Here’s Everything I’ve Done with my Money by NOT Having an Emergency Fund

by Darwin on March 24, 2013

The traditional personal finance advice is that everyone needs an emergency fund, often with absurdly unrealistic amounts of cash (6 month’s salary or more) stashed in a savings account losing money to inflation.  This is a horrible waste of capital in my opinion and while my approach isn’t for everyone, I also want to highlight that not everyone needs to adhere to the cookie-cutter advice doled out by “professionals” when it doesn’t reflect reality or the best use of funds.  Let’s start at the beginning of my post-college career and walk through how much better off I am by having NOT stashed half a year’s worth of income in a savings account.

  • First Job – I started fresh out of college with no credit card debt and only some student loan debt in the form of an interest-free loan I paid back to my parents over my first 5 years out of school.  It was totally manageable and my salary was decent, as I entered into a mediocre job market but had an in-demand degree (see unemployment by major).  While I was able to bank some of my excess income, I was also saving for a ring, and I also wanted to buy a house right away.  If I had waited to save half a year’s income, I would have had to forgo both  - probably for at least 2-3 years.  I mean, how quickly can you actually save half a year’s salary when you have to pay current living expenses, contribute to a 401(K), pay back loans, etc.  So, I didn’t build an emergency fund.  
  • Within 1 Year, I Bought a Home and an Engagement Ring – As soon as the 1 year lease was up on my apartment, I plopped down the bare minimum on a home (3%).  While many people gasp at this move, putting down more than you have to is foolish in my opinion.  The only entity you’re helping by putting down 20%, 30% or whatever, is the bank.  Nowadays, yes, there is PMI, which tilts the equation in favor of putting down at least 20% to avoid that cost, but given the choice between waiting years to buy a home with 20% down or just buying one today with next to nothing down (if you are so inclined), I’d buy the home and try to get the equity up to 20% quickly and refi out of the PMI.  Regardless, I bought the home, proposed, and took a nice trip to the Caribbean to boot – because I didn’t have an emergency fund.
  • Fast-Forward a Few Years – We had saved enough that I probably did have equivalent to a few months’ salary and had our first kid.  Rather than leaving all that money in the bank over the years, I’d been investing in a Roth IRA, maxing out my 401(k), putting money into the kids’ 529 plans and enjoying life – Hawaii, Europe, and more.  We also decided to move to a larger home when our second child was due, so we sold the first home and booked a six-figure gain to use as down-payment on the next one.  In that case, we cleared the 20% threshold to avoid paying PMI.  I’m not sure if following that transaction if we had what would be considered a full 6 months cash remaining or not, but then we had our third kid and put in a swimming pool rather than blindly hang on to probably close to six figures in cash.
  • More Recently – Again, over the years, rather than leaving money in cash, like a true emergency fund must be, I’d accrued various CDs and more retirement funds, but also established a ~50,000 account in a routine taxable trading account.  I’d seen it grow from probably 35K to 50K over several years of bull markets.  Well, a seemingly great real estate opportunity came around and it’s something I’d really wanted to branch into for a long time.  Not just for the higher returns, but also to diversify my asset mix.  The investment required was roughly $50,000.  I had a few choices.  I could liquidate all my taxable investments, triggering lots of capital gains, or I could do a 401(k) loan, or I could pass.  I didn’t want to pass, and didn’t feel paying thousands of dollars in taxes now to avoid the 401(k) loan was the right move, so I borrowed $50,000 with 401(k) loan.

 

What If I NEEDED an Emergency Fund?

For one, early on in my twenties, my expenses were low and I had been accruing funds in a 401(k) which could be tapped in a catastrophic emergency.  Next, my wife was graduating the next year and ended up with a job as well where we were living off my salary alone and her salary was gravy.  Finally, the job market was tight enough and my colleagues were jumping ship left and right to competitors so I knew if something happened at my employer, it wouldn’t be long until I was employed again. After all, there’s severance, unemployment and other companies.  In a 90′s economy, you’d have to work really hard to stay unemployed for a year with a Chemical Engineering degree.

Fast forward to today.  If I were to be laid off tomorrow, first off, I’ve probably accrued at least 8-12 months’ severance by now (not really sure the exact number), and the federal government is just now starting to wean people off the 99 weeks unemployment insurance.  While we couldn’t live off $2500 a month, in the meantime, I could freelance/continue to collect money from blogging, my wife could substitute for a couple grand a month and before you know it, we’d be at least, say, $6500-$7500 a month with a much lower tax liability, so after tax, we wouldn’t be in horrible shape – and this would only be for the span of a few extra months it would take me to get a job.  Let’s say it took me a full year and I only had 8 months’ severance (which, by the way, I’d be saving all the extra blog money along the way during those 8 months, since severance is full salary).

So, if I go back and recap all the things I COULDN’T HAVE DONE had I always carried a true “emergency fund” of 6 months cash in the bank, here’s how my life would be different:

  • Never would have bought my first house in time to…
  • Buy our second, larger home we live in now
  • Would have put off marriage longer
  • Probably would have put kids off longer and only had 2 instead of 3
  • Never would have traveled as much and had incredible memories to live with
  • Never would have bought a swimming pool
  • Never would have invested in college rental properties OR the CAD Outsourcing business I forgot to highlight (still churning right along)
  • and more.

In some regards, you might say, “well, hindsight is 20/20 and you just happened to be lucky”, but to that I’d say that I have always been able to gauge the economy, my field and career prospects pretty well.  Now, I’d say this is a riskier approach to be sure, but if you know that your skills are in demand and you see colleagues hopping left and right to competitors where you don’t even have to relocate?  And you’re young and in good health?  And you want to get more out of life than living the life of a pauper so you can play it safe?  Well, then maybe this approach is for you.

{ 17 comments… read them below or add one }

Brick By Brick Investing | Marvin March 24, 2013 at 11:20 pm

I agree 100% while emergency funds are great safety net for some they aren’t for everyone especially absurd amounts such as 6 months saved up. We have a small emergency fund that consists of a couple grand for small emergencies. We have no debt outside of our mortgage that is less than 33% of my after tax pay. All the money we have left over after expenses goes into investments.

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Simon March 25, 2013 at 8:05 am

Finally someone has written a post that discredits having a massive emergency fund. I think you need $2k at the most for an emergency fund, as its always nice to have something to fall back on, but any more is a waste.

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retirebyforty March 25, 2013 at 11:55 am

I think about 5k is good for emergency fund if you have other savings or high income. You could cash out your CDs if you really needed to. The only reason why we have a large amount right now is because it’s the first year of semi retirement for me. If we continue to do well, I’ll drop that down to a more reasonable level.

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Darwin March 25, 2013 at 8:34 pm

I do like that number, maybe plus a few grand. That could cover a roof that gets ripped off in a storm, a new HVAC unit if it dies, major medical issue, etc. Covers 1-2 major issues that could conceivably come up in life.

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Darwin March 30, 2013 at 1:43 pm

I like to have enough to cover a major expense that’s not all that far-fetched. For instance, new HVAC, new roof, major car blow-up, etc. Any one of those things or covering a month or two of living expenses could all be covered w 10K or less.

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WILD about Finance March 25, 2013 at 1:42 pm

I agree in the sense that too much money tied up, earning peanuts for interest as the rates are so low, is just a waste of time really. Thats money could be used to take on another project that could generate way more income than say 1% interest like some banks are offering.

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Darwin March 25, 2013 at 8:27 pm

It didn’t feel so bad when we were earning 5%

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WILD about Finance March 26, 2013 at 8:58 am

Me neither, but those days are gone, for the time being at least. :(

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krantcents March 25, 2013 at 7:39 pm

I don’t have an emergency fund wither! I choose to have my money working for me and earning a decent return on investment. I do have some savings and I have money in a brokerage account. I have a line of credit at a very low interest rate. This is one of the advantages of very little debt and good planning. When I replaced my refrigerator, I put it on a zero interest account for a year and I set up automatic payments to pay it off in 11 months.

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Darwin March 25, 2013 at 8:27 pm

There ya go – putting it to work!

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Art March 26, 2013 at 4:18 pm

The Roth IRA is the answer for emergency fund beyond a few grand at the ready. the 401k has penalties for removing principal, Roth’s do not. Always have a diversified portfolio even if your young, because you could be forced sell your assets in a down market. For emergencies you take out assets that have be doing well recently. I don’t mind stretching to reach a goal like owning a home, but sometime patience is virtue.

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Darwin March 30, 2013 at 1:40 pm

Totally, stealth benefit of the Roth IRA.

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Funancials March 26, 2013 at 10:27 pm

I wrote an article a while ago called Emergency Funds are Overrated. I would link to it if I wasn’t on my phone. I’m glad you agree. Definitely need something to cover emergencies, but isn’t that what insurance is for?

I think as PF experts preaching to the masses, it’s better to say things like “have 6-12 months saved” rather than “you don’t really need an emergency fund.” People are dumb so I would rather err on the side of caution.

I think the important part is saving and continually building wealth. It doesn’t necessarily have to be in a liquid savings.

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Darwin March 30, 2013 at 1:40 pm

True, people are dumb, don’t have discipline, etc. At the same time, most people they’re preaching to have no ability or desire to build a 6-12 mo fund anyway, so perhaps they’re aiming high. Or, maybe it’s just a bunch of people regurgitating the same info, that’s not uncommon.

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Paula @ Afford Anything April 1, 2013 at 11:37 am

I absolutely agree that the conventional wisdom, 3-12 months of salary, is astonishingly high. I agree with creating a fund for car repairs, home repairs, etc., though I don’t conceptualize that as an “emergency fund” so much as it’s “money you set aside for inevitable expenses that happen at random intervals.” Maybe I’m just being nit-picky, but I don’t think needing to replace a washing machine is an emergency.

I’ve set aside about $20k in a standard, taxable brokerage account that’s investing in broad-market funds. If there’s a real, genuine emergency, I can tap that money. Sure, I might “lose” some if I have to withdraw during a bear market, but the longer that the money stays invested, the lower the risk of loss.

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Darwin April 1, 2013 at 8:08 pm

That’s been my approach too – my emergency funds are about 5K liquid all the time but 30K in stocks at the moment

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Jeremy Streich July 12, 2013 at 5:09 pm

“Well, hindsight is 20/20 and you just happened to be lucky.”

I believe that you (generic you) should have 3 to 6 month (of expenses) emergency, but only after you have paid off all debt besides the house. Statistic show that in any give 5 year period you have an 80% chance of having a financial emergency costing $8K+ (after insurance, or things not covered by insurance).

For us our furnace died the second year after we bought the house, our EF covered it. During the replacing the furnace we learned the air conditioner coil was leaking into the furnace (what destroyed our furnace), so they took that out (as it was middle of winter we didn’t need it), and we had a new coil put in in the spring (also from the EF). We had the car break down, another $1K from the fund. 6 months later we bought another car (not out of EF, but other savings), and was still in working order when we sold it. The seals on both of our toliets have broken at different points (old wax does that, apparently) and our EF easily took care of the plumbing costs (I know this isn’t hard, but we’re not very mechanical — I can do electrical, but keep me away from things with moving parts or pipes that carry large quantities of water). We have replenished the fund each time, and handled each thing without borrowing from investments or taking on debt.

About the use of borrowing from IRA and 401K, I’d like to point out, retirement can’t be touched in bankruptcy. Borrowing from a 401K is dangerous not only because you incur interest payment (to your 401K) but also because money not returned is counted as a withdraw and penalties apply. Taking principle out of a Roth doesn’t cause penalties, but it does unplug that money from the investment.

“[I]f you know that your skills are in demand and you see colleagues hopping left and right to competitors where you don’t even have to relocate?”
My skills are in demand, I pass up higher paying opportunities to live close to family and keep a modest life style. If I changed jobs, even in the area, I could be making 15-20K more a year. I chose not to because my current job is 9-5, less stressful, and allows me to work on my own business when I’m not at work (no non-compete, no NDA)

“And you’re young and in good health?”
I’m 32, I’d guess by your gauge I’m in young. I have no serious alighments, take no meds, but I have incredible health insurance through my current place of employment in case that changes.

“And you want to get more out of life than living the life of a pauper so you can play it safe?”
I don’t live the life of a pauper. I’ve had my house now for 5 years, been married for almost 6, have a 4 year old daughter. My wife chose to stay home and raise our daughter (I know more income we are leaving on the table).

We just put in a play set and a garden, we have two normal sized picnic tables and child sized picnic table. We drive a 2001 Honda Odyssey that works just fine for all our needs. We have a TV, NetFlix, two laptops (well, three but one is in need of repair), and a Kindle Fire. We have memberships to a couple of museums, and have been known to take a few days at a bed and breakfast a few miles outside the city for our anniversary (or just to get away) or to hotel with indoor water park for Christmas. We’ve also had my wife’s step mother living with us for the past year. It’s not high flying and glamorous, but it suits us.

How do we manage? I have a slightly higher than average paying job, we keep no debt (save the mortgage, which we want to work down soon), keep an emergency fund, spend less than we make, and actually enjoy living. We are not for want. All without the worry of “what if” because we are fully insured, have a fully funded EF, and have most of our ducks in row in case something does happen. I say most only because we have to do a will, but we are having trouble on who would be our daughter’s guardian.

My aim, slowly become a millionaire next door, to build wealth and give lots of it away.

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