Why I don’t have an emergency fund
from dr Peter Kim from Passive Income MDWCI network partner
Before we begin, I wanted to add a small disclaimer: every situation is different, and what works for me may not work for everyone. I put the numbers together and realized that an emergency fund isn’t best for me. Will it be the same for you? You have to decide that yourself. With that in mind, let’s dive in.
What exactly is an emergency fund?
As you probably know, a emergency fund intended to be a buffer for unexpected expenses or bumps on life’s highway. These could include (all are things I’ve experienced):
- Unexpected health costs: Like going to the ER for broken bones or suspected appendicitis
- Problems with the car: tire burst, broken windshield, etc.
- Unexpected house problems: Roof leak, broken pipes and subsequent flooding
- Unexpected Pet Costs: My dog inhaled a fox tail and it required a $1,200 procedure to remove it
- job loss: I haven’t actually experienced this, but I know it’s a reality for many people
Given how devastating unexpected events like these can be for the unsuspecting family, most financial experts (like Dave Ramsey) recommend that your emergency fund should be able to cover 3-6 months of total expenses. Exactly how many months depends on the stability of your job, whether you have a double income and how healthy you are. Suze Orman even advocates eight months full of costs.
Now I’ve read Dave Ramseys Total money makeover. In fact, I recommend that most people should read it. After reading it when I finished my education, I built up a sizeable emergency fund and felt confident I could weather any storm.
Then . . . I watched the money sit and do nothing. All I could think about was how it was wasting all of its potential.
I began to wonder if an emergency fund was really for me. I decided to do a deeper analysis, and spoiler alert, I decided against the contingency fund altogether.
More information here:
Why I think I don’t need an emergency fund
The following considerations went into my decision:
- We are a dual income family: I work a little less than full time. My wife is a doctor and although she only works part-time now, I know we could both work more if we had to.
- Late payment from work: In terms of billing, I am getting paid with a two month delay. For example, on March 1st I get paid for what I’ve been doing all of January. There is almost always a delay between service, billing and collection. So I know that if something happens, I’ll still get a paycheck for the work I’ve already done.
- Disability insurance: Not only does it cover 30% of my current income tax-free, but I’ve added one as well Drivers with a partial disability. If I lose more than 15% of my income because of a disability or accident, after 90 days my insurance company will start making payments to make up the difference.
- Passive Income: This is of course a big thing for me. I deserve passive income from other sources, which currently covers more than half of my expenses.
- Home equity line of credit: I opened a HELOC that is serviced for only $75 a year. If I had to use it in a pinch, this could cover 10-12 months of expenses.
- I’m pretty adept at selling things online: If it really mattered I could sell some of my possessions on eBay, Craigslist and FB. I’d start with some of my wife’s pretty handbags (shhh, don’t tell her).
- Opportunity costs: This is a big deal. Sure, I could have money in a high-yielding savings account like Ally, but with a compound annual inflation rate of 3%, a 1% yield just isn’t enough. I wanted to use this money.
More information here:
What I used the money for instead
When an unexpected event occurs, like that $1,200 procedure when my dog accidentally sniffed something up his nose (which happened twice, by the way), I put it on myself Credit card. I have until next month to pay it off in full once my paycheck comes in. I’m lucky enough to have a buffer and don’t live paycheck to paycheck, and I always pay off my credit card in full each month. If the worst case scenario happens and the costs are very high, I could fall back on one of the above resources like my HELOC.
Ultimately, this is just one situation where I decided that the conventional wisdom just wasn’t right for my particular situation. Of course, I believe that one must be prepared to deal with life’s unexpected circumstances. After all, we can rest assured that life is unpredictable.
I’m saying make sure you’re prepared for an emergency, but do it in a way that makes sense.
Has anyone else eliminated their emergency fund? Anyone think I’m not smart? Comment below!