Is an Emergency Fund Necessary with a High Savings Rate?

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Emergency funds are needed, right? Every personal finance expert advises building up one regardless of your financial situation. General advice recommends emergency funds range from $1,000 to one year of living expenses, depending on if you carry debt. Well, I have a confession: until this year we never had an emergency fund.

No emergency fund for us (until 2017)

https://www.kiwiandkeweenaw.com/emergency-fund-necessary-high-savings-rate/
A stockpile of tomatoes does not equal an emergency fund.

 

When I dove into saving for financial independence/early retirement (FIRE) headfirst I felt defeated by so many bloggers non-nonchalantly throwing around investing practices recommending:

  • Fully fund your HSA
  • Fully fund your 401k
  • Fully fund your IRA
  • Then you get to save the EXTRA money in a taxable brokerage!

Who the hell has extra money after investing almost $30,000/income in the first three accounts?!?!?  That is unattainable (turns out – it wasn’t).

I felt so far behind and greatly annoyed by their confidence and swagger. How would I ever open a taxable investment account? My feelings drove me towards maxing those accounts out as much as possible. That was back when I still wanted to keep up with the Mustachians. Thus, I made my biggest financial mistake.

Having no emergency fund made my routine when my husband and I got paid was very stressful:

  1. Figure out which bills were due before the next paycheck (we got paid on off weeks, so every Friday we’d get a paycheck)
  2. Check my Personal Capital app (sign up today, if you haven’t) to confirm the balances on all of our credit cards and bank accounts
  3. Contribute any “extra” money to our IRAs (since to be perfect you have to front load those)
  4. Adjust our 401k contributions if needed

We were saving 65-75% of our income, yet our checking accounts frequently had less than $300 in them.

Zero Emergency Fund (Failed) Logic

Now, give me a chance to defend myself! I did use some reasonable logic to determine that an emergency fund really wasn’t necessary.

Tree Down
Life does throw some surprises at you. Like the day you come home and the 60′ tree was blown over by the wind.

Why I thought we didn’t need an emergency fund:

  1. If a true emergency came up, we could charge it on a credit card. In fact, regardless of the emergency fund the cost would go on the credit card, as we put all of our day to day spending on credit cards! Our credit limit greatly exceeds any foreseeable financial emergency.
  2. We can always adjust our 401k automatic contributions to cover the emergency. If an emergency came up, we could magically increase our take home pay by $6,000/month by lowering our retirement savings to only meet the employer match.
  3. There are very few true emergencies. Our biggest expense, travel, is planned, my method easily allowed for us to increase our cash prior to buying place tickets.
  4. I wanted to get my money in the stock market and out of my spendy hands as quickly as possible. You can’t spend money you don’t have. And time in the market has been proven to be the key factor in taking advantage of market gains (JL Collins doesn’t like dollar cost averaging).
  5. I figured our above average salaries were a sufficient emergency fund. We make higher than average salaries, and are able to save a bunch of money to pursue FIRE, so an emergency fund didn’t seem as important for us.
  6. I figured I would get around to it when our salaries increased.
  7. I was still living in the debt repayment mindset. I never shifted to the FU money or financial freedom approach to saving.

I never saw the value in having an easily accessed cash emergency fund until I set one up this year.

Now I Love My Emergency Fund

This year we realized the errors in our ways. Ha! I think not, I think number 6 finally happened, and we now make enough money to have some extra to build an emergency fund. Emergency Fund

We started slowly growing our emergency fund, first to $1,000 and now to roughly six months of living expenses! How did we do that?

  1. Resist funding our IRAs. We still front loaded our 457s and 401ks as much as possible (they have lower expense ratios and fees compared to our IRAs, and IRAs can be funded for 2017 through April 2018).
  2. Hold off on a major home repair. Our house could use a new roof, but it is in good enough shape to last another 1-5 years. We had planned to stay ahead of the game, and replace it this spring and saved up cash. (FYI – A DIY roof is surprisingly inexpensive.) That cash is now sitting in our emergency fund.
  3. Tracked our spending and continued to cut things that we don’t value.

Having a high savings rate, made growing the emergency fund easier. We have so much privilege, and I need to write about it sometime.

But basically, we did what anyone who is currently saving for retirement should do if the don’t have an emergency fund. We slowed down retirement saving to keep our current selves more financially safe. I didn’t think that having the cash in our savings account would reduce my financial stress, but it has! Substantially.

Our jobs can stress us out and chronic pain may force Mr. Kiwi to stop working someday (or at least slow down). Having a cash emergency fund helps open up options that a high savings rate doesn’t necessarily make easy.

Now, there are plenty of arguments out there that tell high savers that an emergency fund isn’t critical. I’ve heard the argument of using a Roth IRA as an emergency fund and we have 457 accounts, which allow us to access money fairly easily if needed. But that is not the same as a cash emergency fund, sitting in the bank ready for you. If there is an emergency, having the money easily accessible will be one less thing to worry about.

That’s my experience, and I am so glad we’ve reformed our ways. That emergency fund helped inspire me to start this blog, consider new career options, and enjoy more in life.

Do you keep an emergency fund? How does it help you on your FIRE journey?

Do you want to read about other’s financial mistakes? Well lucky for you there are a series of bloggers who have also owned up to their financial mistakes:

  1. ThinkSaveRetire – Don’t brag about success; tell me your failures
  2. A Chronical of a Father with CentsMy financial mistakes
  3. A Journey to FIMy financial mistakes
  4. OthalaFehu – Budget Bungles, Money Muddles, and Fiscal Flubs
  5. Turning Point Money – My Financial Mistakes
  6. Femme Cents – 7 Lessons I Learned from my Biggest Financial Mistake
  7. Jumpstart From ScratchRecent financial blunder
  8. Gen Y MoneyInvesting mistakes in my 20s
  9. Atypical LifeFive super lame blunders from my life
  10. The Frugal GeneTop 5 sorry ass mistakes made in my 20s
  11. 99 to 1 percent6 financial mistakes and 15 lessons learned
  12. Winning Personal FinanceMy 7 most regrettable financial decisions
  13. Chief Mom OfficerOverdrawn checking account!
  14. Foreign Born MD Biggest mistake: Over a million dollars worth
  15. Kiwi And Keweenaw Is An Emergency Fund Necessary with a High Savings Rate
  16. The Cash Dad – My “Normal” Story is Filled with Money Mistakes!

Do you have any financial mistakes you want to share? Comment below!

 

24 comments on “Is an Emergency Fund Necessary with a High Savings Rate?”

  1. Pingback: Budget Bungles, Money Muddles, and Fiscal Flubs - OthalaFehu's Blog

  2. “My feelings drove me towards maxing those accounts out as much as possible. That was back when I still wanted to keep up with the Mustachians. Thus, I made my biggest financial mistake.”

    Great points! You need to find a balance that works for you. We took the same approach once we decided to take action. Resisting the urge to contribute additional amounts to retirement accounts was difficult as we viewed doing so as personal finance blasphemy.

    We came too close to the financial edge in one instance when Mrs. BD had lost her job near the beginning of the financial crisis while we lived in New York City. That motivated (or, rather, scared the crap out of us) to focus our attention for 12-15 months to build an emergency fund which is now roughly 6 months of expenses.

    Balanced Dividends Recent Posted:
    https://www.balanceddividends.com/how-we-got-to-averaging-1000-a-month-in-passive-income/

    1. Reply

      Thanks Mike! I’m so sorry your wife lost her job and put you in a place where you needed the emergency fund. Thanks for sharing your story, it’ll help keep me motivated to stay the course!

  3. Pingback: My Biggest Financial Mistake: over A Million Dollars Worth! - Foreign Born MD - Achieving the American Dream

  4. I’m also the same way, just needing to keep money in cash even though the chances of an emergency are pretty low. One big thing that I do is to keep my emergency fund in a 5% interest, FDIC insured savings account. It takes a little bit of work to set up, but its well worth it since, in a way, I still get the liquidity and comfort of cash, while also not feeling like my money isn’t “working” for me.

    1. Reply

      Oh, I’ll have to look into a 5% interest account. Ours earns about half that currently, so there’s room for improvement!

  5. Pingback: Our 6 Financial Mistakes and 15 Lessons Learned - 99to1percent

  6. Reply

    Yes, you do need it. We have a big one ($100k) sitting in short-term investments. We have used it to jump into some opportunities, but we always make sure to top it up again.

    99to1percent recently posted…Joining the Million Dollar Club/Challenge and So Can You
    https://99to1percent.com/joining-million-dollar-club-challenge-can/

    1. Reply

      Thanks for stopping by! Glad to hear your family has an emergency fund too! And with that large of one, I’d have it in short term investments too!

  7. Reply

    Saving 65-75% of your income is incredible. Is that off the gross or net?

    We don’t have an emergency fund either – We parked anything extra we had in Betterment (to be used for emergencies). But it takes upto 4 business days to transfer fund when needed, so that wasn’t a good idea. We’re correcting that next year by having a cash stash. My issue is that I just cannot stand having money idle. Not sure what I’ll do when I’ll have my million 🙂

    1. Reply

      That range would actually cover both our gross and net savings. It looks like we’ll be around 75% net this year. It seems like Betterment is a popular strategy! Honestly, a year ago, I could have been convinced. But it’s pretty amazing what having a traditional emergency fund has done for me since it is federally insured, and sitting there in case we need to use it. Especially with the health challenges we’ve faced the last few years, having some cash, makes going to the doctor less stressful.

  8. Reply

    Thanks for joining the chain gang. I’ll be honest, I do have an emergency fund but I have it at Betterment and not sitting at an online savings account. We keep around 6mo of expenses on this account at 40/60 (stock/bonds). I know a lot of people will disagree with my approach and that is OK. My point of view is similar to yours (at least back in the day) in terms of thinking I could use credit cards (0% APR) or my Roth IRA contributions. I hate to have 6mo of expenses making 1.25% at Ally. I recently read a post by FinancialPanther so I might be parking some money at 5% APY. If I do, It will be ~$20K that’s it.

    1. I’m the same way with our emergency savings, as we prefer to have our capital “working” and not just earning the savings rate offered by Ally (which we also use for banking).

      To help offer some additional liquidity, we actually recently moved about 1 months worth of expenses into the savings account. While not ideal, we at least now can access the funds same-day vs. a few days or longer from selling securities and waiting for a transfer back to our bank.

      You mentioned you’re utilizing a 40/60 stock/bond mix; we do as well for the longer-term portion of our savings. We’re using a Vanguard balanced fund in combination with an investment grade bond fund (which has check writing capabilities), so I guess we have 3 tiers of liquidity now: (1) the 1 month in a bank savings account, (2) roughly 1-2 months in the bond fund, and (3) the rest in the 40/60 balanced fund.

      Perhaps a little over-engineered but it works for us in terms of liquidity, risk, and relative capital appreciation with moderate income.

    2. Reply

      You and I do the exact same thing! I have about 8 months’ expenses in a 60/40 stocks/bonds portfolio at Betterment. It’s only to be tapped in event of job loss. The rest of our taxable is 90/10.

      1. Reply

        8 months of expenses sitting 60/40 at Betterment sounds pretty reasonable! I like that you set a parameter of “only to be tapped in event of job loss.” I like our savings account, but I can definitely see your approach too!

    3. Reply

      $20k would be about 9 months of spending for us! Gotta love frugality, so having 6 months cash sitting in an emergency fund isn’t too extreme. It seems like the Betterment path isn’t a pretty reasonable approach especially holding bonds. It shows you that personal finance, once again, is personal!

  9. Reply

    We don’t have an emergency fund. In a pinch, I could use a credit card to get 30 to 45 days. Then I could sell some stock, and get funds out of the taxed investment account.

    1. Reply

      Personal finance is definitely personal! I’ve really liked just knowing the money is sitting there. Plus with our low spending, it really isn’t all that much money. Thanks for stopping by and sharing your story!

  10. I’m not sure this counts as a mistake! Seems like an optimization strategy to me.

    1. Reply

      I see what you are saying, but it was definitely a mistake for us! Not having an emergency fund trapped us in our jobs we didn’t like, and caused a lot of financial stress that we unnecessary. The small market gains hardly make up for the burden we were carrying.

  11. Pingback: My "Normal" Story is Filled with Money Mistakes! - the Cash Dad

  12. I need to make a list of all my financial mistakes soon…inspired by this and Think Save Retire!

    I’m in the “no emergency fund” camp, but that’s because I’m a believer of having $100,000 in a taxable brokerage account for the “everything goes to hell fund” Even with a 50% market drop and a layoff, thats still $50,000 in living expenses.

    1. Reply

      Yes, there are soo many smaller mistakes I’ve made too. I definitely need to get those organized! Someday I’ll have that taxable brokerage account, but with our salaries (and access to 457s) we haven’t been able to save enough to fund a taxable account. Fortunately, our spending is so low on average that our emergency fund doesn’t have to be too big!

  13. Pingback: 7 lessons I learned from my biggest financial mistake - Femme Cents

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