Our emergency fund is exactly $0.00

In our financial plan, you will never find the one staple item that every financial planner calls the cornerstone of a responsible financial plan: the emergency fund. We have none. Zilch. Nada. 

With the exception of about $100, maybe $200 in small bills in a safe place in our home, and about $1,000 in cash in our checking account we have zero cash sitting around. Not that we are so cash-strapped that we couldn’t afford an emergency fund. Our net worth is solidly in the seven figures and north of 30-35 times our projected retirement spending budget. We never had an emergency fund and never plan to have one. That doesn’t mean that we never have unexpected spending shocks. If we do need cash we will get it from our vast supply of “emergency cash,” which is, in exactly that order:

  1. Credit card float (=interest free loan from the credit card company between the transaction and the credit card payment due date)
  2. Papa ERN’s paychecks
  3. The $100,000 HELOC (home equity line of credit) on our condo
  4. Finally, a large sum in several brokerage accounts, more than half our liquid asset net worth

If the financial planner guild didn’t already have high blood pressure before, they probably keeled over with a cardiac arrest just about now when they see that we use a line of credit as our emergency fund. Let me explain where we come from:

The main reason against having an emergency fund: Opportunity Cost

The concept of opportunity cost is as old as economics itself. In fact, I still remember my first economics class in college. Econ 101 (or whatever the number was at that time), first lecture, first few minutes of the lecture after the intro, the professor explained the most basic concept in economics that everyone has to understand: opportunity cost. It seems that the bozos in the back of the classroom who later failed that final exam are all spreading this emergency fund business hogwash now. All completely irrational from an economic/financial point of view. Don’t believe that cash holdings are a large, unnecessary cash drag? Check out this blog post on Personal Capital: In the last 30 years a 70% Stock, 30% Bond 0% Cash portfolio grew from $1.00 to $18.36 (nominal). A 60% Stock, 20% Bond, 20% Cash portfolio grew to only $14.11, almost a quarter less. That’s a steep price to pay for the luxury of having cash sitting around.

At least back in the old days, financial planners recommended 3 months of expenditures, but that was when money market accounts actually paid interest. Suze Orman now recommends having 8 months worth of cash earning 0.50% interest per year (before taxes). By the time we need that emergency cash, an equity portfolio would have already doubled to 16 months of expenses. So, if you have substantial amounts of savings, who needs an emergency fund?

Another example that shows the total utter irrationality of the financial adviser community is the recommendation to start an emergency fund even before paying your credit card debt (here and here and here), which is the pinnacle of financial illiteracy. The “logic” is that, and I quote from the last of three sources above: “having an emergency fund in place is going to keep you from taking on more debt when an emergency hits.” An analogy of this idiocy would be this: a fire truck arrives at a burning house. The truck carries enough water to extinguish this fire. But instead of fighting the burning fire (the equivalent of 15% interest eating your future) the truck waits for a second fire truck to show up (saving in the emergency fund) for fear of running out of water, just in case there is a second fire somewhere else in the neighborhood. How dumb is that?

But what if something does go wrong and we need cash?

  • If we can pay the bill by credit card we pick the card that currently offers the longest float, that is, the card that will give us the longest interest-free loan. By the time the credit card bill is due, we have likely gotten income to pay the credit card bill. If the bill was still too large we pay it from the HELOC and then use future paychecks to pay down the HELOC. True we might pay a few dollars in HELOC mortgage interest but that cost is only very occasional and still significantly smaller than the opportunity cost of tens of thousands of dollars lying around at essentially zero percent interest.
  • So far we never even needed to go to step 4 as described above, i.e., sell investments to cover costs. But if we have to we will. We made very good money with our investments, thanks in part to never falling for Suze Orman’s emergency fund fallacy. We might as well spend some of that money in an emergency. Or better: The money that we didn’t hold as cash but invested in equities has already grown so much over the decades we can use the dividends from that account to pay the bill!
  • Our health insurance has a manageable annual out of pocket maximum. Large medical bills we got in the past were always small enough to cover with our regular paycheck. What’s more, we normally receive the bills with huge delays, usually 3 months after the services were rendered, thanks to our hopelessly bureaucratic health care system, so we have ample time to prepare. After receiving the bill we again have probably at least a few months to delay the payment and then we use, you guessed it, the credit card with the longest float. By the time the credit card bill is due we had probably at least six months of time to prepare for that “emergency” expense.
  • If Papa ERN were to lose his job, we currently have enough net worth to completely retire. Besides, his employer would be contractually required to pay a pretty substantial severance package (unless Papa ERN does something really, really reckless and stupid and gets himself fired with cause), including large sums of deferred bonuses that would definitely sweeten the transition. Health coverage would also continue under COBRA, though we’d have to pay for it.
  • Papa ERN has a very generous package at work that covers long-term disability. His company would pay 70% of his salary if he were to become permanently disabled
  • Papa and Mama ERN have life insurance, just in case
  • Other emergencies, like car repairs or appliances breaking down, are so small relative to the monthly paychecks rolling in that we don’t really worry about them. We live in a condo where big-ticket repairs are covered by the homeowners association fees. There is not a single item inside our home that couldn’t be replaced for less than $1,000. Why do we need 8 months worth of salary sitting around idle for that?

A behavioral reason

Money that’s just lying around looks very tempting. Before you know it that emergency fund might be used to buy an “emergency flat-screen TV” or an “emergency vacation.” We think frugality is a lot easier if you are not literally but effectively cash-strapped like we are, and before you buy any big-ticket item you have to weigh the actual cost.

An emergency fund is easily raided for all sorts of wasteful spending. Especially since the current interest rate is so low, it would be all too tempting to get a 0.50% interest “loan” from your emergency fund, for that shiny new thing waving at you; a boat, a down-payment for a new car, you name it. On the other hand, it’s a lot harder for us to sell our investments or dedicate future investments from bonus payments and paychecks for some wasteful spending.

Funny Accounting

If the reasons above weren’t enough, the entire idea of an emergency fund has one additional fatal flaw. If you are really serious about your emergency fund, right after spending on an emergency event you’d have to replenish that fund back to 8 months of expenses, right? Unless you believe there will be only one single emergency in your entire life. So right after that first big emergency, you’ll soon have to start scrambling to save to replenish your emergency fund. Just like we scramble to pay down our HELOC with future paychecks. The cash flow strain for us is the same as or at least similar to people with an emergency fund. The only difference is that we never had the drain of opportunity cost because we invested our life savings in high return assets, not in a 0.50% money market account.

Update: Make sure you also, check out our follow-up posts here:

157 thoughts on “Our emergency fund is exactly $0.00

  1. I agree, but with a couple small caveats:

    1) I believe a small emergency fund is prudent if you don’t have assets because you are a very high risk if something happens to your income. I have heard of people being cut off from their credit accounts, usually because of something like missing a payment after a job loss but there are plenty of honest mistakes that can make creditors look at your current situation and suddenly end your credit lines.

    2) There is an assumption that you have a reasonable amount of your assets in liquid investments. Lack of an emergency fund might not work for someone too exposed in non-liquid investments.

    As my portfolio has increased my comfort with a smaller emergency account has increased as well for the very reasons you outline. As long as you have something of value you can liquidate and have defined “emergency” appropriately you should make out much better with the investment than the cash.

    1. Agree with all. I have some small investments in illiquid investments. But there’s always a big stash of Fidelity equity mutual funds that can be in our account within a few days. Cheers!

  2. Hi there,I check your blogs named “Our emergency fund is exactly $0.00 – Early Retirement Now” daily.Your writing style is witty, keep it up! And you can look our website about love spells.

  3. Great post! I drafted a post for my blog about how I increased the return on my cash savings when I realized that it seemed the opportunity cost was very high for havings a significant amount of cash on hand. I started to do some research in the personal finance community and came across this post. I’m not moving my cash position into investments today, but I’m thinking about it based on your post and a few others. I hope you don’t mind that I linked to this post on my blog and I’m sending my readers this way to read more about your alternative to a large cash emergency fund.

      1. Get a fire proof safe capable of withstanding 1200 degrees. As for burgers, as long as safe is bolted down you haven’t any worries. Especially if it’s a gun safe like mine, LOL!

        1. Nice! I don’t think the downstairs neighbors would have liked a gun safe bolted down into their ceiling. But definitely, something to consider once we move out of the apartment in the big metro area nd into a single-family house. 🙂

    1. I’m not sure if I agree with having thousands in cash. How many things in our day-to-day life do we actually needs cash? I usually only carry about $60 in cash on me and it usually lasts me a month. I rarely use cash in my day-to-day dealings. Pretty much all my day-to-day stuff is done via CC. If it can’t be paid by CC (like my mortgage), then I use my banks bill pay feature, and if that didn’t work then I can still write a check. There’s almost nothing out there that is cash-only. I do have about $500 in cash in my gun safe, but that’s it. $500 would be enough to float me if I needed the money absolutely right this second. If it can wait 15-30 minutes then I can go to the bank. I usually keep a $2000 buffer in my checking account to account for paycheck and bill timing mismatches. So if I can wait an hour I can always go to the bank for some cash. If it can wait longer, then I have investments I can sell and get the cash in 2 days via direct bank deposit. Remember we’re talking about true emergencies that ONLY accept cash. How many big ticket emergencies need to be paid in cash right this very second? I can’t think of a single one.

      Comparing the US states to Puerto Rico is not really an apples to apples comparison since the infrastructure is way more advanced in the US states. If our infrastructure was hit hard enough where banks didn’t have any cash to dispense, then our economy has hit a point where the only things that would require cash are true necessities like food and fuel. And if its a truly catastrophic event, then cash loses all of it’s value anyway and we’d turn to a barter system with commodities. I really can’t think of any reason to have thousands in cash where access to it is needed right this very second. If you are truly worried about these one in a billion odds of an event happening, then I’d rather have my money tied up in tangible goods that can save my life like guns, reserve food and fuel, and a generator vs cash which will probably become worthless. Remember if the banks fail, the US fails and we’re on our own. It will be anarchy and people will be looting anything of value (remember Hurricane Katrina). A gun will protect you more than cash will in a catastrophic event. With hurricane Katrina, all you needed was enough cash to get out of the city. Once cleared of the city you had power, access to your bank accounts, etc, etc. Plus hurricanes don’t just happen, we usually have days of advance notice before they hit so you can make preparations to evacuate or hunker down. If you’re hunkering down, again, cash isn’t needed because you can use your cc to buy your supplies.

      I also don’t agree with the mentality of hording cash and waiting for a downturn in stocks. There are many articles out there that talk about dollar cost averaging. Yes, theoretically if you timed it absolutely perfect you could buy in a down market and then sell in the up market. But who has a crystal ball for that? If all you’re doing is waiting for a downturn, you’re missing out on all of the opportunity costs when the stocks are rising. For example, if the stock goes up 30% over the next year but then drops 10% so you decide to buy and then it goes up again. Yes, technically you made money from buying when they were down, however you also missed out on the opportunity costs when they gained 30% the previous year. Dollar cost averaging is the way to invest.

      1. Josh,
        I’m different in my way of thinking than you. I’m a natural cynic about all things. I’m also a conspiracy theorist. I’ll always have immediate access to thousands in cash as well as thousands worth of physical bullion. I have food stored, water, plenty of guns, thousands of rounds of ammo, a generator, acreage and three German Shepherds. That’s me.
        You’re right, our infrastructure is way more advanced than third-world puerto rico. I do anticipate the day will arrive where due to hacking/cyber-attack, our electrical grid and/or the internet will be compromised. It could be simply for a few days or it could last months. When this happens there will be panic and mass pandemonium beyond our wildest dreams. I’m not saying I’m prepared, but I’m better off than most. I really don’t consider myself a “prepper,” I’m simply cautious, extremely cautious.
        As for dollar cost averaging, I practice this in my 401-k. Outside of my 401-k, I’m holding lots of cash, individual-issue municipal bonds, mortgage bonds and a steady 20% allocation to equities. I am static in one way, I am a trader at times and I have bought the dips three times in 2018 and exited profitably within weeks, on the ensuing rallies. I bought in again last Thursday and I’m holding with gains of 3% so far. This static trading activity has netted me a safe, 9% YTD. 10-12% per year is my goal and this has been consistent. Again, that’s me.

      2. Very good comment! For years while living in SF my concern was an earthquake followed by 3-5 days of collapse of basic services. Hence, a few hundred dollars if cash in the safe. Apart from that, a little bit if cushion in my checking account for the bull vs. paycheck mismatch and the rest goes straight into investments!

  4. The emergency fund is supposed to be for when you lose your job. In a financial crisis like 2008-9 the bank might stop you borrowing against your house as well and your stocks have halved in value. Also companies tend to cut dividends in financial crises… Historically, I didn’t really have an emergency fund though too. Much of the time I had little chance of being fired as an academic and have the life and disability insurance. Right now I do have a pile of cash, but it is effectively reducing my mortgage in what is called here an offset account. Longer term I would rely on investments that are negatively correlated with the stock market as the emergency fund.

    1. Again: I don’t lose my jobs every 6 months. In order to save a large enough stash to hedge a job loss, most Americans will have to save a long time. In that time frame, equities are bound to gain enough that even in the worst case when the market is down you still outperform the low-yield money market.

  5. Isn’t the whole emergency fund talk a bit of a misnomer?

    Dave Ramsey and others use the emergency fund discussion to really focus on people who don’t have substantial assets. There, the emergency fund is an alternative to debt and their target audience is typically struggling to know how to properly manage debt, so creating a safer alternative is of real value.

    The FIRE community by definition are people who have (or strive to soon have) substantial assets. Most of the things I hear people describe as emergencies are not emergencies to someone that has substantial assets. They are unplanned expenses. And in that respect I wholeheartedly agree that the “emergency fund” mantra seems silly if what you are talking about is an unplanned set of tires, etc. For the FIRE community, I would think the biggest emergency risk is job loss in a down economy before hitting your FIRE number, particularly among high-income professionals who may be making a lot today and aiming for and living a lifestyle that’d require fatFIRE, but nonetheless could find themselves struggling to replace that income with a comparable job if forced onto the labor market unexpectedly. Essentially, it’s a version of sequence of returns risk, is it not?

    To me, instead of talking about emergency funds, isn’t the real debate here is what’s the optimal amount of one’s portfolio to hold in cash/cash equivalents? I think few plan to live in a just-in-time world of selling stock each time they want to engage in an act of consumption during their retirement. The question in my mind then is what’s the optimal amount of cash to hold for what time and for what reasons? People will clearly move into cash the amount of their planned expenses within some window around the actual date those planned expenses are incurred. The question would seem to me to be: (1) how much in front of the actual date of incurring the planned expense would you move the funds into cash, (2) how much of a cushion, if any, would you create around your forecast of those planned expenses? Also, I presume the main complaint about emergency funds is the delta between returns on those options and the stock market. But there are way better options these days than a .5% money market. A simple online savings account will get you 1.4-1.65% these days without breaking a sweat. Some short term CD options already are back up at or over 2%. Is there a spread between the emergency fund options and a higher stock market return where you would be willing to trade some potential return for greater safety?

    For me I have a large amount of my portfolio (16%) sitting in cash equivalents, earning around 1.7%. I will readily admit that this is driven by emotion and not optimization for me, having lived once before through a job loss, my portfolios tanking and being upside down on a mortgage simultaneously. (Today, at least I’d have a bigger stockpile if I faced the same situation.) I also expect that cash percentage to shrink substantially going forward. By the time I hit my FIRE goals, that percentage should be down to less than 7%. It will probably be down to 12% in the next 2-3 years.

    1. Very nice summary. Almost a guest post! 🙂
      Maybe we should simply ask Ramsey and Orman if they would still recommend the EF for us in the FI community! My suspicion is that they would. They seem to be pretty inflexible in their beliefs.

      Good point about the cash portion in the portfolio. I also like to look at the overall portfolio and not by bucket. If someone close to retirement doesn’t want to deal with 20% implied equity volatility and duration risk for long-term bonds, then absolutely, hold some cash to de-risk! I just don’t think that someone who’s 25 years old is just starting to invest needs to de-risk.

      1. I’m just learning about this community, and I know this blog post is over a year old, however, I’d like to comment. I’m happy I had an emergency fund, but this has given me a new point of view for how to keep it, but I’d personally would have to sell etf’s and such because I don’t have a heloc, and don’t want to unfreeze my credit to get one; however, I now realize I don’t have to put money into things with a low growth rate, e.g. a savings account earning 0.1%. As for why I’m grateful I had money accessible is we’ve had approximately $8500 in medical bills in the last 8 months (we will be hitting the out of pocket max soon) and $6500 plumbing repair (the main sewer line).

        1. I hope the 4th Qtr stock market selloff was an eye opener for many folks, especially those without a bona fide
          Emergency fund.

          1. It’s only a problem for people who confuse emergency funds and glidepaths/cash cushions in early retirement.
            I’ve openly supported having some cushion of fixed income assets to smooth out Sequence Risk. See SWR Series 19, 20, 24, 25.
            But I don’t see how having an emergency fund invested in stocks during Q4 would have derailed anyone’s finances. My car/heater/refrigerator/etc. didn’t break but even if it had and even if I had to sell stocks at the bottom of the stock market in December, it wouldn’t have jeopardized my retirement.

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  7. I don’t have an emergency fund, per se – nothing that I have ever called an emergency fund. That said, my wife demands that we keep a healthy portion of our assets liquid. This works well with our family’s normal cash flow. We never have to worry about being short on cash or over-drafting. If we need something, even a car or whatever, we just write a check. Of course this convenience (and emotional comfort toy for my wife) is a drag against our wealth building, costing us thousands in potential gains each year. I think we all know that you can’t perfect your finances – optimization given the facts on the ground is the best you can do. And, when you are married, there are a lot more facts on the ground.

    1. Well, equity funds are liquid as well. You can access the money just as quickly (or maybe with a 1-day delay).
      So, that’s what I used to do when still working: plow everything into Fidelity stock funds.

  8. I was looking forward to reading your content and sharing it with my clients (I’m a CPF(R)) until I read through several generalized statements regarding financial planners and the turned-up-nose tone taken. You may have retired early, but your maturity level is still mid-career.

    1. Thanks for your feedback. This post has been around for 3+ years and you’re the first person to complain. But I agree that some of the language here was a bit strong, so I took out the phrase “so-called” in combination with “financial planners” and made a few other changes. Even though I still find that Suze Orman and many others deserve that “so-called” moniker and potentially much worse!
      But I also realize that there are many financial planners that actually deserve their title.

      And just to be sure, I changed the text here because I re-read the post and was just a little bit shocked about the coarse tone of that younger and less-mature myself back in 2016. Not because I want someone to share my content with someone. I got plenty of viewers. If tone is more important to you than useful content I don’t want you to share my content with your clients!

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