We, the Bitches, have said many times that emergency funds are absolutely foundational to financial stability—which makes it wild that today, I’m here to completely contradict myself and say you might not need an emergency fund at all!
When we first started this blog, our frame of reference was regular folks. We gathered experiences from friends and coworkers who were mostly young and broke, with neither interest nor experience in managing money. Overwhelmingly, those people needed emergency funds and often didn’t have them.
Now we have a healthy readership of self-identified personal finance nerds… and we’re seeing the opposite problem! These people took the “build an emergency fund” step and ran with it. But like, past the goal post, straight out of the stadium, and deep into Parking Lot B. They’re sitting on shockingly large piles of cash, afraid to spend or invest, chasing ever-higher amounts for “safety.”
So today I want to talk about why you might not need an emergency fund. Or at least, why you might not need a classic emergency fund (i.e., the giant pile of X months’ expenses in cash). In some cases, it’s a smart, strategic decision to have a smaller or less traditional emergency fund. Especially if there may be better uses for your cash right now.
It doesn’t apply to everyone—but if you’re reading this blog, odds are good it applies to you!
Three factors: Risk tolerance, social support, and financial adaptability
There are basically three factors involved in determining if you might not need an emergency fund. The first is your personal level of risk tolerance. How costly might a potential failure be? The second is how much social support you have access to. Do you have accounts or—gasp!—actual human people who could help you out in a crisis? The third is your financial adaptability. How quickly could you find another source of income and begin to recover?
Insert mandatory repetition of the phrase “personal finance is personal” here. All of these factors can be drastically different from person to person, family to family, and motley crew of space loners turned found family to motley crew of space loners turned found family.
You may be high in one category, low in another, and average in the third. That’s totally cool. Everyone is different. (But we’re all shiny.)
What is your risk tolerance?
Risk tolerance is essentially your answer to the question “is failure an option?”
If you lost your source of income tomorrow, what would the consequences be? Dire or survivable?
If it would be utterly catastrophic, you have low risk tolerance. For these people, a loss in assets or income might mean, say, losing custody of their children, or going without expensive lifesaving medications. If a financial crisis would be unideal yet endurable, you have high risk tolerance. Generally, people with high risk tolerance don’t have children, dependents, disabilities, or other critical vulnerabilities. Must be nice!
How much social support do you have?
Social support plays a huge role in determining whether you might not need your emergency fund. Social privilege, connections, and community wealth are among the best protections from true catastrophe. We talk about this shit all the time at Bitches Get Riches, yet we can never really say it enough, because it so often goes unsaid in the world of personal finance!
If a situation arose in which you needed to borrow $1,000 today, is there anyone you could call that could—and would!—say “sure, hold on, I’m Venmoing you right now”?
When I started this blog, my answer would’ve been: yes, three people. Today, I counted fifteen, and probably could’ve kept going. Which is an absolutely wild thing to think about. Because for so many people, the answer is zero! If you have low social support, you probably couldn’t come up with even one tenth of that amount. If you don’t come from an affluent and stable community with generational wealth to share, it lowers your options in a crisis. It’s one of the many reasons we will never shut up about the gender and racial wage gaps.
- 1 Easy Way All Allies Can Help Close the Gender and Racial Pay Gap
- Ask the Bitches: “Do Women Need Different Financial Advice Than Men?”
- The Biggest Threat to Black Wealth Is White Racist Terrorism
I’m lucky to have high social support. It’s a privilege to be surrounded by people who are stable enough to help me. As I write this, I’m caring for my husband after his second major surgery of this year. Our friends organized an unbelievable conga line of homemade food and takeout delivery to ease the strain of caregiving and recovery. We’re getting incredible help from every direction because our community is healthy enough to give it to us.
Obviously, this isn’t just about interpersonal lending. Connections help you find good jobs, housing, and softer forms of support. Communities can—and should—be crisis buffers, but they can only fill that function if they’re stable and healthy. And this community doesn’t have to be huge to be impactful! Partners alone make a huge difference, as we discussed in our recent article about financial discrimination against single people.
One more thing: DON’T BE A SHITTY FRIEND. You should still pay your loved ones back for spotting you in a dire situation. Or better yet: repay them in kind the next time they need a hand getting through an expensive emergency.
How financially adaptable are you?
Finally, adaptability counts for a lot in emergencies.
Losing your job can be scary. But if you work as a generalist in an in-demand field, it’s a lot less scary. Like, the difference between Luigi’s Mansion and PT. If you were laid off from your job as a restaurant server or a nurse practitioner, you could have multiple competing offers by day’s end. But if you’re an alpaca shearer or a nuclear security sergeant, the total number of companies looking to hire such roles is far smaller. You might have to face the costs associated with a long job search, a cross-country move, or retraining to fully recover.
The same goes for having assets in general. Have you paid off all your debts? Cheers! Got mad money invested in easily accessible non-retirement accounts? Bravissimo! Developed skills or side hustles that can be monetized at a moment’s notice? Mazel tov! You’ve established a great baseline of financial adaptability that makes you much more prepared for rainy days.
If you have high financial adaptability, you can probably safely scale down the size of your emergency fund. But if you’re a specialist with low financial adaptability, it’s wiser to keep your emergency fund thick and liquid. (Barf—sorry.)
How much is too much emergency fund?
If your risk tolerance, social support, and financial adaptability are all high, you can play pretty fast and loose by saving an almost nonexistent emergency fund. Having low (or no) debt and a credit card is plenty for someone in this highly ideal financial situation.
I’m trying to picture who this kind of person might be, and all I’m coming up with is the Winklevoss Twins circa 2002?? Let’s go with that. Tyler and Cameron are set for life on the strength of those foreheads alone! No additional saving support required, no notes! They can get the idea for Facebook stolen from right underneath their noses, and come back as crypto kings and venture capitalists like nothing ever happened.
If your risk tolerance, social support, and financial adaptability are all low, saving a traditionally large liquid emergency fund is still the best choice. Fantine from Les Miserables lives in a broken country with high unemployment and no social safety net, has a minor child with fragile health, a retaliatory boss, shitty friends, untrustworthy and expensive babysitters, and no assets besides enviably glossy hair. Yeah… plot might’ve been slightly different if she’d had a few mille in le olde banque.
My quick and dirty formula for a just-the-right-size emergency fund
Okay, okay, so how could you get to the point that you might not need your emergency savings? How much do you really need that rainy day fund to be? Again, this number is incredibly personal. But I’ll give you a quick and dirty formula that might help you pinpoint how much you might need to tuck away in a savings account.
In my extremely unprofessional opinion, everyone should save a minimum of one month’s living expenses if they are able to. That barely feels like it qualifies as an emergency fund… more of a personal overdraft protection plan, really.
If you have low risk tolerance, add 3-4 months’ expenses.
If you have low social support, add 3-4 more months’ expenses.
And if you have low financial adaptability, add another 3-4 more months’ expenses.
In summary, the Winklevoss Twins need a month’s worth of money saved up. Fantine needs a year. Maybe she could’ve used it to hire a lawyer to sue Tholomyes’s ass for hella child support! IDK, I’m not a fanfic writer! YOU tell ME—NaNoWriMo’s coming up!
I practice what I preach
I’d describe myself as having low risk tolerance, high social support, and high financial adaptability. It helps a lot that I’m debt-free and imminently employable. (If you ignore all the anti-work shit I write on this blog, lmao.) I have solid connections who can—and do—help me out in moments of crisis. Plus a loving partner to split all of life’s surprise bills 50/50!
Fittingly, my cash emergency fund for the past few years has been 3-4 months of savings. And I include the credit limit on my credit card as part of that fund, because I carry no balance on it.
My credit card is my emergency fund
Years ago, I kept a full year’s worth of cash squirreled away as my emergency savings. It was enough to pay rent, eat food, and cover almost any insurance deductible. I was very lucky, and none of those financial hardships ever came to pass; but this meant my emergency fund sat in my savings account, slowly depreciating. Meanwhile, I was toying with the idea of closing my credit card altogether—after all, I never used it! I was too scared of debt to touch the damn thing. And no one had explained to me the importance of a long credit history to your credit score.
Eventually, I came to realize that my rainy day fund was bloated. I was hoarding cash, dragon-like, to stave off the financial anxieties every veteran of the Great Recession carries. Clearly, I needed to let that shit go and grow as a person by embracing greater risk. I saw an opportunity to justify that card, and put my emergency savings to better use. In the end, I invested most of my huge-ass emergency fund, and invited the credit card I was once so afraid of into my emergency preparedness plan. I’ve come to think that’s the ideal role for credit cards to play.
My credit card works as an emergency fund because of my high risk tolerance and social support… but mostly because of my adaptability. If I use my dusty credit card to cover an emergency, I’ll pay it off lickety-split with my high income potential. The last thing you want is for credit card debt to become an emergency in and of itself.
You might not need your emergency fund if its primary function is allaying your financial anxieties
My need for an emergency fund is not as pressing as it once was. I used to live in an expensive city, work at a company known for abrupt layoffs, and stretched my monthly budget as thin as it would go to attack my debt. At that time, each one of those things was a good reason to keep a strong emergency fund in a savings account.
My life is more steady now. We actually have room for error. So novel to know I can hit a rough patch and actually bounce back from it! It would be extremely cool for that to be everyone’s experience, but I know I’ve already asked Santa for too much this year…
If your life is pretty stable you’re living well within your means, do the math to see if shrinking or phasing out your emergency fund makes sense for you too. In my observation, large emergency funds are almost always an expression of financial anxiety. Which is utterly understandable! But compulsive cash-hoarding is holding way too many frugal young people back from reaching their true financial goals faster. And I rarely see it actually curing those anxieties. Instead, it becomes a cyclical problem where defending and growing that fund becomes a new source of even more intense financial anxieties. I don’t want this Smaug Paradox for any of our readers.
Consider repurposing that emergency fund into less debt, diversified investments, greater stability, and greater happiness. Because yeah, at the end of the day, money is supposed to be traded away for stuff you want more. Amazing how that works.
Loyal readers, how much do you keep saved in your account? Do you consider your credit card to be part of your financial hardship plan? What about other assets? Please share your experiences in the comments below!
More Bitch wisdom on emergency funds:
- You Must Be This Big to Be an Emergency Fund
- On Emergency Fund Remorse… and Bacon
- Financial Lessons Learned from a Night in the ER
- I Think I Need to Go the Emergency Room?
Trouble saving? We have a coloring book for that
If you have a savings goal in mind—for an emergency fund, perhaps?—try the patented Bitches Get Riches savings goal coloring page! It comes with savings tips and tricks and a handy dandy calculator too. Plus, it’s real fuckin’ purdy:
18 thoughts to “You’re Saving Too Much Money in Your Emergency Fund… And You Might Not Need It at All”
About a month, I suppose, sometimes higher and sometimes lower. It’s more a maintenance/slush fund, though. I’ve spent it on vacations and I’ve spent it on a new pool pump when ours but the dust, and it just builds up for covering big things. It’s an extremely luxurious privilege to be confident that you can always cover 100% of bills.
This post is timely for me! My emergency fund used to cover 3 months of my living expenses. But then my mom bought me a condo! (long story) Now that I’m only paying HOA and annual taxes, my old fund covers 6 months of expenses. I’ve been considering spending some that fund on new furniture, or opening a CD fund.
Heh I keep a year because I rate myself low on all three points: risk tolerance, social support and financial adaptability.
My risk tolerance was built from a childhood of financial stress that was compounded by a very long period of unemployment during the Great Recession. That, I can slowly chip away at.
I have a great group of friends but I don’t think I could actually ask more than a couple of them for an assist. They might have it but I couldn’t ask for money.
My career is probably at the peak of what I’m willing to push for, given the sacrifices that might be required for anything “higher” and I have everything (flexibility, autonomy, good money) that is important to our lives right now. I wouldn’t be willing to take anything less than this 🙂
But I don’t disagree with you, I keep a year of emergency funds out of anxiety. I use credit cards regularly to build up rewards but nope, won’t consider leaning on them as part of the plan if we lose our jobs or need time off for health reasons. Given the fact that my health has never been good, I remain a catastrophic planning type. I don’t see that changing so much since I’m too deeply aware of how easily an accident or illness can alter the trajectory of a life.
As always, love your humor and perfect pop culture references!
I have pretty high social support (a friend of mine who moved across the country a few years ago had their house burn down two weeks ago, and immediately our friends raised nearly $1K in grocery gift cards- before their GFM was even set up). I have a spouse with a much higher net worth and income than me. I have several sources of income and am probably able to get *some* kind of job quickly if all my work dried up because I have a pretty broad professional network. I have pretty low average monthly expenses (~$1300-$1500). No kids, no car, no debt. We rent, so I could exit my lease if something really bad happened.
And yet… years of living in poverty without much safety net and living through the recession in a town where you couldn’t even get a retail job without a degree, I have to have a big emergency fund. My stress level won’t let me have less than 12+ months in my emergency fund, plus my sinking funds in checking. I also maintain Euros in a separate account for freaking out in case I run away to Europe (EU citizenship pending). Is it reasonable to have 10K in my checking account? Absolutely not. But rational is less important to me than breathing easy. I still invest, and I put aside more than 22% of my income in retirement.
Part of this is medical fear from ~~america~~: I didn’t have health insurance for years before the ACA (because poverty), and I went 8 years without treatment for a progressive autoimmune disease. Now, I am treated effectively with one medication, but my insurance loves to fight me every year on covering it. This year I got slammed with a $3K unexpected co-pay due to a rule change in 2021. My medication costs $12,000 per month without insurance or manufacturer copay assistance. There are ways to get it (fly to Mexico) for only several hundred dollars, but that costs money. I get scared, especially with the ACA being chipped away by the courts. Not to mention the surgeries I’ve had with unexpected out-of-network costs in the thousands. Also I can’t get disability insurance (due to my condition), so I always get scared about that.
Anyway. My choices aren’t necessarily rational, but neither is the US health care system. And that’s my stance.
My financial anxiety is through the roof and will stay there forever, I think, but I compromised with myself: now that I’m in a good union job with fair pay (HALLELUJAH), instead of stacking up cash in my bank account obsessively as an emergency fund, I’m making an extra mortgage payment every month.* That helps me feel like the money is going to something useful and zero-risk – paying off the debt faster, hooray! – AND ALSO it’s a Thundershirt-like comfort to look at the “Next Due Date” part of my monthly statement and see that I won’t start getting rude phone calls for a year or more, if something happened where I needed to stop making payments right now. Since the mortgage payment is the biggest of my monthly expenses, not needing to pay it for a year would increase the potency of my actual, lump-o’-cash emergency fund significantly without having to increase the literal amount sitting in that bank account. I’m sure there are tons of theoretically smarter places to put this money, but DAMN is it nice to have come up with one that is actually soothing to my anxieties.
*If you want to do this too, make sure first that the fine print on your mortgage won’t penalize you for pre-paying! My mortgage is through my beloved small credit union (strong, strong rec for wee mighty credit unions BTW), so I just went in person and asked about it for reassurance before commencing this plan.
I’m in this picture and I don’t like it
Ie. y’all got my eying my emergency fund and the bear market and thinking about making the leap
I think you nailed this. I teach others to have an emergency fund but I never truly had one. I’m strong in social support and adaptability and my risk tolerance is moderate. If I had over 10k in my checking account, a wallet full of paid off credit cards and a husband with the same, I knew I was fine.
I retired at 51 and am almost 58 now. I do keep 6 or 7 years of subsistence expenses in CD’s and cash just so I don’t have to sell investments when the market is down. Not sure if you would consider this an emergency fund. This seemed silly until now.
I admittingly have too much in my cash savings accounts, and also 2 credit cards with a combined limit of ~$20k but the only thing that has kept me from re-purposing my cash somewhere else is…if I use my credit cards to pay off a 5-figure emergency, there’s no way I’ll be able to pay my card(s) off without accruing some interest, so like…how does that math work? Does the buying power that I’m losing by sitting on cash hypothetically overshadow potential credit card interest, or the other way around? My brain hurts.
I have the same question!
My personal e-fund is 8 months worth of expenses. My spouse’s personal e-fund is 6 months of expenses. We also keep an e-fund for our home at about $15k in case, for example, our main water line gets a leak and we have to pay $6,500 for the plumber to dig up our front yard to replace it (true story!).
I would say I have low risk tolerance, high social support, and medium financial adaptability. However, this set up works well for me. I don’t try to grow my e-fund beyond the 8 month mark and I invest quite a bit – maxing my 401k, Roth IRA, and investing in my taxable account.
Overall, we are in a very good financial position and while it’s not optimal to have 8 months of expenses in cash plus a home e-fund, it’s what helps me sleep at night when my car breaks down or a pipe breaks in our house. Not having those unexpected expenses come out of my cash flow or come due on a credit card bill to then come out of cash flow is the peace of mind I need.
I would also echo what some other folks have noted about healthcare in America. I am lucky to have great insurance through my spouse’s job but I’ve been on ACA and know how insane the costs can get with mediocre or no insurance at all. For folks who have high/regular healthcare expenses, a fully funded e-fund makes a ton of sense.
This is definitely a personal choice. I like how you’ve broken it down into those three categories to give folks a measuring stick and a framework to think about it!
I have a premium bank account which is “free” if I keep a minimum balance. The minimum balance works out to be about 6 months of living expenses. This pool of cash is my defacto emergency fund. It’s there if I have an emergency but in non-emergency situations it means I’m not paying monthly user fees to the bank (which are criminally high in Canada). The fee that I don’t pay works out to roughly a 5% “return” on my money. In addition to not paying the monthly fee, I’m also eligible for other stuff like free money orders, better currency exchange rates and other perks, all of which I’ve used at least once since opening this account.
But but but—I liiiiiiiiiike my giant savings safety net! 😉 Ok, I probably like it less now than I used to when we first established it. I’ve grown a lot over the past few years and feel more confident / secure in the last area (financial adaptability). I launched my own biz, so I’ve been networking like crazy for the past 6 months and have a huge amount of connections. I feel pretty confident that if I ever decided to go back to work for someone else I could have a job ASAP from one of those.
So now I’m wondering, if I decide to let go of some of that cash I’m sitting on, if maybe spending on my business is the best investment. I’ve wanted to hire a personal chef for a while now. Or maybe we could outsource laundry. Either would give both of us more time for our business hustles. Of course I could spend it on “practical” things to, like a logo or a real website. XD
One pleasant side effect of being This Person is that as you become more financially stable, savvy, and less anxious and precarious, you might find that you have accidentally started a Down Payment Savings Fund ¯\_(ツ)_/¯
I expect that I will feel some kinda way upon spending the down payment savings fund, about no longer having that money liquid! And I’m a little stressed that I think I want to buy in the next couple of years, but not 100% sure I will, so I want to keep it liquid, but I also don’t and IDK man.
My oversized emergency fund taught me that I am more capable than I thought of taking good care of myself and others. And it has brought me peace of mind over the years as I move from precarity to financial stability. But, it’s time — I need those savings I worked hard for to do a different job now. Here’s to personal growth that is also financial growth that is also personal growth! 🙂
We have about a year in various cash pots. We need at least 3 months by May since I don’t get paid in the summer.
I am fine with this. I’m not crazy about selling stocks and dealing with figuring out which to sell in terms of taxes and markets and etc. Much easier to take money out of cash during an emergency.
Love this framework! It is definitely an anxiety allayer for me.
I have just under a year’s worth of basic expenses, which…. is probably too much. Especially considering I recently found out that even if I DID get laid off (unlikely), my company would provide a severance package of a bit less than 3 month’s pay.
Under these guidelines, I probably only need one month’s expenses in an emergency fund, but that would stress me the heck out. I’ll probably widdle it down to 6 months or maybe 4 months.