Emergency Funds are for Liabilities

13 05 2014

The general advice for an emergency fund is that it should be enough to live for six months.  For me that’s 9000$ with my current budget. I recently started separating my money differently. I now put cash intended for investing in 10,000$ batches in a separate savings account and was wondering if I should create one for an emergency fund. After giving it some thought, I realized I didn’t want 9000$ sitting around earning almost nothing and that the general emergency fund advice is wrong so there really is no need for me to.

After thinking a bit I have determined that for me, an emergency fund really only needs to cover one thing: losing my job. To come to this conclusion I asked myself two questions:

  1. Are there any other emergencies that would require an emergency fund?
  2. If I lose my job, what in my budget do I really need and what do I not need?

Let’s start with number one. What about a non job loss emergency, for example car breaks down. The answer is simple for someone following the principles of Early Retirement Extreme, the money I save on every paycheck from my job to invest can go towards that emergency instead of toward investing.  Since I save more than 50% of every paycheck, this is quite a lot of money and can cover any emergency I can think of that wouldn’t be covered by insurance.

Now for number two, what do I really need in my budget if I lost my job? To stay alive, I would really only need food money. I already don’t have a cellphone bill, a car payment, a mortgage, etc. If I lost my job, I’d have no reason to stay where I am since I’m here for my job.  I could rent out my room and then move back in with my parents, or baby sit for relatives and mooch a guest room, or couch surf with friends, etc.

So, all I really need is food money!  Someone very frugal could live off of 100$/month, but I’m more in the 250$ to 300$ range. That means my emergency fund only needs to be 1800$. That’s less than I keep in my checking account to make sure I have enough for auto rent/credit card payments, so there’s really no need for me to maintain a separate emergency fund.

Put simply, if you save a large amount of your paychecks, your emergency fund only needs to be as large at 6 months of your emergency budget, which is your budget minus everything you can cancel quickly.  If you can’t cancel your cell phone bill, car payment, mortgage payment, etc, you’re going need to have a lot more. If you can live in a tent and hunt for food, you don’t need anything.


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