- 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):
- 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.
- 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.
- 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.
- 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.
- 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 me—and 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 dump[note]I always make Evernotes when I’m learning something new or making a big decision. It’s such a valuable life hack, and I recommend it to everyone. [/note]: 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 one[note]This is the type of note you’ll see.[/note].
$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
- Steady job: M’s a hard-working, well-liked, and respected employee. His job is also relatively stable—so job loss is highly unlikely.
- 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.
- 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.
- House hacking: We’d continue hosting students, and could increase our efforts to host more students, more frequently.
- Go back to work: I’d be happy to swap with M and go back to work[note]I haven’t earned income as a graphic designer in over a decade, but I’ve maintained my skills through designing pro-bono projects and working on this blog. It wouldn’t be difficult to pick up freelance graphic design work or find an in-house position.[/note] so he could stay home with the kids.
- Insurance: We have life insurance, and M has good disability insurance at work.
- Universal healthcare: Fortunately, we’re Canadian—so we don’t have to worry about most healthcare costs.
- 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.[note]I do this by allocating a certain amount of our monthly income to be saved towards specific categories. For example, I allocate $100/month to save up for home maintenance. The balance in the category grows and shrinks, but we always have enough.[/note] These categories are essentially super-efficient, mini emergency funds.[note]Because these categories are targeted and small, they’re way better than an amorphous general emergency fund where money sits around ‘just in case’.[/note]
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:
- Regular cash flow: The excess cash we’d normally send to investments could temporarily be redirected to emergency expenses.
- 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.
- Credit cards: M and I each have several, and they could be used as one-month interest-free ‘loans’.
- 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 dollars[note]I do this using Norbert’s Gambit in our non-registered Questrade account.[/note].
- 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
- Sell our investments: We could liquidate investments in our taxable accounts for cash within a few days.
- Sell the kids’ investments: Our kids have their own taxable investment accounts[note]Our large family loves gift-giving—and the gifts are often in the form of cash. Our kids are more than happy to invest most of the money, and keep a small amount to spend or save up for a future purchase. (Second-generation FI in action!)[/note], which we could also liquidate. (We’d pay them back, with interest, later.)
- 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?
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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