Lowering my emergency fund… to…. $0.00?

For most of my life I’ve had about 6 – 12 months of living expenses sitting in cash in my checking account. This cash is my “emergency fund”.

I’ve always felt fine about this because of these old-school popular money beliefs:

  • Cash is king
  • Cash solves problems quickly
  • Holding cash allows me to jump on opportunities if they arise.
  • Financial gurus say it’s important to have an “emergency fund”.
  • Most Americans are cash poor, and since I never want to be like that, I should blindly do the opposite.
  • If I ever lose my job, a cash pile lets me live for 6 to 12 months with no income.
  • Cash can cover an emergency health/dental/car/pet/travel expense without touching my “other investments”.
  • Bla bla bla, emergency funds are smart and anyone without one will be financially ruined.

This was my old way of thinking.

Now, my thoughts on emergency funds are changing… 

I’m starting to question conventional wisdom and am realizing that holding a 6 month cash “emergency fund” might be hurting me more than helping me. 

My money beliefs are shifting… Here are my new thoughts on cash emergency funds:

  • Cash is a burden. It is counterproductive to my wealth building mission.
  • Cash isn’t important — access to cash is.
  • Having an emergency fund is less important than having an emergency PLAN.
  • An emergency fund doesn’t prevent emergencies from happening. There’s no reason to feel “safer” with cash in a checking account.
  • In reality, my entire net worth IS my “emergency fund”.
  • If I lose my job, I can actually live for ~15-20 years without income if need be.
  • I shouldn’t blindly follow financial gurus, they can be wrong about a lot of things.
  • If I have a large unexpected health/dental/car/pet/travel expense, paying with cash is only 1 of many payment options.

Soooo… With all this being said, I’m thinking about ditching my emergency fund and dumping all my cash into the stock market.

Am I crazy? 

(don’t answer that just yet…)

Reasons to have a $0.00 emergency fund:

Don’t worry, I won’t make any drastic changes without fully researching and thinking this through.

There are a handful of FIRE bloggers (way smarter and more experienced than I) that believe in holding $0 in cash. Probably the one I’m a biggest fan of is Karsten (aka Big ERN) over at Early Retirement Now.

ERN has written multiple blogs over the past 6 years about why emergency funds are crap, and why people should consider having ALL their money invested and working for them instead. I’ve read all the related posts, and love that his research includes both technical simulations as well as psychological reasons to support his points.

I’ll reference ERN’s posts within this article, but here’s a quick summary of reasons why it’s better to hold as little cash as possible:

1. Opportunity cost. For every dollar you hold in cash, that’s a dollar that’s not working for you earning better returns.

a) In most cases, it’s financially better to invest your emergency fund (and withdraw the money from your investments when you need it) vs. hold a large cash pile to use if/when you have an emergency. The math doesn’t work out all of the time, it works out most of the time (like 75%).

b) ERN goes into extreme detail in this 2018 post about investing your emergency fund in stocks, and again with new data, proving the emergency fund is still useless even after last year’s massive recession! 

c) Just FYI… The reason most people still keep emergency funds in cash — even though they might know it’s mathematically better not to — is because they sleep better at night that way. There’s nothing wrong with this! Sometimes people are more worried about the small chance of loss, vs. excited about the higher probability of gain. We are all humans and it’s cool to feel this way. But I personally am trying not to.

2. Holding cash leads to behavior biases. I have definitely fallen into these mental accounting traps that can lead to making bad decisions…

a) Having a big cash pile makes it more tempting to spend. When I wake up every morning and see $30k in my joint checking account, there’s more of a chance I’ll tell my wife we can “afford to” go on a $3k luxury vacation vs. if we held only $1k in our checking account. Making cash less accessible reduces unplanned spending.

b) Emergency funds skew our view of risk. People think their entire portfolio is divided into “buckets”, and that each bucket has a different level of risk. But really we should take into account our entire portfolio when evaluating risk. For example, I could probably invest my $30k emergency cash into stocks, then with some minor asset shuffling in my brokerage account, achieve the exact same overall risk I have now, with a higher return. (Or, achieve the same return I am getting now, but with a lower amount of risk). Make sense? Very interesting *and more advanced* post about that here.

c) The longer you hold large amounts of cash, the more emotional attachment you have to it. Remember my friend with $200k in her checking account? As each day goes on, she gets more and more scared to do something with it. Same with me and my ~$30k emergency fund. I’ve had it in my checking account for over 15 years!!! If an emergency does happen and I truly need $30k, I will probably sell some assets to cover the expense, vs. using my emergency cash. Why? Because I can’t fathom the thought of not waking up and seeing my “artificial safety net” there. This bleeds into the next point below.

3. If an emergency happens, and you use your fund, then what? Following up on what I mentioned above, let’s say I have an emergency and need to spend my $30k emergency cash. What happens next? How do I replenish my fund? Well, I’d either need to a) scramble and save money over the following months to pay back my emergency fund or b) withdraw money from my brokerage account to replenish the $30k in cash I just spent. Both of these scenarios are the same if I held $0 in cash. If an emergency happened I’d either need to a) scramble to save and pay back money to wherever I borrowed it from or b) sell assets to cover it. Same scrabble or selling whether I have cash or not.

4. 10 other debunked myths about holding emergency cash. ERN has written a 2-part post about these “emergency fund myths” and responded to countless people who disagree with his point of view. These 10 points are so interesting to read!!

a) Debunking emergency funds – part 1

b) Debunking emergency funds – part 2

Accessing money in an emergency…

OK, let’s suppose I put all my emergency cash into investments and go down to a $0.00 emergency fund… What happens if disaster strikes? What happens if my car suddenly dies and I need $15k to buy another one? What if a medical emergency rolls around and I’m stuck with a $14k out of pocket bill? What if my wife and I lose our jobs at exactly the same time?

Here are some options for us to pay for things (in no particular order):

1. Credit cards could cover most immediate expenses (my wife and I have a whopping $107,100 in available credit across 11 open cards). We would never spend that much, but it’s the quickest way to pay for emergencies with 20-50 day interest free payment terms. There are also ways to roll credit over with longer interest free periods we could take advantage of.

2. Borrow money from our Rental Property Emergency Fund. We have about 20k sitting in cash in our rental property float account. Borrowing from this doesn’t cost us anything. (I’ll delve into later why this account will remain in cash – I’ve always kept rental property accounts completely separate from personal accounts)

3. Liquidate stocks to pay for an emergency. This could be done in a lump sum to pay for a large expense (like $15k for a new car) or done slowly over time to pay living expenses in the case of job loss (eg. withdraw $5k monthly for however long we need to live off it).  Obviously this is a last resort option if we happen to experience a disaster *during* a large stock market crash.

4. Securities-based line of credit, aka “margin account”. This is like a home equity line of credit, but, instead of using a house as collateral for a loan, our brokerage firm (TD Ameritrade) will lend us money using our taxable brokerage account as collateral. The available amount we can borrow is based on our account value and the positions we hold. As of today, TD will lend us up to $123k in cash, payable by WIRE or bank transfer. The current TD interest rate is 9.5%, so we could borrow $10,000, and pay about $2.60 in interest per day for each day until we pay it off. Not ideal, but certainly not horrible in an emergency situation!

5. Cover the expense with new earned money: For a small emergency, like covering a $5k unexpected expense, there’s a chance my wife and I can cover this from our regular paychecks in the course of a month or two. We don’t have a huge savings rate right now as we are just ramping back up into work, but some months we have a larger savings rate (higher than usual income + lower than usual expenses). If a disaster comes in one of those months, we may just be able to cover it without touching investments anyway.

6. Borrow from friends/family. I sound like a jack-ass admitting this, but my wife and I are incredibly blessed with close friends and family in fairly well off positions. There’s potential that we could borrow large chunks of money from them (based on the fact they know we are “good for it”). I’ve personally lent $25,000 to a friend in the past who was in a tight cash spot, and they paid it back in 60 days. I believe some of my friends today would do the same for me, although this would be a last resort type option.

7. Combo of the above. Depending on the emergency, we could do a blend or mix of the above methods.

Downsizing my emergency fund…

So, here’s my current situation…

My wife and I have about $35k in cash. We are kind of on the Coast FI train, and our savings rate for this year will probably be like 15% or so (some months lower, some months higher due to irregular monthly income). We are still up in the air about our exact FI number, but it’s safe to say “retirement” will be 7+ years away at our current rate, maybe longer. We are not risk averse, mostly because of our age and lifestyle (no kids yet, don’t own home yet, can happily kick into frugal overdrive to cut back spending if needed, etc)

All that being said, I’m 90% convinced that we can drop our $35k emergency cash fund down to ~$10k without having any major cash flow issues. The only reason I don’t feel comfortable dropping down to a $0 cash position (yet) is because of some possible travel plans at the end of this year (planning Aus for Christmas if they open the borders) and also my wife is unpaid for the summer as a teacher.

Pending agreement from my wife and an analysis on where to invest the $25k cash, I might actually do this…

Am I crazy?

(ok, now you can answer!)

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37 Comments

  1. Slackerjo July 26, 2021 at 6:57 AM

    Nope, not crazy. High income + assets equals easy access to credit and investment $.

    I still think cash is king for lower income folks (like myself). Last winter our pay was delayed 24 hours. People had a complete meltdown because they have no savings and maxed out credit and their bills were about to be zapped out.

    Reply
    1. Joel July 27, 2021 at 9:47 AM

      Actually, I have a ‘low income’ also at the moment. But I see your point about having investment $ to draw from and access to existing credit. More options to draw cash from various areas gives me more options – which many others don’t have.

      Reply
  2. IM-PCP July 26, 2021 at 7:34 AM

    I like cash in the bank (and maybe some real cash and a full pantry at home). Things happen: power outages, economic swoons where you lose your job while the stock market drops and your credit card company decides to cut reduce your credit line. (For the record, I am not a prepper.)

    If keeping your emergency fund in your checking account is too tempting, which it is for me, I like to keep that money in a separate fund that I don’t look at very often. Even 1 or 2 month’s worth of money can provide a real safety net. Maybe that is your Option 2?

    Reply
    1. Joel July 27, 2021 at 9:59 AM

      I’m curious about CC companies reducing my credit lines… How much will they reduce it by in an economic meltdown? I have no clue. If we have $100+k in available credit currently and they cut my lines by 90% across the board, that still gives us $10k to pull from. Also I’m curious why they didn’t do this during last year’s crash? I’m not saying it can’t happen, just trying to figure out the likelihood. Luckily, it’s only 1 of my backup options.

      Love the physical cash backup… We keep small bills in our earthquake kit for power outages!

      Reply
  3. Dan Murray July 26, 2021 at 8:28 AM

    I used to carry 1 year of living expenses at the bank. I’ve reduced that to 6 months while I adjust our budget to live at “retirement-level” spending. I”m 62, my last daughter just finished her Masters degree (that’s like getting a raise). Our monthly spend is naturally decreasing. What I’ve realized is that with a small effort we can cut our monthly spend to around 60% of the level we’ve been doing over the past 5 years. I’m now planning to reduce my cash level to 6 months of this revised monthly spend and investing the difference. I don’t want to go to 60 days just because we are heavily invested in the stock market. When the market get frothy like now, I’m more risk averse. I’m aggressively working toward a magic number in my invested corpus that I should attain around May of 2025. My reduction in cash levels helps me get their faster.

    Reply
    1. Joel July 27, 2021 at 10:05 AM

      Hey Dan! Congrats on your daughter finishing her masters! Lowering expenses gives you a bunch of new options for saving and reducing your cash position. I definitely think as you get closer to retirement it’s important to prepare for sequence of returns risk, and holding cash can be a big part of that. If I was retiring soonish, I wouldn’t be so aggressive as we are being right now.

      Reply
  4. Billy July 26, 2021 at 9:03 AM

    Sounds like a sound strategy to reduce your cash drag. Since my wife and I are DINKS, use credit cards to buy everything that gives us grace period as extra cushion just in case, we have a very small amount of cash in the bank, but treat our Ledn crypto savings account as our emergency fund and bond position as I’m close to FIRE.

    Reply
    1. Billy July 26, 2021 at 9:06 AM

      I should add that I only hold USD coin for crypto which not not change in price.

      Reply
    2. Joel July 27, 2021 at 10:09 AM

      I’ve been getting a ton of email responses about crypto (mostly USDC) options as an emergency fund. Something I am not familiar with and will have to research more. My wife and I have a small amount of bonds, which I guess I could have included as one of our options for pulling in an emergency. Congrats on being close to FIRE!! :)

      Reply
  5. Aretina Rittenhouse July 26, 2021 at 9:04 AM

    Good morning Joel, I was just having this discussion with a family member a couple days ago after reading ERN’s two posts you mentioned above. I’ve been thinking about all the possible “emergencies” that could occur requiring immediate access to cash. I live in a rural area, but not so rural that credit cards couldn’t cover an emergency until investment accounts could be accessed. A couple exceptions I thought of: power outages – we have Midwest summer t-storms and winter ice storms that can knock out power for miles and in that case, cash and credit card machines may be unavailable. It’s usually not for more than a couple day so certainly wouldn’t require the entire emergency fund. And unless you have cash on hand- you’re emergency fund is still unavailable -checks aren’t as welcome nowadays. Road assistance/towing: luckily this hasn’t happened to me but even with AAA you may be waiting a couple hours for roadside assistance or a kind traveler to help you out. Bail/bond : ) *I was really trying to think of every possible scenario. I appreciate the articles and discussion how the billing cycle redefines “emergencies”. It was a fun exercise to examine the what-ifs to determine what makes financial sense on an individual level.

    Reply
    1. Joel July 27, 2021 at 10:53 AM

      It’s an interesting and eye opening exercise to think about all the possible emergency scenarios and rank them by probability. It can be painful to think about, but ultimately it makes me feel better and more prepared.

      Reply
  6. steveark July 26, 2021 at 9:29 AM

    I think I paid for all the lost opportunity of my emergency funds when our company opened a two day window to buy unlimited volumes of the IPO stock they were introducing at the strike price. It was on a Friday and the money had to be transferred by close of business Monday. Because I had a year of expenses in my bank account I was able to buy a boatload of the IPO and was able to sell it 60 days later when it was up to 150% of purchase cost. I don’t think I could have executed that with any of the strategies listed. You just had to have cash on hand. But admittedly that isn’t something that will likely happen to others. But in my case my emergency fund made me some money. I think having some cash is another form of diversification and the less steps and less infrastructure it takes to access it then the better in terms of a natural disaster or civil disruption.

    Reply
    1. Joel July 27, 2021 at 11:08 AM

      Amazing that worked out for you Steve. You have the best stories haha!

      I do like keeping a small amount of cash on hand to jump on new opportunities. (albeit much smaller opportunities than your big IPO win). Bank account churning gives me a good cash return, and sometimes buying and selling stuff on craigslist requires cash. I bought a Harley Davidson for $2k once at a garage sale (sold for 3.5k the next week), and I wouldn’t have been able to get it if I didn’t have $2k in cash sitting at home that weekend.

      Reply
  7. Jason Brown July 26, 2021 at 10:04 AM

    Hey Joel — very interesting perspectives on this. You gave me a lot to think about for sure! I don’t think this is a one-size-fits all situation and at the end of the day I think it’s all a matter of each individual’s financial position. In your example, you had $35K in cash just sitting in a checking account. I would agree that’s a large chuck a change to be sitting there and not growing. If it were me, I would invest $25K and leave $10K as an “emergency fund” but move that into a savings account that you don’t see or touch (as the previous commenter suggested) as you were struggling with temptation of wanting to spend it, etc. Also, how much debt you are carrying will certainly factor into your decisions as well. Thanks for sharing these thoughts!

    Reply
    1. Joel July 27, 2021 at 11:11 AM

      Yep, everyone has a different situation. Debt payments, savings rate, rent v. own, etc… I think dropping to $10k is very doable in my situation given our other backup options. :)

      Reply
  8. Steven July 26, 2021 at 11:06 AM

    I have been thinking of reducing my cash EF. I just haven’t had the courage to do it. We have about 10 months. thinking of starting small in 10,000 dollar increments until it hurts lol
    thanks

    Reply
    1. Joel July 27, 2021 at 11:16 AM

      No pain, no gain. I agree with the courage statement… My thoughts are – if I get rid of my cash and then can’t sleep at night, I’ll just reverse my decision the following month. Got nothing to lose (except a few bucks and maybe I’ll be publicly laughed at… both of which have happened before and aren’t as bad as people think).

      Reply
  9. Brian July 26, 2021 at 11:55 AM

    Not a bad idea at all. We have 3 kids and are working through paying off student loans and our mortgage. We have a $10,000 emergency fund. Our fund is in a high yield savings account, so the temptation to use it is not as strong.

    We also have what I call a Fix It Fund. This is more of a strategic approach to the Emergency Fund. I made a list of all major appliances and repairs that come with home/car ownership. I projected when they may need to be replaced and the current cost of each item (think fridge, roof, deck, heaters, tires, etc.). We put a little bit aside each month towards this fund and make sure we are on track to have the cash needed to replace these items when the time comes. This money is kept in I-bonds (before the rates fell to zero). So we’ve been able to keep up with inflation and earn a bit of interest.

    Reply
    1. Joel July 27, 2021 at 11:19 AM

      Love the fix-it-fund idea. This is kind of how I structured my rental property emergency fund, because stuff goes wrong all the time over there!

      I’m looking into high yield savings accounts for my remaining ~10k. Something is better than nothing!

      Reply
  10. Angela Jean July 26, 2021 at 2:02 PM

    I had no savings/no emergency fund for the first 44 years of my life and NEVER had an emergency. (I’m not saying I’m proud of this…just a fact.) I now have $40,000 in my savings and don’t sleep any better at night.

    I say invest your emergency fund.
    Have an amazing week!!!

    Reply
    1. Joel July 27, 2021 at 11:20 AM

      Wow. Thanks for sharing :)

      Reply
  11. Katie @SolopreneurCafe July 26, 2021 at 2:49 PM

    I’m with you, whether that qualifies me as crazy or not. I’m having trouble thinking of an emergency that I would need cash within 24 hours for – becoming a fugitive?? But seriously, the big stuff, like a $15K roof replacement, doesn’t need cash and definitely takes more than 24 hours. Car? Meh, my home co-owner is my 71yo mother who has a 2019 SUV with extended warranty (no, not bought from a robocall!)…when my 2005 SUV dies, I’m not replacing it anyway. If I lose my source of income overnight? Again, not a cash-in-24-hours event.

    Reply
    1. Joel July 27, 2021 at 11:23 AM

      That’s my thinking also. Actually, my margin line of credit from TD allows for same day WIRE transfers. So technically I think I could get a huge pile of cash within 24 hours if needed.

      Reply
  12. Fernando July 26, 2021 at 3:15 PM

    If your peace of mind isn’t affected, then by all means go for it. You’ll obviously have the means to deal with an emergency if one came up. My wife and I have six months of expenses as cash in an online savings account. Why? Because of our peace of mind. Although it represents only a small portion of our net worth, our peace of mind trumps in this case,

    Reply
    1. Joel July 27, 2021 at 11:25 AM

      Awesome. That’s the beauty of being in a good financial situation… You can focus more on peace of mind and freedom, vs. squeezing every single cent out of investments. My wife and I are still trying to find the sweet spot where we can sleep well, and also make the most of our assets. Cheers Fern!

      Reply
  13. Amanda Rufener July 26, 2021 at 5:02 PM

    I go back and forth daily on how much cash to keep available. I agree it’s helpful to have cash but it’s more important to have ACCESS to the cash like you mentioned…

    Reply
    1. Joel July 27, 2021 at 11:28 AM

      It helped me to run though all my ‘access to cash’ options. I found out I had more than i realized.

      Reply
  14. David @ Filled With Money July 26, 2021 at 7:23 PM

    I mean, businesses list “cash and cash equivalents” on their balance sheet as “cash” so if your stocks are extremely liquid with the ability to turn around into cash in 1 – 2 business days, I don’t think there’s anything wrong with making your emergency fund be 0.

    To each their own, but whether your emergency fund is six months of expenses or $0, it’s still fine as long as you know what you’re doing.

    Reply
    1. Joel July 27, 2021 at 11:31 AM

      I think 48 hours is very doable. It might be a very stressful 48 hours, but doable nonetheless. To each their own :)

      Reply
  15. Impersonal Finances July 27, 2021 at 12:04 AM

    I agree with so many of these points–and am basically at Emergency Fund Zero at this point and… it’s uncomfortable haha. I had been contributing a little too heavily to my brokerage account (first world problems) and now feel a little paycheck-to-paycheck pressure that I haven’t felt in a while simply because of the lack of buffer I left myself with. I essentially went from 30k+ pre-pandemic to less than 3k in cash… So, I need to work back up to a little more in the ole checking account! I think 5-10k is probably the most comfortable range for me.

    Reply
    1. Joel July 27, 2021 at 11:33 AM

      Given the recent bull run, it sounds like you’ve already made money on your emergency fund? I agree, the 5-10k might be the best balance for me too.

      Reply
      1. Impersonal Finances July 27, 2021 at 7:22 PM

        A little bit! Some of it deviated from VTSAX and went to more speculative stuff, which has cut into those gains haha. But long term, it should prove very fruitful!

        Reply
  16. Liz July 27, 2021 at 7:42 AM

    I’d say keep enough on hand for common non budget items like new tires for the car or your car insurance deductible. Check if the bank charges a fee if you dont keep a minimum in the account.
    I have the mindset of once it’s invested, even in a brokerage account, I shouldn’t touch it. That’s why with work being uncertain recently, I’ve gotten a bigger than I normally have emergency fund. Having had board of directors I’ve never met make life changing decisions for me…I’d rather be a little cautious. I think things are settling, so I do need to plan to move it.
    At one point early in my career I was working in a different state and we had to pay for the hotel & then work would reimburse us. There was once where my credit card was due Thursday & the next hotel check wouldn’t be there until Friday. I think that’s probably part of why I keep a little accessible. Also one of my accounts has no fees if you keep a minimum and do direct deposit. Well what happens if you lose your job and unemployment is added to a debit card and not direct deposited? I called the bank an negotiated a few months of no fees for years with them & keeping the minimum.
    Good luck!

    Reply
    1. Joel July 27, 2021 at 11:39 AM

      Keeping a little to cover cashflow issues is smart… I’ll admit the “$0.00” is just a dramatic statement – in reality there will always be a few bucks in there to keep minimum balances.

      I like the idea of calling the bank and negotiating account fees!

      Reply
  17. Glasses Guy July 28, 2021 at 6:34 AM

    Hi Joel! Fantastic article. I also have maintained a 5 month cash emergency fund, barely making anything with a “high interest” savings account from Capital One. I have a taxable brokerage account that is 100% in stocks that contains about 3 years worth of living expenses. Crazy thing is, I used to keep 20% of my brokerage in cash for that elusive “buying opportunity.” A few months ago I wised up and threw it all into the index funds because everything just kept going up and I was missing out!

    I am having more trouble psychologically with the cash emergency fund though. From a pure mathematical standpoint, I know I am losing out, but it still feels like a safety net/security blanket. What do you think a good strategy is to move this to stocks? I was thinking maybe to move the cash to stocks $5K at a time until I get to $10K and then maintain that moving forward. Thoughts?

    Reply
    1. Joel July 28, 2021 at 3:07 PM

      I think there’s no harm in trying… and then if it doesn’t work out or you feel too troubled at night, change it back. I’ve identified about $10k because that’s what I *think* I’ll feel ok with. But who knows, if I can’t sleep at night ahve have anxiety every day, I’ll go back to cash.

      As for putting 5k at a time, I personally think the lump sum approach is better. But you have to decide for yourself :). Good luck and congrats on the stocked up brokerage account!

      Reply
  18. Nate H August 1, 2021 at 7:45 PM

    I love this article! We’ve got about $40k, which feels amazing! Our expenses were about $5k/month, but I’ve been waiting on recalculating them as both kids started daycare 3 days per week this summer, but one will switch to 5 days of daycare in the fall, and the other one will go to public kindergarten. I’ve also got one more installment payment that I’m due at the end of September for $22k from the sale of my business. I’ve been chasing bank bonuses and am on track to earn $1,000 this year relatively easily, but we’ve been paying 4% interest on my wife’s $35k student loans, so it doesn’t take a genius to figure out that $1,000 in bank bonuses is less than $1,400 in loan interest!!!

    Our plan once I receive the next check is to eliminate her student loans and then put a lump sum into my 401(k) to supplement the ongoing contributions I’m making to ensure I max it out for the year. That should still leave us about $15k in reserves. We’ll probably keep that because we are very behind on retirement savings and don’t have much we could access if we needed to.

    Reply

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