Most of the time, a personal finance blog would recommend you to create an Emergency Fund in case of unexpected emergencies, hence the phrase Emergency Fund.
For those who don’t know, an Emergency Fund is a fund where you “should” ideally keep a savings of six months to a year of expenses on hand. If there happens to be any unexpected bumps or accidents like a layoff or a medical problem, you can then utilize the Emergency Fund to pay for your expenses.
However, if you had read, checked out, or glanced at my Simple What to Do with Your Money Guide, you will see that I did not recommend an Emergency Fund at all. There’s actually a very good reason for this and also why in the title of this article, I said that you may not need an Emergency Fund.
Remember! Being flexible is key!
Brief Disclaimer: Some of the products and services on this post may offer compensation for referrals. For the products and services that do not receive compensation, there are referred simply because I think these products and services and useful and will be convenient to have.
Simple What to Do With Your Money Guide Recap
From my Simple What to Do with Your Money Guide, the simple steps to manage your money are:
- Find out What Accounts You Have
- Understand Where Your Money Is Going
- Create a Budget and Stick to It
- Pay Off Your Student Loans
- Max Out Your Tax-Advantaged Accounts
- Save Up For Other Goals
If we simply looked at the titles, you can see that the saving only really starts with Step 6, but in actuality, we’re also saving money for retirement, which is starting at Step 5.
I won’t run through each of the steps again. Just know that the guide will always be there if you need it.
Why You Should Have An Emergency Fund
Yes, yes, the title of this article is “Why You May Not Need An Emergency Fund”, but first I want to detail out “Why You Should Have An Emergency Fund”.
As stated before, an Emergency Fund is typically six months to a year of expenses that is stored in a savings account.
I recommend using a bank like Ally Bank as their interest rates are 1.00%, which are much higher than any of the bigger banks. They are also FDIC insured, so you don’t have to worry if the bank shuts down, which I don’t foresee in the near future.
The purpose of the Emergency Fund is to pay for any unexpected accidents or situations in life like losing a job, a leak in the roof, a failed water heater, or anything else that would need a whole bunch of cash.
When the emergency happens, you can then use the funds in your Emergency Fund to pay it off and help you get through the crisis.
Why You May Not Need An Emergency Fund
If your finances are in order, there are times where you don’t need an emergency fund and can rely on money instruments like your credit cards or taxable accounts.
Credit cards can serve as an alternative to your emergency fund as you don’t have to pay them back as soon as possible, but I still recommend paying them in full by the due date.
If you are unable to pay your credit card bills in full, I would not recommend not having an Emergency Fund. You should build one up and make yourself financially stable.
Taxable accounts work because it’s just like a savings accounts, but instead of getting a 1.00% interest, you will let it sit in the market and have it grow or drop with it.
How exactly would you use these instruments?
Let’s say my water heater broke and I have to pay $5,000 to get it replaced. I can either pay in cash and be out $5,000 today or put it on my credit card and pay it off by the due date.
When you are dealing with credit, remember to pay your balance in full or your credit score will dip!
For taxable accounts, you can withdraw from your stock holdings and transfer the money to your savings account to cover the costs of a major accident or purchase. Keep in mind that when you withdraw from your taxable account, you will have to pay taxes on your gains and it will also take a few days to transfer the money between accounts.
By combining the use of credit cards and taxable accounts as an alternative, you can theoretically not need an emergency fund and have your money grow with the stock market.
Everyone has a different level of risk that they are comfortable with. The key is to be as flexible as possible when you can.
If you’re more comfortable with a lower level of risk, then having an Emergency Fund might be for you as you won’t have to deal with the time it takes to transfer money out of your taxable accounts or putting purchases on your credit cards.
If you’re feeling risky, then the possibility of not having an Emergency Fund would be the more ideal choice. You can leverage your existing taxable accounts and credit cards to cover for your emergencies when they happen.
One last thing to remember is that this isn’t always for everyone.
Take me for example, I would consider myself fairly risky and am okay being without an Emergency Fund, but you might not be the same as the level of risk you are comfortable with is lower.
What do you guys think? For those who have emergency funds? Could you do with it? And for those who don’t have emergency funds, why do you not have one?
If you aren’t already tracking your accounts or net worth, check out Personal Capital! It’s an amazing online tool that provides great visualizations and is easy to use!
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