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)
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:
- Figure out which bills were due before the next paycheck (we got paid on off weeks, so every Friday we’d get a paycheck)
- 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
- Contribute any “extra” money to our IRAs (since to be perfect you have to front load those)
- 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.
Why I thought we didn’t need an emergency fund:
- 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.
- 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.
- 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.
- 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).
- 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.
- I figured I would get around to it when our salaries increased.
- 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.
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?
- 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).
- 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.
- 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.
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:
- ThinkSaveRetire – Don’t brag about success; tell me your failures
- A Chronical of a Father with Cents – My financial mistakes
- A Journey to FI – My financial mistakes
- OthalaFehu – Budget Bungles, Money Muddles, and Fiscal Flubs
- Turning Point Money – My Financial Mistakes
- Femme Cents – 7 Lessons I Learned from my Biggest Financial Mistake
- Jumpstart From Scratch – Recent financial blunder
- Gen Y Money – Investing mistakes in my 20s
- Atypical Life – Five super lame blunders from my life
- The Frugal Gene – Top 5 sorry ass mistakes made in my 20s
- 99 to 1 percent – 6 financial mistakes and 15 lessons learned
- Winning Personal Finance – My 7 most regrettable financial decisions
- Chief Mom Officer – Overdrawn checking account!
- Foreign Born MD – Biggest mistake: Over a million dollars worth
- Kiwi And Keweenaw – Is An Emergency Fund Necessary with a High Savings Rate
- The Cash Dad – My “Normal” Story is Filled with Money Mistakes!
Do you have any financial mistakes you want to share? Comment below!