I think an emergency fund is an age-old timeless topic in the financial world. Some say you need 6 months of living expenses saved up. Others even say you need 12 months of living expenses saved up. Dave Ramsey starts off with having a $1,000 emergency fund.
I’d say probably around 99% of people say keep this money in cash. Well by cash I mean in a savings account. Hopefully not too many people have their emergency fund in cash under their mattress at home. Actually preferably most would say a high yield saving account.
If you asked me a few months or years ago I would have agreed with most of this expect keeping cash under the mattress and the $1,000 emergency fund.
Yet after much thought and digging into countless scenarios I now believe in the Death of the Emergency Fund!
Wait, What Do You Mean!?
Yes, you read that right. I believe in the death of the emergency fund. What I mean is that I think the traditional cash emergency fund is outdated and typically not needed. This of course is going against 99% of what people in the financial community would recommend.
Yet I’m not new to walking a different path in my journey. Just check out how we live in San Diego on less than $30K here. I can already see the angry financial community ready to go Super Saiyan on me…
Most emergencies are an inefficient lifestyle design!
Inefficient Lifestyle Design
Most people have designed a lifestyle that is inefficient. They own too much stuff. They have too little wealth. People, in general, live for the now without thinking about the future. They buy the biggest house they can yet forget about the maintenance costs that come with it.
Personal Capital on the other hand has been the most efficient way I have tracked my wealth over the years!
That roof replacement after 15 years is not an emergency. That in fact is routine maintenance. That water heater needs to be replaced after 10 years. Yeah, not an emergency in fact it is routine maintenance.
People tend to own so much stuff they forgot to do routine maintenance and have no clue how much it costs them. When you live intentionally, buy based on values, understand the costs to keep, and maintain what you own I see very few emergencies come up.
In fact, I would say an efficient lifestyle design is arguably the best way to combat emergencies.
A Real Emergency
Remember I said “Most” “emergencies are an inefficient lifestyle design”. So I still think there are emergencies yet I just don’t see them very often. So here are a few off the top of my head.
- Sudden death in the family
- Sudden medical expense
- Sudden change in living situation
- Non-routine car issue
- Sudden loss of job
I’m sure there are a few more but these are a few real emergencies that come to mind. The ones above seem to be outliers and not the common trend I see.
This is my way but do what works best for you. I now have a zero cash emergency fund. Instead, I invest all my cash in my taxable account. This way my money is working hard for me earning me money in my sleep. I did this slowly over the last 6 months or so.
Two big things that helped me do this one was my wife and discussing what emergencies could come up. The second factor was really diving into some math behind investing and how much money I had.
I could not think of too many emergencies that could come up but let me list a few I thought of…
- Death in my family
- Truck blowing up literally
- RV getting hit with an astroid
Death in the family I’d assume I’m flying back home. That is covered by all the CC points I have easily. Food or hotel costs if need be easily can be covered with my pay. I save 50%-75% of my income so I can simply flow that cash toward this. Ahhh the good old truck got blown up. Well we use our truck to pull the RV we live in.
Well, the first thing is my insurance would pay me what it’s worth which is more than I owe on it. I’d pay the deductible again with my free cash flow. Then simply get a loan and buy another truck in the next few days. Yes basically that easy for someone like me with above an 800 credit score and a solid wealth stash.
RV got hit by an asteroid, well again insurance would pay me the value of it eventually. I’d first get a hotel room for a few weeks. While in the hotel room I’d look for a nice used RV and get another loan for that one. Again easily could cash flow all of this with my monthly income.
If not I’d use a CC for it and then pay that off before the interest hits. The last resort would be to sell some of my stocks off to cover what I need if at all.
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The more I dug into the math the more I felt I should go to a zero cash emergency fund. The first thing that really stuck out to me was from JL Collins. That 75% of the time the market is in the positive by the end of the year for any given one-year timeframe? So you have about a 25% chance of it being in the negative.
Yet if I keep it in a savings account there is a 100% chance it will be worthless by the end of the year. That is because of inflation which on average is 3.22%. So you have a 100% chance of losing 3.22% on that cash every year.
The graph below shows the length of each bull and bear market. It also shows how much it gained or lost in that timeframe. Again this is a really important point behind the math.
The graph below does the same thing but is a little cleaner looking and has a little bit better insight to what the graph above has.
To me once I fully understood this the choice was simple.
What Investments Would I Access?
A quick breakdown of my investments that I would easily access if the doomsday emergency came up and all else failed.
- Taxable Account – $
- M1 Taxable account
- Roth IRA –
Now the Roth IRA would be a last resort, I would only use after the taxable account. My first would either be my vanguard or M1 Finance taxable accounts. So right now as I write this post I don’t see any emergency being bigger than my cash flow let alone bigger than my taxable account.
What If _________(fill in the blank)
I often hear a few doomsdays what if’s when I mention my zero cash emergency fund. So let’s just cover a few.
- What if the market drops to ZERO
- What if you lose your job
- What if some crazy health situation happens
- What if the market tanks 50%
If the market goes to zero we all have a hell of a lot more issues than money at that point. My career in the military is very secure and I have 4 years left till retirement. I’m well covered with health insurance so is my wife. My wife also is a French citizen so she still has their health care on top of ours through the military.
If the market tanks by 50% I literally will still as of today have $54,000 in case of an emergency. That is more than most people make in a year. I’m writing the post in
August October by the way so by the time this is read by everyone I probably will have a bigger taxable account.
Often these what-if examples are just fear. I never hear anyone talk about what if I did not have an emergency for 10 years and made 150% on my money during those 10 years. We as humans tend to focus on the worse possible situation and write that off as a common trend.
Yet the reality is that is just fear guiding our judgment. The reality is the common trend is usually the exact opposite. Once I really challenged this ideology I realized I should have gone to a ZERO cash emergency fund sooner.
I no longer let fear paralyze or guide my choices. Instead, I crush my fear.
Check these Books out that helped me crush my financial fears!
I have an efficient lifestyle designed that has allowed me to optimize my life, health, finances, and happiness. It has allowed me to have fewer emergencies to appear. It has allowed me to believe the death of the emergency fund is a great avenue to not only build more wealth but have less risk from emergencies.
I see no reason to have a cash emergency fund unless it’s for an emotional reason at this point. I can’t wait to see over the next year how much more my taxable accounts grow and allow me to take on better opportunities and have my money working hard for me.
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