The Emergency Fund Fallacy

It continues to perplex me why there should be a distinction between an emergency fund and your general savings.  If you have $100,000 in the bank, what is the difference between calling it $100,000 in savings, and splicing the funds into $10,000 emergency money and $90,000 savings?  The answer lies in the fact that people who need to create an emergency fund likely always have “emergencies” and are weak with their spending and savings!

Let’s say your name is Mr. Benjamin aka a $100 dollar bill.  You’re relaxing with your fellow Benjamins in the bank, hopefully earning at least a 4% interest rate using the “DVD Method To CD Investing” and having a grand old yield maximizing time.  A Benjamin’s purpose is to provide a solid source of liquidity and risk free interest income for the owner upon his or her retirement.

Some Benjamins are lucky.  Their owners don’t discriminate between one bill or another.  They treat each bill with vital respect i.e. they don’t touch it!  Some owners are just nutty, always disturbing their party and separating one Benjamin from another.  “Listen up Benjamins!  100 of you are to relocate to this side of the tracks, and the other 900 Benjamins get to kick back and relax!


As soon as you start identifying some of your savings as emergency fund money, that portion becomes “at risk.”  Your emergency fund becomes a slush fund that tempts you to spend because you don’t have the discipline enough to lock away your retirement money.  You bring your savings to the front lines, allowing you to justify your desires because you’ve earmarked other monies for retirement.

Having an emergency fund is a crutch.  You start thinking in emergency fund type increments.  That’s a lovely iPad my emergency fund can cover no problem!  Or, let’s buy a brand new car and take out a loan since our emergency fund can take care of the payments!  1/10th rule for car buying?  What’s that!  The list of stuff you start wanting gets longer and longer until you no longer can control your temptation.

Worse yet, some of you might treat your emergency fund money like gold and never spend it!  What does that mean?  It gives you a green light to spend all your other money at will because you feel artificially complacent that no matter what, you’ll still have your piddily emergency fund to depend on.  This could be the more dangerous result, since an emergency fund is generally only a small fraction of your overall savings.


As soon as you identify the weakness of the emergency fund concept, you’ll realize that you’re just making excuses for your spending and savings habits.  Instead of creating an emergency fund, go broke to win big and lock your money away.  If you have to create an emergency fund, you are scraping at the bottom of the barrel with regards to your personal finances.

Do you think multi-millionaires have emergency funds?  Nope.  They have tax efficient muni bonds, private equity investments, and liquidity.   Stop thinking so small and start thinking bigger, holistically if you will!  A dollar here is the same dollar there.  Focus on fixing what’s most important, your money habits.


Sam @ Financial Samurai – “Slicing Through Money’s Mysteries”

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship. Sam focuses on helping readers build more income in real estate, investing, entrepreneurship, and alternative investments in order to achieve financial independence sooner, rather than later.

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  1. says

    For those who use their emergency fund the way you describe (either way), the weakness is not in the concept of the emergency fund. The weakness is within the person.

    And while the rich may not have an “emergency fund” a large portion of their investments are in taxable accounts where they can easily access the money if there is an emergency. The average person will end up with all their money locked up in tax-advantaged retirement accounts with very few ways to access the money without penalty.

    I don’t agree with you that there’s something wrong with the emergency fund concept. The problem, and you actually pointed to this in your last paragraph, is with your money habits. If you don’t have control over your impulses and desires, an emergency fund is not going to change that for you. But it can serve as a buffer when unemployment, medical emergencies, or other high cost-low frequency events occur in your life. If all your savings is locked up in retirement accounts, how will you cover those expenses?
    .-= Paul Williams´s last blog ..Weekend Reading – 05/21/2010 =-.

    • says

      Paul, very good points, and very well written. You must be a blogger.

      To answer your last question…. The key is to be the best at what you do, and that way, you will never have to worry about unemployment. Medical emergencies are covered by insurance of all types, which is a great topic.

      Finally, you can withdraw the interest from your CD savings or whatever investments you make penalty free.
      .-= admin´s last blog ..The Dark Side Of Early Retirement =-.

  2. Samer Forzley says

    I think we can agree on the fact that everyone MUST have savings. I understand what you are coming from, totally, however I find that convincing people to save for emergencies is a battle easier won. People get they need to save, many think saving outside of that is for retirement and must be locked up in a 401 or some other form of long term investment

  3. says

    I’m not so sure that an “emergency fund” would induce a person to use it to spend; in fact, wouldn’t it just be a core kernel that would not be touched unless the rest of your cash was spent?

    That said, I don’t actually keep an “emergency fund” myself. As a Canadian I have a combination of private and government insurance available for different situations, and there are lines of credit for everything else (I don’t recommend that for everyone, but if you are disciplined enough to not actually use the line of credit unless you really need to, then it’s fine).
    .-= Kevin@InvestItWisely´s last blog ..What to do… what to do… when Mr. Market is grouchy? =-.

  4. Rhonda says

    We do have an EF. We have always had an EF. It is money to be used only in case of a dire emergency. We also have a savings account. I am OCD (really), and I have the money broken down on paper into categories – vacations, gifts, house, car, etc. There is money set aside for every line item in our budget. I do this because if I didn’t I know I would overspend. How can I know how much I can spend on Christmas without interfering with the vacation of our dreams? How do I know how much we can spend on house renovations without dipping into the new used car money? I label everything.

    When my husband was laid off 2 years ago, I was prepared to use the savings first, then the EF money to cover bills. Fortunately, he was never actually unemployed (transferred) so I didn’t have to.

    We don’t have a spending problem. We currently save 14% of our take home pay. But we would have a spending our savings problem or the opposite – save everything because you don’t know how much you can spend responsibly – if we didn’t label our savings.

    • says

      Rhonda, I am glad you are OCD! :) Someone has to be OCD in the family in case of trouble. You aren’t separating the money into multiple different funds in one bank are you? The way you do it, is kinda like the way a lot of people do it on Excel I think….. just on paper no?

      I’m curious to know why 14% savings, and not 15%? And when you say 14%, is that 14% saved of gross income or net income? There’s still no standard explanation. Thnx
      .-= admin´s last blog ..The Dark Side Of Early Retirement =-.

  5. says

    definitely agree with this. i dont have seperate accounts for emergency,travel, etc etc. but what i do have is a savings account that all my after expenses income goes to. thats my emergency fund

  6. david M says

    I agree with 100%. I have no emergency fund but have a large amount of US savings bonds that I can cash in at any time if need be.

    I also don’t understand the concept of saving x number of $ per month. I spend what I spend and the rest gets saved.

    Along with this, I also do not see the need to create a budget, again, I spend what I spend and the rest gets saved.

    Of course, this only works because I live considerably below my means.

  7. FranticWoman says

    I guess I’m missing the point. You can call it an EF or whatever you would like but having some liquid savings around is a good idea. I call mine a rainy day account then I have multiple accts labeled for a specific purpose like Rhonda mentioned. I spent $1200 in car repairs last week – it came from the Car fund. I have a general fund then other breakdowns. I have $2000 worth of dental work scheduled. Congrats to the OP that he/she has $2k sitting around at their fingertips in checking or in excess after their next paycheck to be used for things like this but I do not – I like it sitting in wait until I need it.

    For things expected but not scheduled (like car repairs or dental work) having an acct seems like a good plan. I don’t consider those accts to be EF, but it is up to you to define your savings. I thought most PF people considered an EF for X amount of monthly expenses saved and/or a way to avoid using CCs. If you are well off enough to have excess cash after all bills are paid and you have hundreds of thousands in investments, then yes, perhaps the OP applies. I’m just more average I guess. I like having general savings for “whatever”, retirement savings, investments, and individual funds for purpose (like the $300 a mn a put into car fund for my next car purchase). My parents have $10k in their checking acct all the time – they never transfer funds when they have a big expense like a new roof for instance. Works for them, but I am uneasy with that. I’d rather it sit elsewhere and earn a tiny bit of interest or perhaps I cant control my spending month after month of available funds like the OP intimated. I’m ok with that.

    I also like the ease of bulking up a simple liquid acct – call it EF if you like – until I have enough “extra” to buy more stocks or a CD or whatever.

    I have to add – stating that unemployment would never be a worry or medical issues of any kind (due to insurance) is just plain ridiculous IMO. Or more likely naive. It is dangerous to believe one will never have to worry about emergencies, especially as life marches on. Easy to say at 20; hard to say at 50.

    • says

      FranticWoman – My point is that if you create an emergency fund, you are inviting emergencies into your life. It’s a mindset. Instead of creating an emergency fund, just focus on creating the big savings nut with maximum returns.

      It’s not ridiculous to assume that health insurance will pay the majority cost of your health problems. That’s what health insurance is for no? It’s ridiculous to assume that health insurance doesn’t do what they state they will do.

      As for unemployment, we live in a world where anything is possible. I will be THE BEST burger flipper at McDonald’s if I have to. There are jobs out there if we want it. I guess I’m not thinking about unemployment after 50, b/c I hope I will be retired by then too through savings discipline now. 28 years of work after undergrad should be enough to accumulate wealth no?
      .-= admin´s last blog ..The Dark Side Of Early Retirement =-.

  8. says

    Actually, I have the reverse system. My entire savings nut is my emergency fund, in the sense that it is what I will count on to survive upon retirement.

    I create “Fun Money” fund (s), where it’s OK to just spend it at will, b/c I know my savings account is what will support me. I call this fun money funds pressure release valves.

  9. says

    Ha ha, you do like to rile us up don’t you? ;)

    The answer is of course most people can’t afford to have $100,000 sitting around in savings. For most people, achieving financial freedom means leaving safety but truly dire real returns of cash for at least bonds, and probably equities, and in both cases you need to invest for the medium to long-term to cope with volatility.

    If you’ve socking away $100,000 in cash but you’ve an investment portfolio of $1 million, you don’t need an emergency fund.

    If you’re earning say $50,000 a year and you’re trying to invest $5-10K into the market for the long-term, you do. IMHO! ;)
    .-= Monevator´s last blog ..Rich friends, poor friends =-.

    • says

      I just use $100,000 as a nice round example for illustrative and math purposes. It can be $10,000 in the bank instead of $100,000 as well.

      Read your article on why you need an EF… it’s fine. You should change the title to simply “why you need savings”!

      I honestly don’t try and rile you guys up. Just thinking out loud!
      .-= admin´s last blog ..The Dark Side Of Early Retirement =-.

  10. Geek says

    The reverse spending problem is true. If you have savings for a house, and it doubles as your emergency fund, you could spend it all and be left with no emergency fund when you buy a house.
    You yourself have the 30/30/3 homebuying rule. What is that extra 10% (on top of your 20% down payment) if not an emergency fund? Call a spade a spade!

    • says

      The 10% after the 20% down payment is not an emergency fund. It is just called savings. I don’t recommend someone putting a 20% downpayment and having anything left aftewards, let a lone putting only 10% down and having nothing left.

      Change your mindset of identify a portion of your savings as an EF, and see your entire savings hollisticaly as your Life Fund!
      .-= admin´s last blog ..The Dark Side Of Early Retirement =-.

  11. says

    I don’t know that I have what you would call an emergency fund. I just make sure I have a certain percentage of my savings easily accessible and liquid. It takes 2 days to transfer, but there are no penalties for withdrawal like there is for a CD. I guess it could be considered an emergency fund of sorts though because it is cash I have readily available in case I need it. For instance, my son needs his wisdom teeth removed, unexpectedly early. That is going to cost me 10 benjamins because our insurance stinks. I will just transfer that money when I need it. But I will not obsess over replacing that 1k. It will just get replaced over time.
    .-= Kris´s last blog ..The Importance of Organization – How One Little Change Set the Tone For My Day =-.

  12. says

    I have to disagree. I have a “regular” savings that is linked to my regular checking as overdraft protection (it has $500 or so in it, sometimes more but never less). Then I have an emergency fund (which is to pay rent, etc. if I lose my job, or a car repair, or something). Then I have a wedding savings account, a vacation savings account, and a Christmas savings account (to buy presents for other people). Nothing in any of these accounts is ever used for any purpose other than what it’s been allocated for, ever. What your describing has nothing to do with an emergency fund or not, it’s to do with whether you have the willpower to not spend more than you earn. Someone who would use their emergency fund to buy an iPad is usually not someone who has any money in a savings account in the first place.

    I am still paying off some credit card debt so no IRA at this point, and the yield on CDs is worse right now than the yield on my savings account (ING), but I do have a 403(b) through work for retirement. I have to work at my job for 3 years before I get the match, but then I get the first 3 years’ match all at once and it’s monthly thereafter.
    .-= Honey´s last blog ..My Girlfriend Is Awesome. But The Sex Is Terrible =-.

    • says

      Your emergency fund is used to pay………………….. RENT?

      Your statement captures the essence of my post. Rent is not an emergency, it is a permanently reoccurring expense. One you change your mindset, your finances will be set free and flourish.
      .-= admin´s last blog ..The Dark Side Of Early Retirement =-.

      • says

        The emergency is not the rent. The emergency is not having a full-time job to pay the rent. I do not think that being “the best burger flipper” is a good idea because it wouldn’t make me enough to replace my current full-time job and it would be a waste of time I could spend looking for something equivalent to what I had.

        Out of what allocated funds should I pay rent if I lose my job, otherwise? And remember that I am opposed to property ownership, so I will never be buying :-)
        .-= Honey´s last blog ..3 Guys Who Hit On Me Recently, All of Whom Had Girlfriends =-.

        • says

          I see. You should pay rent from your savings, which hopefully is working hard for you, and not an emergency fund. My point is, don’t think in “emergency fund type increments.”

          Know that you have the power to overcome your emergencies by doing whatever you want, or whatever it takes to survive. Have that confidence!
          .-= admin´s last blog ..The Dark Side Of Early Retirement =-.

  13. says

    I completely agree about not having emergency funds. It’s not the name it’s what it’s invested in is really the issue. This is something I’ve been meaning to write about.

    If you do follow people like Suze Orman who say have at least 6 months of income (now are saying 12 months) in EF, that can be A LOT OF MONEY. In addition, they recommend putting EFs into low interest (ie money market accounts). So you are almost assured not to match inflation, especially at the current rates. So in the long run you are almost sure to loose money in real terms.

    Also from other studies have shown how often EFs are not used.

    In my case I determined years ago an EF was silly to have. Also instead call it a security bucket. It contains fixed income securities on my taxable side. For the most part the securities I pick go up in value. They are not purely CDs and have a mixture of many different investments (ie munis, GNMAs, and even Lending Club) My security bucket right now is averaging 5.37% (before taxes of course).
    .-= Investor Junkie´s last blog ..Fidelity Investment Rewards Visa Card Review =-.

  14. cm says

    Reading the comments, I am surprised to see that other people have special “funds” set earmarked for certain things. I just have what I call “my money”. It would make me crazy to have “the car fund” and “the vacation fund”, etc. But that’s just me. I just try to hoard greenbacks and begrudgingly buy stuff when I really should. (Ok, not that bad)

    That said, I purposefully don’t put 100% of my money into difficult-to-instantly-access things like CDs, but leave a few thousand bucks in my local bank’s checking account to pay the typical bills and expenses with. It gets replenished each month by salary and now and then I draw a chunk of it away into better interest situations.

    If there were a real emergency and I needed a big blast of dollars (like a great house buy presented itself, or a business venture, or something untoward), I can call all the Benjamins home from their higher interest outposts within a week. Almost any emergency can wait that long.

  15. says

    I don’t think there is anything wrong with sectioning everything off and I think it may actually make you not spend certain things.

    Say you do have an emergency, you only have $1k emergency fund and $6k savings…. You are more likely to heavily budget to try and not spend more than your emergency fund, however if you had $7k in savings that was also for emergencies it’s much more likely you would end up spending $1.5k of that…. The separation distinction can actually help you to spend less I think.
    .-= Forest´s last blog ..A Pledge To Never Take Credit Again! =-.

    • says

      Hi Forest, there’s nothing wrong with ring fencing this money and that.

      I’m just asking readers to think BIGGER. If you think in “emergency steps”, you start thinking everything is an emergency. Forget that. Think about your entire savings nut, as a Life Savings fund.
      .-= admin´s last blog ..The Dark Side Of Early Retirement =-.

    • says

      Jason-san, it really is semantics, which I suggest readers move away from. Let’s not think about emergencies, and just think about the normalities of life instead.

      If we are stuck in the emergency fund mode, we aren’t unleashing our full potential.
      .-= admin´s last blog ..The Dark Side Of Early Retirement =-.

  16. Money Green Life says

    good post! I agree with you 100%. I think people create “emergency” funds as an excuse to buy things where they normally wouldn’t. I think having such separate category for your money really prevents you from saving more than you can.

  17. says

    I don’t really have an emergency fund, at least not in the traditional sense. I have funds that can be used in an emergency, but they are invested in stocks or mutual funds. I am thinking about diversifying more into bonds, perhaps I’ll consider that as part of my emergency fund.

    As you point out above, as you become more wealthy, an emergency fund isn’t as critical to establish or have. While I’m not quite wealthy yet, I don’t think I really need a separate cash balance dedicated to be an emergency fund either…

    Great point… :)
    .-= Money Reasons´s last blog ..MoneyReasons Weekly Cache 2010, May 23 Iron Man =-.

    • says

      Good stuff Don-san, maximizing your money and not thinking about an emergency fund as a crutch.

      True, perhaps more wealthy people have less of an emergency fund mindset, but that’s part of how they got there in the first place…. a different, bolder, bigger mindset.

      .-= admin´s last blog ..The Dark Side Of Early Retirement =-.

  18. says

    You say you don’t stir people up on purpose-I think you may not be entirely truthful….But that is what makes people stop, and think. Thinking about their money is always a good thing.

    I like to think of this EF issue in the big picture. People who have never taken care of their money, cannot think like you think-it is impossible for them to think “holistically”. They are having trouble keeping up with the interest on their credit cards, much less laddering their CD’s.

    So teaching basic steps of planning your spending, putting aside money for emergencies, and paying off your consumer debt gives people a plan that they can understand. It is a starting place-not an ending place.

    Anyone here who says they don’t have an emergency fund, but have plenty of savings, insurance, retirement plans, and are saving 15% of their income-are way ahead of probably 80% of the folks who don’t understand “money”.

    I “get” your point about the emergency fund perhaps being a crutch, but when you have a broken leg, sometimes you need a crutch, till things mend. You can then walk on your own again. And with hard work, and more time, maybe you will be ready for the marathon in a few months or years! “Emergency Fund- I don’t need one!” is a great goal!

    For a martial arts analogy, the novice surrounded by black belts will not last long.

    But give the novice a mentor with the knowledge and skills, and willingness to teach, and the novice’s will to accept the teaching, and work daily to improve, then soon the student can become the master, and mentor others! Or, as my Mama says-you gotta walk, before you run!

    Great discussion!
    .-= Dr Dean´s last blog ..Fin Reg: The New Buzz Term-Should You Care? =-.

    • says

      Hi Doc – I am being truthful. I wouldn’t have written this post if I wasn’t sufficiently jarred by all the posts glorifying what an emergency fund is and why we all need one!

      I didn’t begin this post with the though of shaking things up. I went into this post to address why an overemphasis on emergency funds is the wrong mindset, which will limit your long term financial well-being.

      Your comments are just regarding discussing the basics of personal finance. But, I don’t think we’ve discussed the basics on this site for a while now. That said, the basic fundamental concept of personal finance is BELIEF. The belief that one has the strength to succeed. An EF is a belief limiting concept, because it doesn’t allow you to propel.

      I hope most of us reading this site are already jogging, and not still crawling yet. And if they are, they’ll eventually get to jogging so they might as well try and experience what it’s like already.

      Thanks for your thoughts!
      .-= admin´s last blog ..The Dark Side Of Early Retirement =-.

      • says

        Hey, FS, I know, you know I wasn’t questioning your verisimilitude. But you do have a great habit of jarring peoples thought processes-which I think is great.

        It has certainly made me think. My blog, book, and ebook are all addressed at folks who are just beginning their financial journey, so my thinking/teaching is directed towards beginners.

        I realize your readers may be much farther along on their journey, and therefore may need to examine their thoughts and any “limiting” mindsets.
        .-= Dr Dean´s last blog ..Fin Reg: The New Buzz Term-Should You Care? =-.

        • says

          One thing I’ve learned along the way, what may make sense at one point in your financial journey might not make sense when you say have a higher net worth.

          If you say you have a NW of over $1 mil, more than likely you have money in taxable accounts. You are better off having a good asset allocation, than setting aside money
          specifically for EF.

          Meaning you have some portion of your NW is fairly liquid, and can cash them out quickly,
          while other assets you can cash out in a more orderly fashion and on your terms.

          Studies have shown EF are not used that often. (I believe once every 4-5 years if that)

          What it really comes down to is people who don’t have EF, usually don’t have any
          savings. The issue is they need to start saving, than really setting up an EF.
          .-= Investor Junkie´s last blog ..Fidelity Investment Rewards Visa Card Review =-.

        • says

          Sounds good. Yes, I think we have different audiences. It’s good you are trying to help those who are at the beginning of their financial journey. Thnx.

  19. says

    I would say Heidi and I have a combined savings account which qualifies as emergency and padding. I hadn’t thought about putting that money in a bond though hmmmm.

    Do you agree or disagree with the emergency fund concept and why?

    –> I think it is smart for those people who are currently struggling with finances and need to just save something now. It’s a great way to jolt from spending all your money to actually putting some way. So for the beginner who is just learning to save money, I think it’s great. If you’ve moved on and mastered saving, then I think you don’t need it and should have more of an investment mindset. I’d argue (and maybe because I’m more risky) that most extra money should be invested somehow instead of sitting in savings. This is a transitional phase for me right now as I’m learning the ins and outs of investing.

    Do you agree with me that creating an emergency fund is a way to shimmy around one’s mental weakness in finance?

    –> Yes it is. It is for people who must start saving something and have a bad habit of spending money. I think it’s like a shot of morphine for those with bad spending habits. I’d hope that eventually those who start putting money away in an emergency fund will take the next step and start trying to grow their money.
    .-= Jeremy Johnson´s last blog ..Why You Did (Or Didn’t Do) That =-.

  20. says

    Interesting discussion. Maybe its an asset allocation issue? I think its a good idea to balance out your portfolio to account for unexpected cash needs. As life experience teaches us, there ARE things that will come up that will be totally unexpected. Just keep in mind this reality.

    In theory, I see the point. Just save, invest, and don’t plan on having emergencies. The thing is, they can and do happen. Which is why they are emergencies! Also, there is the “sleep well at night factor.” If it makes folks calm to know that a specific portion of their portfolio is set aside for “emergencies”, then so be it.
    .-= Squirrelers´s last blog ..Delayed Retirement to the Extreme =-.

  21. isa says

    sometimes it’s worse, the savings get depleated while the minimal “emergency” money goes untouched

  22. Profitable Investing says

    I completely agree with your assessment on emergency funds. People just end up using them to buy things they think they need now, but probably won’t be used again after 6 months. I think investing money into IRAs or other tools where you can’t pull money out early is a great way to save for retirement. Great post!

  23. says

    Coming in late here… but I agree that there shouldn’t be a distinction, but that pertains to people with generous savings.

    Emergency funds are kind of a lowest common denominator thing–they’re for people who don’t normally have savings and are prone to relying on credit for “savings”. Let’s face it, the savings rate in this country is depressingly low and a lot of people are one or two paychecks away from foreclosure. An EM is a good way to get started with long term savings.

    A second group might be those who plow all of their savings into tax sheltered plans and have no liquid funds. They might also use credit for savings in a pinch. No small number of people are carrying both retirement accounts and high balance credit cards at the same time.
    .-= Kevin@OutOfYourRut´s last blog ..Save Money on Vacations =-.

    • says

      Kevin – You’re right and hence the “scraping the bottom of the barrel” line. The hope is that we get PAST the emergency savings fund type mentality and look at the bigger picture. To go beyond the basics, and to really build wealth. An EF is like a Physicist passing 10th grade chemistry… it must be done, but it’s not even a thought to him or her anymore.

  24. says

    The purpose of an emergency fund is to help people separate qualified and non-qualified monies. People need to maximize qualified monies and invest them into as risky assets as is consistent with their individual risk tolerances and is consistent with appropriate diversification principles. I see young people talking about early retirement and they invest in CDs with taxable money, earn miniscule rates and then pay part of that to Uncle Sam. I don’t get it!
    Too many people get stuck into raiding their 401(k) or IRA because they haven’t set aside enough for the unexpected expenses that inevitably come along.
    .-= DIY Investor´s last blog ..Benchmarks revisited =-.

  25. says

    Really well said Live Cheap. If you have so much money saved, you don’t think in emergency terms. Yet, if you think in emergency terms, it’s hard to break out of that thought process and save tons! Catch 22!

    I used $100,000 in savings as an example for illustrative and easy math purposes.

    Some kids never stop sucking their thumbs and biting their blankies, even in adulthood though. Best to ween em off!

    Thanks for your thoughts.

  26. Charlie says

    Most of my savings is all locked up. I keep some savings liquid which could be the closest to an emergency fund but I’ve never had to spend it. The way the markets have been acting lately, I’m definitely going to keep up my savings trend going.

  27. says

    Hmmmm…. Interesting thought. I don’t distinguish between the amount I regard as “emergency fund” and all the rest of my savings. However, I do keep the emergency fund–about enough to live on for a year–in safe, liquid form. To wit, in the bank.

    I don’t regard it as something that I can just spend, any more than one would just spend one’s retirement savings. The fact that it’s not in the stock market and so pulling it out isn’t a taxable event doesn’t make it any less a form of long-term savings. I see it as de facto disability insurance, should I be injured or fall ill and find myself unable to continue even the measly part-time jobs I’m taking in layoff-induced early retirement. Given the current volatility in the market, I would not feel safe investing this money in higher-earning instruments. They’re likely to be bigger-losing instruments.

    On the other hand, I do have a small fund of what I call “diddle-it-away savings,” to which I contribute each month from cash flow. This is what I use to cover things like clothes, the $700 pair of glasses I just had to buy, the $1,200 car maintenance bill, and the $450 bill the air-conditioning guy surprised me with last month.
    .-= Funny about Money´s last blog ..DIY Veterinary: The dog-proof hot-spot bandage =-.

  28. H Lee D says

    I see savings and emergency fund as two completely different things.

    As a budding triathlete, I’d like a road bike — my mountain bike is a drag. I would buy a bike out of savings. I would not buy a bike out of the emergency fund.

    When, at 31, I was diagnosed with cancer and missed 6 months of work, my husband and I were grateful to have an emergency fund because ends weren’t meeting.

      • H Lee D says

        Remission for 2.5 years :). Someday, we will have enough money saved or have a strong enough cash flow not to be concerned with an EF separate from savings, but when your gross income for 2 is $80K/ year, $100K in savings takes a long time.

        • says

          $100,000 was just a nice round number to use for illustrative purposes. Even $10,000, I’d treat the same.

          Congrats on remission! That’s great!

        • says

          $100,000 was just a nice round number to use for illustrative purposes. Even $10,000, I’d treat the same.

          Congrats on remission! That’s great!

  29. says

    I never heard of emergency funds before I started reading blogs. I suppose E funds are primarily intended for people who are in debt and need a buffer between them and their debt obligations if they lose their jobs.

    For those with savings and no debt, they might as well just use a credit card for their emergencies and then liquidate some savings to pay it off. That’s what I do. No real reason to have cash sitting idle unless it absolutely has to, say, if markets are overvalued.
    .-= Early Retirement Extreme´s last blog ..The value of reviewing bad books =-.

  30. says

    Those who use an emergency fund like you describe (to buy an iPad for example) don’t really have an emergency fund. They have a “I can spend X amount” fund.

    The point of the emergency fund is that it’s only to be touched in a true emergency. Using it for anything else defeats the point. Separating the money, I believe, helps to create a mental block that forces you to ask yourself “Is this a real emergency?”

  31. Aury (Thunderdrake) says

    I never really bought into the whole fallacy of emergency funding. Such dormant funding… That could be spun into the asset column, or worse still, get chiseled into via inflation! Oi!

    Given that I’m an avid gold and silver trader in my spare time, it always seemed more sensible to put my emergency funds in that, while enjoying the appreciation and hedge against inflation today. Enough to get me out of a jam, at the least. The rest I’d rather have backed into tax-haven dividend stocks.
    .-= Aury (Thunderdrake)´s last blog ..3 more things you can put in your hoard =-.

  32. says

    I don’t have a designated emergency fund account, but I do like to keep enough cash on hand in my savings account for 3 months living expenses (I am closer to two right now). I can always sell a stock if I am low as well.

    I don’t think saving for emergencies is a fallacy, but it is important to have the money available. I think we think alike on this one.
    .-= Eric´s last blog ..Ask The Readers: Student Loan or Savings =-.

  33. says

    I used to have this emergency fund until I realized having this kind of fund always end up either on emergency situations or emergency purchases. There is not much difference with emergency fund and my savings since if you ran out of emergency fund; your savings will be pulled out. Now, the part of my money that I don’t want to be used is invested in a time deposit account and not in savings account. This is one way keeping myself out of the fund.

  34. Norman says

    I do not have an emergency savings, just a savings account. The one account gets used for a multitude of things but mostly it doesn’t get used at all. I just keep adding to it. It may turn into an emergency fund if I’m ever unemployed. Mostly the term emergency fund is used to try to convince people to start saving instead of living paycheck to paycheck. Especially a young person just starting out, once you get them to start saving, not only will they be prepared for emergencies that come along, like a car repair bill, but they start getting it and realize that it is in their best interest to save for the long-term.

  35. Andrew says

    Interesting perspective, this is something I have thought about often. Like you, I personally do not make a distinction between my EF and other long term savings. It is liquid enough that I can get to it if I need it, and in the meantime it is earning more than if it were sitting in a bank savings or money market account. That said, I do think that personal finance is personal and some people might benefit more from drawing that distinction, especially if it can help break the debt cycle.

  36. Steve in W MA says

    The importance of subdividing your cash assets into different categories, such as emergency funds, car replacement funds, income replacement funds, etc, is that it gives you a better sense of what you can afford.

    I have savings categories in my budget for a number of “lumpy” expenses such as car repair, car replacement, clothing expenditures, and medical expenses/copays.

    I have an emergency fund that is about 2K dollars–for something completely unexpected that needs to be paid for. What would this expense be? I have no idea. Almost every other expense I can think of is accounted for and, to some degree, saved for, in my budget so it would have to be something unusual.

    Right after the emergency fund I have money put aside for replacing my everyday living expenses in the event of an interruption to my income.

    Right above that, I have savings for a house and savings for retirement.

    By having the whole sum divided up, and referring to the division of the funds as listed in my budget, it allows me to see what I can easily afford in any one category and avoids me dipping into funds that are reserved for emergencies, medical expenses, car repair, car replacement, or what have you, when I get the urge for that new Ipod or whatever.

    I carry these figures with me in my wallet so I can refer to them if necessary when I am out of the house.

    • says

      Sounds good Steve, and that makes a lot of sense. My suggestion is basically to encourage people to move BEYOND just thinking about an EF as it turns into a crutch. Once you get out of micromanaging your finances and shooting for true wealth creation, things really start happening.

  37. skrpune says

    I have to whole-heartedly disagree with other posters’ assessments of how people use emergency funds as crutches and excuses to buy. Anyone who does that or thinks of their EF as a crutch is just fiscally irresponsible, and they’d spend their money irresponsibly no matter what they called call the account.

    In my opinion, EF’s – when used properly – are more about making sure you can keep yourself afloat (and out of debt and with a roof over your head) during an extended unplanned “fiscal outage.” For me and my husband, we’ve got an EF that covers a full 6 months of expenses, and if we were to only lose one of our incomes, we’re covered for well over a year. My hubby works for a state uni in IL, and the state hasn’t been as good with their finances…knowing we have that EF set up gives me such peace of mind. Given that my husband is a professor in the sciences, and given that getting a prof position is a process that can take anywhere from 6-12+ months (academia moves SLOWLY), it’s imperative that we’re ready for that.

    Like a few other folks who have commented here, we have multiple savings accounts earmarked for different purposes. I set up a house fund (home repairs & savings for next purchase), car fund, tuition fund, fun fund, gift fund (x-mas & birthdays), and a newly created slush fund. That slush fund is going to act as our short term EF and a temporary holding spot for additional funds that can be allocated elsewhere (i.e., additional investments, extra mortgage/car payments) – this will help us get better returns in the long run than simply letting the money sit in checking or savings.

    Now I’m not trying to say that everyone needs to set up umpteen savings accounts for every category imaginable. But for me, it channels my obsessive compulsive tendencies into something that is positive, gives me & husband peace of mind, and allows me to do actually feel okay about spending money on “fun things” while not taking us off track of reaching our financial goals. Call your EF whatever you want – I just highly recommending having some sort of safety net so that an interruption in cash-flow doesn’t send you spiraling into debt.

    • says

      Setting up all sorts of emergency funds for this, this, that, and that is a bit too neurotic for me. One forgets to see the bigger picture. If you micromanage THAT much, you will surely be stressed out and start becoming a financial cripple.

      “Making sure you keep yourself afloat” is exactly the mindset I want people to get out of. If you keep thinking in emergency fund terms, you will never be able to truly work towards financial freedom.

  38. says

    I don’t discriminate between my dollars – aside from retirement savings and investing, I just have one big lump sum sitting in my savings account. I’ve never had something that I specifically call out and size as an emergency fund, my savings account has just always had over a year’s worth of living expenses in it.

    As I pay for business school though that savings account is going to be cleared out and I’m wondering how much of a margin I need to keep for safety – a true emergency fund I suppose.

    Either way, I think the commentors are right that the bigger problem is with the people, not the technique in and of itself.

    • says

      The people who are what breed this technique of thinking. It’s fine for the absolute basics, but if anybody plans on gaining true wealth, they’ve got to get out of this mindset.

      I enjoy the broke feeling. It’s thrilling so dot worry!

  39. says

    Ha ha. This is what I love about you, Sam. Thinking out loud. I used to have a knee jerk reaction to posts like this. But once I really think about it, it starts to make sense. I was divying up my savings the other day and thought, “what the heck, savings is savings. Just save the damn $$.” And then I relaxed and haven’t though about it since.

    Thanks for the thought provoking posts :-)

  40. Untemplater says

    I usually have most of my savings invested. I’ve kept my cash inflow liquid this year though because CD rates are crap right now. And luckily I’m quite disciplined and not tempted to spend it.

  41. JR Rosales says

    What if there is no emergency fund but have mutual funds and some properties? Would that be fine?

  42. says

    I think having an emergency fund is a great first step (a crutch). As you expressed, for those of us that have advanced, it’s best to not consider it a separate fund, but one large amount of savings that should be reinvested.

  43. Spencer says

    Hi Financial Samurai. I first want to say that I recently discovered your blog (about a week ago) and find myself sifting through pages of this for hours at a time – your stuff is great.

    I graduated last year in 2014 and have been working at my first job at an insurance company in the Bay Area for a little over half a year. Once I started bringing in “real” paychecks for the first time in my life everyone close to me (parents, friends, etc) and just about anyone else’s personal finance opinion will tell you that the first thing you need to do is BUILD AN EMERGENCY FUND. I was curious what your take was on the subject because I’ve already grown to really like your content and respect your opinion…which led me to this article.

    I fully understand and agree with your argument but there’s no denying the fact everyone must have a certain level of liquid assets for that “rainy day” that many have mentioned in previous comments.

    It seems to me that the way to look at this is the way that all insurance companies view and handle it. Insurance companies are in the business of saving for a rainy day, particularly YOUR (the customer’s) rainy day. They are also in the business of making money – if they aren’t you probably don’t want their insurance. Insurance companies are unique in that they are one of the few services that gets your money before you get what you paid for (and hopefully you never will!) so they naturally sit on a giant pile of cash. Obviously they would like to invest it and put it to work. However, it is good practice (and all states have certain requirements) to have a certain level of reserves in order to pay out claims as people crash their cars, there are earthquakes, etc.

    While the personal finance/emergency fund side of it is far less complex the theoretical concept is the same – we all want to put as much of our hard-earned cash to work as possible but retain enough liquidity to cover unexpected expenses in the short-term. It’s less about segregating your Benjamins and more about making sure there are just enough of them that are just close enough by to cover your expense fluctuations and/or unexpected events.

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