Rethinking emergency funds

Go on any major finance forum or site and the old adage is to stash 3-6 months of expenses towards an “emergency fund” before investing and saving for other purposes. Let’s define emergency fund first.

Well, that’s the problem right there. There are different definitions of what an emergency fund is used for, here are a few:

  • Unexpected expenses
  • Job loss
  • Car issues
  • Home repairs
  • Medical emergencies

In my opinion, there are actually very few things that are truly unexpected like job loss and medical emergencies.  But even with the latter, one should know their health insurance plan and deductibles and have an idea of what a true medical emergency will cost. If you own a home – home maintenance and occasional repairs are expected and one should have a fund for that. If you have a car, regular maintenance and occasional repairs are also expected and one should have a fund for that. Death, disability and divorce are among the large ticket emergencies but that’s what insurance is for.

Dave Ramsey’s popular get out of debt plan has saving for a small emergency fund of $1,000 as it’s first step before attacking the debt. I think his baby step plan is sound advice in terms of order of attack but doesn’t quite fit for high income and stable earners like doctors.

Big Law Investor has a strong argument for why high income earners don’t need a traditional emergency fund, at least right off the bat. And Millennial Money has a nice checklist to help you decide if you need a traditional emergency fund in cash, summarized here with my take on it.

  1. Do you have a stable job? The good news is that physicians have incredible job stability.
  2. Ability to have additional income opportunities. Most physicians can easily hustle to work extra shifts and moonlight if there is a need for more income.
  3. Investments you could sell if you needed. Never a good idea to withdraw from your retirement accounts, but many of us have a taxable account that we can draw upon. I never recommend taking out a loan from your 401(k), but it can be tapped in true emergencies.
  4. Quality insurance coverage. I always recommend insuring against financial catastrophes only (life, disability, divorce, liability, auto, home)- doctors can generally self-insure the rest (like, you don’t need to buy that insurance for your phone). In addition most of us (really, all of us should) have disability insurance but most have a 3-6 month waiting period to get benefits. This is definitely a reason to have at least that much saved in expenses to get you through that waiting period.
  5. High credit card limits. Most of us can leverage our available credit in true emergencies until we can figure out how to obtain the money (extra shifts, investments, etc). Obviously going into credit card is never a good idea, but they are available if need be.

So what am I doing? In my current work situation, I don’t have an elimination period with my work’s disability plan (I currently have a mandatory employer sponsored long term disability insurance plan + additional private insurance). I am ferociously attacking my student loan debt and aggressively saving for retirement. Until my debt is gone, I am comfortable having a small emergency fund worth about 2 months of expenses. Right now it’s just sitting in my checking account as a nice cushion. I also have a small fund for car maintenance since its inevitable something will come up. Once I am ready to beef up my emergency fund, I’ll likely invest a portion of it into a taxable account like Betterment recommends.

We are currently debt free (2019). We have 1-2 months of expenses in our checking account and “the rest” in our taxable brokerage account at Vanguard. We invest aggressively 90/10 stocks/bonds. We just consider it a part of our overall portfolio. We have enough that it’ll still be more than sufficient if the market drops and we need to pull some out.

The beauty of personal finance is the personal part. Guidelines are nice, but one should really examine and question if the advice is right for you.

How much is in your emergency fund? What is it for? 

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  1. babymd on February 1, 2017 at 9:47 am

    Hi! Congrats on your blog =) Looking forward to learning more from you! Currently I have my emergency fund of 3 months salary sitting in checking and savings account and debating what I should do with it. Trying to figure out if I should keep the emergency fund (well move it somewhere better) or use it to tackle debt (CC,student loans, mortgage,car)…

    • missbonniemd on February 1, 2017 at 10:19 am

      The amount you need to feel comfortable also depends on your situation – if you have kids for example and pay for childcare etc, the extra cushion is helpful. Would def keep that money liquid – FDIC account only. Consider that Metropolitan account that gives you a 2% rate for MDs only only up to 25K, or Ally that does a flat 1%.

  2. mrspickypincher on February 1, 2017 at 9:55 am

    We have one month of expenses in our emergency fund. I detailed this a while back on our blog and I got plenty of pushback from people who like sticking to the 3-6 month rule. We’re not *significantly* high earners, but we definitely make way over the average household income in our city. It makes far more sense for us to apply our dollars towards debt–instead of letting it sit inert in an account for what *might* happen.

    • missbonniemd on February 1, 2017 at 11:14 am

      Agreed. If paying off debt, a smaller efund is probably the right move.

  3. Theresa on February 1, 2017 at 11:35 am

    I like the rule of thumb of 1 mo of expenses for each member of the family, since emergencies tend to scale by the number of people involved. I think of the e-fund as providing a ready source of cash to keep us out of debt when major unexpected expenses arise, including things like last-minute travel expenses for a death in the family (expensive when you need 5 tickets), or a major home repair. We keep a home maintence line item in our budget that is ever increasing as well as covering most things that have come up, but it doesn’t have the 20k I would need to replace the HVAC on short notice. For us, with good job stability and good insurance, it’s basically a fund of readily accessible cash for outsized and not optional expenses that cannot be delayed. So, not as sacrosanct as some hold it to be, but so far we’ve been able to replenish it within a month or two of anytime we’ve had to use it.

    It also helps me “right-size” the amount of cash we have on hand relative to invested assets, because I need a decent amount of ready cash but I don’t actually need to be able to buy a new car, replace the HVAC, and fly 5 people cross-country on 6 hours notice all in the same month. I’m better off having the cash to do one of those things, while investing the rest for higher returns.

    • missbonniemd on February 4, 2017 at 12:45 pm

      I like the 1 month per person in the family!

  4. Smart Money MD on February 4, 2017 at 12:29 pm

    I would expect physicians who have a relatively stable job and good cash flow to minimize the emergency fund when they are trying to get out of debt ASAP. That was how I approached my bank account early on.

    Congrats on starting your journey to financial freedom!

  5. Hatton1 on February 5, 2017 at 1:50 pm

    I currently keep about 2 years of expenses split between a short term bond fund and a mmf at vanguard. I am nearing retirement so I started accumulating this money last year. In the past I looked at the money in my practice as an emergency fund. I always kept enough liquidity to cover malpractice and tax estimates and routine life emergencies. I read anywhere from 2-5 years of expenses once retired so you never even have to worry about a long bear market in retirement.

    • on February 8, 2017 at 7:24 am

      That is my plan too near/at retirement – few years cash/liquid reserves to weather market downs. Keep the rest invested 🙂

  6. TJ on February 12, 2017 at 12:20 pm

    I always figured I could cash flow an emergency that I’m not insured for. That is – my savings rate would just drop for that month.

    But then you have some folks who are in a financial panic because they get a flat tire. Perhaps for them such a fund adds value.

  7. […] Rethinking Emergency Funds […]

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