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:

195 thoughts on “Our emergency fund is exactly $0.00

  1. and there you go…you lost a reader here. Every single blog I read tells me to have a emergency fund now you say I shouldn’t have. I don’t have papa paycheck, I dont have credit card, nor a house only a small brokerage account but you’re saying I shouldn’t have it. Man….bye

  2. “By the time we need that emergency cash, an equity portfolio would have already doubled to 16 months of expenses.”

    I’m not sure why you ignored one of the most obvious arguments for an emergency fund, which is that when you need your emergency fund it may coincide with a market recession. And thus those 16 months of expenses get cut in half.

    And why use 0.5%? Do you really think 0.5% is the best interest rate people are getting now or even on average throughout time? A more suitable interest rate for savings would be 1.5% at least. And at that rate, the 8 month emergency fund would turn into 9 months after 7 years. Nothing major but also not something to ignore.

    Another huge point you’re missing is that banks have the right to withdraw your credit limit at any time. So when you both lose your jobs, the market crashes, and everyone and their mom is trying to get credit, do you really think the banks are going to sit idly by and let everyone go on a spending spree? They can lower your credit limits to only 10% of its current value. They can also lower your HELOC as well. Not sure why you act like a HELOC is guaranteed money you have access to when it isn’t.

    Cash drag is just a fancy term for FOMO.

    Now to your credit I will say you make a good argument for not having too much money in cash. But to say someone should have zero dollars in their emergency fund is short sighted. Please amend your article with the points I just listed above.

    1. Calculate the return between when I wrote this article (May 2016) to today of:
      1) a money market account
      2) an equity index fund
      And assume you now have to withdraw the money because the emergency occurs during a recession.
      You’ll find that the stock investment did significantly better.

    2. The original article was written a long time ago, back when online savings accounts paid next to nothing, unlike the 1.5% typical s earnings today. I agree with your arguments, I not only have one year’s worth of expenses in an emergency fund (earning 1.15%) but I keep approx. $20k in cash currency in a safe place. The cash would come in handy if extreme panic set in and the banks were inaccessible and ATM’s become empty.

  3. Have you run these numbers based on some of today’s high interest rate accounts? I’ve just moved my E fund to one offering 3%. I’d say that’s a reasonable return for having some cash sitting on the sidelines.

    1. There’s no cash accounts offering 3% right now. Absolutely none. There must be some heavy strings attached, like 3% only on the first $5K. Or it requires a minimum number of debit card transactions. What bank is it specifically?

  4. You can afford to not have an emergency fund, because compared to the majority of people you are rich. You can pay out of the pocket many items that for others will trigger an emergency (and credit card allowances also depend on the income I suppose). For those who can spend no more than a monthly $200 on discretionary purchases, it can be hard to fund those $1000 for a single item needing replacement.
    When it comes to the “psychological” aspect, that can work both ways: Avoiding to go to the doctor for financial reasons might not always be the smartest decision, not even financially … – and on the other hand I did the math and decided to “be my own insurance” rather than buying health insurance, especially as in France real expensive illnesses are taken in charge 100% by public funds. (But anyway it would never occur to me to spend cash I keep on the side for non essential items …).
    Finally its perhaps only a question of semantics: Couldn’t the term “emergency fund” just mean “Keeping some money you can access short term”? (Regardless of where it is invested, I do eg bonds). The only question is how much you need on top of what you are spending on average … – and for the above mentioned reasons this could be more of a lump sum, rather than a percentage of networth or monthly income.

    1. Instill feel everyone should have a couple to a few thousand dollars in cash currency locked away in a safe place (in my case in a gunsafe) for emergencies. I also keep several thousand dollars of silver bullion in the safe, it’s purpose to protect against erosion of those dollars due to inflation. This isn’t for everyone but it’s certainly for me.

        1. Silver is extremely liquid AND bullion is seeking for premium over spot. A week ago I called my local “gold and silver exchange” and asked the owner what the price is spot silver was, he replied $28.70 per oz. I asked his what he’d pay me for any amount of bullion? His reply? $29.05 per oz! That’s a premium AND the transaction isn’t reported to IRS.
          So from the tone of your query to me, you’re a skeptic of my owning bullion. Don’t be.

          1. No, I’m not a skeptic. I own gold and silver myself. Very small amounts. But to make a difference in the asset allocation and return patterns, you’d need probably at the very least 5%, better 10% precious metals exposure. (see SWR series Part 34). Not sure I’d want to hold that much gold (or gold and silver) in bullion at home. For larger amounts one would have to use an ETF or metals futures.

            Also, are you saying that this merchant pays you more than spot price for selling? I would have thought the bid price is spot-x and the ask is spot+y and you’d have a pretty wide B/A spread x+y of probably around 5-10% for silver and probably 1-2% for gold. But I could be wrong. Maybe this is for specific silver coins like American Eagles?

            Also: just because the transaction isn’t reported to the IRS doesn’t mean you don’t owe taxes. All gains are taxable.

            1. I don’t consider my billion holdings as part of my asset allocation. They’re in my safe to hedge my cash from inflation and I hold a lot of cash. I don’t own any precious metals ETF’s but I will begin buying on a pullback to $1700 level, basis Gold.
              The dealer paid me over spot and it is because there is a Shortage of bullion in the US. He told me if yuh order some online from dealers it’ll take months to revive as the dealers truly don’t have any inventory. Hence, he paid me 29.05 per oz. when spot was exactly at 28.70. It was assorted silver including two rolls of Peace silver dollars. No American Eagles as I don’t own any.

    2. Please read the other parts:
      https://earlyretirementnow.com/2016/09/07/debunking-emergency-funds-part1/ especially the the second myth “2: A $0.00 emergency fund only works for very high net worth, high-income households. All others should have an emergency fund”

      Also, yes, clearly it’s about the semantics. I showed that it’s likely optimal to “invest” the emergency fund in stocks:

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