Why I (Still) Don’t Have an Emergency Fund (Emergency Fund Series Part 1)

Someone from Money reached out to me about my ‘Why I Have No Emergency Fund’ post (I know, I’m shocked someone reads this blog too) referring to their article about high-interest savings accounts (https://money.com/best-high-yield-savings-accounts/ if you’re interested – it really is a good explainer of some pros and cons for high-interest savings). Basically, the question is why I don’t have funds parked in a high-interest vehicle. I’ll try to answer that here, but my basic answer hasn’t changed from my first post. TL;DR version: inflation kills savings. 

Very long; please read (VL;PR?) version: I still have lots of reasons not to park funds. Because this is a long and fraught conversation I’ll break it up into two parts. This part will be reasons not to have an emergency fund and the next part will cover what to do instead (Part 2 is here when it becomes available). On to the reasoning! 

Ultimately, I have three reasons not to have an emergency fund: money efficiency, the nature of emergency, and the PITA factor. Money efficiency first. Quite simply, it doesn’t make any damn sense to be paying interest on debt while also warehousing cash (except in very specific circumstances I’ll cover in Part 2). Even paying off mortgage debt at 3% (and I’m loathe to pay off mortgage debt in almost any case) would be better than saving any meaningful amount of money at 0.8% (or particularly at my bank’s current 0.01% rate). By all means keep a small ($1,000 or so) amount of cash on hand to cover any gaps, but more than that is a waste. It is helpful to have some cash to cover short-term needs, because money transferred between institutions can take 3-5 business days to post, but if you need more than $1K you’re likely going to be making other changes to minimize expenses (see the next point) or will need to draw down your investments. The standard 3-6 months of expenses in cash decaying in a bank account is hugely wasteful – CUT IT OUT!!!!

But what do I do with it if it’s not in a savings account? I stick mine in the market (more on that in Part 2). Yes, this is a risk – there’s a chance you can lose some of your principal to the market. However, I balance that risk against the certainty that your money will decay in a savings account (or similar more-secure vehicle like a money market account or a CD). If you’re earning 1% and inflation is 3% you’re losing 2% no matter what. Weigh that against the possibility that funds in a broad-based market fund will go down enough to erode your principal in the time it takes to (possibly) have to use the money. I would much rather take market earnings even at the risk of a loss while my money sits waiting for me to have an emergency. If you’ve got $5K in emergency funds and they grow at 7% per year for 5 years you’ll have $7,088. In order to have ‘lost’ principal at that point you’ll need to have to withdraw the money, and the market will need to drop about 30% when you need to make your withdrawal (so the withdrawn balance after growth minus the market drop is less than your initial principal). More likely, even with the market dropping precipitously you’ll be able to take out your principal and still have a bit left over. But what causes you to have to take out the money? That brings us to the nature of emergency. 

So what do I mean by the nature of emergency? Well, what is an emergency fund supposed to be solving for? Emergency funds are usually described as being for large structural shocks to your economic life – serious illness, job loss, pandemic, etc. My contention is that saving cash (other than a nominal amount as described above) won’t be very helpful in that situation. 

Yes, it’s highly recommended to have accessible assets (and more on that in Part 2) but if you don’t have one of those structural shocks you’ve not only wasted the money you’ve saved in a an account earning nothing, you’ve sacrificed the earnings any of that money could have made (the opportunity cost). If you have, let’s say, $50K in an account earning 0.8%, you’ll have $52,039.85 at the end of 5 years. That same $50K earning 7% in the market (the historical average – I know, who made up that number? I dunno, but they did) will have grown to $70,127.59 (depending on the assumptions on the calculator you’re using). 

Beyond just the amount of growth you waste keeping cash, there’s also the ‘will it help in the end’ factor. If you go through a job loss, is everything else going to stay the same? Same phone bill, cable package, car payment, etc? Probably not. If you go through one of these structural shocks you should be re-writing your life to accommodate the changed circumstances. You can’t possibly know now how much money you’ll need after-shock. So, you can’t plan with certainty. Better to have flexible, growing pools of money and income you can draw on if/as needed. (NOTE: this is all out the window if you’re already retired, but I’m not, so I haven’t spent a whole ton of time gaming that out. The answers will change when nearing/at retirement.) 

Finally, what do I mean by the PITA factor? Moving money from account to account chasing high yields (and complying with their no-fee requirements) is just a pain in the ass and, as shown above, for zero gain. You’re just picking which bank you’d like to enjoy your money while it becomes less valuable with inflation. If you’re shunting $30K around from bank to bank month to month, not only are you limiting the time your money is actually earning interest (because banks are for sure not posting those funds and giving you interest instantaneously) but you also have to track it, monitor the rates, fulfill their other requirements, and deal with bank errors when they crop up (which happens fuh-requently). Better to just do a thing and stick with it – so much easier. 

So there you have it. Part 1 complete. Part 2 will cover my personal solution to the above, particularly as a real estate investor. If you think I’m wrong, or mean, or smell funny I’d love to know! Just put it in the comments down below.