Wednesday, December 06, 2006

The Emergency Fund Myth

One piece of standard advice that I just hate is that you should keep an emergency fund of three to six months worth of expenses. I personally don't have one, instead I keep a unused line of credit that can cover about five months of expenses.

Why do I avoid an emergency fund? I plan for an entire year's worth of normal expenses in advance, so having the car insurance or Christmas come due is hardly a surprise. I save a set amount each month into my high interest savings account and pull out the money for those yearly expenses when the come up. That way I'm not having too large of a sum of money sitting around, uninvested and losing its value to inflation but I do have a large enough fund to help cushion those unexpected expenses.

As for a true emergency, I have used the line of credit before and found it worked out fine. After our baby was born ten weeks early, we had a lot of unexpected expenses (hotels, food) including the replacement of one of the main structural beams in our house for $9,000 and the car lease buyout for $8,000 (the story on the lease is an entirely new post). The total damage was about $22,000 in three months. So after maxing out the line of credit and stripping down every penny I had saved in non taxable accounts I was still $5000 short. So I took an offer of help from my parents and took out a loan from them for $5000 to be paid back in 8 months.

In 12 months I had manged to pay off the entire debt, which given the size of the emergency I feel is a perfectly acceptable time frame. So depending on your own situation, you may be better off with a $0 emergency fund.


Lazy Man and Money said...

Amen, a big line of credit is good enough for true "emergency" protection. You just have to be careful that the emergency isn't "not enough iPods" or something silly like that.

Harrison said...

I agree that you idea will work to settle your emergency cases. but i hardly believe it will really solve your problem in long run. For your case, the more emergency case happens, the more debt you will be in. This is too risky for me.

For me, I will use 2 kind of emergency. first I will use my saving. When not enough only use this "credit" type of emergency fund.

Canadian Dream said...


I agree that you want to raid your savings first prior to going to the line of credit. I tend to run my house with some extra money stuffed away in a few different accounts. After that is gone I hit up the line of credit.

I just wanted to point out to people that the 3-6 month emergency fund is not required for everyone. You may personally like it which is fine. It has to do with how you like to handle things and your risk tolerence.


Matt said...

Nice that you can rely on your parents like that. Are you sure they're ok with that?

Canadian Dream said...


Yes they were fine with that. The money was just in Canada Saving Bonds anyway, so I paid them the same interest during the time I had the money. So they were not out one little cent after I was done borrowing the money.

They offered the loan, because they knew we were in a very unusual situation and just needed a little help to get over a cash flow crunch.