Why You May Not Need An Emergency Fund

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:

  1. Find out What Accounts You Have
  2. Understand Where Your Money Is Going
  3. Create a Budget and Stick to It
  4. Pay Off Your Student Loans
  5. Max Out Your Tax-Advantaged Accounts
  6. 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!

Related: The 5 Factors That Affect Your Credit Score

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.

Be Flexible

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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18 thoughts on “Why You May Not Need An Emergency Fund

  • February 13, 2017 at 9:59 am
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    I definitely could not do without an emergency fund. In fact, I like to have emergency funds for my emergency funds lol. It’s a complete mental thing but having a lot of extra savings makes me feel safe – especially since I’m self-employed.

    Reply
    • February 13, 2017 at 1:32 pm
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      I agree it’s a mental thing.

      On the opposite side of the spectrum, I don’t have an emergency fund. I think if I was self-employed, my level of risk would be lower and I would most likely have an emergency fund.

      Reply
  • February 13, 2017 at 1:35 pm
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    We have about 3 months of living expense in our checking account. When I was working full-time, it was much lower. Maybe aroud $3-4,000. I had good income and I could pay off the credit card very quickly. Now, my income is a lot less so we need a bigger cushion. Also, we pay the property tax in one shot. That will drain our account.

    Reply
    • February 13, 2017 at 2:04 pm
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      Makes sense, Joe.

      When I retire, I plan to finally have a larger emergency account and withdraw from my investments once or twice a year to bring my emergency fund back to par. But since I’m still working, I can rely on credit cards to cover what I need before I pay it off.

      I actually have a pretty large amount in my checking account, but most of it is to enable myself to “float” some money when doing some manufactured spending on credit cards.

      Reply
  • February 13, 2017 at 6:18 pm
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    I wouldn’t go without a emergency fund at all. The reality is an emergency is most likely when the market is down, which would cost you the most when selling your stock holdings. However I do see alternative emergency funds as viable. Mine uses a cd ladder, but I’ve also heard of pre approved home equity loans (though rates still often go up at the worst times), alternate sources of income, dividend bearing stocks, and bonds in a taxable or Roth account. I hold about three months in a normal year in emergency CDs. It’s just stocks themselves I think are a bad idea. After all the biggest emergency is usually losing ones job.

    Reply
    • February 13, 2017 at 9:38 pm
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      True, FTF.

      Putting the Emergency Fund into a CD is also another great option. It’d be even better if the CD had a high interest rate! I remember there was a promotion at NRL Federal Credit Union where they offered a 7% CD with a minimum balance of $500 and a maximum balance of $7,000. That would have been a great deal!

      Reply
  • February 13, 2017 at 8:47 pm
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    The only time I got caught with my pants down when I didn’t have cash available in my emergency fund is when my car engine blew up and I had to buy a new car. I didn’t need to take out a loan but it did take me a couple of days to liquidate the accounts in order to get the funds needed to buy a car. Since they I’ve kept a little bit back to cover unexpected expenses.

    Reply
    • February 13, 2017 at 9:40 pm
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      It’s always great to have a little bit extra to cover unexpected expenses.

      It’s probably because I haven’t had a really big emergency, which is why I advocate not having an investment account and instead placing them into alternative money instruments like a taxable account.

      Reply
  • February 13, 2017 at 8:55 pm
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    If I look at the past 10 years, the most money I would have needed in an emergency fund was ~$10k. I keep way more than that in the bank, which is a habit I need to break. For me it isn’t so much the risk of not having money for an emergency. I feel like having that extra cash around could come handy if a really good investing opportunity came around.

    Reply
    • February 13, 2017 at 9:41 pm
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      I agree! Depending on how much risk an individual can handle, they should adjust how much they should have lying around if something occurs.

      Reply
  • February 16, 2017 at 3:54 am
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    SP — I love this topic because “emergency fund” is always tossed around in personal finance circles, and I completely agree it’s different for everyone. My perspective is based on the fact that I have a stable income. I’m in little danger of losing my job, so I have no need for 6 months of expenses to be sitting around. So here’s what I do.

    First, I think irregular expenses, like car repairs, are not really emergencies. That’s just life and Murphy’s Law. For those, I keep a healthy buffer in my main checking account of around $5-10K so that I can pay for the problem with cash flow.

    Second, I think if your finances are in order, you can also handle large, unexpected expenses. For me, it’s something like a $12K preschool bill. What I like to do there is use a 0% credit card offer and pay it off within the promotional period. I get several of these offers every month and could probably access $50K this way if I wanted to. These companies are relentless, but it’s useful. (For people with bad credit, they might need that 6 month account.)

    Finally, for a truly bad emergency (like job loss or major health issue), I think you need liquid assets (like stocks in your example) or life / health / car insurance. I have these, so I still don’t need that 6 month account. Job loss is actually the most difficult to deal with (because you may lose income and insurance at the same time), so having marketable skills and income-generating ideas are probably more important than anything.

    Great topic! –R

    Reply
    • February 16, 2017 at 4:59 pm
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      Great comment, R.

      I definitely agree with all the points you made and having an or no emergency fund is highly dependent on an individual’s financial security and risk level.

      In terms of a job loss, having marketable skills and income-generating ideas would definitely help in finding a new one.

      Reply
  • February 16, 2017 at 6:07 pm
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    Interesting perspective, SP. The emergency fund seems to be a hot topic among financial bloggers recently. In the end, it’s a personal decision and will vary based on someone’s financial picture.

    We have an emergency fund of about 3-4 months in a high yield savings account which we probably can stretch to 5-6 months. In the end, having this money helps us sleep better at night. It’s also a very small percentage of our overall net worth.

    Reply
    • February 17, 2017 at 10:31 pm
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      Thanks for the comment, SRGO!

      It’s definitely a hot topic among financial bloggers and can be controversial at times.

      Overall, just like you said it’s dependent on the individual and whether or not they can sleep at night if they do or do not have an emergency fund.

      Reply
  • March 3, 2017 at 12:55 pm
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    Re: your example with the $5000 water heater repair bill. Even if you had $5000 in an emergency cash fund, I don’t understand why you would pay the bill with cash. I would charge the repair bill to my credit card to get cashback or points and then repay the credit card from the emergency fund when the bill came due. Actually, this is what I do for most expenses not just emergency ones. If you are paying your credit cards off each cycle and they are cashback/points, you want to run any many expenses through your credit card as possible.

    I would argue that if you are carrying a credit card debt, you shouldn’t have an emergency cash fund. You should plow every dollar you save into repaying your credit card debt which is likely incurring interest charges over 10% APY.

    Relating this back to your example – if you have the cash/taxable accounts and a credit card, charge it, get the points and pay the credit card bill from the cash. If you only have the credit card, you have no choice. You’ll have to charge it and eat the interest payments; i.e. back on the hamster wheel of debt & repayment.

    Reply
    • March 3, 2017 at 3:25 pm
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      Exactly, Dan.

      I think that if we could push every dollar we spend into our credit cards AND we’re responsible enough to pay off our credit cards on time, we can essentially delay using the money in our checking/savings by a month, which means we can easily withdraw or transfer money from our high interest savings or taxable account instruments.

      It’s a good idea, until the vendor doesn’t accept credit cards, then that’s a different issue. 🙂

      Reply
      • March 3, 2017 at 6:52 pm
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        I don’t see credit cards dying out anytime soon. This country is addicted to debt and credit cards are the easiest way to access credit. I can believe that rewards like cashback may get shaved or transaction fees will get squeezed but in a world with the internet, credit cards or their equivalent will have a sizable market for quite some time.

        I would likely pay an annual fee to use a credit card if it came down to it. Who wants carry around large amounts of cash? You could use a debit card but credit cards offer fraud protections such as not being responsible for more than $50 after reporting your credit card has been stolen and payment dispute protections. As you mention, they offer the grace period which is free float. Cashback & points are the cherry on top but credit cards offer many features that cash & debit cards do not offer.

        Reply
        • March 6, 2017 at 7:23 am
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          I agree with you, credit cards are just so convenient to use now! I can walk into a shop, swipe a card, and walk out, then next thing you know, I can see the transaction online at my bank or even at a transaction aggregator like Mint or Personal Capital.

          It’s definitely much easier to hold one plastic card than holding multiple bills in your wallet. Plus, the added benefits offered by the credit card are nice too!

          Reply

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