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:

253 thoughts on “Our emergency fund is exactly $0.00

  1. I just listened to the ChooseFI Podcast episode where this was mentioned and let me just say…you sold me on the idea! I don’t know that I could go straight down to $0…but I’m definitely going to cut my fund by 1/3. Once I’m comfortable, I may take it down further. Really great post!

      1. Thank you so I have $30,000 in emergency but I owe $198,000 to my mortgage
        Should I work on paying that down or put it in a growth fund if so which one ?

        1. Susan,
          You need an emergency fund! Put that $30,000. in an online savings account AND work on paying down that mortgage. Consider refinancing now, followed by extra principal payments.
          There are some on this topic chain that don’t believe in a bona fide emergency fund but how did they feel in March when their equity investments dropped by 1/3??? Cash in the bank is KING, as it provides peace of mind.

          1. Honestly? I felt fine because instead of sitting on cash for the last decade my emergency fund tripled in the market, so when it went down 25% I was still up 225% from day 1. If you want to keep one cool but understand the cost and make that choice with awareness rather than personal finance dogma. If your savings rate is >50% of your income your financial risk is different than someone saving 5%.

        2. Depends on your age. If you’re still young and building a nest egg, put most of the $30k in the market, keep the mortgage and make only the required payments.
          Closer to retirement it might be a good idea to pay down the mortgage for peace of mind! 🙂

        3. What about using the $30k doing a cash in refi to a 15 year loan in the low 2% range? You can always get a home equity line of credit or tap 0% for 15 months credit cards in case of emergency. This march when stocks were down 30%, as a test of that strategy I applied for one of the 0% cards with no balance transfer fee and got approved for $45k.

          1. That approach isn’t advisable because an emergency fund is LIQUIDITY. Cash in refi is taking your cash a liquid asset and moving it into an illiquid asset.
            HELOC or tapping credit cards in an emergency is adding more debt which is so counter productive. What if the emergency is a job loss/layoff? Then what?
            Look folks, WTF! Out of greed you declare not investing all cash into equities as opportunity cost. What happens to you when you’re among tens of thousands who lose their jobs all while the markets are in crash mode? Your cash is vaporized in the crash and you don’t have emergency reserves to pay your rent, but food, etc? So then break your lease, move back in with your parents (like a mooch!) and borrow from family to pay for bills.
            All of this can be mitigated by holding some cash reserves, which is what this person with $30k should do.
            The March market swoon wasn’t long enough. I wish it had been longer, more drawn out. It’s sort of like Hurricanes. They’re devastating but they’re necessary because they have a cleansing effect on the environment. Bear markets are like hurricanes. Not enough amateurs got “cleansed” earlier this year. When the bear market arrives next time, this entire topic will be null and void.
            As for me, I’ll remain debt free, hold lots of cash and bullion, bullets, beans and bandaids And will watch the crash from the sidelines….

  2. 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

  3. “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.

        1. Can you update this given what’s happened over the past year? Millions of people are unemployed. Without a job, this takes out 3 of your options – paycheck, HELOC and credit cards. And while the market is up substantially at the end of all of this, it was a turbulent year.

          I understand the opportunity cost argument. But we are at a place where I don’t need to maximize every dollar. I like sleeping at night knowing our family would be ok, even if everything went to hell at once. Cash gives you options and time to make decisions in a way that nothing else can.

          Thank you for providing this well researched argument and why it works for you. It squeezes my brain in a different way!

          1. I agree. I’d like to hear from the retired investor and how everything has worked out in the last year. I’m also in the cash camp, holding substantial cash and sleeping well at night. The Bitcoin holders and GameStop traders, more power to them but those are not for me!

          2. The EF would have been a bad strategy in the 2020 episode because the stock market recovered so quickly. You would have been MUCH better off with the EF invested in stocks!

            But yes, I’m planning a new post on this. It’s a topic that keeps coming back. 🙂

  4. 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?

          1. Getting closer to 5%. Yeah, the opportunity cost is now reduced. But at the same time, equity valuations look pretty good now and equity expected returns are also higher. If you’re young and accumulating, 100% equities still works best.

  5. 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:

  6. You’re not alone. Most families don’t have an emergency fund. Thank you for sharing several options of how you might pay if there was an emergency expense. Very helpful.

  7. Same answer if I can get 2% or more on my cash?

    In reality I’m getting 6% on $2k in cash, 2.15% on $30k, and 2% on 20k.

    Note that my cash is a mixture of unused sink funds (e.g. vacation), credit card float (money we need to pay the bills when they come in), “next month” (by the end of the month I like to have enough cash to cover the next month), enough to cover my biggest insurance deductible (homeowner’s), and an emergency fund (which is only about 1/2 month of spending).

  8. Thanks for the great post, which made me start thinking about my own emergency fund.

    I still have two questions related to your post.
    1.) I am not sure how credit cards work in North America, but isn’t your credit card float depended on your job/salary? Which means if you were to lose your job, wouldn’t this affect your available credit card float? I would assume the credit limit for customers is less if they are unemployed. Maybe not in your case (because of your net worth), but for other individuals.

    2.) I am a student, I dont have a credit card and my income is not as save and regular as yours. Furthermore I do not have a house and therefore no option for using a HELOC. Currently I have an emergency fund, which can cover about 2 to 3 months of expenses. Because of the opportunity cost I am thinking about reducing this, but I am not totally convinced, because of the lack of other means (you could be using)

    I would really like to hear your thoughts on these aspects.

    1. You’re a student without a safe abs consistent income. no home for access to a HELOC, and no credit card for emergencies? Why on earth would you want to reduce your emergency find for investing? DO NOT fall prey to the influence of anyone who would lead you down that path. The folks on this post that contribute that they invest their emergency fund and use other means to solve short term problems are well off financially. This is not at all your situation and I doubt these posters would expect you to do this considering your lack of financial flexibility.
      I for one, am fairly well off and I still keep $10k in cash in my gunsafe along with gold and silver bullion AND $50k in cash equivalents money market fund. None of these posters will ever convince me to reduce this because if anything I’d like more cash and bullion in my safe. Everyone’s idea of an emergency and everyone’s idea of cushion is different and in my mind, cash is never trash.
      Capital preservation trumps opportunity costs.

      1. I’m retired and I have much more than that in safe assets (money market, bond funds, Muni funds). It depends on where you are in life. If you’re 2 years away from retirement, as your name suggests, you should indeed be well below 100% equities unless you’re not risk-averse at all (see my recent SWR Series Post 43).

        But young folks should dip their feet in the stock market as early as possible. I actually HOPE they go through their first 50% loss in the stock market with only less than $100,000 on the line to build up their defenses against irrational overreactions. Stephan has his entire life ahead of him and can compensate for short-term losses. “Capital preservation” should not even be in your vocabulary until you’re about 3-5 years away from FIRE.

        1. That’s one point to consider, the youth. However, things could potentially get very ugly (from economics, taxation, over regulating, immigration—open borders, stock market suffering, loss of jobs, etc.) over the next two years under this Administration. In cases like this and with a potentially ominous future why would anyone regardless of age throw caution to the wind and neglect their emergency fund when this is the time to build it up?
          As for my portfolio, I’ve peeled way back on equities in the past three weeks near the all time highs to the point I’m 20% equities currently. I’m bearish based on valuations AND the politics (cancel culture, Dems dominance in house and senate, etc. this will NOT be good for investing, won’t be good if you’re Conservative & White!).

    2. Myopically looking at one single potential event you are indeed better off keeping the EF in a MM account. But note the other post I wrote: https://earlyretirementnow.com/2018/04/18/emergency-fund-in-stocks/
      Once you average over a lifetime of emergencies, you’re again better off with the EF invested in stocks

      Credit cards in the USA will indeed assign a credit limit based on your earnings. I have never heard that the credit limit goes down after a job loss

    3. When I was a student, earning about $5k/year in income, I qualified for a total combined credit limit of 2-3 YEARS of living expenses so it would be pretty easy to use these as a float until things got better. I used my credit to earn several sign up bonuses that paid $500-1000 each to supplement my income. Credit card companies have made things a little tighter on the bonuses in the past few years but its still pretty easy to get 2-3 big bonuses per year, but as recently as 5 years ago it was pretty easy to get more than a dozen per year on very little income.

  9. I’ve only recently discovered your blog — really cool stuff! 🙂

    Do you have any posts describing how allocation should change toward and/or after retirement?
    Additionally, what would you recommend for someone who’s a freelancer who doesn’t have a steady income?

      1. I’m a software engineer in my mid 30s. I don’t really like my current job, and frankly I’m tired of working on things that don’t mean anything to me personally. I have some money saved, so I decided that I can give myself a 6+ month partial-sabbatical to reclaim my mental health, and work on a few ideas that are meaningful to me, and try to turn them into income generating businesses :).

        I think that in my case I probably will need to have at least 6 months of expenses as cash in my checking account, and the rest I can probably invest. Worst case, if my experiments fail, I can start looking for a job again.

        Thing is, I’ve been keeping huge amounts of money in my checking account for fear of potential losses in the stock market because I thought that I’d need the money to buy a house… but plans changed and I don’t think I’ll be buying anytime soon, so I’ve lost the opportunity to gain a lot money over the years :(.

        Now that I want to “go my own way”, and I don’t think I’ll be buying in the next 10 years, I figured it’s time to actually invest. Thing is, it’s once again unclear what the hell is going on with the market and some people are saying that there may be a major crash soon… so I’m back to square 1, heh :(.

        1. Tough situation. That’s why I always recommend to automate your savings and stay away from market timing on the way in.
          Even the house-buying money should be in stocks. Market goes up, you got more. Market tanks? Maybe not a good time to buy anyway.
          If it makes you feel better, do the dollar cost averaging now to prevent regret if the market goes down or sideways.

  10. The “emergency fund” advice isn’t all bad, it’s just not universal. It is good advice for people, and there are a lot of these people, who live by the seat of their pants at all times, spending on whatever need or want crops up when it crops up and living until the next paycheck with $0.47 in their checking account. They don’t have well thought out investments and don’t have liquid assets to move for emergencies. For those people, the advice to accrue a chunk of cash so that they can more easily weather the financial bumps of life seems worthwhile because that’s an improvement over scrambling to make ends meet every time there is a pet illness or a car repair.

    For people who have substantial liquid assets, investments, manageable or no debt, sensible spending habits, and a handle on how to mobilize the money they have to cover emergencies, then an all-cash emergency fund sitting in a 0% bank account could arguably be unnecessary.

  11. I understand the stats and calculations behind your position. I’ve read enough of ERN to know not to argue the math with you. 🙂 That said, there are other reasons people keep a significant amount of cash in an emergency fund. Peace of mind. We are emotional beings. It’s not something you can plug into a mathematical calculation, but it is something that is important to ones overall comfort with their financial plan.

    I’ve always kept around 3 months of expenses in savings. The amount of cash compared to my overall investments is insignificant and would not have changed my retirement date (23 months to go). However, I do sleep much better knowing I won’t be relying on my HELOC and credit care float in case the unexpected happens.

    1. 3 months of expenses in savings is small enough to not really matter. Compared to 300-360 months in your stock portfolio to reach FI.

      I never had the patience for even keeping 3 months in cash. Everything went into stocks. Served me well. I also slept well

  12. Nice post! It made me thinking, even though some things are country-dependent (seriously, you can pay your medical bills by a credit card? Wow!).

    The way I would summarize it, is that an emergency fund is a sort of insurance. And you might already be well-insured elsewhere (your job, your country-specific benefits, other sources). So it makes sense to review those and don’t over-insure yourself, because the premiums are non-negligible.

      1. Great Post! I have always avoided a large emergency fund for the reason you mentioned- easy to raid for extra trips and unnecessary expenditures.

  13. I agree, but only after learning the hard way…

    I had approx 20k as my emergency fund, using a redundancy payment I didn’t need as I walked straight into another job. That was about 25 years ago and the money has been steadily earning (almost no) interest and is certainly worth less in real terms. Would it be worth double, or more, in a stock fund? I daren’t check!

    At the time, I needed the “peace of mind”, but it has been such a wasted opportunity as you said. 

    1. I really can’t understand you folks who have no emergency fund due to “opportunity costs.”  Come on, markets everywhere are in a free fall and so is the money you would have set aside in an emergency fund, had you been prudent.  Shit happens, things break, jobs lost, and you need peace of mind. Do like me: have $10k (or more) in greenbacks in your gunsafe and have an equal amount in bullion (gold, silver or both) as an insurance policy against inflation erosion.  Tips is the ultimate peace of mind. 

  14. When the consequences of this current Leftist Administration are fully felt and the equity markets are down 40-50%, jobs are scarce, prices of goods/fuel/food are inflated even more than now, you’re going to wish you’d had ample savings set aside not just in money markets but in greenbacks.

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