12 thoughts on “Why You Need an Emergency Fund

  1. Miguel (The Rich Miser)

    I’m a big believer in having an emergency fund. I have 1.5 months of living expenses in mine, though I have investments in taxable accounts that I could liquidate in a long-term emergency. I also have two personal credit lines that I don’t use, which would cover around 2 months.

    Part of my pay is bonuses, so the credit lines would tide me over if I needed a short-term loan while a bonus came through. This has never happened, but I sleep better having them available.

    1. thefinancialjourneyman Post author

      I like the idea of keeping those lines of credit open.

      That allows you to only keep 1.5 months of cash liquid.

      Even if you never use it, having access provides the feeling of some security.

  2. Cubert

    I like your idea with the Vanguard fund. That makes good sense as you can cash out quickly if you need it. My main go-to for emergency dollars is a home equity line of credit. I think I got that advice from Mr. Money Mustache. The idea is that it’s an emergency, so even though using those dollars for essentials isn’t ideal – it’s better than leaving your money in a low yield savings account.

  3. Dividend FIREman

    Thanks for the tip on the Vanguard fund. Every time I build up an emergency fund, I end up using those monies to invest, when something promising comes along. This is primarily because the interest rate on the emergency cash is so low, and I hate having money sitting around not working for me. Even the rate on my online savings account is still only about 1.45%.

    A fund with a decent rate of return is much more likely to remain intact in my world. 😄

  4. MrFireby2023

    In my emergency fund I’m a little bat-poop crazy! I personally keep an amount equal to my mortgage balance so that at any moment I can pay that sucker off, this is equal to approx. 1 1/2 year’s of living expenses. I keep it at https://www.purepoint.com . Some may ask why I don’t simply pay it off? My mortgage rate is only 2.80% , yet my savings rate at purepoint is 1.60%. I’m paying an effective rate of 1.20%, which is hardly enough to justify paying it off and giving up all that liquidity. To me liquidity is everything. Back in September 2008 EVERYONE wanted liquidity. Liquidity provides peace of mind.
    As for readily available cash I believe in keeping about $1200. in your home (in my fire proof gunsafe) at all times as a needed home/car repair or root canal (great examples you provided, because they’re “real world”) may be needed at any time, when least expected. I also see a great deal of value in a safe deposit box where one should hold additional $4 or 5,000. Why so much? Recall Puerto Rico recently? There was no electricity, no ATM’s and a scarcity of cash. You never know what short term catastrophe might pop up in your home town. If you have a gun safe, keep it there, if not, a safe deposit box has a lot of merit.

    1. thefinancialjourneyman Post author

      Your reasoning makes sense.

      If your effective rate is only 1.6%, there is no reason to be in a hurry to pay it off.

      I like the idea of keeping some cash at home.

      Where I live, it is not uncommon to lose power for up to a week due to blizzards in winter or hurricanes in the summer.

  5. Moose

    What do you think about Early Retirement Now’s position that people in the FI community don’t, with few exceptions, need emergency funds? Given that we save 50%+ of our income, have a large amount invested, have large amounts of credit available, and likely have some sort of side hustle, it made me scratch my head a bit. In my scenario, it still made sense because I knew I’d be leaving my job soon, but if I didn’t have that factor, I’d be tempted to invest 100% of excess cash and keep a tiny emergency fund.

    1. thefinancialjourneyman Post author

      Hi Moose,

      Ha, I just listened to the ChooseFI podcast this morning with Early Retirement Now.

      It makes sense to not keep an emergency fund if you have a large taxable account.

      He also said that it could take people years to build up a 6-month emergency fund and miss out on better performing options.

      Depending on the situation, 3-6 months of cash might be excessive.

      For me, the least amount of cash that I would want to keep liquid is about 1 months worth of expenses to cover household and car repairs.

      1. Moose

        I’m with you, it’s not the most clear-cut topic in FIRE and a lot of it depends on the person. While I can rationally understand where Big Ern is coming from, I don’t think I’ll ever have a zero dollar emergency fund. For one, I don’t want to tap into investments to cover an expense. Emergencies are random but selling decisions shouldn’t be.

  6. The Fied Piper

    Great article! We are currently in the process of building up our Emergency Fund back up to about 3 months’ living expenses. We are self-employed, and do not have to worry about being laid off. But if the economy has a downturn, it is nice to know that we will have our short term expenses covered.

    Our philosophy: A small amount of ready-reserve cash is wise, and invest the rest in an easily accessible interest earning account. To each their own, but this is what we feel the most comfortable with.


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