Do I really need an emergency fund?

November 20, 2013
Our income is 99% secure. Is it ok NOT to keep 5-6 months of cash available?

Advisor answers

It sounds like you know the answer to the question, but want to find someone to give you the answer you want to hear.

You mention that you have income that is 99% secure. What does that mean? Are you self-employed? Do you work for a family owned company? Do you work for the government? How long have you worked where you do now?

I absolutely believe an emergency fund is required as part of any plan. Why? What would happen if the 1% you left open occurred? Would you be able to p...

Even if your income is 99% secure, there are other "emergencies" that come up that might go beyond your income stream. For example, insurance deductibles, unexpected repair (you know those pesky water heaters rarely send out an email telling you they are about to die), or let's look at the positive side-an unanticipated opportunity. Having liquid assets is not a bad thing, it's finding the 'comfort zone' for the right number. Some people will feel, especially during a time when the stock markets are rising, that they have ...

The "rule of thumb" is to maintain an emergency fund equal to between three and six months of income. Here is my rule of thumb: "There IS no rule of thumb".

As your question implies, an emergency fund which traditionally has been held in cash equivalents (money market mutual funds, bank savings, etc) earns close to 0% interest, and is therefore losing value in real terms every year. It hasn't always been like this, but currently cash equivalents earn less than the rate of inflation. In a 3% infl...

Life throws you curve balls, sometimes when you least expect it. If you have a adequate cash reserve you'll be able to easily hit the curve. Keep 3-6 months in reserve. Unless you have guaranteed income that increases each year with inflation and can live on 80% of your income and can pay for all of the improvements/fixes/replacements in your life out of normal cashflow, you should have a cash reserve. This is the first building block to financial freedom.

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James Kinney

James Kinney

CCPS, CFP®

I agree with James.

It IS important to have access to emergency funds that are liquid. And that should be at least 5-6 months expenses. But while traditional advice has been that should be in a money market or savings account, traditional advice did not know about today's .000005% interest rates.

I am therefore fine (as James indicated) if people want to put some of their emergency funds into a conservative sleeve in their investment account so at least they can earn something on their money. There are fe...

Guy Baker

Guy Baker

AEP, CFP®, CLU, ChFC

No - you never know. I would have at least 6 months - even if your income is secure. But it is great you are asking. You could put it in something that earns more and is a bit illiquid - life insurance cash values, a good annuity? Keep out a little, in case.

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