Before we get started, I wanted to include a small disclaimer: every situation is different, and what works for me may not work for everyone. I’ve crunched the numbers and found that an emergency fund isn’t best for me. Will it be the same for you? That’s what you’ll have to decide for yourself. With that in mind, let’s dive in.
As you probably know, an emergency fund is meant to be a buffer for unexpected costs or bumps in the highway of life. These might include the following (all are things I’ve experienced):
- Unexpected health care costs, like an ER visit for broken bones, suspected appendicitis
- Car issues: blown tire, broken windshield, etc.
- Unexpected house issues: roof leak, broken pipes & subsequent flooding
- Unexpected pet costs (my dog inhaled a foxtail and it required a $1200 procedure to remove it)
- Job loss (I actually haven’t experienced this, but I know it’s a reality for many people)
Given how devastating unexpected events like these can be to the unsuspecting family, most financial experts (like Dave Ramsey) recommend that your emergency fund should be able to cover 3-6 months of full expenses. Exactly how many months depends on the stability of your job, whether you have dual incomes, and how healthy you are. Suzie Orman even advocates for 8 months of full expenses!
Now, I’ve read Dave Ramsey’s Total Money Makeover. In fact, I recommend that most people should read it. Having read it when I initially finished my training, I built up a sizable emergency fund and I was confident in my ability to weather any storm.
Then… I watched as that cash sat there and did nothing. All I could think about was how it was wasting all of its potential.
I began asking myself whether having an emergency fund was truly the right thing for me. I decided to do a deeper analysis, and spoiler alert, I decided against the emergency fund altogether.
So, here are the considerations that went into my decision:
- We are a dual income family. I work a little less than full-time. My wife is a doctor and although she only works part-time now, I know that in a pinch we could both work more.
- Delayed payment from work. In terms of billing, I am paid on a two-month lag. For example, on March 1st, I get paid for what I did in all of January. There is almost always a lag between service, billing, and collection. So I know that if something comes up, I’ll still have a paycheck coming in for the work I’ve already done.
- Disability insurance. Not only does it cover 30% of my current income tax-free, but I’ve also added a partial disability rider. If I experience a drop in income of more than 15% due to a disability or injury, after a period of 90 days, my insurance company will start paying me to compensate for the difference.
- Passive income. Of course, this is a big one for me. I’m earning passive income from other sources, which currently covers over half of my expenses.
- Home equity loan. I opened up a HELOC that is maintained for only $75/year. If I had to use it in a pinch, this could cover 10-12 months of expenses.
- I’m decently adept at selling things online (Ebay, Craigslist, FB) and if it really came down to it, I could sell some things. I’d start with some of my wife’s nice purses (shhh, don’t tell her).
- Opportunity cost. This is a big one. Sure, I could have funds in a high-yield savings account like Ally, but with an average yearly inflation rate of 3%, a 1% return simply isn’t enough. I wanted to put that money to work.
So what happened to that sizeable emergency fund of mine? I chose to invest it and so it went to (and continues to go to) crowdfunding, investment properties, and taxable accounts, to name a few.
When an unexpected event does occur, like that $1200 procedure when my dog inadvertently sniffed something up his nose (which has happened twice, by the way), I put it on my credit card. By the next month, I’m able to pay it off in full as my paycheck comes in. I’m fortunate enough to have a buffer and don’t live paycheck to paycheck, and I always pay off my credit card in full every month. If the worst case scenario occurs and the expense is very large, I could tap into one of the resources mentioned above, like my HELOC.
Ultimately, this is just one situation where I decided that the conventional wisdom just wasn’t right for my particular situation. Obviously I believe that you need to be prepared to handle life’s unexpected circumstances. After all, the one thing we can count on is that life is unpredictable.
I say, make sure you’re prepared for an emergency, but do it in a way that makes sense.
Has anyone else eliminated their emergency fund? Anyone think I’m not being smart about this? I’d love to hear…