Early Retirement Now

Our emergency fund is exactly $0.00

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In our financial plan, you will never find the one staple item that every so-called 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 so-called 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 all became financial planners because this whole emergency fund business is one big hogwash and 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.

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 so-called 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?

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:

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