Enough With The Emergency Fund, Sort Of

The entire financial world wants you to believe that success with money is just math.  It’s not.

Well, it is, but – for most average, everyday people, anyway – it’s only about math eventually.  First, it’s about behaviour.

The idea that you can transition seamlessly from someone spending more than she makes to someone who can handle money surprises, knows how to invest, saves 25% of her gross income, and makes good financial decisions without even trying over a weekend of reading Total Money Makeover or watching a ‘Til Debt Do Us Part rerun marathon is faintly ludicrous, unless your income to expenses ratio is already really, really good.

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A five minute clip on an evening news show isn’t going to magically balance your budget for you, and we – collectively, the financial media – have got to stop patting ourselves fatuously on the back for “helping people” when we’re not acknowledging that the part between “figuring out there’s a problem” and “solving the problem” takes time.

An example: the emergency fund.  A staple of personal finance advice: make a budget, pay off debt, build an emergency fund, save a couple of bucketloads of money, buy a unicorn, live happily ever after.  Simple formula, fixed your life, you’re welcome.

Look, I’d bet that most people who encounter the tenets of personal finance for the first time encounter them because finances are in some way a problem: too much debt, too little income, a series of small crises, a big crisis, or a nagging inability to go from one month to the next without a credit card balance increasing ever-so-slightly.

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Figuring out how much money you will bring in over the next year and allocating it so you’ll still have a place to stay, food to eat, clothes to wear, a way to get to work, lower (or no debt) and more savings by next year, plus all of the other things we need or want to spend money on is a skill that develops with practice.  It’s hard.  It takes time.

So when I say enough with the emergency fund already, I don’t want you to misunderstand me: no one ever, in the history of money, ever said “I wish I hadn’t had that pile of cash sitting there when I needed it after I was hit by a car”.  A bag of money sitting in the bank, ready and willing to be used in the event of an emergency is a fine thing.  But it’s a luxury, not a necessity.

If it’s relatively easy for you to amass a pile of cash, I’m going to bet that you don’t really need one.  If it’s pretty tough to build up that minimum three to six month’s worth of income (or expenses, depending on who you read), and you need to dip into it pretty frequently for unexpected non-emergencies like car maintenance, or your semi-annual property taxes, and you find yourself back to whatever-baby-step-number-it-is “refill the emergency fund”, then I’m going to suggest that you haven’t mastered budgeting yet, and an emergency fund is the last thing you should be fixating on.

Related: A new look at the RRSP vs. mortgage debate

No one ever mentions this about an emergency fund, but it’s true: once you build a cash reserve – no matter how small – you don’t want to use it.  Ever.  You’ll go to great lengths to not use it, because it’s become a symbol of success to you, and because using it means you’ve failed to properly account for irregular expenses that aren’t really emergencies.  You might not use that exact phrase to describe the feeling of deep reluctance to break the piggy bank, but you know it’s true.

Repeat after me: an emergency fund is only as good as your willingness to use it, and your ability to fill it up again, and your ability to fill it up again is only as good as your ability to budget in the first place.

Sandi Martin is an ex-banker who left the dark side to start Spring Personal Finance, a one woman fee only financial planning practice based in Gravenhurst, Ontario.  She and her husband have three kids under six, none of whom are learning the words to “Fidelity Fiduciary Bank” quickly enough.  She takes her clients seriously, but not much else.

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  1. Tawcan on August 21, 2014 at 3:53 pm

    Great advise! I want to say that once you truly live below your means and that your monthly expenses are lower than your monthly income, it’s not as important to have 3-6 months of living expenses saved up for emergency fund.

  2. 40tween on August 22, 2014 at 4:42 am

    You hit the nail on the head with this one, Sandi.

    I think having an emergency fund is a good idea, and managing it as you stated (i.e. ability to use it and refill it) is a true test of someone who’s finally in the budgeting groove.

    If we take job loss as an example, I think people may be reluctant to even build an emergency fund in the first place if the expectation is that they’ll get some type of compensation from their employer (i.e. a package) that’ll tie them over for a few months. Key thing here is to get a package! What if that doesn’t happen?

    I’ll be slowly building mine, but ensuring that if it just sits there for a while, it’ll at least be invested in something to allow it to grow.

  3. xoxox on August 22, 2014 at 6:05 am

    I always considered my RRSP as a sort of security fund, especially for unexpected long term emergencies. Of course given the tax consequences, it is definitely a last resort. But if someone lost their job it could be used with insignificant tax consequences. For short term, less serious problems (muffler falls off the car), there is the LOC or a credit card. Which suggests that instead of holding an ‘Emergency fund’, pay down the LOC or the credit cards. This has the dual benefit of reducing interest costs and the gap left is the ST ’emergency fund’. I always felt comfortable putting any unexpected windfall into my LOC and considering that as a sort of emergency fund. I agree with you that those who can have an emergency fund tend to be those with little debt and a paid up RRSP and even a TFSA, who really have no need for it.

  4. debs@debtdebs on August 22, 2014 at 6:49 am

    One misconception about an emergency fund is that you need to have it sitting there all in cash earning a pittance of 1% interest. I keep $7-10K in cash, but the rest of our 10+ months of e-fund is in our TFSA and invested in mutual funds which are growing quite nicely. I can access that money within a couple of days, if needed which is soon enough. A true emergency is never a on-the-day emergency.

    • Rick Manjin on August 25, 2014 at 1:32 am

      If anyone shops around 1 year casahble GIC’s can be found for 1.75%, 2.00% rates.

      They can be cashed after 30 and 90 days without no penalties and interest lost.

      I know they are not great but 1% is really bad.

  5. Kyle @ Young and Thrifty on August 23, 2014 at 12:14 am

    I never understood this either to be honest Sandi. I always feel like I’m cheating on PF dogma when I say that it is much more important for most people to pay down high interest debt or take the company match on their pension plan than having more than a month in a emergency fund. Especially with interest rates so low right now, just make sure you have access to a line of a credit instead. What’s the worst case scenario, you lose your job and dip into the line of credit? That’s still better than having high interest credit card debt or having missed out on an automatic 100% ROI with the company match.

    • KC on August 29, 2014 at 11:32 am

      And what happens when you have no money (aka EI, etc) coming in for 6-12 months and you cannot make any payments to the LOC, now you’re screwed!

  6. Mclain on August 23, 2014 at 3:21 pm

    My current strategy is having 2 months expenses in my bank and I can always access my TFSA or either of my personal or corporate taxable accounts if needed. I can’t stomach the thought of having a year’s worth of expenses rotting away in a savings account.

  7. Max on August 24, 2014 at 5:16 am

    What a pointless and regressive article. The writer attacks every current approach to emergency funds without giving any cogent or rational alternatives. She sounds like someone who has actually started working again for the ” dark side” she supposedly left; she seems to be advocating that rather than have personal savings for an emergency to just go and borrow money for it…….

  8. Trombonedadio on August 24, 2014 at 6:00 pm

    Maybe the term “emergency fund” is relative. Money available in a TFSA, RRSP, Line of Credit, or just a pile of GIC’s can be used for whatever you need it for if you are willing to pay the consequences (taxes, lost income, lost interest, interest charges, etc.). Obviously, if you have no choice and must access that money, I guess that qualifies as an emergency, and you will use it!

  9. Travis @enemyofdebt.com on August 25, 2014 at 7:25 pm

    Wow, I love this post – I can relate to it, because my wife and I spent 13 years racking up $109,000 of credit card debt, then fought out way out over the course of 55 months. We did not change our spending habits, our lifestyle, our communication level, or our budget skills over night. It was a long process…one that is still in motion. I know exactly what you mean about not wanting to use the emergency fund once you have one…it’s like a golden egg that you like to look at and polish…but never,ever,ever sell.

  10. Bridget on August 26, 2014 at 11:03 am

    GREAT post!!!

    and I LOL’d so hard at “A staple of personal finance advice: make a budget, pay off debt, build an emergency fund, save a couple of bucketloads of money, buy a unicorn, live happily ever after.” because I’ve been working for 3 years no to afford my unicorn and I don’t think people that already have one understand how difficult they are to save for 😉

  11. Prudence Debtfree on August 26, 2014 at 11:47 am

    I have problems with this part: “If it’s relatively easy for you to amass a pile of cash, I’m going to bet that you don’t really need one. If it’s pretty tough to build up . . . then I’m going to suggest that you haven’t mastered budgeting yet, and an emergency fund is the last thing you should be fixating on.” There are confusing mixed messages here.
    We’re following Ramsey’s steps, and we’re still at the non-mortgage debt-repayment stage. We have been learning how to budget as we’ve taken our non-mortgage debt down from $102,200 to $34,000 over two years. Once that debt has been paid off, we’ll save for our emergency fund – probably with the same budget that we’re mastering now. It won’t be easy, but it will be possible. And it will be very desirable since my husband is self-employed and there are no guarantees. “Enough with the emergency fund?” I don’t agree. It needs to be built up with discipline, at the right time, given the priority of paying down debt first, for the right purpose – to be used in emergencies.

  12. canadianbudgetbinder on August 29, 2014 at 5:32 am

    Obviously we budget and I agree with you that it’s a mindset and it takes time to master if ever for some people. We have the projected expenses built into the budget I designed for us so we don’t have to use the emergency savings for car repairs or taxes which I agree is NOT the purpose of the savings. I like to have some money in cash just in case but that’s our personal preference. We have credit cards and we have a line of credit but what we don’t have is a crystal ball that will tell us that we will lose our job, get in a car accident, injured at work, home etc… or become ill where those savings will be a god send. I don’t want to have to rely on credit or pulling retirement funds because of not having an emergency savings or TFSA which many use in this case. What works for one person might not work for another but then again we have to live with the consequences of our financial actions no matter what anyone says or suggests.

  13. JMK on August 29, 2014 at 10:13 am

    On the need for an emergency fund, I’m now in the “it depends on your situation” camp. If you are just starting to address massive debt and figure out budgeting then it’s likely a necessity. At this point any small unanticipated expense could derail your new financial lifestyle. Once you have paid off debts and are allocating substantial monthly funds to retirement savings, vacation funds, entertainment, expected house/car repairs etc, then the need is less. If you unexpectedly need to replace your transmission, or fly to a funeral you can simply cut everything back to the bare essentials for a month (or two) to pay for the expense and then resume your discretionary spending plan again after. Any month were there is no emergency, which is most months, then you get to spend on those items which are not basic life sustaining costs. No sorry, your restaurant budget is not essential to life. Really. When there is no emergency, and everything else is covered, then fine, go enjoy.
    We keep a minimum of $1k in our bank account at all times. Keeping the balance above $1k means never paying fees, and also gives us a small easily accessible emergency fund. But that’s it. Years ago we realized that for our situation, it was unnecessary to hoard anything more than that. We tried to envision any situation where we’d actually need to access a large emergency fund and couldn’t. We have only a small mortgage left, and live a very frugally – we live on a little over half of our combined income. The rest mostly goes to massive savings so we can retire early, and extra mortgage payments (killing the mortgage asap is part of retiring early). If either of us lost our job or was unable to work we could pretty much live on the remaining salary, with unemployment benefits or disability insurance more than making up the rest. We’d just return to normal mortgage payments and retire in our 60s like many others. Simultaneously being fired with cause (so no benefits) is the only scenario we figure would cause us to need an emergency fund and given our work ethic that isn’t going to happen.
    Over 30 years we’re had 5* layoffs between us, so we know life happens. It’s what drove us to cut our lifestyle back dramatically to only what was actually important to us.
    *layoff #5 currently in progress as of 2wks ago. We immediately stopped the extra mortgage payments and retirement contributions. Once my notice period, and severance are finished my unemployment benefits will kick in, but since we don’t actually need them we’ll likely just resume our extra retirement savings and mortgage payments. No drama, no panic. Just the PITA of finding my next job. We’ve used this latest layoff as an opportunity to reinforce with our kids that our lack of panic is a direct result of choosing to live way below our means.

  14. Noel D'Souza on September 9, 2014 at 2:36 pm

    Great article Sandi. Absolutely, being “good” at personal finance is about far more than just numbers, though the numbers will ultimately tell the story of whether one is “good” (or improving) or not.

    Several people have commented on having a line of credit rather than cash in “a safe place”. I’m not a fan of a “LOC only” solution, since an LOC is a credit facility offered by the bank, and the bank can pull or adjust the terms if they deem it appropriate.

    During the last financial crisis, banks began reigning in credit, unilaterally reducing their customers credit limits on LOCs and credit cards. Imagine finding yourself without a source of income, and the bank decides to pull or chop your “emergency LOC” as well! For security, there’s nothing quite like cash that is actually yours.

    If you’ve got high interest debt, definitely kill that first. Establishing good money management habits ensures that with or without a formal emergency fund, you won’t be thrown for a loop when (not if) the unexpected occurs.

  15. Joanna on July 16, 2017 at 4:10 pm

    I’ve been telling my boyfriend who is bad with money that he should have an emergency fund with 5 months of expenses on hand. I too have a small emergency fund but I’m mainly focused on paying down debt. I have been feeling lately that perhaps an emergency fund is pointless because it is losing money and there are usually other things in place to help out if you lose a job. Then his brother just got a knee infection and can’t work for 3 weeks.(he is a mechanic) He doesn’t have an emergency fund and since he wasnt hurt on the job there is nothing for him. I am now a firm believer in the emergency fund once more. You just never know. My boyfriend was spending 100% of his income plus he was over 10k in debt. Within 7 months of me helping him with finances he is debt free with $2500 in savings. Sometimes people can change like that.

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