FI Personal Finance

You Don’t Need an Emergency Fund (You Need an Emergency Plan)

Our emergency fund balance: $0!

Disclaimers

  • I’m a FI enthusiast—not a certified expert. This article is for information only, and should not be taken as financial advice.
  • My emergency fund strategy is not appropriate for everyone. You should be well-educated in personal finance and on your way to financial security before considering such a strategy.
  • If you’re new to personal finance, are in debt, or in any way financially insecure, a 3–12 month emergency fund is a wise financial move. In these situations, do not rely on any form of credit for emergencies.


This post was last updated in June 2020.

We don’t have an emergency fund

Yep, you read that correctly—we don’t have an emergency fund. Am I a risk-taking daredevil? A free spirit who believes the universe will provide? Actually, I’m neither.

In truth, I’m pragmatic and careful with our finances. I’d never do anything to put my family at risk. So how am I protecting us?

A plan instead of a fund

Instead of an emergency fund, we have an emergency plan (more on this to follow).

First, I’ll explain why we’ve gone against the standard advice from the “experts” (I think many of you in the FI community will relate):

  1. I’m unconventional: I don’t blindly follow mainstream thinking. I always question the “norm” and look for ways to make things work in my own situation.
  2. I’m a hyper-optimizer: I want our money to always be working for us. The opportunity cost of having cash sitting around “just in case” really, really bothers me.
  3. I’m highly risk tolerant: When I know what I’m doing, and I’ve mitigated the risks, there’s no reason to be fearful.
  4. I know our expenses well: Having some life experience (I’m 40), I have a good feel for when and how often various large expenses might happen, and how much they’ll cost. This gives me a lot of leeway when planning for them.
  5. I’ve educated myself: I never just jump into big decisions. I took the time to research and learn about how others deal with their emergency funds. Due to that, I’m fully confident that I’m making the right choice.

So… who inspired our $0 emergency fund?

In my research for having no emergency fund, I came across several excellent articles on this topic. Not surprisingly, these articles were written by FI bloggers. (I guess quirky minds think alike!)

Mr. Money Mustache

MMM’s Springy Debt Instead of a Cash Cushion was what first inspired me to look into this topic. In the article, he suggests using credit cards and an LOC (line of credit) as emergency funds. While innovative and intriguing, this approach felt a little risky to me. So I kept digging.

Early Retirement Now

I next stumbled across Big Ern’s series of articles about their $0.00 emergency fund. This was what I was looking for! Big Ern not only counted credit cards and a HELOC as his emergency fund, but also his paycheques and brokerage accounts.

Bingo! If a smartypants like Big Ern thinks this is a good plan, we’re definitely on to something. But of course—I’m meand I want to research all the info before I make a big decision. So I went ahead and clicked through the other links in Big Ern’s article:

Alternative emergency funds

Why I think the “Emergency Fund” is a scam: Unchained55 compares saving an emergency fund in a savings account with investing it in mutual funds (with a HELOC as backup). I think you can guess which approach comes out ahead, but I’ll let you read the article yourself!

Emergency Fund Alternatives: The Green Swan also advocates for a combination of investments and loans for emergency funds.

A Layoff, an Emergency Fund, and a Martin Guitar: Be Net Worthy used severance pay, a HELOC, and unemployment benefits to cover his family’s expenses after a layoff.

With all that factual evidence against having a cash savings emergency fund, it was easy for me to get fully on board.

Making a plan

Since we already didn’t have a cash savings emergency fund, I didn’t need to change anything. Still, I knew I needed to do more than simply make the decision—I needed a proper plan.

A plan would not only serve as a record for me to refer back to (when I’d inevitably forget the reasons for this decision), but also to help me solidify my understanding.

For this, I turned to my favourite notebook/journal/brain dump1: Evernote. Below is what I wrote in that Evernote, with some commentary added for clarity and further detail. 

For even more helpful info, click on the little superscript numbers like this one2.

$0 emergency fund—my rationale/plan

I choose not to have a nebulous emergency fund for unknown future emergencies. Instead, we have an emergency plan.

Here’s my detailed rationale for our $0 emergency fund, and a plan for how to handle the emergencies:

What kinds of emergencies could we encounter?

First I need to know what we’re planning for. Otherwise, I’m just guessing! Our emergencies can be broken down into two main categories:

1. Loss of income:

  • Job loss.
  • Serious injury or illness.

2. Unexpected expenses:

  • Major home expenses.
  • Major car expenses.
  • Lawsuits (rare, especially in Canada—but you still have to mitigate the risks).

How we’re covered for loss of income

  1. Steady job: M’s a hard-working, well-liked, and respected employee. His job is also relatively stable—so job loss is highly unlikely.
  2. Severance pay: If M was laid off, he’d receive severance pay of one month per year of employment. At 15+ years of employment, we’d be well-covered.
  3. Government employment insurance: If M was still unemployed once his severance ended, he’d receive EI. While it’s not much, it would cover some of our expenses.
  4. House hacking: We’d continue hosting students, and could increase our efforts to host more students, more frequently.
  5. Go back to work: I’d be happy to swap with M and go back to work3 so he could stay home with the kids. 
  6. Insurance: We have life insurance, and M has good disability insurance at work.
  7. Universal healthcare: Fortunately, we’re Canadian—so we don’t have to worry about most healthcare costs.
  8. Family support: If I was the one who was injured or ill, M could keep working because we have plenty of family nearby to help with getting the kids to school and other day-to-day stuff.

How we’re covered for unexpected expenses

  • Insurance: We have home and car insurance to cover what we can’t afford to replace.
  • Personal liability coverage: Our home and car insurance includes personal liability coverage in case someone sues us.
  • YNAB categories: This is the closest thing we have to a cash emergency fund. I use categories in YNAB to save towards unexpected home and car expenses.4 These categories are essentially super-efficient, mini emergency funds.5

Note: I don’t include large expenses (e.g. new roof or car) in this plan because they’re typically not ’emergencies’. They tend to be pretty predictable—you can see them coming years ahead. I’ll write about my plan to deal with these large expenses in a future article.

Accessing cash in an emergency

We have a variety of options for quickly accessing cash in an emergency:

No-cost options

  1. Regular cash flow: The excess cash we’d normally send to investments could temporarily be redirected to emergency expenses.
  2. YNAB categories: Each month, we put money aside for annual expenses such as insurance, property tax, investments, vacations, etc. In an emergency, we could easily pull the cash from these categories since not all of it is needed right away. We’d need to replenish the money eventually, but it could tide us over for several months.
  3. Credit cards: M and I each have several, and they could be used as one-month interest-free ‘loans’.
  4. US cash: We keep some in a savings account for our US travels and expenditures. We could easily and cheaply exchange this cash for Canadian dollars6.
  5. Discretionary spending: We could easily cut all discretionary spending (clothing, home improvement, dining out) until the emergency is over and paid for.

“Some cost” options

  1. Sell our investments: We could liquidate investments in our taxable accounts for cash within a few days.
  2. Sell the kids’ investments: Our kids have their own taxable investment accounts7, which we could also liquidate. (We’d pay them back, with interest, later.)
  3. Use our personal LOCs: It’s not cheap, but it’s not exorbitant either. And it’s readily accessible—a good backup if all else fails.

How to “safely” use an LOC as part of an emergency plan

Our LOCs are the most risky part of this plan, and deserves further explanation. It makes sense for us to use LOCs as part of our emergency plan because:

  • Even if we were to use the LOC and pay some interest, we’d still be further ahead by investing our emergency fund instead of keeping it in a savings account. (See Unchained55’s excellent article for a thorough analysis.)
  • The LOC is only there for TRUE emergencies (which are statistically rare). With all the other backups in place, it’s unlikely we’d actually need to use it.
  • Having an LOC gives us peace of mind—we know there’s a stash of cash that we can access quickly and easily.
  • LOC interest is nothing to scoff at, but it’s low enough that it’s reasonable for temporary use.

So… that’s our emergency plan!

Our emergency plan is infinitely more flexible and productive than an emergency fund. I know our bases are covered, I have a document to refer to when the you-know-what hits the fan, and as a result, I have complete peace of mind.

What are your thoughts?

Do you have an emergency fund, or an emergency plan? Why or why not?

COVID-19 update

In the midst of the COVID-19 pandemic, I thought it’d be a good idea to stress test our emergency plan. Did it hold up? Read my follow-up post to find out!

Follow-up post: Would Our Emergency Plan Hold up to COVID-19?

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26 Comments

  • Reply
    Teresa
    February 4, 2019 at 10:39 am

    Hi Chrissy, That is great information about 0 emergency fund. While I am retired so cannot compare myself to all the young people that will benefit from your blog, I must say that I enjoy following it. My husband and I were self employed and a successful team at business but we had an LOC that we could always rely on if our business went through any downturn. In 40+ years, we never had to draw on it. Now that we are retired, I still have that LOC open just in case. I used Ynab to track my expenses for a couple of years when planning for our retirement – that is a great tool for anyone at any stage in life.

  • Reply
    Chrissy
    February 4, 2019 at 11:40 am

    Hi Teresa,

    Thanks for sharing your wisdom from a retired person’s perspective. It’s helpful for those of us not yet at FI to hear from people who’ve made it to the other side!

    Glad to hear about your experience with an LOC. As someone who’s very averse to consumer debt, it’s comforting to know that it’s possible to keep the LOC as a backup only—and that it’ll likely never need to be deployed.

    Like you, I love YNAB and can’t see myself ever stopping using it! Thanks again for your help comment!

  • Reply
    Money Mechanic
    February 4, 2019 at 5:22 pm

    I think the further one is on the journey to FI, the less important the traditional emergency fund is. I like the concept of an emergency plan instead. We technically don’t have an emergency fund, but we do maintain a balance in TD so that all our accounts and credit cards are free. It would cover us for 2 months if necessary. I’ve also started a separate account at EQ bank that is funded monthly to capture our bigger annual bills. I used to keep that cash in my business account, but there it truly does earn 0%!!!

    • Reply
      Chrissy
      February 4, 2019 at 10:50 pm

      Hey MM, you’re totally right. I never considered that yes—this emergency plan of ours is better suited to those who are further along. In the beginning, many of us would be wise to have a bucket of free and clear cash to access. Thanks for pointing that out. It should like you’ve got a good plan in place. I also love EQ!

  • Reply
    T on FIRE
    February 6, 2019 at 7:42 am

    I enjoyed this post. I’m now thinking much more critically about the concept of the emergency fund. I often fret about my emergency fund for the same reason you did. I don’t like the idea that it’s just sitting there, making 1.5% interest, when it could be working harder for me. Paying off debt, being invested. That said, my no-cost cash flow options aren’t as numerous as yours (YET) so maybe I need to do a tally and figure out my own plan.

    • Reply
      Chrissy
      February 6, 2019 at 8:46 pm

      Great minds think alike, right? 😉 I knew there’d be others like me, wanting a more optimized approach to their emergency fund. Thanks for commenting T—I’d love to hear what you decide to do.

      • T on FIRE
        February 11, 2019 at 7:12 am

        I’ve decided to leave 1k in my Emergency fund until my sinking funds are fully funded. The excess (about $600) will be put on debt so it’s working a bit harder for me! ALSO I found a better savings option with EQ bank, so my plan is to move the 1k over there to make me feel slightly better. Thanks for the idea.

      • Chrissy
        February 11, 2019 at 9:05 am

        I love EQ as well! The money I set aside each month in my YNAB categories stays at EQ until I pay for the expense. You can’t beat their 2.3% rate, plus the amazing perk that you can use the account to pay bills directly.

      • T on FIRE
        February 11, 2019 at 9:38 am

        I’ve been thinking about moving my sinking funds in there too once funded. Great minds CLEARLY do think alike. Haha!

  • Reply
    Financial Tortoise
    February 6, 2019 at 6:33 pm

    Thanks Chrissy for sharing! Really enjoyed your take on the emergency fund topic. Made me rethink how my wife and I’ve approached our own emergency fund. We’ve always followed the traditional recommendation of saving at least 3 month of cash but thinking about it now, we hardly touched this money the last few years. It just sat there making 0.5% interest. Your approach forces us think comprehensively about our unique situation and to develop an appropriate plan instead of blindly following a generic advice. Thanks!

    • Reply
      Chrissy
      February 6, 2019 at 8:53 pm

      Hi there Tae!

      It sounds like you’ve done a great job with your money management to this point. But it’s always good to pause and see if it’s time to change things up.

      One of the things I love about the FI community is how normal it is to question the norm! And then we find a new, more-optimized way to do things.

      Thanks for coming by to comment. I look forward to following your blog!

  • Reply
    RCC
    February 9, 2019 at 8:32 pm

    I’m glad to read about something I resonate with so well. All this time I’ve never had an emergency fund – I’ve relied on insurance and a HELOC at the ready in case things get dire. You’ve laid out a simple but informative post confirming my own assumptions. Thanks.

    • Reply
      Chrissy
      February 9, 2019 at 8:43 pm

      Hi RCC,

      I love your comment! Putting out potentially controversial articles like this is a little nerve- wracking for me.

      Knowing there are others out there who think like me makes it all worth it! Thanks for taking the time to comment. You made my day!

      Chrissy

  • Reply
    Andrew Marshall
    February 14, 2019 at 6:39 pm

    Love those benefits that M gets at work! One month severance per year worked? Incredible. Two weeks in the US, no matter how long you have worked there.

    Interesting idea about the Categories. Sounds like you would just be rearranging your priorities in an emergency. Forget the new car, spend it on what you need most. Main point is you have some savings, you are not at absolute zero and spend very paycheck.

    Good writing by the way. I enjoy your style.

    • Reply
      Chrissy
      February 14, 2019 at 9:03 pm

      Hi Andrew,

      M’s really lucky—we’re very aware that few companies, American or Canadian, offer such a generous severance package. His company is amazing—that’s why he’s been there as long as he has!

      Thanks for all your kind words. Made my day!

      Chrissy

  • Reply
    Greg at RetireBy36
    February 24, 2019 at 9:53 am

    Chrissy,

    I loved this post! Thanks for summarizing some of the other well respected bloggers opinions as well. I’ve always been a Dave Ramsey follower but have diverged from his plan when it comes to emergency funds. In my opinion, an emergency fund is a useful tool for the type of person that wants a “set it and forget it” personal finance plan. On the other hand, those of us that are more interested in personal finance can come up with more efficient use of that emergency fund cash and still have a plan if things go sideways.

    How much do you leave in your checking account at any given time to cover unexpected monthly expenses? I would consider this a micro-emergency fund to cover things such as a minor car repair.

    When you say that you use a taxable investment account as an emergency fund, do you mean a non-retirement account? Personally, I keep my “emergency fund” in an SP-500 tracking index fund in a non-retirement investment account. I’m wondering if you do that same.

    Thanks!
    Greg

    • Reply
      Chrissy
      February 24, 2019 at 3:28 pm

      Aww, thanks for your kind words Greg! To answer your questions:

      In our savings accounts: I generally keep a $3,000-ish float that’s comprised of monthly savings for annual expenses like car, home, and life insurance. Then we have another $5,000 or so that’s slowly saved up for vacations.

      Cash that didn’t get spent from the prior month goes into the “investments” category. I let that grow to about $5,000 then I dump it into whichever account we need to top up.

      I budget $50/month in each of my house and car maintenance categories—these would be the micro emergency funds you mentioned. We’ll have months where none of it gets used (I let it roll over month-to-month) and months where we go over. We rarely go over, but if we do, I just skim some from the investments category.

      Yes, the taxable accounts are our non-retirement accounts, and we invest those funds half in a Canadian broad-market fund and half in an S&P 500 fund.

      Thanks for your thoughtful comment. I love discussing stuff like this with like-minded people!

  • Reply
    Greg @ Retireby36.com
    February 24, 2019 at 9:57 pm

    You’re welcome! Thanks for sharing the additional information. 🙂 I don’t typically budget out individual expenses (car, house, etc). Currently, I just break out my expenses on a monthly basis into fixed (rent, gas, car insurance, etc) and non-fixed (everything else). As long as I stay under my fixed and non-fixed budgets, and hit my savings goal for the month, I’m happy. I like your idea of using monthly saving for annual expenses as an emergency fund. I’m going to look into that idea! Thanks!

  • Reply
    Liz
    May 21, 2020 at 10:07 pm

    Great post! Love the concrete-ness of it with the backup financial sources you provide as your emergency fund. And your reasoning makes total sense! I feel the same. Since we recently moved across the Atlantic I kept a rather large cash flow because who knew what to expect with an international move. But now that we are settling in and better understand our month to month expenses I will reinvest the chunk of cash. Your post reminded/inspired me to do so! Thanks!

    • Reply
      Chrissy
      May 21, 2020 at 10:51 pm

      Hi Liz—thanks for the great feedback! I know this approach doesn’t work for everyone. But for me, it felt better to be very concrete and intentional.

      That way, I knew we were covered, but also weren’t leaving cash on the table, doing nothing.

      If we had a major life change as you did, I definitely would hold onto more cash. It’s always comforting and smart to have more cash in uncertain times.

      I appreciate the comment! Thanks for taking the time to share your thoughts.

  • Reply
    Maggie
    May 22, 2020 at 6:47 am

    Hi Chrissy! I’ve been wondering if/how you’ve been rethinking your emergency plan since the start of the global pandemic? My strategy has been to take a chunk of my vacation fund and budget info living expenses in YNAB, prefunding as many months ahead as possible. Honestly I think YNAB is the only thing keeping me sane these days 😛

    • Reply
      Chrissy
      May 22, 2020 at 8:42 pm

      Hi Maggie—I am totally on the YNAB bandwagon, and suspect I will be for life! It is SO great for situations like this, where it’s helpful to round up all the cash that’s not imminently needed.

      I have done the same as you and have cleared out our vacation, entertainment, and other discretionary categories to prefund three months ahead. (In non-pandemic times, I’m more cash-averse and try to avoid funding more than a month ahead, so this is a big change for me!)

      It sounds like we’re on the same page!

  • Reply
    Alain Guillot
    May 29, 2020 at 7:26 am

    I had an emergency plan, instead of an emergency fund, just like you, for over 10 years, but then I found myself exceeding my savings objective several consecutive years. Finally, I decided that I didn’t have to optimize 100% of my life, so I allowed some cash to build up in my checking account. The cash has built up to about 4-6 months of living expenses.

    In a difficult time of our lives as Covid-19, it gives me a lot of security to see that cash sitting in my checking account, doing nothing. It’s very much worth the opportunity cost. It’s like having a spare tire in the trunk of the car. You have many alternatives if you get a flat tire, but it’s nice to know it’s there and worth carrying the extra weight.

    • Reply
      Chrissy
      May 31, 2020 at 10:12 pm

      Hi Alain—you are in an enviable position. Few people exceed their savings goals as you have! I think it’s important for all of us to manage our finances in a way that works for us and that we’re comfortable with, and it sounds like you’ve done exactly that!

      I absolutely agree that it’s comforting to have extra cash right now, with all the uncertainty. Even I (normally uncomfortable with a lot of cash) am willing to hold a little more! Thank you for sharing your personal experience and insight. I’m sure it will be helpful to others.

  • Reply
    [email protected]
    November 28, 2020 at 11:01 am

    Interesting post and comments. Plenty of food for thought. I’ve reduced my EF to £3k which equates to just over three months of outgoings. It was over £12k a few years ago and I felt excited that I had a full year’s worth of expenses in cash. A couple of big holidays helped bring my EF back down to Earth.

    It’s a great point you’ve made that if you’re well along your journey to FIREing you’re in a better position to consider not having a large amount of cash laying around earning next to no interest. It’s a real head v heart decision with me. My heart loves having that little pot of cash around. It’s comforting. My head is telling me that I don’t need it. I’m mortgage free and financially incredibly secure. In a real emergency I can liquidate funds in my S&S ISA. What I lose in transaction fees will have been more than covered by growth as emergencies tend to be rare. Although I’ve been working where I am for 17 years, my difficulties in dealing with office politics keep me pessimistic about my job security. So that tends to influence my choice to keep cash in an EF.

    Because I’m so frugal I tend to have cash sloshing around in my current account anyway (again – a heart thing). Our fridge freezer went kaput a couple of weeks ago and I was able to pay my half for a new one with unallocated cash from my current account. In fact I was also able to top my EF in the same month.

    Just imagining myself not having a cash EF makes me feel naked and anxious. I shall delve into the links as ‘I know’ I don’t need an EF. My heart needs reassuring and will only be becalmed by such a decision on sight of plenty of evidence that my head can understand.

    • Reply
      Chrissy
      December 1, 2020 at 4:55 pm

      Hello [email protected]—emergency funds are a very personal topic. Oftentimes, it has just as much to do with your personality and comfort level as it does with math. As you say, it’s head versus heart!

      IMO, there’s no right or wrong; just what’s right for you and your situation. Don’t let me or anyone else convince you to do something that leaves you feeling naked and anxious. It sounds like you know yourself very well. That awareness is important and the “sleep at night” factor cannot be ignored.

      Based on how much time and thought you’re putting into this, I have no doubt you’ll make the best decision for your personal situation. I’d love to know what you ultimately decide!

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