Do I really need an emergency fund?

[Lordy]

Hello all,

I have recently been watching Caleb Hammer's channel on YT, where the emergency fund is an important topic.
So far, I have always kept a mountain of cash, but my attitude has changed over last few weeks and I am looking for a reality check.

Emergency funds are usually for unforeseen expenses (broken fridge, car, whatever), unemployment or medical bills.
In the usual USA context, that makes sense, but I am not sure if these things really apply for me.

Living in Germany, medical debt is not a thing, so there is no procedure that could suddenly create a bill in the hundreds or thousands.
My unemployment benefits would cover roughly 80-90% of my living expenses and would run for up to 12 months. Plus, firing people is not easy here, so I have high job security and would probably get a severance for signing a dissolution contract.
Last but not least, all my stash is in highly liquid ETFs, so I could sell on a moments notice, should I really need cash. In the meantime, I have a 5K credit line with my checking account.

Looking at all these combined, it feels like for me, holding onto emergency cash is just not that useful.
Of course I keep some emergency cash at home, should the ATMs fail, but I no longer can convince myself to keep thousands in the checking/low yield account.

Thoughts?

Cheers, Lordy

[deborah]

I’ve had several emergencies in my life. All before I retired.

I was run into by a double decker bus - my car was totaled and I had whiplash for several years.

My house was burned down and everything I possessed (except the clothes I was wearing) went up in flames.

My house wasn’t burned, but almost 500 houses in my town were burned down, and we had no electricity or water for several weeks.

I didn’t have a designated emergency fund, but had the capability to quickly and easily get significant amounts of money to throw at problems each time. If there are only a few generators available and your electricity is out for weeks, you need to have money and act quickly or you need to be resourceful and work out how you’re going to do without.

[Anon-E-Mouze]

Even if medical expenses aren't the kind of catastrophic, urgent expense you might face, there are other kinds of emergencies you might face - which might vary depending on your personal circumstances. For example:

When I was in my 20s and 30s (single, paying stabilized rent, stable job in Canada that I commuted to on public transit), I didn't have to worry about high medical expenses, a massive jump in my rent, sudden housing expenses, a dead car etc. Probably my biggest unpredictable expenses were veterinary bills for my cat.

In my 40s (married, living in Europe, paying stabilized rent, stable job that I commuted to on public transit), most things were the same but I did have to pay suddenly for several trips home (tickets for 2) to Canada when my mother became ill with cancer and then died. Thankfully, we had a very good leave policy and generous bereavement leave, so I didn't have to take any unpaid leave days. But I still had to come up with about $10K one year that wasn't in my regular budget. And I exhausted my leave that year so if I'd needed to take more time (and I was the sole income earner), I would have needed another $5K per month.

In the dumpster fire that was my 2022, we had to deal with, among other things, multiple cross-country trips to help care for my elderly father and stepmother (both had cancer, one died), a dental emergency that was partly covered by insurance (but still required an outlay of about $1K), a surprise $45K tax bill in a down equity market (because my Vanguard funds paid a whopping $115K deemed dividend that was historically anomalous), and then a requirement to pay quarterly tax instalments (of $45K) for anticipated taxes in 2023. Add to that, we got a free car from my father in 2023 (yay) but had to pay to get it moved across the country ($1500) and also received a beautiful, very large painting from him (inherited from my grandfather and probably worth about $15K) but also had to pay $750 to move it across the country. Husband also had to deal with some tax problems that required an upfront payment ($20K) that will likely get reimbursed when the issue is resolved (relating to proof of payment of US taxes). We also moved my father into a retirement home - thankfully, he does not need any financial support. Also thankfully, our relatively young house (about 7 years old) doesn't have any major structural issues.

We did have an emergency fund, and a line of credit, but it didn't stretch to the amounts needed (and needed suddenly) for all those 2022 bills - and in several instances we needed to come up with thousands, or even tens of thousands of dollars in days. We also had financial assets that could be liquidated, but the market was dropping so it wasn't a great time to do that (and interest rates were going up on our LOC).

A few lessons learned from 2022: With aging parents, there is a need for a bigger cash cushion. For one parent, all we really need to think about is the cost of sudden travel and accommodations. For the other surviving parent, we may need to suddenly start paying for part of their nursing home costs because that parent has very limited resources and provincial funding for nursing home care is only for the basics (and there are waiting lists for subsidized care in good nursing homes). We also need to be prepared for weird tax bills because of our financially complex situation. And as our three cats age (they're 10 now), we may be facing some large, sudden vet bills in the coming years. We also want to have resources to deal with house issues, especially as weird weather increases the risks of things like storm damage.

[Dreamer40]

In your situation, I agree that it doesn’t seem like you need a big pile of cash on hand. You can get it quickly if you need it and odds of needing it seem low. I’m keeping more cash in savings than I used to because the interest rate has gotten pretty good. But I didn’t bother when DH and I both had super reliable jobs, a high credit limit, and investments were easy enough to liquify quickly if necessary.

[Sibley]

Well, I'm dealing with HVAC issues, for which I don't know what to do yet but it's going to cost money. Potentially a lot of money. Said money will most likely come out of my emergency fund.

You need to be able to access funds quickly. A bunch of money in a savings account is one way to do it, but it's not the only way.

[bill1827]

I'd guess that the emergency fund that Caleb Hammer recommends is to allow for the precarity of income and lack of much social security in the US. If you lose your job or become to ill to work it's desirable to have enough savings to pay your expenses for some period, say 3 months, to tide you over the income gap.

When I was young and poor I never had an emergency fund, not enough income to save but had family who would give support if needed.

When I got a better paying job, I didn't have one either, but did have variable amounts of savings, access to credit, and a job with good staff support for personal problems. The social security in the UK used to be quite good as well, though it has now degraded to about US quality.

Issues like faulty appliances or heating replacement will just be paid for from income. They aren't generally what I would call an emergency. You can live without a fridge or washing machine or HVAC until you can afford a replacement.

And you have insurance for burned down houses.

[wenchsenior]

Even if medical expenses aren't the kind of catastrophic, urgent expense you might face, there are other kinds of emergencies you might face - which might vary depending on your personal circumstances. For example:


In the dumpster fire that was my 2022, we had to deal with, among other things, multiple cross-country trips to help care for my elderly father and stepmother (both had cancer, one died), a dental emergency that was partly covered by insurance (but still required an outlay of about $1K), a surprise $45K tax bill in a down equity market (because my Vanguard funds paid a whopping $115K deemed dividend that was historically anomalous), and then a requirement to pay quarterly tax instalments (of $45K) for anticipated taxes in 2023. Add to that, we got a free car from my father in 2023 (yay) but had to pay to get it moved across the country ($1500) and also received a beautiful, very large painting from him (inherited from my grandfather and probably worth about $15K) but also had to pay $750 to move it across the country. Husband also had to deal with some tax problems that required an upfront payment ($20K) that will likely get reimbursed when the issue is resolved (relating to proof of payment of US taxes). We also moved my father into a retirement home - thankfully, he does not need any financial support. Also thankfully, our relatively young house (about 7 years old) doesn't have any major structural issues.

We did have an emergency fund, and a line of credit, but it didn't stretch to the amounts needed (and needed suddenly) for all those 2022 bills - and in several instances we needed to come up with thousands, or even tens of thousands of dollars in days. We also had financial assets that could be liquidated, but the market was dropping so it wasn't a great time to do that (and interest rates were going up on our LOC).

A few lessons learned from 2022: With aging parents, there is a need for a bigger cash cushion. For one parent, all we really need to think about is the cost of sudden travel and accommodations. For the other surviving parent, we may need to suddenly start paying for part of their nursing home costs because that parent has very limited resources and provincial funding for nursing home care is only for the basics (and there are waiting lists for subsidized care in good nursing homes). We also need to be prepared for weird tax bills because of our financially complex situation. And as our three cats age (they're 10 now), we may be facing some large, sudden vet bills in the coming years. We also want to have resources to deal with house issues, especially as weird weather increases the risks of things like storm damage.

I'm seconding a lot of these comments b/c all the exact same shit has come up for us (plus a much higher monthly outlay in ongoing medical bills than in our 30s/40s) in the past few years, after about 25 years of dealing with pretty much low incidence of 'emergency expenses'. Just had a 450$ vet bill today, in fact, and it's just the start of ongoing expenses in that regard for just one cat over age 10. We have 4 cats total, so...

And thanks for reminding me of that unfortunate Vanguard tax situation. I keep trying to forget LOL.

[reeshau]

In the meantime, I have a 5K credit line with my checking account.

One consideration for anyone thinking of credit lines as emergency funds:  understand in what circumstances, and with what notice, those lines can be taken away. HELOCs, credit cards, and other lines of credits all have conditions: change of employment, credit score, or even "at will," where changes can be made.  And in the case of an acquisition, the acquiring company can change terms to their standards.

It's not insurmountable--emergency planning is all about what makes you comfortable, and how well you sleep at night.  But I have heard too many times people declare these as their plan, without being able to answer questions about the parameters they operate on.

More generally, many FIRE articles assume US conditions, and those in the EU are blessed with advantages in healthcare and employment.  As others' examples have shown, I would look to your transportation (car?) and housing (owned?) to think about the disasters you might have to overcome.

Thinking about family emergencies is also a good idea.  FIL was an oil services exec, and traveled extensively around the world.  When we were establishing our credit cards, our imagined scenario was something happening to him in Australia, and having to leave for there TODAY to set up for an indefinite time.  We didn't need to cover the whole thing, necessarily, but had to have enough credit space to at least get us there, and last until we could make some payments on the card--so it was sustainable.  That is probably deep into areas most people wouldn't worry about, but it was a present issue for a number of years, for us.

As for the comments and examples around insurance:  yes, it helps.  But no insurance signs up for 100% of incidents.  There are deductibles, depreciation, excluded items, secondary costs (like staying away from home during full-on construction) and lots of others.  We had water in our house last year.  Insurance covered about $75k, but our bill is about $45k.

[ender]

I find that regardless of whether I need one or not, I feel a helluva lot better with ~1 year worth of my spending in cash.

I have, so far, never "needed" it.

[Anon-E-Mouze]

To be more systemic about this, you can borrow from enterprise risk management and apply it to your situation. Consider the following:

1. What kinds of risks are possible that could affect me? (Possible includes highly improbable events but not impossible events. Deal with probability later.)
2. What is the magnitude of each risk if the worst-case version of it materialized (e.g., a $10,000 vet bill)?
3. What is the likelihood of that risk materializing in the next 1 year? 3 years?
4. What mitigants exist to reduce your exposure and to what extent? Are there any risks that those mitigants won't work as expected and if so, in what circumstances? (For example, unemployment insurance kicks in after one month and covers 75% of your salary for 6 months. Home insurance covers 80% of rebuilding cost and 75% of displacement cost but you'll need to cover immediate living costs yourself and then get reimbursed. Your line of credit could get cut in half by the bank.)
5. If the worst-case scenario materialized, how much money would you need in 24 hours, three days, one week, one month, three months?
6. Are there any combinations of risks that would exacerbate each other, or limit the effectiveness of one of your mitigants? (For example, you're counting on being able to sell some of your ETFs within a few weeks to cover a period of unemployment but you get laid off during a recession and your ETFs have tanked?)

Multiply the quantum of your risk by the probability of it occurring within, for example, a year. Then consider whether:
- Any mitigants exist to reduce what you'd need, but keep in mind that a mitigant might not be available immediately and that the mitigant itself is subject to risks in terms of its availability.
- Identify which risks (or what proportion of the cost of a risk) could materialize and require funds within 24 hours, three days, one week, etc and make sure you have truly liquid assets to cover what is needed for those periods.

For example, I have some cash in an online bank paying a high rate of interest but transfers take about 3-5 days show up in my bank account. When I had that unforeseen, very large tax bill, I paid it using funds in my traditional bank account, my LOC and a bit on my credit card. Then the transfer from the online bank showed up 5 days later and I paid back the LOC and paid down the credit card. If I hadn't had those other sources of liquidity, I would have needed more cash on hand in a traditional, easy to access account.

[Telecaster]

I'm not a fan of a big cash emergency fund.   I keep enough cash on hand to deal with irregular, but non-emergency expenses like the water heater going out, or a tree limb falling on the car.   Then I have sufficient liquid assets to deal with a reasonable emergency.   

Some people express concern about having to sell stocks in a down market.   I don't share this concern.  True emergencies are rare, and down markets don't typically last for more than 18 months or so.   But by keeping a large amount of money in cash, you are creating a cash drag on your portfolio.   Which means in the event of an emergency, your net worth is likely to be lower with a large emergency fund even in a down market. 

[LightStache]

It's not an all-or-nothing proposition. OP, instead of keeping a "mountain," you could just keep a small pile. It sounds like you're on stable financial footing with low risk, so maybe instead of keeping six months in an EF, just keep two months.

Also, instead of keeping yours in a "checking/low yield account," can you move it to a higher yield savings account or something similar?

[BOP Mustache]

We have $2000 in an online savings account this generally covers the largest house rates bill or car service/repair we’ve ever had to cover.

The rest is in index funds that can withdrawn within 1-2 days notice.

No point having 20-40k sitting there earning 1% return

[reeshau]

Some people express concern about having to sell stocks in a down market.   I don't share this concern.  True emergencies are rare, and down markets don't typically last for more than 18 months or so.   But by keeping a large amount of money in cash, you are creating a cash drag on your portfolio.   Which means in the event of an emergency, your net worth is likely to be lower with a large emergency fund even in a down market.

I think this situation has a tendency to be exaggerated.  I also think this is why it's useful to express EF in terms of months of spending.  The more mustachian you are, the lower your spending, and the higher your savings.  So, even a year of EF can be a small percentage of your overall portfolio, and the performance drag is a non-issue.

I keep 1 year's spending as an EF.  It used to be, it was because I was the sole earner for my family (not by choice) and we were homeowners in the US.  (and so, with concerns about medical costs)  I am now retired, and I keep it because I am regularly drawing on my portfolio for income, as a buffer against down markets.

Even following the 4% rule, such an EF is...4%.  For me, as I find myself living life and with history since 2020, it's about 1.5%.

[Catbert]

We have $2000 in an online savings account this generally covers the largest house rates bill or car service/repair we’ve ever had to cover.

The rest is in index funds that can withdrawn within 1-2 days notice.

No point having 20-40k sitting there earning 1% return

OP, I suspect this is the correct answer for you:  a few thousand in immediately available "cash", a credit card or two and access to your portfolio within a few days.

[Villanelle]

We have less of an e-fund than most people (even most Americans).  I think everyone needs to evaluate their own life and decide what makes sense for them.  You've done some of that evaluation already, and what points toward a much smaller e-fund need than average.  But you still need to consider what kind of risks do apply--not just those that don't.  Do you have a car?  Repair bills can add up quickly.  Do you live far from family and have a potential need to travel on short notice for something?  Do you own a home, and all the repairs that can come with that?

For us, based on DH's job security, our significant investments (in Roths and non-retirement counts, so fairly accessible), our HELOC with several hundred thousand $ available, and some other reasons, we don't keep much of an e-fund, if that's defined as cash sitting in a savings account or under the mattress.

DH's work situation will be changing dramatically in a about a year and I'm now gradually building up the amount we have in our checking/savings float.  But not by a ton because those other factors all still apply.  Our situation is changing somewhat, so our e-fund needs change somewhat as well.

If you spend a bit more time figuring out what needs might befall you, you can likely come up with a good number.  And maybe that number is "almost nothing" , but it's probably not "none at all".

[Lordy]

But you still need to consider what kind of risks do apply--not just those that don't.  Do you have a car?  Repair bills can add up quickly.  Do you live far from family and have a potential need to travel on short notice for something?  Do you own a home, and all the repairs that can come with that?

I do have a car, but I rarely use it. I work from home so my income doesn't depend on it and I have public transport and car sharing to fall back on, should it break.

I live in the same town as my (very small) family. My family's needs are well covered by their own incomes.

I currently rent, so a broken heater or water pipe does not phase me.

[Villanelle]

But you still need to consider what kind of risks do apply--not just those that don't.  Do you have a car?  Repair bills can add up quickly.  Do you live far from family and have a potential need to travel on short notice for something?  Do you own a home, and all the repairs that can come with that?

I do have a car, but I rarely use it. I work from home so my income doesn't depend on it and I have public transport and car sharing to fall back on, should it break.

I live in the same town as my (very small) family. My family's needs are well covered by their own incomes.

I currently rent, so a broken heater or water pipe does not phase me.

Can your landlord raise your rent, or ask you to move out?  Could your house burn down? 

Really though, I'm not going to try to imagine every financial blow you could sustain.  The point of my post was to encourage you to think critically about your life to find those yourself and how likely or often those are to occur, and size your e-fund accordingly.  Or you can just do the cursory analysis you've already done and come up with the fact that you don't need one. And that will *most likely* be fine.  Unless it's not. 

[ChickenStash]

I sort of have an e-fund as there's usually a grand or two float in the checking account at any given time waiting for bills to be paid or auto withdrawals to investment accounts that I could redirect, if needed. I had a more structured setup earlier in life when I made less and had more debt to take care of (oops) but now that I'm past that and have more experience with random financial pitfalls there isn't as much of a need so I don't bother dedicating anything specifically for the purpose.

It's all very personal so everyone has to look at their own situation, though. I've already encountered cars breaking, water heaters leaking, and appliances crapping out and after having dealt with all of those at some point I didn't find them to really be emergencies worthy of any special financial planning. The big ones that come to mind are either covered with insurance or big enough that a simple e-fund wouldn't make a dent, anyway. In that sense, my entire FIRE stash and all of my assets are my e-fund, depending on the scope of the emergency.

[MoneyTree]

I never understood the advice to keep an emergency fund.

Sure I have a few grand to cover normal ongoing expenses in my checking account. But that isn’t particularly for emergencies. Its just for spending in general.

Most unforeseen expenses can be covered by paying with a credit card, which would not come due until the payment date following the statement period, so at least 1 month.

And it only takes a few days to sell some stock and have any needed cash transferred to your checking account.

To the point about having to sell stock during a downturn, what about missing out on the gains from having perpetually uninvested cash? Isn’t it also equally likely (or even more likely) to have to sell during an upswing versus a downturn?

I still don’t get it.

[Villanelle]

I never understood the advice to keep an emergency fund.

Sure I have a few grand to cover normal ongoing expenses in my checking account. But that isn’t particularly for emergencies. Its just for spending in general.

Most unforeseen expenses can be covered by paying with a credit card, which would not come due until the payment date following the statement period, so at least 1 month.

And it only takes a few days to sell some stock and have any needed cash transferred to your checking account.

To the point about having to sell stock during a downturn, what about missing out on the gains from having perpetually uninvested cash? Isn’t it also equally likely (or even more likely) to have to sell during an upswing versus a downturn?

I still don’t get it.

I think a lot of this depends on how you define "emergency fund".  I look at it as a layered thing, and consider my credit cards, HELOC, non-retirement investments, and even the contributions to Roths to all be part of an emergency fund.  The credit cards allow essentially immediate access to "money" needed to actually pay for things. With the HELOC, I can write a check, so that's almost immediate access as well.

For people who don't have investments yet--which are also going to mostly be the people who most need money advice and access to at least a small "cash" (in quotes because having it in a HYSA or similar, with ATM access, probably works almost as well)--it probably makes sense to have at least a couple thousand dollars or non-invested money. 

[Telecaster]

To the point about having to sell stock during a downturn, what about missing out on the gains from having perpetually uninvested cash? Isn’t it also equally likely (or even more likely) to have to sell during an upswing versus a downturn?

I still don’t get it.

And there's another problem as well.  Let's say you have an emergency and use up all of your cash e-fund, but thankfully didn't have to sell any stock.  Now what do you do?   You have no e-fund.  Do you sell stock to replenish the e-fund?  Or do you build up the e-fund over time by say, keeping dividends in cash that otherwise would have been reinvested?   

But no matter what strategy you use, you only benefit if you time the market correctly, both in spending the cash and replenishing the e-fund.   And no matter how you decide to do it, replenishing the e-fund ultimately comes out of your total portfolio anyway because either you sold stock or didn't reinvest.

[Kwill]

Like others, I would say yes it's better to have an emergency fund of some kind but no, you probably don't need a 'mountain of cash'. Maybe you could keep one month's worth of expenses in a liquid form so that you don't have to go to credit or draw down the ETFs immediately if it's not the best time. I think you mentioned being able to live without a fridge if you had to, but that sort of thing would be easier to avoid and potentially more expensive if it increased eating out.

I'm using my emergency fund right now to make a job transition easier. I'm moving from the UK to a new job in the US that will pay much more, but I've had to pay up front for a removals company and for the deposit and first month's rent and application fee for a new apartment. I've also had to buy a plane ticket and pay to book hotels for the last night here and the first night there. Moving everything would have been too expensive, so I'm selling or giving away everything I can here while also starting to order a few things for the new place. I will also need to continue paying my mortgage for a little while after starting to rent a place in the US because it will take a little time to complete the sale of my current place. And because it was my last chance while in Europe, I also treated myself to a week's vacation in Italy, and I'm doing a few special things in the UK while I can, like treating my nieces to a fancy afternoon tea. A lot of this isn't anything like a true emergency. I could have dumped everything, worked to the last minute, only paid for the flight, and stayed with friends for a few weeks in the US. But it's really nice to wrap things up properly and know I'll have a place to stay when I go. It's more about flexibility than emergency.

[reeshau]

With the HELOC, I can write a check, so that's almost immediate access as well.

Just calling out as a caution:  a HELOC can be frozen by the bank at will, as happened extensively during the 2008 financial crisis.

As the variety of responses here shows, do what let's you sleep well at night.  There is no one right answer.

[Villanelle]

With the HELOC, I can write a check, so that's almost immediate access as well.

Just calling out as a caution:  a HELOC can be frozen by the bank at will, as happened extensively during the 2008 financial crisis.

As the variety of responses here shows, do what let's you sleep well at night.  There is no one right answer.

Definitely.  Thankfully, our HELOC limit is a couple hundred thousand dollars less than our equity in the home, so it seems quite unlikely it would be frozen, but stranger things have happened.

[jim555]

If you have multi years of savings for FIRE that is your emergency fund.  To me it never made sense, unless you are just starting out in the first few years of savings.

[Anon-E-Mouze]

If you have multi years of savings for FIRE that is your emergency fund.  To me it never made sense, unless you are just starting out in the first few years of savings.

What if your FIRE savings are accessible only with a penalty, or if the market is in the tank when you need your funds? What if you need cash today or tomorrow, and it takes several days for settlement of a securities transaction to reach your bank account? (A line of credit helps in that situation.)

[jim555]

If you have multi years of savings for FIRE that is your emergency fund.  To me it never made sense, unless you are just starting out in the first few years of savings.

What if your FIRE savings are accessible only with a penalty, or if the market is in the tank when you need your funds? What if you need cash today or tomorrow, and it takes several days for settlement of a securities transaction to reach your bank account? (A line of credit helps in that situation.)

I've always had a mix of after tax and retirement accounts, selling something takes max T+3, or T+1 for settlement.  Plus credit cards are available, margin loans, or personal loans.  An emergency fund to me is useless.

[ender]

What if your FIRE savings are accessible only with a penalty, or if the market is in the tank when you need your funds? What if you need cash today or tomorrow, and it takes several days for settlement of a securities transaction to reach your bank account? (A line of credit helps in that situation.)

What are situations this would matter?

I've never been able to find a situation where I'd need cash ASAP and a few days for settlement/ACH transfers wouldn't be sufficient.

Maybe if I had an amazing deal that was cash only on a car or something?

[Anon-E-Mouze]

What if your FIRE savings are accessible only with a penalty, or if the market is in the tank when you need your funds? What if you need cash today or tomorrow, and it takes several days for settlement of a securities transaction to reach your bank account? (A line of credit helps in that situation.)

What are situations this would matter?

I've never been able to find a situation where I'd need cash ASAP and a few days for settlement/ACH transfers wouldn't be sufficient.

Maybe if I had an amazing deal that was cash only on a car or something?

That's the thing about emergencies (and why emergency funds are needed). You don't know what you need and when you need it until it happens.  Last year, for example, we had a very unexpected tax bill for tens of thousands of dollars (got notified on Sunday by our accountant, payment due on Monday). Yes, we could pay via credit card (at a 3% charge) and we could transfer funds from a line of credit (interest expense) or sell securities in down market (settlement delay), and we did a combination of those things - but at a cost.

That doesn't mean I now keep tens of thousands in a chequing account, but I do keep tiers of funds available, including $5K at a moment's notice and another $20K (in high interest savings) available within a few days.

[mistymoney]

What if your FIRE savings are accessible only with a penalty, or if the market is in the tank when you need your funds? What if you need cash today or tomorrow, and it takes several days for settlement of a securities transaction to reach your bank account? (A line of credit helps in that situation.)

What are situations this would matter?

I've never been able to find a situation where I'd need cash ASAP and a few days for settlement/ACH transfers wouldn't be sufficient.

Maybe if I had an amazing deal that was cash only on a car or something?

posting bond?

[Adventine]

What if your FIRE savings are accessible only with a penalty, or if the market is in the tank when you need your funds? What if you need cash today or tomorrow, and it takes several days for settlement of a securities transaction to reach your bank account? (A line of credit helps in that situation.)

What are situations this would matter?

I've never been able to find a situation where I'd need cash ASAP and a few days for settlement/ACH transfers wouldn't be sufficient.

Maybe if I had an amazing deal that was cash only on a car or something?

That's the thing about emergencies (and why emergency funds are needed). You don't know what you need and when you need it until it happens.  Last year, for example, we had a very unexpected tax bill for tens of thousands of dollars (got notified on Sunday by our accountant, payment due on Monday). Yes, we could pay via credit card (at a 3% charge) and we could transfer funds from a line of credit (interest expense) or sell securities in down market (settlement delay), and we did a combination of those things - but at a cost.

That doesn't mean I now keep tens of thousands in a chequing account, but I do keep tiers of funds available, including $5K at a moment's notice and another $20K (in high interest savings) available within a few days.

I hope you also changed your accountant.

[Kwill]

I have recently been watching Caleb Hammer's channel on YT, where the emergency fund is an important topic.
... I have high job security and would probably get a severance for signing a dissolution contract.
Last but not least, all my stash is in highly liquid ETFs, so I could sell on a moments notice, should I really need cash. In the meantime, I have a 5K credit line with my checking account.

Looking at all these combined, it feels like for me, holding onto emergency cash is just not that useful.
Of course I keep some emergency cash at home, should the ATMs fail, but I no longer can convince myself to keep thousands in the checking/low yield account.

I just went and watched bits of a few of Caleb Hammer's financial audits. It seems like he picks people whose finances are in a very bad state--no savings, high amounts of debt, not much in the way of reasonable investments, precarious or variable income streams, spending out of control, etc. In those situations, an emergency fund is an important part of climbing out of the hole and building a better situation. In the few videos that I watched at least, he's not talking to people like you. It sounds like you have a stable income that more than covers your spending, no debt(?), a stash that can be accessed in emergencies, and a credit line that you are reserving for emergencies or special situations, rather than relying on credit on a regular basis. You've got a plan in place for emergencies and funds to cover them, so that's good. What we've been debating is really just what form the emergency fund should take, whether it should be cash or whether investments can double as emergency savings.

[VanillaGorilla]

I feel that the size of an emergency fund should be inversely proportional to the size of your taxable portfolio. If you're broke or all your money is tied up in retirement accounts or other illiquid assets, then you better have a liquid emergency fund.

If you have a massive taxable portfolio, then that portfolio is your emergency fund.

If you do have an emergency fund, then you should consider the effect of tax drag and whether cash is an appropriate vehicle for your portfolio at large.

For me personally I usually have 1-2 months of cash on hand just out of sheer laziness. I save 50% of my post tax/401k income so I can and do trivially cashflow typical "emergencies" (house repairs, car repairs, vet bills, medical expenses). If I somehow need to raise several months' worth of expenses I would liquidate investments, without worry about the market being up or down. In the long run avoiding cash drag is the most prudent course.

[pdxvandal]

This 1,000%!

I feel that the size of an emergency fund should be inversely proportional to the size of your taxable portfolio. If you're broke or all your money is tied up in retirement accounts or other illiquid assets, then you better have a liquid emergency fund.

If you have a massive taxable portfolio, then that portfolio is your emergency fund.

If you do have an emergency fund, then you should consider the effect of tax drag and whether cash is an appropriate vehicle for your portfolio at large.

For me personally I usually have 1-2 months of cash on hand just out of sheer laziness. I save 50% of my post tax/401k income so I can and do trivially cashflow typical "emergencies" (house repairs, car repairs, vet bills, medical expenses). If I somehow need to raise several months' worth of expenses I would liquidate investments, without worry about the market being up or down. In the long run avoiding cash drag is the most prudent course.

[engineerjourney]

I bought into not needing an emergency fund back in 2016 then I hit a stretch of terrible luck with a family death, medical emergency, pet emergency, car accident, two cracks in car glass within a week, furnace fire, etc.. all within a two month period.  If you have to work with a smaller company you might not be able to pay via credit card.  I now have a decent sized emergency fund just to not have to stress about it.  It was absolutely awful to have to figure out how to pay for something while dealing with really unfortunate things.  Since we invest heavily into tax advantaged accounts and don't have a taxable investment account there isn't a lot of flexibility quickly.  So now we have a 20k emergency fund... which right now is earning almost 5% interest.  Any "drag" is worth it to me to not have to stress at all when shit hits the fan.  YMMV

[Raenia]

When our basement flooded with sewage, the remediation team had 5% surcharge for credit card payments. 5% on a four-figure payment is a nontrivial amount of money, on a payment that can't afford to wait 2-3 days for the financial institutions to open and make a transfer (happened on a weekend, naturally). We were very grateful to be able to write a check without worrying about if there was enough in the account, or if we would be able to make a transfer or sell shares before they cashed it.

I don't really get the argument of being able to cashflow an emergency expense. If the bill is something you can schedule, then sure, but in a real emergency, you might have to pay that bill before your next paycheck. If you've got a hole in your roof or a pipe gushing water into your house, or a pet dying, or something similarly urgent, you don't have the luxury of waiting that long.

Especially those who use their taxable account as their emergency fund, depending on the relationship between your two financial institutions it can take several days to process the sale and transfer - and weekends and holidays are out. We recently pulled funds from Vanguard

Like others, we keep tiers of funds. We'll never keep less than our home insurance deductible in an account we can write a check from, then another 10-20k in a high yield savings account that can transfer in 1 business day. If we ever need more than that, it's likely that those two accounts will have enough for a downpayment/deposit to start work, giving us time to transfer from brokerage for the rest.

[Telecaster]

I don't really get the argument of being able to cashflow an emergency expense. If the bill is something you can schedule, then sure, but in a real emergency, you might have to pay that bill before your next paycheck. If you've got a hole in your roof or a pipe gushing water into your house, or a pet dying, or something similarly urgent, you don't have the luxury of waiting that long.

Especially those who use their taxable account as their emergency fund, depending on the relationship between your two financial institutions it can take several days to process the sale and transfer - and weekends and holidays are out. We recently pulled funds from Vanguard

Most or all brokerages these days have bill pay and check writing features directly from investment accounts.   

[glacio09]

I have recently been watching Caleb Hammer's channel on YT, where the emergency fund is an important topic.
... I have high job security and would probably get a severance for signing a dissolution contract.
Last but not least, all my stash is in highly liquid ETFs, so I could sell on a moments notice, should I really need cash. In the meantime, I have a 5K credit line with my checking account.

Looking at all these combined, it feels like for me, holding onto emergency cash is just not that useful.
Of course I keep some emergency cash at home, should the ATMs fail, but I no longer can convince myself to keep thousands in the checking/low yield account.

I just went and watched bits of a few of Caleb Hammer's financial audits. It seems like he picks people whose finances are in a very bad state--no savings, high amounts of debt, not much in the way of reasonable investments, precarious or variable income streams, spending out of control, etc. In those situations, an emergency fund is an important part of climbing out of the hole and building a better situation. In the few videos that I watched at least, he's not talking to people like you. It sounds like you have a stable income that more than covers your spending, no debt(?), a stash that can be accessed in emergencies, and a credit line that you are reserving for emergencies or special situations, rather than relying on credit on a regular basis. You've got a plan in place for emergencies and funds to cover them, so that's good. What we've been debating is really just what form the emergency fund should take, whether it should be cash or whether investments can double as emergency savings.

It's this exactly. Most financial help videos like that are for people who suck with credit in the first place. It creates a buffer for them to not go straight to the credit at the first trip up. Emergency funds are a vital part of breaking the cycle.

For me personally, I've been "in the process" of getting ready to buy a house for the past ten years so my rather large emergency fund doubles as a house down payment. My husband isn't good with investing but he's great at squirreling away cash. It's worked out well having the majority of savings going into investments, and a smaller amount slowly growing the down payment fund "for when we're ready". Does it make financial sense? No, but it makes marital sense.

[Villanelle]

We have a check book attached to our HELOC.  While it might take me 10 minutes to dig the checks out from the bottom or a drawer, after that, I could pay for a large expense even if they didn't take a credit card.**  If they also won't take a check, I don't think I'd trust the company.  That means the only large expense I couldn't pay immediately would be one where they literally only took actual cash.  And an e-fund wouldn't help with that because unless I had paper bills stuffed in the mattress, I could only pull out <$1000 with ATMs. (I only minimally use a local bank, so even if it was during bank hours, I still couldn't access much more than that.) 

I think this all points back to each person needing to evaluate their own circumstances.  As much as it would be clean and easy to be able to say, "Everyone needs an $Xk e-fund" or "everyone should have Y times expenses (or salary)", that's like saying, "everyone needs $1m to retire."  It doesn't work that way.  Likelihood of emergencies (which is always going to be just a guess), liquidity, number of options, long-term outlook, risk tolerance, and other factors all play into a thoughtful e-fund decision.



**HELOC is with the same bank where paychecks go and where we keep a large float to manage billing cycles and not have to always do precise math to know the exact balance.  Presumably, I could transfer immediately to cover the HELOC check, perhaps even before check was even cashed (if the account lets me overpay), and pay no interest at all.  At worst, we are talking a few days' interest, which would likely be <$1. 

[Dicey]

Nope, you don't. You do you and please let us know how it works out.

BTW, I had a totally unexpected cancer diagnosis this year. Not for a second did I worry about money or make any decisions based  on the availability of funds. It made a surreal situation much easier to manage. Still does.

[lifeisshort123]

In the US, the ROTH IRA functions very nicely as the emergency fund as you can take out your initial contributions at any time. 

[Dicey]

In the US, the ROTH IRA functions very nicely as the emergency fund as you can take out your initial contributions at any time.

But you can never put them back.

[lutorm]

As we're transitioning to FIRE this month, I think this depends entirely on your life situation. If you don't have any loans you need to keep paying, don't have a job you can lose, don't need to have a working car so that you can get to the job you don't have, etc, then your economic situation will be a lot more resilient. Yes, you can still get hit with some large unexpected bills that must be covered (some form of damage to your house not covered by insurance comes to mind) but in FIRE you hopefully already have a withdrawal plan that includes having access to funds for living expenses over the coming year and the only impact on a spike in outlay would be the potential need for an asset sale at a suboptimal time.

If you're barely staying afloat, on the other hand, an emergency fund might mean the difference between staying afloat or having to utilize some sort of short term credit that could put you cashflow negative. In that situation not having one means living an extremely risky life.

[TheAnonOne]

Had my AC not cool properly this spring, $2000 to recharge it. 18 years old.

I just bought an entire new system. Not worth the hassle or worry going forward.

A large emergency fund buys you this type of freedom.

[oldladystache]

As my net worth increased my definition of emergency changed. I don't think of a sudden need for $2,000 as an emergency.  $20,000 wouldn't be an emergency, but an annoyance.

[Finances_With_Purpose]

Well, I'm dealing with HVAC issues, for which I don't know what to do yet but it's going to cost money. Potentially a lot of money. Said money will most likely come out of my emergency fund.

You need to be able to access funds quickly. A bunch of money in a savings account is one way to do it, but it's not the only way.

This.  One big issue is if you have a car wreck or the like and need immediate cash to buy a car or whatever else.  Worst case, you can finance short-term, but I hate doing that, and find that cash is almost always cheaper on all things. 

But you can invest some of your EF money in short or even medium-term things, especially bonds/CDs/treasuries, and then just sell them if you need some cash.  You'll take a small loss, but it's just like giving up a year or three of returns, in the event of that emergency, if you think that that's unlikely for you.  (And if you're right, you come out ahead.) 

I have wavered over the years from too little (cash crunch! big all-cash house repair) to too much, and I used to keep and want to keep a much, much larger emergency fund, but we've dialed it back and put a lot more into investments--with massive gains as a result.  I have a hard time keeping as much in cash now, however, we do keep a big enough cushion to, e.g., buy an HVAC unit immediately. 

It all depends on how much access you have to a bucket of cash quickly if/when you need one.  I have several backup plans, too, and realized the same re: unemployment, so I run with a little less than I thought I would.  I certainly couldn't pass up the historic opportunity on I-bonds with all the spare cash that I could muster. 

YMMV, but I also get a good return on cash often, because I can pay - and offer to pay - in cash, which nets me discounts.  E.g., I had a roofer bill me for repairs recently.  "Hey, what if I paid cash - can we get a discount?"  It saved me about 3-5% off of thousands, and just on that one transaction.  I always offer cash for anything over about $300. 

[Telecaster]

Had my AC not cool properly this spring, $2000 to recharge it. 18 years old.

I just bought an entire new system. Not worth the hassle or worry going forward.

A large emergency fund buys you this type of freedom.

A couple quibbles.   I wouldn't rate replacing the HVAC as an emergency.   You already knew that someday you would have to replace it.   It was just a large irregular expense.   

The other quibble is that a large liquid net worth buys you this type of freedom.   It doesn't have to be in cash.