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Rethinking the Emergency Fund

A lot of what we talk about here is specific to people on the early retirement path, but today’s topic is something every single one of us should have as an important part of our financial plan: an emergency fund. We think of our emergency fund not as a one-and-done kinda thing, but as something that has evolved upward and downward over time. And now, as we’re approaching early retirement, we’re once again rethinking how much we need to have saved in our e-fund when we hit our magical date.

Somewhere along the line, I was heavily influenced by that wacky Suze Orman, who espoused the virtues of an emergency fund that can cover a full eight months of living expenses, which is pretty far beyond the three-to-six months that most planners (including Dave Ramsey) recommend. And so for years, we’ve been those diligent worker bees who looked at what we’d need to get by in a given month, and adjusted our emergency fund to match eight of those. That’s all after we saved up to have an emergency fund, of course. What do you think? Did we overdo it?

The Evolution of Our Emergency Fund

2005 — We get together. I have about $35,000 in debt (student loans, credit card debt and a car loan), a few hundred dollars socked away in a super conservative bond mutual fund, a baby 401(k) and maybe $100 in savings. I think of credit cards as “emergency funds.” Mr. ONL is three years older, so does exotic things like max out his 401(k), and has some mutual funds. But no emergency fund.

2006 — We move in together, and decide to get smart about our finances, which really only means attacking my debt. Emergency fund value: $0.

2007 — While aggressively paying down debt, I discover Suze Orman, and decide we need an emergency fund, preferably all eight months worth of expenses, which at the time equals about $25,000. We start saving for both our emergency fund and a future home purchase. Emergency fund value: $10,000.

2008 — Debt free at last. We have a big year: filling up our emergency fund, continuing to save for a home, and getting married. Emergency fund value: $25,000.

2009 — Buy our first place, a condo in the big city, which raises our monthly expenses. Eight months worth of basic expenses now equals $32,000, which we hang onto after making our down payment. Nearly throw up the day the down payment gets wired to escrow company. Emergency fund value: $32,000.

2011 — Buy our mountain house, but still have our city condo. For some reason we think this makes sense. I know. #balleryears. Now need a bigger emergency fund to cover it all. Emergency fund value: $48,000.

2013 — Come to our senses and sell the city condo. Invest the proceeds in Vanguard along with part of our emergency fund, and buy our rental property. Emergency fund value: $40,000.

2015 — Realize that we’ve achieved financial independence, live more cheaply, and don’t need so much money earning close to zero percent interest in a savings account. Reduce emergency fund. Emergency fund value: $25,000.

2018 — Future us have retired early. We own our home outright, we have ample insurance and savings, and our monthly expenses are minimal. Emergency fund value: ??

Rethinking the Emergency Fund // Our Next Life. Smart finances, cash cushions, contingency plans.

What’s the Right Amount for an Emergency Fund?

Our emergency fund balance has gone up and down quite a bit over time. And the philosophy surrounding it has evolved too. We’re pretty sure we overdid it for a lot of years, because we followed the eight-month rule blindly, without considering other factors. Never mind that we always had two incomes, either one of which could cover most or all of our basic expenses in the event that one of us lost a job — the odds of us both losing them at the same time would be super slim. Never mind that our emergency fund has never earned more than the most meager interest rate, guaranteeing that we lose spending power every month to inflation. Never mind that we have always been well insured (maybe over insured?), and would have minimal exposure in the event of a natural disaster. We wanted to be prepared!

It’s not like we’re beating ourselves up about it. We’d always rather be overprepared than underprepared. But there is a little bit of face palm action when we think about how much we kept locked in 1 percent interest rate savings accounts for years, when it could have instead been growing during the S&P 500’s hot years.

Thinking about emergency funds now, there are a bunch of factors worth considering:

  • What’s our bare minimum budget, subtracting everything we can’t cancel or postpone, and forgoing all the luxuries? In other words, what’s the least we could get by on each month, without sacrificing food, shelter or heat?
  • Are we reliant on a single income or two? In our case, with two incomes, do we need both incomes to live, or could we do just fine on one?
  • What are the deductibles/annual out-of-pocket maximums (or “maxima,” for you math and/or grammar nerds) for all of our insurance plans, in the event that something catastrophic and bizarrely serendipitous happens which requires us to shell out for every deductible/annual max at once?
  • If a car dies, do we have another option besides immediately buying another car? (We have two cars, and could figure out how to get by on one.)
  • What are the other factors in life that might constitute an emergency that wouldn’t be covered by insurance? (Last-minute flight to care for a dying loved one, temporary housing while rebuilding our house post-wildfire, etc.)

With those answers, we think in our case we’re fine with a smaller emergency fund than we’ve had in the past, at least while we’re working, because we’d be okay losing one income, and now have enough saved up that we’d actually be fine if we lost both incomes. We also wouldn’t be forced to rush out and buy another car, and the total of all of our insurance deductibles and OOP maxes is under $10K (most of that is health insurance OOP max).

The Magic of the “Life Happens” Fund

As our emergency fund has fluctuated up and down over the years, one of the things that hasn’t changed recently is something we instituted a handful of years ago: our “life happens” fund. This is another concept from Suze, and separates out the kinds of things that we know will happen (we’ll owe some taxes every April, for example, or need to do some costly home maintenance every summer — mountain weather and high altitude sun are tough on houses) from the true emergencies.

For the past five years or so, we’ve kept about $20,000 in our “life happens” fund, which is housed at USAA along with our other bank accounts. (Or emergency fund is offsite at Ally, earning a slightly better interest rate, along with being deliberately harder to access.) Remember those “whoops” work travel expenses I had to float last December, because I hadn’t gotten my expense reports in on time? That was only possible because of the life happens fund. Same goes for the big and surprising federal tax bill we just had to shell out. And same would go if a car died and we needed to buy a replacement.

Sure, the life happens fund doesn’t earn a very good interest rate. But it more than makes up for it in peace of mind for us.

How Big An E-Fund Do We Need in Retirement?

The big question we’re tackling now is: How much do we need in our emergency fund in retirement? We’ll have plenty of funds saved, but those are mostly dollars that we need to last us a long time, not money we can just throw at problems that pop up. So we think it’s essential to have some amount set aside to cover true emergencies, while not keeping so much in emergency savings that we lose a ton of value to inflation.

But how much depends a lot on what we’re already budgeting for. A good chunk of our annual retirement budget already accounts for health insurance premiums (premia, nerds) and OOP maxes, covering us on the health front. On the natural disaster front, we’ll of course be insured, but the biggest threat there is the cost of having a place to stay while our place gets rebuilt, if it came to that. Rather than pay rent for a year or two (not out of the question in a mountain town with only so much construction labor!), we’d just buy a small RV (or maybe we’ll already have one by then) and live on the road, which is far less costly. We’re budgeting for a replacement car every so many years, and can do plenty in retirement without one, unlike now, with all the required airport back-and-forth.

We also have a slew of general contingencies, including downsizing our home, selling our rental property, moving into our rental and selling the main house, doing the Roth conversion ladder with some of our well-funded 401(k) dollars, and a few other options.

But, despite having accounted for a lot of things in our planning, we also expect to be retired for a long time! And while we could certainly absorb certain emergency expenses by just spending less that year or even for a few years, the same way we expect to adapt to poor market performance years, it would definitely keep me up at night if I thought we were one disaster away from our whole retirement plan falling apart. So the answer is: We haven’t decided how much of an e-fund we need in retirement, but we know we want to keep one.

Please chime in! For those already retired, how did you decide how much to keep in your retirement emergency fund? For those in the planning stages, how are you thinking about this question? And does anyone else use the “life happens” fund and love it as much as we do? Please share in the comments!

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84 replies »

  1. As we plan our financial milestones this year and next, our second goal is to have an e-fund with at least six months of expenses for all the reasons you outline. Life happens and we need to be better prepared!

    • Six months certainly seems like a solid plan! You may over time find that you don’t need that much, but I’m in the “peace of mind” camp all the way, and always think it’s better to overprepare than underprepare! :-)

  2. I like holding a lot of cash, but we don’t think of very much of it as an emergency fund more of an opportunity fund or an agility fund. Just about 3-4 months of expenses is actually an emergency fund in our mind.

    Other than the unexpected failure of electronics we’ve only had to dip into our efund twice. The first time was to replace our only car (we sort of upgraded), and the second time was to pay for stitches (technically we had the money in an HSA, but we thought better of using it at the time).

    The nice thing about holding a lot of cash is that you can deploy it in emergencies, but you can also take advantage of opportunities that don’t come around too often (like buying a $65K house).

    • This is what we did last year. The right little house, in the right area of the right place finally came up for sale and we emptied our e-fund buying it. We are rebuilding slowly now but we feel it was SO worth it. We still have all there other savings but we had to move fast and the e-fund was liquid.

      • We’re so jealous of people who can find homes that can be bought with e-fund level amounts! We’d be lucky to find a shack for less than a quarter million dollars in our mountain town. But yay for you! :-)

    • I like that! “Agility fund.” I do personally like having a lot of cash on hand, too, though that scenario of finding a house for $65K would never ever happen here. :-) Happy for you though!

  3. This is interesting. We generally keep between $10-30k in our checking/savings combined and don’t have a dedicated emergency fund. Right now, I don’t like keeping more because I feel like the money is not being properly utilized. As our income decreases, will we play it a little safer? I suppose. At that point, we may want to stay closer to the high side and possibly a bit more.

    • You guys have so much reliable passive income that it seems like a big e-fund would be overkill. Because you’d be fine even if you lost all of your employment income. But it’s also the question of whether you want to be forced to sell off assets when the market is bad, and that’s probably our single biggest reason for keeping an e-fund even though we no longer “need” our income to survive.

  4. I struggle with this number so much. After getting hammered with a hit & run, a broken furnace, and Mr. P needing two crowns all in the first two months of the year, I feel like we need to quadruple my beautiful $10K e-fund number. My biggest issue with emergency funds is I think of having an e-fund for us (job loss, illness, etc.) and an e-fund for our house (shed blew away/apart in a wind storm along with part of our roof = $1500 deductible). I’m going to try to hammer this out over spring break (who needs vacation when you have spreadsheets!), because I want to make sure our money is working for us AND that we’re covered in case of the unexpected.

    • I was going to mention dental but you beat me too it. Hubby dearest lost two teeth and had to have bridges installed. Our dental plan only covered $1000 and each bridge was $4000, so yes, dental all by itself can take a huge bite.

      • An important point! Though I’ve also heard amazing things about dental care in Thailand, Costa Rica, and other countries. If you’re staring down a multi-thousand dollar dental bill, it could be well worth the travel. That’s definitely on our radar.

    • I wish I had answers for you, but you can see that we’ve changed our mind on our e-fund a lot too! :-) And that’s with literally never having had to touch it. (Knock on wood. And does typing “knock on wood” actually appease the gods of superstitions?? I just knocked on some actual wood just in case!) ;-) But sounds like you have a pretty fun spring break planned! LOL

  5. At 63 I’m looking at my Roth IRA. Plus a month in savings. 2 years in Roth and 1 month in saving. Have 30 years in IRA to live on if I don’t make a profit. . If something happened I would get a job tomorrow. We are living high on the hog at $50,000 so I could cut down to $30,000 with not much trouble.

    • You make the most important point of all — that the first step should always be to minimize expenses, not start selling off assets! And since you’re fairly close to Medicare age, the Obamacare subsidy implications of selling off shares/incurring capital gains are probably less important to you!

  6. Honestly, we don’t put a whole lot of thought into exactly how much we will need because, like you did a wonderful job describing, needs change all the time. For us, all we can do is estimate the best we can, build up enough money to live for a year (which for us will be around $30k), and forget it. We don’t necessarily anticipate strengthening or weakening it based on our lifestyle as we go forward, but that is always an option if it makes the most sense.

    I like the concept of a “life happens” fund. We call that our short term savings. We have long term savings in the form of investments. Short term savings for larger unexpected (or even expected, depending…) expenses that aren’t really emergencies, a bank account that we process day-to-day transactions from and, of course, the good ol’ emergency fund.

    At least for now, we are using the “set it and forget it” mentality until something in life happens that requires us to change our tune. We like to deliberately keep things as simple and stress free as possible…as long as we possibly can.

    • Since you guys will be in a similarly low income bracket as we plan to be in retirement, I’m curious if you’ve looked yet at your health care options and how they would be impacted by additional capital gains. For us, in our state, $20-30K in income seems to be the sweet spot: below that and we get forced onto Medicaid (boo!) and above that we lose subsidy dollars quickly (it’s not a sliding scale — it’s a cliff). Of course, living on $30K doesn’t actually mean $30K in income, but if you assume for a second that it was all income, having to sell any additional shares to pay for emergencies would trigger capital gains which could mess up the whole health care situation, force us to pay back a subsidy, etc. So that’s why we’re thinking about this now, in addition to the more obvious reason of not wanting to be forced to sell shares when the market is down. Know you guys do a lot of planning around budgets and projections, so curious how you’re thinking about this! And WELCOME BACK from vacation — enjoyed seeing all your pics on Instagram!

      • We have looked at our healthcare options, and yeah, the key is keeping your income relatively low (in the range that you described). Luckily, that happens to be around what we plan to spend per year to make all of this happen. We will probably COBRA the first year, then look into subsidized healthcare thereafter. We’ve priced out some fairly reasonable healthcare plans in our research, but we’ll need to make doubly sure that those plans cover us for full-time travel.

        What we anticipate is for additional income, acquired through blogging and other online activities, to help pick up the slack a bit with what we actually have to sell in order to live. So, the $30k won’t all be coming from stock, and it is this buffer that will make it easier for us to withstand any unanticipated expenses (whether healthcare or otherwise). Some years, we may only need to sell off $20k in stock with another several thousand being earned through other income streams (or the reduction of expenses through work camping activities around the country).

        I definitely understand your concern with capital gains and how it might affect your healthcare. I think this will be one of those things that we will end up learning as we go. The goal is to keep earned income down as much as humanly possible, and with our planned expenditures each year, we don’t foresee this being a huge issue. But as always, we will get a better feel for how all of this plays out once we finally start into it next year.

      • Learning as we go — 100%. Plus it’s all likely to change, one way or another. Kinda funny planning it all with such moving targets! Will look forward to hearing what you guys learn about all this health care stuff in your first year, since you’ll have a head start on us. :-)

  7. Thankfully, this is no longer a hot topic for us. Since retiring, and after debating the issue for years, we finally decided to reduce our lowest earning asset to the bare minimum. We have ample funds in dividend earning investments, and all expenses covered by reliable monthly income streams with a nice margin to spare. I spent several months of early retirement thinking we needed to bolster the emergency account up for things like vehicle replacement and home improvement, but at the end of the day it just didn’t make good economic sense. I can liquidate an asset at any time and obtain whatever we need, and car replacement and home improvements are hardly unplanned emergencies around here (we have three vehicles, and the house, like any house, will always need something and we would typically be aware of, and plan for, needed repairs). If the roof collapsed today we’d pay the $7500 deductible on an airline miles credit card, then pull from an asset to pay the bill. If we had nowhere to live we’d rent a place or buy a mobile home for the duration of repairs then rent it out or sell it. If all three vehicles broke down at the same time, we’d buy another hybrid on a zero interest deal and decide whether or not to carry the balance when the dust settles or liquidate an income earning investment to get out from under the payment. If we ended up owing a 20% copay for a major medical procedure we’d stretch the payments out at no interest as long as allowed by the ACA (up to a year in some cases). So, bottom line, we keep a few thousand languishing around earning very little, which typically gets absorbed by vet bills or scheduled larger payments like property taxes or income taxes. Four or five thousand sitting around earning nothing starts burning the proverbial hole in my pocket so I keep it simple. As long as no checks bounce and a few months of expenses are covered, I no longer concern myself with it. One savings account with a few thousand dollars seems to be working out well, and it’s just not practical in retirement to stress out over saving six or eight months of expenses when we could cover anything that came up with assets that earn reliable monthly income for us. I don’t like to see the balance drop under $2500 and I feel like a fool if it’s over $4000 unless we’re saving for something specific. The most difficult aspect of the entire process is emotionally letting go of the concept that we “need” large sums of money lying around earning next to nothing. I’m comfortable we don’t.

    • Thanks for chiming in with your experience and what’s working for you? If I recall, you guys have pension income, right? I bet that helps with your peace of mind, too, since you aren’t trying to time the sale of assets to live on to make sure you’re not selling after the market tanks. One thing we’ve been thinking about a ton, and that you’ve probably thought about too, is the Obamacare implications of selling shares to cover emergencies. We plan to be in a low income bracket after we retire, and so selling more shares to cover an emergency would trigger capital gains, which could mess up our subsidy amounts or even force us into worse insurance. That may not affect you guys since it sounds like you get little to know subsidy because of higher income, but thought I’d ask! :-)

      • We receive no subsidies, the county we live in offers very little employment opportunity and subsequently the subsidies are scaled to an income lower than our fixed income (even without dividends and interest income). We receive pension and social security income, and our goal is to live within the confines of that number without utilizing dividends, but we’re not there yet. We utilize the income from the investments to cover any shortfalls, but we don’t dip
        into the assets (we did the first year, to cover some necessary and expensive home renovations). Our largest monthly expense, by far, is medical insurance premiums. We will have those for the next six years (presuming nothing completely crazy happens with the government and the ACA remains in place), and we anticipate the premiums will just keep increasing, so we hold the line on everything else in anticipation of increasing expenses against fixed income. We’ll see relief in six years, when we’ll be forced into IRA withdrawals and I’ll be eligible for Medicare (if it’s still around). The reality is it’s all a giant crap shot, but we just don’t see the wisdom
        in keeping more than the bare minimum in an account with minuscule returns. In your case, you’d have to way the lost returns against the potential
        capital gains/ACA recast, and see which would be worse. I’d imagine having your OOP medical and deductibles in an emergency fund would be a substantial enough cushion, but you have to be comfortable and financial worries do not make for a pleasant retirement at any age!

      • Thanks for confirming that! So yeah, if you’re not worried about triggering capital gains events that would mess up your health care subsidy and you’re (I assume) below the AMT threshold, then selling some shares if needed for an emergency is not a big deal! We still have much to figure out on this front — stay tuned. ;-)

    • $20K seems like a completely great number for virtually any set of circumstances, especially if you rent, as you do. Anything more than that, and you’d be missing out on potential gains with very little upside. But less, and you’d be exposed to all kinds of unfortunately things.

  8. For us, we looked at risk vs reward, and kept minimal cash on hand as an “emergency fund”. This has been hotly debated and I felt that we need 6-8 months of emergency fund cash on hand, while Mrs. SSC felt differently because that’s a lot of $$ earning almost no return. Our compromise was 3-4 months of cash available in a money market type account, and then the rest we would just use from our investment assets if we needed to. So in essence, it’s your “life happens” fund. When our AC broke and needed replacement at $7k, grab from there and replace it. That’s what it’s there for, right?

    With the O&G downturn and likely possibility we could both be out of work, we have upped our E-fund to more like 8 months worth of cash on hand. This was because we realized our first plan was flawed and it was demonstrated to us quite timely by the market “crashing” at the same time we could be out of work. If there was no rebound quickly (4 months or so) we’d be selling stocks at their low points, just to cover things. Our stress test showed we could stretch to 5-6 months, but not much longer. Ooops, hahahaha.

    So we upped our cash reserve and now are in a spot where we could stretch it to at least 8 months, maybe more if need be, and that’s assuming no unemployment funds, layoff package or any of that really. So, that’s where we are now.

    In a few years, we’ll probably switch back to less cash on hand (3-4 months of expenses) and the rest just use assets/investments if need be. We built in cushions for when we need to replace cars and pull a chunk out, and appliances when they wear out, kids clothing increases, etc… things we can estimate, but not predict. That makes us feel a little better having less knowing we’ve tried to account for the unpredictableness of life.

    • I think you make the perfect point, which we failed to do in the post. :-) That layoffs or other big emergencies are most likely to happen exactly when the markets are down — so that’s the reason to keep an e-fund in cash, not just in equities. Mr. Fire Station and others have convinced us that, in addition to a retirement e-fund, we also want a decent-sized cash cushion (like two years worth), to avoid having to do periodic sales if the market slumps majorly, like 2008-style. We know we’ll lose some gains with that approach, but we’re all about that loss-avoidance. :-)

  9. I don’t stress about an actual target amount too much because I use a slightly different system. We keep around $2500 cash in a savings account and the bulk of our ’emergency’ fund is in a taxable brokerage account invested in index funds. I know that with time for funds to settle and ACH lag time I can have money in my checking account within 8-9 business days. I have two cards with $15k limits and $0 balances that we can use in an emergency at which point I would sell enough assets to cover the expense and transfer the cash. There’s enough in that brokerage account to cover ~$12k right now and I’m working on building it up. The savings account should be enough to cover anything that comes up that won’t take a credit card.

    I like this because I know I can handle most of what could happen and still not have a pile of cash sitting idle. I do need to build it up more because we are basically a single income family so we’re dependent on me.

    • I think your approach is a totally valid way to go! I think you could call that the “maximizing gains” approach. We’ve tended to follow the “minimizing losses” approach, in that keeping things in cash allows us to avoid selling shares when the market is down, and avoid triggering capital gains events. But we’ve for sure missed out on gains as a result! I’m sure someone somewhere has done the math on comparing the two approaches, but I think ultimately it’s about whatever makes you most comfortable. :-)

  10. My comfort number is ~$25k and maybe higher, but I also have a couple rental properties where I might need to worry about the possibility of vacancies or a new roof or something.

    It’s obviously going to be different for everyone, but I definitely agree that it sucks to just have that money sitting there doing nothing.

    — Jim

    • That seems to be our comfort number too… for now! :-) We also have a rental, and are still figuring out what “emergency” means in retirement vs. now. Obviously losing a job will no longer be a concern, and that’s the major reason to have an e-fund… it’s a whole new ballgame!

  11. Well, if you’ve read our back story, you know that some type of Emergency Fund is what saved us! Because, yes, it does happen. Both out of jobs at the same time – Holy crap! From 6 figures to ZERO in seconds! That said, an Emergency Fund does NOT necessarily mean “a low interest savings account.” Accidental Retirees above has hit the nail on the head. Putting that money somewhere where it can earn much better dividend/interest than in the bank, BUT is still accessible within a week or so, is in our opinion, a much better way to go. A traditional (non IRA) investment account, with fairly conservative investments which pay a strong dividend is a fairly safe way to fund both retirement and emergencies simultaneously. I always figure good solid companies are a pretty good bet. I mean, seriously, GE and Proctor and Gamble are most likely not going to go away any time soon…the world will always need electricity and Kleenex, right? And if you needed the cash, you could always sell some.

    • I need to read your backstory! For us, it all changes when we retire, because we’re going to be relying on subsidized ACA health insurance. So keeping money for emergency purposes in an investment account could have unintended consequences in terms of triggering capital gains if we sell, which would alter our income and could mess up our subsidy. Yet another fun thing we still need to figure out! :-)

      • You are absolutely right about the capital gains part – but we made a calculated risk that we would NOT have another emergency – and it outweighed the crazy poor returns. The whole Obamacare deal is an ENTIRELY different post altogether! ;)

  12. I suppose my portfolio is my emergency fund, and if that gets tapped out, my credit cards. I’m not concerned. I keep a few grand in cash, but I don’t see the point for additional cash holdings unless I’m saving for something specific.

    • If you aren’t worried about being forced to sell shares in a down market or triggering capital gains, then your strategy is great! We’re probably overly concerned about those things. :-)

      • I probably should consider a life happens fund, because life happens, but at the same time, I feel like the bond portion of my portfolio can be that for now. Maybe some capital gains on the bonds, but pretty minimal.

  13. I keep $10k in an online savings account as my emergency fund. I have debated this numerous times and bounced ideas off a close friend of mine. $10k for me is close to 4 months of expenses in NYC. But if I were to ever get laid off, I’d collect weeks of PTO and some type of severance which would stretch my emergency fund MUCH further. Is $10k too much to keep in cash for my unmarried, renting self? Maybe. But I like seeing the $10k there in cash. Helps me sleep at night. Also if I ever decide to strike out on my own (leave the day job) this will be a nice foundation to help me do that.

    • I don’t think $10K is too much at all! Even if it were earning zero interest, though I’m sure it’s earning slightly more than that. :-) And great point that having that money there, and unrestricted by taxable events, makes it easy to use it to take your career in a different direction!

  14. I’ve thought a lot about this over the years, so I, too, am interested in how other people determine how much to have in a liquid savings account. Part of the problem is that, as I get older, I know what could go wrong so I want to be prepared. When I was younger, it didn’t cross my mind to have an emergency fund and somehow I got by just fine.

    At one point I had almost $50k in savings. That went down greatly when I paid off my mortgage. Now I only have about $5k in a savings account with the rest in a few taxable brokerage accounts with allocations varying depending on the account.

    I try to keep in mind that in a true emergency, I could access my Roth contributions and (for medical emergencies) my HSA. Credit cards would be a last resort but available if the situation were that dire.

    I guess that’s the benefit/curse to building up your assets — you have multiple sources you can draw on if you absolutely have to but it makes things less defined.

    • It seems like you’re on pretty solid footing overall, which I think makes having a large emergency fund less necessary. The thing we’re thinking about now, and need to write about, is the Obamacare issue. Selling investment shares to cover an emergency would trigger a taxable event, and could potentially make us lose part or all of a subsidy, or force us to pay it back. That’s all the more reason, for us at least, to keep a decent cash cushion in retirement, but that’s super specific to our situation!

  15. A couple months ago I freaked out about only having about a $1k “emergency fund,” despite the fact that we have $15-20k in cash for our equivalent of a “life happens” fund – targeted savings accounts – and nearly $30k in cash for a future house down payment. So I decided to save a proper 6 months of low-spend expenses (not including the targeted savings) in our dedicated emergency fund. But now that we’ve accomplished that, I’m feeling way too heavy in cash! It’s so hard to make the decision about emergency fund size vs. other cash savings and investments. We’ve also never had to access our emergency fund (9 years now!). That makes it hard to justify having a significant amount in one in addition to our targeted savings accounts, which take care of pretty much whatever comes up.

    • It’s funny, isn’t it? It feels important to have a comfortable e-fund, but then also feels like a waste not to be making real gains on that cash. :-) But given that all of your funds in all of these categories are in savings accounts (that is, not tied up in the markets), it feels fine if the technical e-fund is small. :-)

  16. Great questions and subject. I had a similar post recently.
    The big lines of our story are the same. We have an emergency fund and a medium term fund (the term life-happens-fund is so much cooler! can I borrow it?) the combination of these is perfect for us. We sleep well at night and can buy without too much thinking a new laptop when the old one breaks down, we can pre pay a holiday while technically still saving for it… Big lovers here of the emergency and life-happens fund.

    Combined, these funds cover approx 13 months of our expenses and yield far less than inflation. Yes, we are loosing money. I have not yet made the mental step to invest this in a little higher yielding set of assets. or to lower it. I guess, as long as the kids are around we will keep it this high. Even later, I prefer to have too much cash, rather than having too sell when the markets are at an all time low.

    On the house-is-destroyed issue: our insurance covers reallocation costs. Is that an option for you? It is quite standard here in Belgium.

    • You can definitely use the “life happens” term — we didn’t invent it! :-) And even though you have a large cash cushion, it doesn’t seem at all like too much. But we’re like you — we’d rather have a little too much, and know that we won’t have to liquidate shares during a bad market. As for relocation costs, that’s an option on homeowners insurance here, but it costs extra, and we don’t pay for it other than short-term rent. But I doubt even a very generous policy would cover one to two years!

  17. We don’t technically have an emergency fund. We do have cash savings of around 50k (which is far too much in cash but we are looking for the next opportunity) and a completely untouched credit card with a 20k limit which forms part of our “if the sh*t hits the fan” strategy. Part of a recent anxiety busting exercise was designing a survival budget and that ran around $1800/mth. We are looking at semi-retirement rather than full-blown ER so we know either of us could just return to work earlier than usual to pull in that $1800. Would either of you consider taking a contract or temp job if things got really bad? If so, that could factor in to how much you need.

    • It seems like you have ample cash on hand to deal with most emergencies, whether or not you call it an emergency fund. :-) And yes, for sure we’re willing to work more if we need to for an emergency — BUT, if things are super bad, it’s likely a bad economy, and then it could be hard to find work. So we don’t want to be naive and think that that will always be an option!

  18. We don’t keep an emergency fund at this point, but we do have 2.5 years spending in cash as part of our retirement portfolio. I worry less about small emergencies and more about a severe financial markets meltdown. The cash ensures we don’t need to sell anything if (when) another 2008 hits.

    • We definitely think your cash strategy is smart, and plan to be at a similar place when we eventually quit. But I do think we also want some funds that are earmarked for emergencies only — since we plan to rely on Obamacare insurance, having to sell shares and triggering a tax event could seriously mess up our health insurance subsidies!

  19. Interesting question. We are probably over-insured and have a great public health backup for extreme emergencies.
    Technically we don’t have an emergency fund sitting in cash, but we are putting all the extra mortgage repayments into our redraw fund (and we have a pact not to touch it unless it is an emergency – none so far, touch wood) So luckily for us we get can access it if we need to, but it is reducing the interest on the mortgage in the meantime.
    I worry more about a loss of an income stream rather than an emergency as that would have more of an impact on our long term financial stability as it a) probably a larger amount than an emergency and b) may be ongoing. So I can sleep at night, I have a list of what expenses I’d cut out and then how I would replace the income. All good in theory!

    • I’m not familiar with a redraw fund, but it sounds intriguing! I think you’re right that a loss of income would be a huge deal for most people — same goes for us in that we’d be fine, but it would definitely postpone our FIRE plans! Thank goodness, at least, that you have great social programs in place as a safety net — we have fewer and fewer of those in the States!

      • Redraw is a type of home loan feature where you can pay extra repayments which is offset against the principal but then you can redraw it if you need. Trick is to be disciplined enough not to redraw it.
        Yes I will stop complaining about our $300/m private health insurance.

      • Wow — that’s a pretty great feature IF you’re disciplined, and don’t keep redrawing the money. Definitely never heard of that here! Instead banks just do the home equity loans or lines of credit, which is a whole other mess. :-)

    • We totally agree with you! And $20K is a great number — enough to cover some major stuff, but not so much that you’re throwing away big gains.

  20. We don’t have an emergency fund right now, because we’re still paying off debt. It makes more sense to get rid of those interest charges as quickly as possible. Our long-term plan is to gradually keep more money in the checking account, and then move some of it over to the savings account. I doubt we’ll ever keep that much saved away (more than $10K-$20K), because we will probably invest in more rental properties if possible.

    • I’ve been there, so I understand! I wonder if you could slowly work your way up to, say, $1000 in emergency funds, just so that you don’t have to put unexpected charges back on credit cards. I know doing that gave me massive peace of mind!

  21. $48,000 in an emergency fund, haaaaaaahahaha. Oh gosh, just wait until you read the post I’m planning to write for next week, in which I will discuss how last week I got overexcited about making large student loan payments and accidentally temporarily ended up with NO emergency fund. I know. Super smart. This situation will be semi-fixed in 2 or 3 paychecks, but that currently feels like a long time from now.

    I think this has actually been a good lesson for me because it forced me to think really carefully about what I would do if I lost my job or had some other emergency in the next month or two. And the answer was: maaayyyyybe try to borrow money from someone, but more likely just go into credit card debt because I don’t really know anyone who could lend me a substantial sum of money (nor would I be comfortable asking even if I did). And the idea of going into credit card debt really scares me. So I think unfortunately I may have to have to make a few minimum payments on my student loans (frowny face) while I make some more transfers to my Ally account. It just kills me to think of thousands of dollars just sitting there doing nothing while my student loans continue to gather interest, but I can’t risk credit card debt.

    (I’m not even going to pretend like I know how much money you should have on hand for emergencies when you retire. Clearly I am not qualified to give anyone emergency fund advice this month, haha.)

    • Don’t worry — I laugh at 48K now too. What did I think would happen?? Did I think we’d both lose our jobs simultaneously, not qualify for any unemployment benefits, not be able to find other work AND keep spending like drunken sailors? Um, yeah. I’ve learned a lot since then! And as for your e-fund and your loans, I so completely understand the enthusiasm for wanting to paying off as much as you can, as fast as you can. Don’t beat yourself up. You’ll have some emergency savings back in place in no time. And if you HAD to put some on credit cards, it’s not the end of the world either. Not that I’m encouraging it, but if you had to float something for a month or two, for example, it wouldn’t be some big financial setback. Look forward to reading your post about this… like all your posts! :-)

      • To be clear, the laugh wasn’t because I think it was a silly idea; more because it’s just so far from the situation I’m currently in (or have ever been in as an adult). I actually think it’s cool that you were being so responsible. :) But saving less also makes sense, in light of the fact that you need that money to be working for you in the markets!

      • No worries — I knew what you meant! I just laugh at that amount, too. I mean, awesome that we had it, but what a dumb use of it, in a 1% savings account for *years.* D’oh! This stuff is also a good reminder that we’re super lucky to have both of our incomes working for us. We wouldn’t have been able to save so much so fast if it was just one of us, especially me. Even though I earn a very good salary, Mr. ONL makes about 50% more than I do, which sure helps a lot. Not that you can’t do this stuff on a single income — it just takes longer. I don’t think it’s an accident that most of the early retirement bloggers are in couples! (Sorry… sidetrack there… but it’s good for me to remember this and be grateful.)

  22. You note 2 incomes & 2 cars. As someone single, it’s all up to me! I’m more comfortable keeping my emergency fund higher. Having spent time over the summer looking for a job, the emergency fund is what kept me afloat. Because it is in a savings account when the market took a roller coaster ride in August I was not stressed out.
    Having had the unexpected happen – a fire in my apartment building resulting in water damage to my belongings & needing to purchase & then submit for reimbursement, I was very glad to have my emergency fund fairly liquid. I’ve been saving for a bigger purchase, which will decrease the emergency fund. Once I get it back up to an ok level, I’m planning to move money into Vanguard & realize if I have to I can pull from taxable accounts, but hopefully gain more per dollar.

    • You’re totally right that it’s a completely different ballgame on a single income! Good for you for having a big enough e-fund in place to ride out a jobless period and a disaster at home! Those things together would have put most people into financial ruin!

  23. Glad I stumbled upon this!

    I just wrote a post about how we got comfortable with “blowing” our emergency fund. With both of our jobs being stable (for the most part) , funds in specific sinking funds, access to taxable investments and lines of credit, we want o aggressively pay down the mortgage and invest so that we can reach our 7 year launch plan smoothly.

    At some point, we may build it back up again but for now we think this strategy is best.

    • That’s great you found an approach that’s working and feels good to you! I’m sure it’s just because I’m naturally risk-averse, but having close to no cash cushion would freak me out a little — knowing that we could be forced to sell off assets during a market crash, for example. But it’s *personal* finance, right? ;-)

      • Yup, I totally get the fear of having to sell assets in a bind. We will still have will some cash on hand for emergencies too. I think over time we will find a good balance between cash and investments.

  24. We recently had to reevaluate our e-fund after we purchased our investment property in January but this was after having WAY too much in cash in the few years prior. As we were saving for the down payment on the property we could have both lost our jobs and been fine for a year or two. Yup, way too much in cash. When my husband did lose his job in the spring of 2014 we really didn’t even flinch. Strange and comforting at the time but making only 1% was painful. Now that a large chunk of that cash went to the down payment of the property we reevaluated how much we actually needed in cash and then transferred the balance to our taxable account. I am still not sure on what number is correct as yes we do have two mortgages but we also have a great cash flow.

    When it comes to FIRE I think we are going to have to evaluate this further as cash will not only be our e-fund but also help to cover our daily expenses. Our investment properties will cover some expenses but the rest will come from our investments. My belief is any money that you need in the next 1-2 years should be in cash as you don’t want to be selling investments when the market is down. But will our investments be paying enough dividends so we don’t need to sell anything and we can live off this? This is one big question to come in a couple of years as we near FIRE.

    • We can totally relate — we had like three years of cash sitting around between selling our first place and buying our rental property! That was in addition to our e-fund. So you’re not alone. :-) And we’re similarly still trying to figure out how much cash to keep around in retirement, though are leaning toward your thinking — 1-2 years. Since our investments are mostly index funds, we know we won’t get enough dividends to live solely off those, at least not in the years when we’re still paying off the rental mortgage. But if you can get dividends to cover your cashflow needs, then great!

  25. The Emergency Fund is a common topic of personal finance. I found this posting and the comments really helpful. It got me thinking about the types of “emergencies” and how I would handle them.

    The general consensus is an emergency fund has cash on hand that can be used when needed for unplanned non-day-to-day expenses that prevents or delays needing to withdraw from long term savings/retirement accounts. The uses of this money can be lumped into 3 buckets (or types of “emergencies”): Loss or lower income, significant unplanned expense, and opportunity to purchase items or investments. The first two can be classified as emergencies.

    The accounts I would use to pay for an emergency would occur in this order. Additionally, during and soon after the emergency I would adjust costs where available.
    1 Checking Account (for small expenses)
    2 Emergency Fund (for larger expenses)
    3 Borrow money from credit card, family, or line of credit (maybe if I need a short term loan)
    4 Roth IRA (it would be a real emergency if I need to dig this deep)
    5 Traditional IRA and other tax deferred retirement accounts

    I do not have a house so a home equity line of credit is not available for me at this time, but is an option for home owners.

    It makes sense to me that the amount of cash to have on hand would change over time with different conditions (employment, number of dependents, insurance coverage). You did a good job showcasing this.

    For simplicity, I prefer to use one cash account for all of these uses. I like the agility fund term that was provided by Hannah Rounds as it more accurately describes how I use it. Or I could just refer to it as cash account like others do. Right now I have cash on hand to replace potential future loss of income (voluntary quit job) and to purchase shelter. I have this money in one Money Market Mutual Fund at Vanguard. I like to keep things simple. Right now I want to have a year’s expenses in cash in case we decide to leave our jobs next year. We are still deciding if we want to live here for the next 5+ years (and purchase a home) or to change jobs and move somewhere else.

    It makes sense to me to use monthly expenses and anticipated duration of no income to calculate the size of the emergency fund. However, I think this is not useful if the more likely emergency is unplanned high expenses such as health care, housing or transportation costs. The repair or replacement costs of housing or transportation should be used to estimate emergency fund size. The deductible and insurance coverage should be used for a more likely emergency fund size. Obviously any emergency can happen to anyone, and all available water will be used to put out the fire.

    • I think your emergency fund approach makes a ton of sense. Though I’m actually glad that you don’t own a home because I think that home equity loans are basically the devil. :-) If the 2008 financial crisis taught us anything, it’s that.

      And yeah, it’s a whole lot harder to calculate what you might need in an emergency fund once it’s no longer about replacing your income, but more about avoiding depleting your early retirement savings. We are hopeful that Obamacare will stay in place, since it helps really predict the OOP max we may have to spend on healthcare in any given year, and if you couple that with deductibles on our other insurance, it should give us a pretty good ballpark. The question is how many times we might need to be prepared to pay those things!

  26. To say I’ve been all over the place with this one is an understatement. Once I discovered FIRE, early on I felt like the 4% rule, while an important big picture idea, didn’t address for me how I would mechanically access cash flow in retirement without depleting my capital base (selling stock). Coincidentally during the run up on the market (before I discovered FIRE), I kept looking for alternative investments to balance out my stock market risk and did it through a private equity investment and an alternative investment. During the test run period, those two investments (2.5 years and 2 years in respectively) have proven to have fairly predictable streams of cash flow, which I’m hoping is not correlated to the stock market. I settled on a mere 3 months of cash as inflation risk is real. SRR is real but declines as time goes on, so I think the first 5 years are KEY to staying early retired to perpetuity. I’m hoping those alternatives prove to be good hedges, but the backup plans are as follows: large unused HELOC which can be used to ride things out in stock markets that are way down, precisely the periods of time when you don’t want to sell stock, part time paying work, or a combination thereof. I know you likely aren’t on board with debt to ride things out but when your rate on aforementioned debt instrument is only slightly above the rate of inflation, the data show this isn’t a terrible plan. But it’s all theoretical until this is put into practice and there is a large market correction. Backup plan to all those other backup plans would be to sell our house and live off the proceeds for awhile and rent but I really like where I live and my community and neighbors so this would be the toughest decision emotionally. I owe only 30% of my home’s value and even if I tapped out the HELOC, I might be at 55% if my value dropped 30%. So ya, 3 months…. :)

    • I think it’s interesting to see our own evolution on this question. We used to keep loads of cash, then we scaled that way back for years to focus on growth, and now that we’re nearing ER, we’re beefing up the cash again to two to three years’ worth. I’m sure that’s horrifying to others (and probably you!) ;-) but it feels right for us. And yeah, the HELOC… we’re thinking about it. ;-)

  27. Hello ONL! I just finished your fantastic book “Work Optional” and in it you talk about having 2-3 years in cash in an emergency fund as you approach early retirement. I’m about 5 months away from pulling the chord and currently have about 12 months in an emergency fund. Your book made me start to fret a bit that I should perhaps stop investing and instead build up cash, especially to prevent sequence risk as this bull market continues to age. Have you revisited the emergency fund topic since you wrote this post? Any suggestions?