By Dr. Peter Kim of MD Passive IncomeWCI network partner
Before I start, I wanted to include a little disclaimer: every situation is different and what works for me may not work for everyone. I crunched the numbers and found that an emergency fund isn’t best for me. Will it be the same for you? This is what you will have to decide for yourself. With that in mind, let’s dive into it.
What exactly is an emergency fund?
As you probably know, a emergency fund is meant to be a buffer for unexpected costs or bumps on the highway of life. These could include the following (all are things I’ve experienced):
- Unforeseen health costs: Like an emergency room visit for broken bones or suspected appendicitis
- Car problems: flat tire, broken windshield, etc.
- Unexpected house problems: roof leak, broken pipes and subsequent flooding
- Unforeseen costs for animals: my dog inhaled foxtail, and it took a $1,200 procedure to remove it
- Job Loss: In fact, I’ve never experienced this, but I know it’s a reality for many people.
Given how devastating unexpected events like these can be for an unsuspecting family, most financial experts (like Dave Ramsey) recommend that your emergency fund should cover 3-6 months of full expenses. The exact number of months depends on the stability of your job, your dual income and your state of health. Suze Orman even advocates eight months of full expenses.
Now I’ve read Dave Ramsey’s Total Money Transformation. In fact, I recommend most people read it. After reading it at the end of my training, I built up a large emergency fund and was confident in my ability to weather any storm.
So . . . I watched that money sitting there doing nothing. All I could think about was how much of his potential he was wasting.
I started wondering if having an emergency fund was really the right thing for me. I’ve decided to do some more in-depth analysis, and spoiler alert, I’ve decided not to use the emergency fund.
More information here:
Why I feel like I don’t need an emergency fund
Here are the considerations that motivated my decision:
- We are a family with two incomes: I work a little less than full time. My wife is a doctor, and even though she only works part-time now, I know that in a pinch, we could both work more.
- Late payment for work: In terms of billing, I get paid with a two-month lag. For example, on March 1, I get paid for what I did for the whole month of January. There is almost always a lag between service, billing and collection. So I know that if something happens, I’ll always have a paycheck for the work I’ve already done.
- Disability insurance: Not only does it cover 30% of my current income tax-free, but I also added a partial disability rider. If I suffer a drop in income of more than 15% due to disability or injury, after 90 days my insurance company will start paying me to make up the difference.
- Passive income: Of course, this is a big problem for me. I win passive income from other sources, which currently covers more than half of my expenses.
- Home equity line of credit: I opened a HELOC which is maintained for only $75 per year. If I were to use it in a pinch, it could cover 10-12 months of expenses.
- I’m pretty good at selling things online: If it really came down to that, I could sell some of my stuff through eBay, Craigslist, and FB. I’ll start with some of my wife’s pretty handbags (shh, don’t tell her).
- Opportunity cost: It’s a big. Sure, I could have funds in a high-yield savings account like Ally, but with an average annual inflation rate of 3%, a 1% return just isn’t good enough. I wanted to put that money to work.
More information here:
Why I used that money instead
When something unexpected happens, like that $1,200 procedure when my dog inadvertently sniffed something up his nose (which happened twice, by the way), I put it on my credit card. The next month, I’m able to pay it off in full as my paycheck comes in. I’m lucky to have a buffer and not live paycheck after paycheck, and I still pay off my credit card in full every month. If the worst case scenario occurs and the expense is very large, I could tap into one of the resources mentioned above, like my HELOC.
In the end, this is just one situation where I decided that conventional wisdom just wasn’t right for my particular situation. Of course, I believe you have to be prepared for life’s unforeseen circumstances. After all, the only thing we can rely on is that life is unpredictable.
I say, make sure you’re prepared for an emergency, but do it in a way that makes sense.
Has anyone else wiped out their emergency fund? Does anyone think I’m not smart about this? Comments below!