Why We Don’t Keep A Separate Emergency Fund

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:

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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.

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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.

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    22 thoughts on “Why We Don’t Keep A Separate Emergency Fund

      1. My 15 HWW Post author

        Hi Drizzt,

        Wow, even though I was expecting some heat, that’s still a pretty harsh comment. If you read the post again, I am actually not advising anyone to follow what I have done and it’s more of an explanation of my current behavior.

        I think the key tenet is “because I will always hold some cash as part of asset allocation, there’s no need for me to keep a separate emergency fund”. But I agree that different strokes for different folks.

        1. Drizzt

          It eventually becomes an advice no matter how we say this is our own sharing because u always look like an authoritative figure.

          Even the best planners can’t plan for unknown things.

    1. Money Honey

      l am totally awed with this write-up. It poses a very serious challenge to almost all financial planners whom have been strongly advocating the necessity of emergency fund. 3-6 months of emergency fund? The ideal quantum as l have read it in certain publications is to keep 6-12 months of emergency stash in normal savings account with the bank.

      1. My 15 HWW Post author

        Hi Money Honey,

        If I am not wrong, most financial planners/authors/bloggers believe that managing one’s personal finance is like playing a game, in the sense that the whole thing is made up of ‘stages’ or ‘levels’.

        Perhaps Stage 1 is being credit card debt-free, Stage 2 is accumulating some emergency funds, Stage 3 is when one starts receiving some passive income & Stage 4 is when one gains financial independence. When one is comfortably at Stage 3 or 4, I believe that it’s possible to replay Stage 2 in a different way and reduce or even remove the emergency funds, as long as one is not too aggressive with his/her asset allocation.

        Since I see emergency funds as mainly a form of unemployment insurance, there’s always the possibility that one might not need it if he/she doesn’t have to rely on employment income.

    2. B

      Hi HWW

      Different people have different needs and different expectations.

      The title may be a little misleading to new investors but the I would agree with your idea. You are already holding up to 30% allocation of cash, so it doesn’t matter whether you name it as emergency fund or investment fund, as long as the cash that is needed for emergency is there.

      The future may be unpredictable but as a proper human being, we are able to minimize that risks by taking smart moves. If we already protect ourselves sufficiently with insurance and you can almost guarantee that your job is secure, then there’s no issue with holding less emergency funds.

      Anyway, holding 6 months of expenses are not too difficult to be honest. Of course these are depending on individuals and family’s expenses but usually it would be less than 10K, at least for my case.

      1. My 15 HWW Post author

        Hi B,

        Glad that you agree with me because firstly, due to our low expenses (yours are much lower in fact), we don’t need too much as emergency funds. And then as long as you hold 10% of investable assets as your war chest, you should be well covered.

      2. Drizzt

        B, its not too difficult if your family is of a good background. Speaking to a lot of friends and you will realize what a teething challenge that can be.

      1. My 15 HWW Post author

        Hi SMOL,

        You are not that old either! 40 is the new 30, especially for men! =p

        Actually, I hope to feel even more invincible after the next 10 years. I do have some goals, aims & dreams , especially with regards to my health & fitness.

    3. summer wind

      Maybe you should rewrite the title of this article. Since you are holding liquid instruments, it will serve as an emergency fund anyway when the need arises.It is good to be young and time is on your side. Wonderful feeling!

      I am the conservative investor who even ask my son to set aside money in a bonus plus savings account to pay for his NUS tuition fees should the parents die unexpectedly.

      1. My 15 HWW Post author

        Hi summer wind,

        Thanks for dropping by.

        You are right and maybe I should add a ‘separate’ to the title. But even if I am not holding much cash, I am fine with liquidating some of my stocks if an unanticipated emergency comes along.

        The bonus plus savings account is a good prudent move, especially if your son took advantage of the interest free loans from our local banks.

    4. Createwealth8888

      No emergency fund? Never mind. But still have to maintain adequate level of liquidity to meet unforeseen multiple life events happening.

      It is never one hole that sinks a ship. It is several holes happening one after another that sinks that ship.

      1. My 15 HWW Post author

        Hi Createwealth 8888,

        I admit my life experience is lacking compared to many qianbeis like you but I do hope that life would not be so harsh as to sink my small boat. Because it’s small, it could also be nimble and flexible enough to steer clear of impending danger (unlike Titanic)?

        If several holes happen, think the emergency fund might not be enough too and one might have to liquidate other assets.

    5. AK71

      Hi 15 HWW,

      I get where you are coming from. 🙂

      However, I would really encourage some kind of demarcation and even a blurry one is useful. Why?

      Let us say that Mr. Market gives us that correction some of us have been waiting for, how much of your cash on hand would you put to work? Doing what you do, if we put in 100%, then, we would have no money left for emergencies.

      A small craft might be nimble but try watching “The Perfect Storm” instead of “Titanic” to see the other side of the coin.

      Food for thought for the weekend. ;p

      1. My 15 HWW Post author

        Hi Ak71,

        Thanks for dropping by. I haven’t watched the movie but probably will do so after watching the trailer.

        You are right that using my opportunity funds as an emergency fund too is indeed riskier considering there could be a chance I become 100% invested (although highly unlikely).

        I really didn’t think this post would be as controversial as it has proved to be.

        I have also read your article on this issue and the weekend (spent overseas) has given me time to ponder over my views and of course, situation.

        1. AK71

          Hi 15 HWW,

          Sometimes, the most unassuming blog post could invite a surprising number of comments. ;p

          It has happened to me many times over my blog posts on the food I eat and how I think investing in stocks is not suitable for some. Oh, yes, mustn’t forget the blog post on why I think some people are irresponsible by having a wedding. LOL.

          Well, having different opinions is natural. The important thing is to stay civil in our exchange and if we really cannot agree on something, there is no reason to become acrimonious.

          Stiff upper lip, soldier on and I will visit again soon. 🙂

          1. My 15 HWW Post author

            Hi AK71,

            If everyone of us in the personal finance blogging space have the same views, then wouldn’t some of us become obsolete?

            It’s great to agree to disagree and appreciate the diversity of views from time to time. I definitely have to laud you for publishing some of your unconventional views too (even if I disagree with them). Most of the time, we can find some other common ground (I love those meals you took photos of).

            No stiff upper lips. I am glad my post has generated many follow-ups and make many think about the purpose of their emergency funds, and if it’s too little and (oh no) or too much. Do stay tuned since I will be following up with both a defense and a softening of the stance. =p

    6. Musicwhiz

      I don’t agree that one does not need an emergency fund because the idea is that you should not be forced to liquidate your equities or bond investments just because you lack cash. They are there for a long-term purpose.

      For me, I will keep at least 12 months of expenses and sometimes up to 24 months; then again I am married and have a child so my situation could be somewhat different.

    7. earlyretirementsg

      OOooooo I like this post!!! I wrote on this too!! Never thought there would be others who will share the same sentiment. What I’m surprised is that many DON’T share the same ideals. But I’d put a caveat. Each individual needs to know his/her own financial situation and the probability that they will need liquid cash fast. Otherwise, I see your idea is the same as mine!

      http://earlyretirementsg.weebly.com/1/post/2013/12/emergency-fund-do-you-need-it-or-not-and-why.html