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Do you really need an emergency fund?

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  • Do you really need an emergency fund?

    What are people's thoughts? I am sure early on, when you have very few prospects an emergency fund makes sense. But between 0% credit cards and a HELOC I think he is right that there are other options that you can use before selling your investments during a down year.

    https://earlyretirementnow.com/2016/...mergency-fund/

  • #2
    Credit cards and HELOCs can be canceled by your credit card company and your mortgage company, an emergency fund cannot. It’s a cheap insurance policy, so I still keep one.

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    • #3
      None of their reasons were particularly persuasive.

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      • #4
        you need a plan, which may or may not involve holding a pile of cash equivalent

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        • #5
          these "do I need an emergency fund" questions tend to come up especially when the market is at all-time highs and we're doing well and have stable employment. Until that all comes crashing down, like it did (even for doctors) in March 2020. So yes I think you need one. Doesn't need to be big. Most suggest 3-6 months of expenses and I have ours at the lower end of 3 months in part for the reasons you cited (along with iBonds although my first purchase won't reach the 1-year mark until October, and you can also withdraw Roth IRA contributions penalty-free anytime). But if I am "losing" money since the fund sits in a high yield savings account rather than an index fund, as I'm already saving 20%+ for retirement, then that is worth the cost

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          • #6
            Originally posted by Redemption View Post
            What are people's thoughts? I am sure early on, when you have very few prospects an emergency fund makes sense. But between 0% credit cards and a HELOC I think he is right that there are other options that you can use before selling your investments during a down year.

            https://earlyretirementnow.com/2016/...mergency-fund/

            This reminds me of companies not wanting to waste money by having some parts stockpiled and in reserve and kept everything as "just in time" inventory. Things worked very well and profits were sky high until the pandemic supply chain crisis struck and they had nothing in their pantry.

            The same thing is being touted there. Why waste money in a savings account, CD or even bonds when it can earn 26% per years in S & P fund. There is always the credit card and HELOC and Payday loans. Until a true emergency occurs and the just in time approach does not work and there are no reserves.

            If you want to have no e-fund, go ahead. I will have 6-12 months e-fund and have peace of mind. May never use it but then it is like insurance. You hope you never need it but it is there when you need it.

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            • #7
              Originally posted by JBME View Post
              these "do I need an emergency fund" questions tend to come up especially when the market is at all-time highs and we're doing well and have stable employment. Until that all comes crashing down, like it did (even for doctors) in March 2020. So yes I think you need one. Doesn't need to be big. Most suggest 3-6 months of expenses and I have ours at the lower end of 3 months in part for the reasons you cited (along with iBonds although my first purchase won't reach the 1-year mark until October, and you can also withdraw Roth IRA contributions penalty-free anytime). But if I am "losing" money since the fund sits in a high yield savings account rather than an index fund, as I'm already saving 20%+ for retirement, then that is worth the cost
              THIS. And when you have it and need it, it really does help. I will now start holding less in mine because I dont need one as big, but just to put in perspective, I very easily couldve blown past a "normal" EFund had my wife survived into the new year and re-started the deductible/medical costs. For my specific situation- I've been out of work since Nov, then add in funeral costs, medical bills, rent, etc. Add in the flood in Sept forcing us to front hotel costs, possibly needing new cars due to the flood, ambulance bills, and well it adds up. Could I have optimized by investing some of that money instead last year, sure- but what if the market had a 20% downturn instead of gain during that time? I'm now in month 2 so credit card bills are due, what if I had to take off in October instead of Nov? Plus the mental aspect of having peace of mind regarding money while your mind is preoccupied with everything else is worth the "losing out on market gains".

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              • #8
                Most doctors have been around long enough , have seen many patients through medical and personal disasters. The all seem to happen at once. Don't get fooled by the optimism bias. Plan ahead.

                The tendency to think that negative events are less likely to happen to oneself than to the average person is known as optimism bias.

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                • #9
                  If u asked me 5 years ago I would have said no. As docs our jobs and incomes are so stable
                  Then Feb 2019 and COVID happened
                  Our medical practice was completely shut down for 3 months. No income, zero!
                  My partners and I were helping supporting 50 staff until PPE funding came in--if we would not have done this we would have lost 1/2 of our staff and it would have taken us many months or years to recruit others
                  I had no income for 4 months

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                  • #10
                    Risking selling stock at a 50% loss in case of emergency during a market downturn is cheaper in the long term than maintaining a cash-like emergency fund so I don't. In reality every time I have had an actual emergency it was covered by my spending slash, my cash flow float and my credit card's grace period. Maintaining an emergency fund in cash while carrying debt at credit card rates is asinine.

                    As long as your alternative to saving an emergency fund in cash is investing an emergency fund and not spending the emergency funds you'll be fine.

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                    • #11
                      Originally posted by kayli69 View Post
                      If u asked me 5 years ago I would have said no. As docs our jobs and incomes are so stable
                      Then Feb 2019 and COVID happened
                      Our medical practice was completely shut down for 3 months. No income, zero!
                      My partners and I were helping supporting 50 staff until PPE funding came in--if we would not have done this we would have lost 1/2 of our staff and it would have taken us many months or years to recruit others
                      I had no income for 4 months
                      The alternative is cashing out the extra investments to accomplish the same results.

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                      • #12
                        Originally posted by Random1 View Post
                        Most doctors have been around long enough , have seen many patients through medical and personal disasters. The all seem to happen at once. Don't get fooled by the optimism bias. Plan ahead.

                        The tendency to think that negative events are less likely to happen to oneself than to the average person is known as optimism bias.
                        This. When it rains it pours. An Efund is needed unless you have a portfolio of sufficient size to self insure any loss. That means no LTDI or any other insurable need.
                        If you are at that point, you are probably not concerned with the return on an Efund. An efund is self insurance. no deductible and no claims approval.

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                        • #13
                          I haven't had a separate EF in years, we would draw down our stock investments if something really terrible and emergent happened.

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                          • #14
                            I probably do not need one. I have a large one. I have renamed it my "contingency fund", which is probably more appropriate for my stage and phase in life.

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                            • #15
                              Originally posted by Shant View Post
                              Risking selling stock at a 50% loss in case of emergency during a market downturn is cheaper in the long term than maintaining a cash-like emergency fund so I don't. In reality every time I have had an actual emergency it was covered by my spending slash, my cash flow float and my credit card's grace period. Maintaining an emergency fund in cash while carrying debt at credit card rates is asinine.

                              As long as your alternative to saving an emergency fund in cash is investing an emergency fund and not spending the emergency funds you'll be fine.
                              Exactly. people love to move the goalposts too.

                              "Why do you need an emergency fund?"
                              "So you have cash when you need it. "
                              "What if you need the cash when there's a crash"
                              "Are stocks less liquid when they're worth less"
                              "but then you're guaranteeing a loss!!"
                              ".....so?"

                              As long as your "efund" is liquid and generally goes up more than it goes down, i don't see how it doesn't make sense to just have that money invested. Sure its not like you're NOT going to be rich if your efund is in cash but i dont think its the mathematically correct answer as earlyretirementnow wrote

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