Mainstream personal finance experts advise us to maintain a separate emergency fund for unforseen negative events in our life. And it should ideally be in the range of 3-6 months of our income/expenses (the wiser ones choose expenses; more on that later). This concept is so important that some of them even advocate that building an emergency fund should take priority over paying off credit card debts (like really?!)
But the 15 HWW household, for one, doesn’t believe in having a separate emergency fund at this stage of our lives. Here’s some reasons why:
Adequate insurance coverage
Most of the emergencies that I can think of that are truly catastrophic tend to be medical-related. Kudos then to those personal finance authors/bloggers who advise their many clueless readers/clients to purchase insurance before even thinking about saving or even investing their monies. And you can get enough coverage without delaying your credit card debt installments since insurance doesn’t have to cost a bomb. You just need to know what kind of protection you need and opt for those plain vanilla products, as I have shown here.
Our expenses are pretty low
I believe the main reason for having an emergency fund is because nobody (other than in Europe and other welfare states) would insure us against unemployment and this fund would sustain you for that period of time before you find another job. Since it’s assumed that it should not take one longer than 6 months to find a job (if he/she really wants a job), experts say that we could be conservative and preserve 6 months of income as cash. Which for our case, adds up to a freaking $50,000!
This is premised on the big assumption that one spends almost everything one earns, which should start to become a foreign concept for regular readers of this blog. Based on our latest recorded expenditure (it pays to record expenses), we require about $3,500 a month to sustain our present lifestyle. So this should bring down the emergency fund levels to a much more manageable $20,000. It should actually be even lower since our CPF funds could easily sustain the $900 monthly mortgage for a year if we stop working right now.
And seriously, if we are BOTH retrenched at the same time, we are prepared and flexible enough to reduce or even eliminate discretionary spending like visits to the restaurants, holidays and the altruistic behaviour of paying for a website domain to improve the reading experience of this blog’s visitors. =p
Managing a sizable portfolio already
Even though we can reduce our expenses, it won’t go all the way down to zero, right? (Unless we become as awesome as this moneyless man.) Therefore, it appears that not having an emergency fund is a pretty dangerous strategy to manage the risk of unemployment. And well, you could also argue that we would be unprepared if all the floor tiles crack from an earthquake, or all our appliances start failing us after the one year warranty expires next April. (The probability of the latter happening is probably higher than what you think, considering how poorly things are intentionally made these days.)
But the thing is that we are pretty risk averse and will probably never invest our liqud assets down to the last dollar. We also adopt an asset allocation strategy based on the valuations of the market. We prefer to keep some cash as potential bullets to be fired when valuations of both the market or certain shortlisted stocks become more attractive.
Since we believe valuations are pretty fair at this moment, we are holding 30% of our assets in liquid instruments like cash deposits and foreign currencies, which already adds up to around $60,000. You can then argue that part of my opportunity funds are actually emergency funds!
And even though the passive income from stock investments still looks pretty humble, we also received a not-insignificant (at least to us) $900 in September. Because of this, there’s really no impetus to set aside another $50,000 or even $20,000 as a separate emergency fund. I am even inclined to say that the emergency fund became superfluous to our needs once our assets breached the six figure mark.
But before you invest all your savings into the market and think that not having an emergency fund is the right thing to do, please read this follow-up clarification on my emergency fund situation.