The Anti-Emergency Fund

don't worry be happy

Before I started this blog a few months back I contacted a few personal finance bloggers and asked for some advice. One such blogger (Charles from the Getting a Rich Life blog) had the following comment:

“The emergency fund posts drive me bat shit crazy as that’s been written hundreds of times.”bat shit crazy clown

Ok – he didn’t provide this picture, but this is what I envisioned…

So, over the last two months I decided against posting an article on why you should have an emergency fund. What’s interesting is that as I continue to learn via other bloggers and my own reading I too have developed a dislike for emergency funds. Why? They are highly impractical and so are we.

The idea behind an emergency fund is to have access to a certain amount of money should a situation arise: you get sick and can no longer work. You are laid off. The roof caves in. A family member needs financial help. The list goes on and on. Some advisers suggest an emergency fund should be set up to help you in these instances.

I can’t think of a single time in my life when I encountered an emergency that required a large amount of money right away. Sure, I may have written a few NSF cheques in my university days when money was tight, but other than that things have gotten along pretty well without having a stash of money in my flower bed. It’s true I have been blessed with a fairly emergency situation-free life but even still, I don’t think my story is a unique one.

“But this IS an emergency…”

What tends to happen more often than not with emergency funds is they are used towards imaginary emergencies such as vacations to the Bahamas to de-stress from a near fatal hectic work month or buying a new car because the old one had some rust on it. When we have access to these emergency funds for a long period of time, and no dooming emergency comes along, we subconsciously realize the world is probably not coming to an end so we might as well live it up with this emergency fund.

I’m all for living today, in fact I enjoy it quite a bit, but not at the expense of tomorrow’s living. While emergency funds have very sound financial intentions, our spending habits tend to get the better of us in the long run.

Read This In Case of Emergencyin case of emergency

Most of our unforeseen emergencies are covered by universal healthcare and workplace benefits. Life insurance and disability insurance is also a must for all those with families (more to come on this soon). These safeguards cover the majority of catastrophes that I can think of, aside from losing a job.

To me, the best way to mitigate the risk of the loss of your job is to manage your current lifestyle. Don’t put yourself in a position where the loss of income for a while will put you over the edge. If you are currently saving and investing a good chunk of your income you’ve already got an emergency fund, so don’t bother tying up additional cash in low-interest yielding bank accounts. Conversely, if you don’t have an investment portfolio and are currently paying off debt instead, it makes no sense to worry about a horror that may never come while the real-life horror story is the interest you’re already being charged! In Canada we have access to employment insurance to cover situations like these. While this may require a pay cut for most, if your spending is in check, you hopefully can manage.

Let me know if you think I’m missing any emergencies or if I’m not being cautious enough. I’ll be interested to hear other peoples take on my anti-emergency fund stance.

 

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9 comments

  1. I don’t know. I’m a bit late in the game regarding the emergency fund (and am still building mine), but I do like the idea of having that backup plan. Maybe it’s because I’m a risk manager, and am generally pro safety net/risk adverse; but I need to know that there’s something more in my control than Healthcare/gov’t programs.

    Part of my “emergency fund” consists of how I operate in my professional life. Constant continuing ed., becoming a more marketable asset to this/any company, and networking. I think people need to stop viewing the fund as simply cash set aside, and more of an overall life plan.

    With regards to people using theirs “inappropriately”, for lack of a better word, it all comes down to choices really. If that is indeed an emergency for you, that’s fine. Just be ready to deal with the consequences later on, should they arise. That remains a reality even if your fund is in a separate account, or part of your every day cash flow though…

    • Jonny

      What’s your emergency fund outlay Dan? How many months/weeks are you trying to save?
      Great point on the job marketability – if you can pack up your bags and jump ship right after being laid off it takes a lot of stress off you.

      • My emergency fund outlay is the standard 6mos, that a lot of people preach about. It’s a relatively new addition to my budget, and I haven’t done a detailed spending analyses so the amount is relatively wishy-washy.

        Truthfully, adding emergency savings to my budget was two fold. Of course, number one was potential emergencies. Number two, however, was the satisfaction of being able to squeeze that extra 100$ from the budget, as well as the potential satisfaction of reaching that 8-10k benchmark.

        Of course, once I reach it; I may realize that having such a vast amount is unnecessary and will adapt. Will cross that bridge when it comes.

        • Jonny

          I guess it comes down to personal preference – I don’t think you can put a price on sleeping well at night. If having that extra bit of cash keeps you relaxed and confident, it probably is worth it.

  2. I tend to think the best way to plan for a rainy day is not by stashing away months and months of salary, but rather by making prudent decisions in all aspects personal finance. A few examples may include ensuring spending aligns with income and picking up appropriate insurance policies. Dan also makes a fantastic point by focusing on non-financial measures… employment marketability in particular.
    Perhaps a compromise is a putting away a smaller amount of cash (a month or two?). I’ve read so-called experts touting for 4, 5, 6 + months of salary which is unrealistic for the vast majority of people. If anything this unrealistic measure brings on stress for the vast majority of people who understandable can’t accumulate 6 months’ salary.
    Also keep in mind the opportunity cost of stashing away significant money earning no or little return for years and years (for those fortunate to never face a need to dip in). This can have considerable negative impact on one’s retirement savings.
    I’ve been fortunate with reasonable financial security and thus I freely admit this may be complete conjecture!

    • Jonny

      Whoa, whoa, whoa – those were a lot of 3 and 4 syllable words in that less sentence!
      It would be interesting to hear some real life stories of people who had to draw down on an emergency fund in times of trouble. I’ve never encountered that kind of situation.
      Typically I would think people that struggle with getting their finances would never think about having an emergency fund.

  3. Jonny
    Great anti emergency fund post. What most people miss out on is that they are too focused on saving that and not realizing that it should be a part of their net worth. I fail every financial advisor advice in an 8 month emergency fund as I’m mainly invested. I have at most 6 to 8 weeks of liquid cash. But what I have set up is
    1. Taxable accounts with stock that covers two years spending (depending on market fluctuations)
    2. ROTH IRA I can tap with a year and a half
    3. If in a bear market and my investments get whacked 50% I have equity lines that cover two years of living.
    4. O% credit cards and one that has an 8 percent fixed rate for another 6 months.

    I’ve had investment opportunities that bought my cash negative for a few months. By focusing on building my net worth which I use as a backdrop it allows me to survive for 6 years in a worse case scenario. We have unemployment for 70 weeks here, I’m pretty sure I’ll find something before I run out of money.

  4. I agree with pretty much what everyone else is saying. Understanding one’s personal financial situation and investments is the only thing that truly matters. An emergency fund can be a part of a larger holistic plan if it’s necessary, but in most cases we can mitigate the chances of emergencies altogether by doing regular financial checkups. Personally I like to stress test my finances by creating what-if scenarios that are unlikely to happen, but still might, such as becoming disabled and can no longer work. Thankfully I’m covered by a group insurance policy. When I tell people I don’t have an emergency fund they sometimes don’t understand why. I think some people who have already built up a sizable emergency savings account might make excuses to reassure themselves that they’re doing the right thing when instead their money could be used to grow their wealth in investments.

    • Jonny

      Group insurance policy is a nice little work perk – if I recall from my public accounting tax years those disability benefits are taxed if premiums are paid by your employer…so make sure you step up and pay the premiums yourself to get the most out of the benefits should you need!

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