According to my painstaking calculations, approximately 5,029,391 hours have been spent discussing emergency funds on the internet. Most of this is from personal finance bloggers, collectively the lamest group of people on the planet outside of 9/11 truthers. Jet fuel doesn’t melt steel beams, man.
Everybody has a take on the lowly emergency fund. Most people tend to think that between three and six months worth of expenses is an optimal amount of cash to have on hand. This covers against all sorts of emergencies, especially the one people tend to worry about the most — job loss. Unless you’re Jared Fogle’s business partner (mildly topical!), you should be able to find gainful employment after three months. Besides, if you don’t, that’s usually when unemployment benefits start to kick in.
Other brave soldiers have the audacity to say you don’t need an emergency fund. I’ve touched on the subject on this here blog a couple of different times. Robb from Boomer and Echo argues that multiple income streams are the new emergency fund, since they’ll still be there once your boss finally gets tired of yo’ ugly face.
Those of us who are anti-emergency fund think something like this. Especially when you’re first starting out, having thousands of dollars sitting in the bank earning less than 1% annually is silly. It’s doubly silly when you’re sitting on high interest credit card debt or even reasonably priced student loan or auto loan debt. These people simply can’t afford to have money sitting around doing nothing. They don’t have enough of it. Every dollar possible needs to be out there earning more dollars.
Think of the big things people say they need their emergency fund for. Things like auto care, medical care, and emergency travel are usually mentioned, along with the aforementioned job loss. These are legitimate expenses, except a) they’re typically insured against and b) they don’t cost more than a few hundred dollars, maybe $1,000 at the most.
Besides, the idea of a one-size-fits-all emergency fund is stupid. The difference in job security between a teacher and a porn star is huge. These people should be looking at their finances in very different ways.
I used to be so anti-emergency fund that I advocated leaving barely anything in cash. Who cares if something came up, I said, because you always had credit. You could use your credit card to pay for the car repair or whatever, and then sell an investment to pay off the credit card.
I’m still a fan of that process today, because hey, if you’re going to have to spend a bunch of money on some crap, you should at least get some credit card rewards points for it. But instead of selling off an investment, I’m going to give you emergency fund lovers (get a room, you two!) a break. Here’s why a $1000 emergency fund is the ticket.
A nice balance
One of the things I failed to understand about the emergency fund is the security it brings folks.
I have multiple sources of income, just like Robb suggested. I have different investments I could easily sell to pay for something that came up. And I even make it a habit to keep approximately 1-2% of my portfolio in cash, which at this point is quite a bit more than $1000. These days, that number is approaching 5%, actually, since I’m not finding many attractive investment opportunities.
But for the person who doesn’t have multiple income streams or investments they can sell off, the $1000 emergency fund is a nice blend of planning for the you-know-what to hit the fan, yet not putting themselves in a spot where they have 50 or 100% of their net worth earning bugger all each year.
There aren’t many expenses that will cost you more than $1000 that aren’t insured against. Most car repairs can be done for under $1000, especially if you make prudent moves like shopping around once you get the quote from your mechanic. Most people have insurance that covers the majority of emergency medical and dental work. And unless you live in Timbuktu, you can fly home on short notice for $1000.
The $1000 emergency fund allows you the freedom pay for most issues, plus it gives a nice sense of security. Because you don’t really want to sell investments, especially if you’re stuffing all of your investment dollars in registered accounts. It’s a nice blend of having enough set aside, but not too much.
Now that we’ve settled this forever, I trust the personal finance world will shut up about it, right? Guys?