This is going to be one of those topics that could go well or blow right in my face. The reason I say this is because an emergency fund is considered a foundational element of a sound financial plan and for a personal finance blogger to even entertain the idea of not having (or needing) one would be a hard thing to swallow. But before you start disagreeing with me let me set the stage before diving into the title of this post.

What Is An Emergency Fund?

According to Investopedia, an emergency fund is “an account used to set aside funds needed in the event of a personal financial dilemma, such as the loss of a job, a debilitating illness, or a major expense. The purpose of the fund is to improve financial security by creating a safety net of funds that can be used to meet emergency expenses as well as reduce the need to draw from high-interest debt options, such as credit cards or unsecured loans”.

I think that’s a pretty good definition; however, I like mine better …

it’s money you intentionally set aside and perhaps forget it even exists. This is money you DO NOT DARE TO TOUCH unless shit hits the fan.

Options For Parking An Emergency Fund?

Since I’m trying to make the case you don’t need an emergency fund I can’t recommend places to store 3 to 12 months of expenses. However, if you’re still interested in building an emergency fund take a look at these accounts and the interest rates they offer.

Type	Minimum	Liquidity	Interest Rate %
Checking	$$	High	0.01
Savings	$$	High	0.03-0.06
Money Market	$$$$	High	1.00-2.00
Certificate of Deposit	$$$$	Low	1.00-2.00
Online Savings Account	NA	High	1.25-1.50

Source: www.bankofamerica.com & www.bankrate.com

Checking/Savings

When it comes to brick and mortar checking/savings accounts we keep the bare minimum to cover expenses we can’t charge to credit cards. Some of these expenses include our mortgage, a car loan, and some of our utilities. Aside from that, we don’t have any money sitting on these accounts and neither should you.

Money Market

Money markets at a brick and mortar bank are horrible in terms of interest rates; however, you can find other options (generally online) that are competitive but require higher minimum starting balances.

Certificate of Deposit

If you really want to see >2% APY you’re going to have to commit to both higher minimums and longer terms and illiquidity as is the case of certificates of deposit. There are no penalty CDs out there but be aware of some that advertise they are but they’re not.

Online Savings Account

All things being equal, I’d suggest considering an online savings account (OSA). This type of account doesn’t require minimums, their interest rate is competitive, it’s 100% liquid and FDIC secured. If you take a look at my financial money map you’ll see I have several OSAs for different goals. For what is worth I personally recommend Ally bank so feel free to check them out

Do We Have An Emergency Fund?

The short answer is No, we don’t have an emergency fund … why? because we don’t need to …  Ok JJ, can you please expand? Well, the only thing I can say is that we want our money to grow. Letting it sit losing value to inflation just feels wrong.

So, what If I lose my job, or need to deal with some major expenditure? How will we handle this or some other event? … the reality is that it will always depend but in general, these are the options we’ve considered:

1. Roth IRAs
2. Credit Cards
3. Taxable Account

Our Strategy for Dealing With Emergencies

The pie chart below illustrates the split between our buckets for handling emergencies. The percentages are not meant to be indicative of the size in $, instead, they show the relative contribution of working capital we have at our disposal.

Roth IRA

My wife and I have been maxing out our Roth IRAs for the past couple of years. Withdrawals made before age 59 1/2 are subject to a 10-percent penalty; however, If you withdraw only the amount you contributed (meaning not the earnings your contributions have made on the market) you won’t have to pay income taxes on your withdrawals. Our Roth IRAs are at Vanguard and we keep things simple investing 100% in VTSAX.

Credit Cards (0% APR)

This might not be a popular option but whether you like it or not it is an option. Yes, you need to have a solid credit score to qualify for these types of credit cards so you better have your house in order.

If you lose your job this might not work but assuming that is not the type of emergency you’re dealing with then you can apply for 0% APR credit cards. In general, these credit cards offer up to 18 months of 0% interest financing.

This should give someone enough time and flexibility to either get a  new job or find an alternative for getting back on track.  

Taxable Account

The Financial Independence community strongly recommends against investing in the stock market if (1) you intend to use the capital for a short to a mid-term goal or (2) for emergency funds. I agree with both recommendations.

This is the last bucket we would tap into in the case of an emergency. We would hate to sell during a bear market but that is a risk we are willing to take. For now, we plan to keep these funds working for us while allowing the asset allocation to play offense 24/7.

Last but not least, adequate insurance has been critical for supporting our strategy. We have peace of mind knowing that not only are our assets (house, cars, rentals) covered (including umbrella insurance which provides an extra layer of coverage against liabilities) but more importantly, we as a family are very well taken care of with excellent health insurance provided by my employer.

Final Thoughts

• The purpose of this post is not to recommend having or not having an emergency fund. The decision is ultimately yours.
• Since we don’t have an explicit emergency fund I can’t comment on how big the EF should be; however, I hear  3-6 months (up to 12 months) tends to be the norm.
• There are many options that offer advantages to brick and mortar checking and savings accounts; however, do your due diligence and read the fine print.
• If you decide an emergency fund is a critical element of your financial plan, please consider an online savings account such as the one offered by Ally Bank.
• Our strategy might not appeal to all readers and that is 100% fine. We can agree to disagree right?
• Adequate insurance is fundamental for having peace of mind.

We’re always looking for ways to improve our financial plan. This is our current strategy but who knows, next time you read my articles you might see something different.

Until then, I’m curious to get your thoughts on emergency funds? do you have one? do you agree/disagree with our strategy? do you do something completely different?

Until next time … JJ