You Don't Need an Emergency Fund

What is an Emergency Fund

An emergency fund is a pool of money that has no allocated purpose other than to be available to you quickly in case of an emergency (health issue, car accident). It isn’t there for frivolous wants, but solely for the unforeseen expenses that will have a drastic effect on your finances.

People often ask how big of an emergency fund they should have. Most people recommend that you have enough money available in your fund to cover anywhere from 1-6 months of expenses (including your mortgage or rent). This is to ensure you can financially survive a traumatic life experience such as a job loss or a stack of unexpected medical bills.

Who Needs and Doesn’t Need an Emergency Fund

Having an emergency fund is never a bad thing, but I don’t think it is as high of a priority for certain individuals as other bloggers and personal finance experts believe. If you have a young family and a house, yes, you absolutely should have an emergency fund. If you are in your early to mid 20s (like myself and several of my readers), are renting and don’t have a family to support, you simply don’t NEED an emergency fund.

What Should I Do with my Money that I Don’t put in an Emergency Fund?

First things first, pay off your debt. If you are in debt, get serious about it and throw every penny you have at getting out of that hole. It should be noted that if you have been working to get out of debt lately and didn’t have an emergency fund set up, did you need one in all of that time?

Second, invest in a Roth IRA. The reasons why this is step number two is explained below. A Roth IRA is an asset unlike any other, and if an emergency doesn’t happen, think of what that money can turn into over time (please see my post Turning $5,000 into $110,000 (Tax Free) – All it takes is time.  It’s safe to say whenever you have extra money, a Roth is probably the best place to put it.

Third, create sub savings accounts. Save money for your short to medium term goals with the money that you have left over.

Fourth, create a buffer in your checking account of a few hundred dollars (maybe $1000) to make sure you don’t overdraft your account when a bill is higher one month.

What Happens if an Emergency Occurs

Well, you tried to play the odds and hope that no emergencies would take place. Unfortunately disaster hit and now you need cash, and quickly. Don’t sweat it, just because you don’t have an emergency fund doesn’t mean you are screwed. You have several options in front of you.

  • Option 1: I know no independent 20something wants to hear this, but ask your parents for money. This is an emergency and families are there to support one another. Swallow your pride a bit and ask. It may make things easier in the short and long term.
  • Option 2: Take the cash from your short to midterm savings goals. I guess your trip to Paris isn’t as important anymore in light of the recent emergency or you may have to hold off buying a new car in two years (may have to push your goal back by a year or two, but hey, life happens.)
  • Option 3: Take your contributions out of your Roth IRA. This would royally suck to do, but it is a legitimate option. You can take your Roth contributions out at any time without penalty. The caveat is that you can’t put them back in as if your Roth gave you a quick loan. If you have been putting $416.66 a month into your Roth to hit the $5,000 contribution limit, it’s possible that you have enough in there to last you a few months should something disastrous happen. (Please note: you can take earned money out of your Roth without penalty if you are paying significant unreimbursed medical expenses or are paying medical insurance premiums after losing your job.)
  • Option 4: Charge it. Yes, it would suck to go back into debt, but if you were that focused about getting out of debt in the first place, you can surely do it again. Think of all you learned getting out of debt the first time, and think of how much easier it may be to get out of it a second time if it was a necessity.

How to Prevent an Emergency from Happening

If you want to avoid using your already established emergency fund, or if you are like me and don’t have a designated fund for emergencies, you should focus on preventing them from occurring. Here are a few tips to help prevent an emergency.

1)Get regular medical and dental checkups (this is the best preventative maintenance you can have and will make sure your body is in tip top shape)

2)Stay active. Eating and being healthy is easier said than done, but if we could all focus on this a bit more we are less likely to have expensive problems down the road.

3)Keep up with the maintenance on your vehicle. It’s amazing how many people equate their livelihood to their car. If your car gets regular checkups like your body does, it will last a lot longer.

4)Pick up a part-time job. Diversifying your income is the best way to hedge against job loss. Even a few hundred dollars a month is going to help you if you get laid off. This extra income can help boost your savings or Roth contribution; helping you in case an emergency does pop up.

I definitely don’t expect everyone to agree with me about the necessity of an emergency fund, but please remember I am only advocating this strategy as an alternative to younger adults who could be boosting their savings in the years when an emergency is least likely to happen. I personally don’t have an emergency fund, but I do have targeted savings goals and a Roth that I can tap into if necessary.

Please leave a comment and let me know your thoughts about this break from the personal finance norm of having an emergency fund.

12 Responses to You Don't Need an Emergency Fund
  1. jim
    July 8, 2009 | 10:40 am

    Emergency funds are crucial and it’s great that you talked about ways to help you boost it. You might want to talk about how you can boost your savings, at least a little, by using CD ladders.

  2. Mrs. Micah
    July 8, 2009 | 11:36 am

    I think that you’re right that families definitely need emergency funds. But I as long as young people focus on saving something (as possible) then they probably don’t need a specific emergency fund. At our age, we can temp, we can find ways to make ends meet–as long as we don’t have people depending on us, it’s a lot easier.

  3. JerichoHill
    July 8, 2009 | 11:46 am

    I disagree that young 20-somethings with no family don’t need an emergency fund. I agree that they don’t need the same kind or amount as a 30-something with family and a mortgage.

    I found having 2 months living expenses when I was 20 and single was excellent. I was not wedded to my job financially and thus I wasn’t pressed to accept a job I didn’t enjoy. That makes a huge difference in life satisfaction.

  4. Brian
    July 8, 2009 | 3:33 pm

    @ Mrs.Micah – you are absolutely right. Our lives are flexible and should the situation arise we can adjust on the fly to make ends meet.

    @JH I think its a lofty goal for 20-somethings to just have money “sit” and not be there for a purpose (saving goal, etc.) I think just being aware of your financial situation is a win. Technically all of my money is an “emergency fund” but i just don’t designate it as such. I wonder if i would continue working so many jobs if i had 2 months of expenses in a designated fund. That said, i do have 2 months of expenses in liquid cash, they are just saving for other things.

  5. J. Money
    July 8, 2009 | 5:08 pm

    Oh man, I’m a HUGE fan of emergency funds so I’ll have to battle you on that one day 😉 I will say, however, that you list some pretty creative ways around one. All of which are indeed ways to get your hands on money, but tapping a Roth or the ‘rents should hopefully be avoided as best as possible.

    Whether you *need* and E Fund or not, that padding can prevent a looooot of stress down the road my friend. Even if it’s just 1 months of extra savings sitting there.

    Regardless, your writing is coming out magnificently! Keep it up bro :)

  6. Stephanie PTY
    July 8, 2009 | 6:01 pm

    I agree with you up to a point – there are many things to save for, and many ways to get money if an emergency should occur. But I do have a few points of contention…

    First of all, an emergency fund doesn’t magically appear once you get married and have a family. You have to build it up, and if you don’t have one from before, you have to build it from scratch. Wouldn’t it be better to just gradually build it up, starting when you first reach adulthood? Then you would already have it when these big life changes happen.

    Secondly, my car disagrees with you about being young and not needing an emergency fund. My parents won’t pay for all of my car repairs, and I didn’t have any other savings besides an emergency fund to speak of the last two times by car needed repairs. The first time, I drained my e-fund. The second time, I had to put it on my credit card, and that delayed the amount of time it took me to pay off my credit card debt by two or three months.

    Right now, with everything going on in my life, I’m really glad to have the emergency fund I’ve got… even if it’s less than $600 right now. There’s a huge chance I’ll need it for something soon – and I’m single, 22, and just out of college!

  7. Shawanda
    July 8, 2009 | 7:50 pm

    I’m going to have to disagree with you on this one. My emergency fund is approaching eight months worth of living expenses. It’s fairly large precisely because I’m single. I don’t have anyone else to rely on but me. If there are people who can count on parents or other family members when they’re in a pinch, then that’s great they have the option. However, I still believe people should be self reliant.

    I’m glad you mentioned the notion of tapping a Roth IRA. One of the main benefits of a Roth is that you can withdraw contributions penalty free. But, if you’re a 20-something investing in a Roth IRA, then most of your money will likely be in stock. If an emergency arises, then I hope the value of your stock is up. Otherwise, you could potentially lock in your losses when you cash out.

    There was a time when I would pay off my credit cards before saving for emergencies. I figured if the unexpected occurred, I’d just go back in debt. I’m not sure that’s such a viable option anymore. Bank of America cut my credit limit in half. I have excellent credit and a low debt utilization ratio. I can only imagine what happened to the credit lines of people living close to the edge.

    Besides all that, I perfectly agree with everything else you said.

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