. I have my own life insurance but it’s hard to shell out for extra coverage when his employer covers the cost.

    Reply
    1. Sherry of Save. Spend. Splurge.

      Hey, I hear you. Money is tricky at any level

      Reply
  2. Yet Another PF Blog

    I sit on a lot of cash, around a year’s worth of spending. I wonder how much of this is country dependent? In the US, we don’t have much of a social safety net and most employment is at-will, so it makes sense for people to have more of a cash cushion. I also substantially increased my emergency fund after buying our condo. Last minute repairs are expensive!

    Reply
    1. Sherry of Save. Spend. Splurge.

      If I lived in the U.S. I’d sit on a lot of cash too. Otherwise, in Canada, I’d be okay even with nothing.

      Reply
  3. liteadventurer

    Another good time to ditch a big emergency fund is when your taxable investments grow large enough where in the event of a job loss or emergency, you can sell off some of your index funds to pay bills. I hold some bonds so that if this job loss occurs during a bear market, I don’t have to sell my stocks when they’re at bargain prices. My own cash emergency fund has gradually shrank over the years from about 50 grand to 10 due to my overall portfolio getting substantially larger. I still like having a little bit of cash on hand.

    Reply
    1. Sherry of Save. Spend. Splurge.

      That’s a good point, I should stick some money in bonds for this purpose next time

      Reply

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