066R | Letting Go of the Emergency Fund

10 thoughts on “066R | Letting Go of the Emergency Fund”

1. Hi! I posted this on the FB group but also really curious to get your input. I have whittled down my emergency fund from 9 mo to 3 mo, slowly out of some fear of the unknown. No warranted fear at all, it was probably just what had been drilled into my head since Suze Orman was my first financial influence 20 years ago. After listening this week I want to get rid of the final 3 mo emergency fund too. Just to give you an idea of where I have grown from at its worst there was $150K in the checking/savings. I went for 14 years with little to no income during medical training/school and I think I just started hoarding cash after I finished. I was paralyzed by the thought of risking it. Now I’m down to 20-30K in the checking. Still not great. I am considering keeping it with the idea of an emergency/opportunity fund. Meaning if the stock market has a big correction, I have some money to invest as an opportunity. I’m not trying to time the market. I have no timeline for this contribution. I am just wanting to have money on hand if it does happen and I can benefit. I am still doing my max contribution to investments each month and will not pull out when market goes down, but will just throw a bit extra in. Thoughts?

2. I think housing does have a simple answer if you separate the housing expense from the purchasing of a house. Yes you want to keep your housing expense as low as possible. Yes purchasing a house is an asset. When you purchase a house that increases your housing expense it is a bad investment, but when you buy a house that decreases your housing expense it is a good investment.

3. Nice roundup episode today. Regarding Paul’s comment, I agree it’s about semantics. The U.S. Census Bureau considers residential housing an investment and the implicit non-cash dividend that homeowners receive is considered an income, worth about 1.5 trillion dollars per year (yes, that trillions with a “t”, just under 8% of GDP), so if in doubt I’d go with what the pros consider an investment/income.
   Paul brings up an interesting point though, and I completely agree with it. We even briefly mentioned that in the podcast and I wrote about it in my blog post (https://earlyretirementnow.com/2017/11/15/that-house-over-there-is-an-investment/) I call it “Don’t get high on your own (housing) supply!” In other words, there is one subtle difference between investing in VTSAX and investing in your house. Investing in twice as many shares of VTSAX gives you twice the investment and that’s twice as good. Buying a house twice the size of what you really need is a bad choice for you. But it may be a great investment for a larger family! Hence, my warning that the housing investment decision has to be split into two decisions: 1) decide how much house you want and 2) decide whether to rent or buy. As long as we keep confounding those two decisions we will never agree on anything.
   By the way, in the business world, lots of things are considered investments, even though they violate all the arbitrary conditions that folks frequently bring forward: For example, a CPA office that owns its office space instead of renting. It’s an investment that doesn’t pay a cash income but you can calculate an IRR of the buy vs. rent/lease decision. And the fact that it’s an investment is not invalidated if the CPA buys a building way too large. Or a business buying too many vehicles. Or an airline buying too many airplanes. Or an airline using an Airbus A380 (up to 800 seats) as a puddle jumper between JFK and Buffalo. Those may all be bad business decisions but all those items are still investments.

4. Nice show today. I’d like to give you the perspective on emergency funds from someone who is post FI. I know a lot of your listeners and guests are steadily on their way to FI or have just recently pulled the plug. I pulled the plug in 2013 and emergency funds have always been an important part of my portfolio. For my emergency fund I keep a full year of expenses in a highly rated tax-free Virginia municipal bond fund https://goo.gl/FgE3X6.

   The fund’s current yield is 3.19% and in addition to serving as an emergency fund it also kicks off about $400 a month in tax-free income based on a $135,000 balance. The purpose of my emergency fund is simple. As someone who is post-FI, I sell off small portions of my portfolio each month, using the 4% rule to fund my living expenses. In my world an emergency may be a 30 to 50% market drop. During the bear market, I would first sell off these municipal bonds using them to support my living expenses and avoiding selling any stocks. I realize that municipal bonds can have also have declines in bull markets, so I looked for the highest rated tax-free municipal bond fund I could find, and one that had tax benefits for my state. I also keep about two months of living expenses in a Fidelity municipal money market cash account, I use this as the core cash account in my investment portfolio, and I can make free ATM withdrawals from it anywhere in the world. I believe Jeremy from go curry cracker uses a similar setup.

   Thanks for a great podcast.

   Brad

5. This is a bit random, but I have a career confession to make. I have a trade job that requires no college, pays to train. I’ve been afraid to tell anybody because I’m afraid the god of gravy jobs will take it away.
   You can make about 40k in 6 months-1 year depending on how quickly you get licensed-I’m now up to 60k. (I’m 6 years in but I’m maxed out which is a major bummer). It has a pension (!) 403b and AND a 457. Generous vacation and sick leave. I get paid to exercise and listen to podcasts. I’ve gotten 2 additional unrelated associate’s degrees while working, which I haven’t even used because this pays better, and it’s been easy to study while doing this job at night.
   What is this amazing job?
   Ready?
   I’m a custodian at a school district. There I’ve said it. Not for everyone, but a FANTASTIC college hack! And here’s the other big secret- (don’t tell my mom) I love it!
   I’m not a traditional custodian either, I’m a 5’4″ woman, so almost anybody can do it.
   The jobs in this field are going to vary a lot depending on your local union (if you have one) but you can look up all of the benefits on the school districts’ web site.
   There’s a bunch of other benefits that I don’t have time to mention- still at work-ha ha! If you like I can go into the certifications, which my district pays part of. They’re great entry ways to other vocations.
   Love you guys! Thanks for everything!

6. I liked the thought provoking episode which challenges the traditional concept of emergency funds. It does seem however, that the attention given to market conditions at the point of the emergency may have been under evaluated. In other words, were you to experience a 50% market decline, lose your job or incur an unexpected expenses of significant proportion relative to your cash on hand, what would you think and how would you feel about selling your equity shares to cover the crisis? Wouldn’t it be better to expand your emergency fund to alleviate this tail risk?

7. Thank you for another great show. I found your podcasts last week and have been listening nonstop for the past few days. How much to put in emergency fund has been a dilemma for my husband and I and we have debated on whether to plan for worst case scenario or letting it go. In the end we feel that it is a decision that should reflect one’s personal situation. In our case, we have achieved FI (by the 25x definition) about 10 years ago, But both of us enjoy our jobs and have very flexible schedule so we can travel or work remotely when needed. So we do not see us retire any time soon. We put away 6 years worth of emergency fund for the worst case possible, where the market can drop 50%+, both of us lose our jobs, and the bear market persists more than 5 years. Granted, the odds of that happening is pretty slim, but the emergency funds we put away is only about 8% of our total net worth, the rest of all in index funds, so we made a deliberate decision understood the opportunity cost of that 8%. It’s great to hear different perspectives on this very subject. Definitely food for thought. Thanks again for the nice show you have put together!

8. The emergency fund question must have a mathematical answer. Something along these lines, (but I am no math whiz, so please someone smarter than I am should,be able to figure this out better than I can).
   Most of the time the market will go up (about 8% or 1.08) let’s say 97% of te time.
   Sometimes the market will go down (as much as 50% or more -0.5) so 3% of the time.
   Add those two together (1.08 x 0.97) + (-0.5 x 0.03) = 1.03.
   So if you can get 3% on your cash position, then in the long run you are breaking even by keeping that money in cash.
   Anybody have a better way to calculate this?

9. In regards to investing your emergency fund no one is talking about the tax repercussions of withdrawing from a taxable account. I understand that if you have gains then that is what gets taxed and then so what but it seems like it should at least be part of the calculations/conversation.

10. If you choose to succumb to “societal pressure” that is your own fault. Dont blame what others think or say or want for your life choices. Maybe teaching your daughter (and yourself) that IT DOESNT MATTER WHAT OTHER PEOPLE THINK would help alot with the VM lady not being “offended” by someone else having an opinion. You want to wear make up DO IT, you dont want to wear it DONT. Why does it matter to her what other people think????? Isnt this whole FI thing about doing things that make us happy and bucking the “system”?