Why You May Not Need An Emergency Fund | White Coat Investor (2024)

Regular readers know we dumped my disability insurance policies recently. We also dumped our emergency fund for a similar reason — we're rich.

An interesting thing about being rich is most rich people don't think they're rich. It's really weird how little insight some of them have. Sometimes they're incredibly out of touch with the people around them. But even those who know they are rich prefer other terms like “wealthy” or “comfortable” or “financially independent.” But it's all really the same, and acknowledging the facts as they are is helpful when trying to be logical about managing your finances and your life.

Purpose of an Emergency Fund

I've written before about emergency funds. The basic idea here is to have some money you can tap in an emergency that prevents you from

1. Borrowing money,
2. Selling investments at a loss, or
3. Having to pay penalties or interest to raid retirement accounts

The classic teaching is an emergency fund is 3-6 months worth of living expenses in a very liquid, accessible, and safe investment. Sounds simple enough, right?

Opportunity Costs of an Emergency Fund

But the crazy thing about emergency funds is that the time you need it the most is when it is the hardest to get AND when your opportunity costs are highest (i.e. typically early in your journey toward financial independence.) At that point you're just learning to earn money, budget, spend less than you earn, and invest. You also have some great uses for cash, like paying off debt, saving up down payments, and maxing out emergency funds.

Due to opportunity costs, it actually took us YEARS to finally get our emergency fund where we wanted it to be. In fact, I think we were millionaires before we had a 6-month emergency fund. We just kept robbing it to make Roth IRA contributions or 529 contributions or 401(k) contributions or house down payments. Then we'd build it back up. Or we'd start spending more and so we'd need a larger emergency fund. At some point, we decided to go from a 3-month fund to a 6-month fund. It was basically a work in progress for a decade, rather than something we set aside early on and forgot about.

Retirees Don't Need Emergency Funds

However, just like with life and disability insurance, the closer you get to financial independence, the less you need an emergency fund. When you reach financial independence, you don't need it at all.

What? Is that crazy?

Well, imagine your favorite retiree. Let's say this person has $2 Million she's planning to live off of for the rest of her life. Does she need an emergency fund? No. She doesn't. She has a $2 Million emergency fund. Her entire nest egg functions as an emergency fund.

In fact, there are lots of things that financially independent docs don't need. Here is a partial list:

1. Emergency fund
2. Life insurance
3. Disability insurance
4. Debt/leverage/bankruptcy risk
5. A job/boss

6. ACLS, PALS, NRP, BLS, MOC, or an active license.

7. Low deductibless

8. Complicated portfolios

9. Overly risky portfolios

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   50/20/30 Budget Is Perfect if You Want to Save but Still Want a Life

10. Financial worries

Our Personal “Emergency Fund”

At any rate, until recently Katie and I had $60K ($10K/month, about what we would be spending if we quit going on vacations every month) set aside in either our high-yield savings account or more recently, a money market fund as an emergency fund. I was updating the spreadsheet one day and as I went through the various accounts I realized we had hundreds of thousands of dollars sitting around in cash.

Cash Flow Issues

Why did we have so much? Well, let's just say that our cash flow issues can be challenging and the easiest way to solve cash flow issues is just to have more cash around. Most of it was money we had set aside to pay taxes. Some of it was money we knew we'd have to pay to others (WCI Scholarship and other expected business payments). Some of it was designated to go to charity but the checks hadn't been written yet. There was also money that just needed to be moved into investments and some of it was money we leave in the checking accounts to ensure we can make payroll and don't bounce checks.

But like our mortgage a couple of years ago, it just seemed silly to keep the emergency fund when we had so much in cash for other purposes. So we got rid of it. No, we didn't spend it. We just moved it into the retirement portfolio. It all went into stocks as they had done poorly lately, and as is my usual luck, the stock market proceeded to drop 3%+ the next day.

Apparently, we're not the only ones without an emergency fund as you can see from this poll we've had on the site for years.

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How We Meet Short-Term Needs Without a Dedicated “Emergency Fund”

So while I think building an emergency fund is a very useful thing to do, we didn't have a fully funded one for very long — just a few years really. Don't worry, there will still be plenty of cash to meet any short term needs. There are a few other options.

1. I keep a minimum of $15K in our personal checking account and another $15K in the business checking account, just to keep from bouncing checks and payments. That's like 3 months of expenses right there.
2. I also take 34% of everything we make and put it into our savings account to cover our tax bills. By April 15th, the amount still in there despite withholdings and quarterly estimated tax payments is usually still a six-figure amount.

3. 

   We also have cash continually coming in from my clinical work, The White Coat Investor, LLC, and our investments. While it is entirely possible that one or more of these streams of income could take a serious hit, the truth is we can live off any given one of them indefinitely.
4. Finally, we also have a sizable taxable account. I mean, we're financially independent. We have enough money to live the rest of our lives without running out and a big chunk of it is in taxable investments that can be liquidated any day the markets are open. That includes some bonds that could be sold in a down market, but even if we had no bonds in taxable, we could sell stocks in taxable and exchange bonds for stocks in a tax-protected account to maintain our asset allocation.

Comparison to a Traditional Emergency Fund

Now, take those assets and put them up against the potential liabilities that most people use an emergency fund for and see how they compare.

1. Appliance goes out. No problem. We could replace all of the appliances tomorrow with what is in the checking account.
2. Car needs a major repair. No problem. With $15K in the checking account, I can repair just about anything worth repairing on the car. In fact, I could buy 2 or 3 other cars with that much money.
3. Somebody dies and we need to buy last minute flights to a funeral for the whole family. Again, we can cover it.
4. I lose my job. Did I mention we're financially independent?
5. WCI stops making money. While our payroll is substantial, the contracts are almost all based on a % of revenue. If there's no revenue, the payroll declines dramatically.

If we can't cover an expense with what we have in our taxable account, then we've probably got insurance that will cover it. Now you see why it seems silly to keep $60K dedicated to emergencies, right? Just like it seemed silly to be arbitraging that last $130K on the mortgage. Rich people don't need emergency funds and I guess we qualify now. In fact, we probably could have ditched our emergency fund, either gradually or even all at once, as we approached financial independence. It's all kind of a squishy continuum anyway.

What do you think? Do you agree that the FI don't need an emergency fund? Why or why not? When will you ditch your emergency fund? Do you think it was worth building in the first place? Did you ever use it? What for? Comment below!