I read an article the other day from Business Insider about a financial writer, Holly, who “wiped out” her emergency fund years ago and never plans on rebuilding it. Of course, this immediately captured my attention. And although my initial thought was wary of her proposal, I found the article reflecting some of my own beliefs about the all-important emergency fund.
The article points out that traditional advice advises you to have 3-6 months’ worth of monthly expenses inside a savings account that’s safe. The purpose is to shelter you from life’s unexpected emergencies.
In her case, she ended up depleting it a few years ago and has decided not to replace it as many financial advisors recommend.
And, of course, since she was a financial writer, I was intrigued.
Why Not Rebuild?
Here are her main reasons:
- Her savings accounts are getting negligible interest. Remember back a couple years ago you could get upwards of 2% with a high-interest account? Well, no longer. Banks adjust these payouts regularly. And since her bank requires a whopping $25,000 to earn a now measly 0.4%, she felt it was time to put her dollars to better use. Currently, she just leaves only a small amount in this account.
- Credit is easy to access. The purpose of the emergency fund is to cover unexpected expenses. In Holly’s case, she can cover these expenses with a credit card, earn rewards while doing so, and then pay off these cards at the end of the month.
Now, let’s stop here for a moment…
For most people out there, if they only utilized this strategy as stated above, I would disagree. And I believe she would too. A lot of people out there cannot pay off those cards consistently. But there is more to this story…
- She has lots of other assets. Read that part carefully. She has “ample assets outside of retirement”. This is extra And for this money, she has chosen to invest in index funds every month. These are generally low-fee funds and in her case, she’s investing in VTSAX which is Vanguard’s Total Stock Market Index Fund. She is very aware that if she needs these funds she will have to sell and take a tax hit. She also knows the stock market may drop in the short-term as well. However, those returns still beat the savings account rate by a long shot. And as she lets it grow over time, this account will build up much more rapidly. This means that the traditional six-month emergency fund may actually build up to many years’ worth of expenses.
- She has multiple streams of income which is huge for her. Since she has money coming in from many sources, Holly has much more flexibility.
And for these last two reasons, I tend to agree with her decision. She has carefully crafted her method of substituting the traditional emergency fund. She is aware of the potential curve balls that may be throw her way and is prepared for them.
But this outside-the-box method for an emergency fund isn’t for everyone which I’m sure Holly will agree.
Cookie-Cutter Advice Isn’t Always Right
One of my favorite lines was this:
“You should still take the time to decide whether every rule applies to your situation.”
She was saying that traditional financial advice is just that: traditional. It also isn’t a one box fits all approach.
You see, for many people out there, having an emergency fund is essential and I would recommend they concentrate on this first, before investing.
Why?
Because many people literally cannot pay $500 – $1,000 towards an emergency without using a credit card. But then they don’t pay off that card which builds debt. Do this enough and this increasing debt load is a quick grind to the poorhouse. And trust me, there are many reasons to save for an emergency. If they cannot get off this path, I believe an emergency fund is still the life raft for them.
But for the more experienced – and for those who have other resources available to them – emergency funds can be a little more… personal.
What Works For Me
For myself, I’m a little mixture between the two. I tend to adopt more of a bucket approach to my emergency funds.
Short-Term Savings:
- This is used for quick, necessary things I hadn’t planned for. You know, the surprise out of town trip. Those smaller expenses that happen that weren’t in the budget. I tend to dip into this account faster – it isn’t necessarily for true emergencies. These are very liquid accounts such as your basic bank savings account. It also isn’t my largest account.
Intermediate Savings:
- This account is more for “emergencies”. I try not to touch this account unless I need to even though it doesn’t have a lot of money in it. I also park the money here in a higher interest account.
Long-Term Savings:
- Like Holly, I also have my largest savings account tied to the stock market. It’s not in a 401(k) or other retirement account. It’s a regular brokerage account. In this account I can get access to the money quickly – it’s easy to transfer money to my bank account if needed.
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- I try not to touch this money if possible. It’s my third-tiered emergency bucket for when all heck breaks lose. Like Holly, I have not needed to dip into this account and my purpose is to keep it growing.
- With this account, I tend to trade a 60/40% stocks/bond ratio but I momentum trade them once monthly. Meaning, my ratios stay the same, but the stock portion rotates between four broad-market ETFs depending on their momentum strength and the bond ratio with only two bond ETFs.
- Over time (which included the 2020 market collapse with the pandemic), this account has done well for me. It’s not money I need for retirement. And like the author of this article, I have other income streams supporting me.
Personal Finance is… Personal
So, thanks for this article, Holly. I found it refreshing from the typical boring rules of finance. You’ve found something that works for you and your family. We can all take encouragement that we can adapt our personal finances for what works in our own situations.
By making our finances a bit more personal and unique to our situation, we’ll certainly be more involved and have a little more fun doing so.
You can read more about Holly, here.
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