When You Might Not Need An Emergency Fund

While we often treat having an emergency fund as a given, it's not something all financial experts agree on. There are some situations where it might not make sense to have an emergency fund as we normally think of it. Money image from Shutterstock

First off, a little clarification. When we talk about an "emergency fund" what we usually mean is somewhere between three to six months' worth of living expenses. Ideally, that money should be stored in an account that you can quickly access when said emergency pops up. Some advise keeping it in a normal but separate bank account, though financial expert Dave Ramsey suggests a money market account.

Now that we've re-covered those basics, personal finance site Early Retirement Now suggests that for some, this may not be the best way to store savings. Sure, a money market account might make more than a regular savings account, but it won't be better than a proper investment. More importantly, emergency funds are designed to offset the expense of a major financial downfall. If you're able to secure interest-free credit, however, then the point starts to become moot:

The cash flow strain for us is the same as or at least similar to people with an emergency fund. The only difference is that we never had the drain of opportunity cost because we invested our life savings in high return assets, not in a 0.50% money market account.

This is a highly subjective situation, but it makes a certain amount of sense. If you have interest-free temporary credit available to you, then you're starting to face an opportunity cost if you have thousands of dollars sitting around uninvested. When an emergency pops up, you can quickly pay down what you need to now, then sell off some of those investments to pay off the emergency before it incurs interest costs. This option may not be available to those with poor credit, but it's worth weighing your options.

Our emergency fund is exactly $0.00 [Early Retirement Now via Rockstar Finance]


    Is it worth trying to put together an emergency fund, or better to pay off debt first?

    As an example, the limit on my credit card is 18k. I owe about 5k. I also have a personal loan (I made a lot of mistakes in my 20s) that I am paying off. I have been throwing all of my money towards paying off the debt, with the view that if an emergency came up, I could always just bring back out the credit card. That way if an emergency DOESN'T come up, my money is being well spent and saving me paying more interest.

    But I keep hearing about this emergency fund business, so maybe I am wrong...

      I'd say you're doing the right thing by paying off the debt first.

      As long as it's 'readily accessible' your emergency fund can be whatever makes your money work hardest. For you it's putting it on the credit card, for me it's in an offset account against the home loan, for somebody else it'd be an ordinary savings account.

    Spot on! Clear the old debt first.
    I too made big mistooks at first - just learning.

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