It seems like you’re very good with math. You analyze everything.

However, you forgot risk. With an cash emergency fund, You pay for the emergency and that’s it.

With a credit card, you are likely put things other than emergencies on your card, Making the balance swell and harder to pay off

A good post. I totally agree. If you have the ability to carry the risk from other sources (e.g. liquid assets, credit facilities), then an emergency fund is wasteful.

I don’t know, money in a savings account is an emergency fund in my book. I also use a credit card to cover the immediate expense. That way I can take advantage of rewards plus gain interest during the grace period. The only money I keep in my (interest yielding) checking account is the money budgeted for specific bills during a given pay period. Whatever you call it, its smart to have funds you can access fairly quickly — in at least enough time to pay your credit card bill — in case of emergency.

This was very well written and is a good devil’s advocate post for not having the emergency fund as so many bloggers talk about.

I started trying to have one but since I have credit card debt (and a few real emergencies) it has gone down.

Now I simply put in around $5 a month to it and pay more on the credit cards because I would end up using my credit cards in an emergency anyway.

squegie, I like the idea of using a moneymarket acct for “emergency stashed cash” especially since its fluid but not really easily accessible to tempt one to use it for non-essentials.

This is a very interesting way of looking at emergency funds and credit cards. But I guess there may be some differences with the way people view and define emergency funds.

I have different layers of funds I can tap into to cover unexpected expenses. I don’t call any of them “emergency funds” per se. The amounts in these funds depend on their liquidity, availability, and cost to access them.

For example, my most liquid and least costly funds available are those in my checking account which exceed what I need to meet my minimum balance requirements. I like to keep this “buffer” at least $1,000 but if that amount drops a little from time to time (especially near the end of the month) that is okay. If I drop below the minimum balance amount I will have to pay some small fee per month (maybe $10, I am not sure), so the cost is not a lot. I also have an overdraft line of credit on the checking account so the balance can go negative without penalty.

After that, I have two bond mutual funds which have checkwriting privileges, so I can tap into them to immediately pay large expenses my checking account’s excess cannot cover. Jacob, I do find your credit card’s use as a quasi-emergency fund very interesting and I could use its grace period to bridge short term cash flow shortages no longer than 20 or 30 days (as long as I don’t wish to use other sources to pay the bill).

Those bond mutual funds as well as other mutual funds also have electronic redemption privileges which enable me to transfer money into my local checking account but it takes about 2 days. I tapped into those larger funds when I needed to buy a new car 4 years ago.

Because some of my larger expenses are not monthly, I have to do some careful cash flow planning for the whole year so I don’t get caught lacking enough money even temporarily to cover my expenses.

Deegee (above) has it right….multiple layers of funds. In Information security we call that “defense in depth”. One source of “emergency” funds is NOT enough, especially in the case of credit cards. That credit can be pulled at any time by the bank on their whim. A credit card can be considered as one layer of an emergency fund, but that’s all.

This is all well and good if you’re already retired and have a good amount of pad. However, if you are still employed and lose your job, without an Efund, you are putting yourself at risk for alot of accumulated debt. It also depends how big of a family you have to support, if you have a car (to repair), etc…

I agree with dboy and deegee that both should be used – there should be a layer. I have a modest Efund and if I had to collect unemployment, that check would cover my weekly expenses and then some. However, if a medical emergency came up, etc. I would then have 10grand to use without starting a hill of debt with credit cards and no confirmed job in the future.

I call it ‘preventative management’ instead of ‘crisis management’

@jeffb161 Do more research. The roth ira has a 5-year holding period. A Roth IRA is not a good place for emergency funds.

Jacob’s approach is only as risky as 1)your discipline in not using readily available credit and 2)possessing assets that can be turned into cash quickly. I am a financial planner by trade and I do the same thing he does. I just prefer not to have idle cash unless I’m holding it intentionally due to market buying/selling. The key lies in being honest with yourself about your own tendancies.

It sounds like you do have an emergency fund. If you charge $2,000, and pay it off in 20 days, the funds you used to pay it off with are emergency funds, even if they are not allocated specifically for that.

It matters not where you keep it, just that you have it.

[…] fast. If you have no income, you will find it the devil’s own job to borrow money which is a perfectly reasonable way of leveraging your emergency fund. A year’s worth of low-ish running costs as  savings is not enough to hedge some kinds of […]