Stop Using Your Emergency Fund As A Crutch

401kThe emergency fund, the most misunderstood item in the PF community.  It seems simple, start with $1,000 for emergencies than build to 6-8 month worth of living expenses.  The only problem is too many people use the emergency fund as a crutch for not getting ahead.

Saving for an emergency fund, car fund, vacation fund, because I paid off $100 in debt slush fund.  Overspending is overspending, even if you put lipstick on a pig.  There’s nothing wrong with going on vacation when you’re in debt, but a really nice one because you “saved” for it really isn’t saving.  Just because you split your spending into different “funds” to tell yourself you’re budgeting, you’re really not. You’re still spending too much, even if you have little nice envelopes for it.

You can’t afford to contribute to your 401K so you miss out on the company match because of saving for an emergency fund.  That’s a 100% gain on your money, beats any debt payments.  Due to the fear of investing people hide behind the crutch of building an emergency fund. How many times have you heard when I get out of debt and have a sufficient emergency fund I’ll begin to invest.  How come the same people always seem to have a monthly emergency?

If you’re in credit card debt you don’t need an emergency fund.
If you have 18%+ interest rate on your credit card, you’re in an emergency. Greece that European country that was going to bankrupt the Euro, they’ve defaulted numerous times in history. For bonds risk is priced in basis points so 1%= 100 basis points. Greece’s bonds are priced at a 7.5% interest rate, which means you’re more than 1000 basis points higher risk than Greece, who never pays their bills.

If you have $10,000 in credit card debt, and $5000 in an “emergency” fund, you should use that $5000 to pay that debt down. If an emergency arises you can charge it on the card, that’s cheaper than having 18% interest compound daily against you. I know some have 0% interest, you do get 4% charged for a balance transfer. Eventually the musical chair runs out and you won’t be able to transfer it anymore. If credit card debt isn’t an emergency, then what is?

Open a Roth IRA and put your funds in there.
Everyone needs liquid cash for monthly living expenses. I have 2-3 months due to my rentals, but I never plan to have nearly a year’s worth. I don’t consider that my emergency fund but part of my FU fund.  When you’re starting out open a Roth and place your liquid funds in there.  You can access your principle at any time.  You don’t want to miss out on contribution years just because you’re trying to pay off debt and building a cushion.  My biggest regret is not financing my Roth IRA for six years, I missed out on all those contribution years.

Once you feel comfortable enough with your cushion you can then start investing stocks in your Roth.  The benefit is that you didn’t miss out on any contribution years.  Hurry up 2013 catch up closes April 15.  Another blogger expressed that this is a bad idea, as it will teach people to tap into their retirement accounts in emergencies.  If you don’t have self control with your money, it doesn’t matter where the money is located.

Do you think rich people and those in the wealth building phase wonder how much they’re going to save into their emergency fund this month? Hell no, they’re wondering how to raise capital to buy assets at great prices. Want to get wealthy, think like they do.  Don’t use your emergency fund as an excuse not to get ahead.

Do you agree that people hide behind emergency funds?



  1. I agree with you to a certain extent. We’ve been known to let our emergency fund balloon out of control, simply out of laziness or apathy. We recently lowered our emergency fund threshold to make sure we’re not over-saving for no reason.
    Holly@ClubThrifty recently posted…Using Vanilla Reloads for Credit Card RewardsMy Profile

  2. I think the first step is to stay out of debt.
    No car on credit, not credit cards cover!
    Then comes the Invest :-)
    And then comes the great freedom, but because you have a small fortune no debts for it.

    Best regards

  3. Unfortunately, I don’t think MOST people even have an emergency fund to begin with.

  4. I’ve always felt like we shouldn’t have a huge emergency fund as we pay off this huge amount of debt, but couldn’t put it into words. Now I know why. Thanks, Charles!

  5. I don’t have an emergency fund, but do have a $12k available balance on a credit card for emergencies. I know people like to have that much cash sitting somewhere, but I would rather put my cash to work for me than sitting doing nothing. My idea of an emergency fund is passive income. If my cash flow is equal to the expenses that can’t be put off (mortgage, food), then I’m OK. I’m not at that point yet, but getting closer and closer.
    Liam G recently posted…Disappearing ActMy Profile

  6. Charles,

    I really liked this article. I think it’s interesting to hear a lot of people’s reasoning and I know some of the debt wizards suggest things like the $1,000 fund and what not.

    The reality is that people need to learn self control and how to determine NEEDS vs WANTS. And you are correct, who cares if they pull the cash from a Roth, savings, CD, envelope — if they pull it, they pull it. Doesn’t matter the source.

  7. Great points Charles. I’ve always thought debt was an emergency, and a much more immediate emergency at that. We have a couple months in the fund, but we know we have liquidity from our Roths if things got way, way dire. And I actually laughed out loud when you pointed out that people paying credit card interest have a higher rate than Greece.
    Ryan @ Impersonal Finance recently posted…get to know your blogger- Cashville SkylineMy Profile

  8. I agree that emergency funds can really hold someone back from their full potential. It’s a bit ironic since an EF is suppose to help people with their finances, not hinder their progress.

    This is why I’ve never had an EF. Like you mentioned, if we want to be rich, we have to think like the rich do. I like to focus on increasing my wealth, not on worrying over trivial pumps in the road of life. If I lived in a developing country with no social net then maybe having an EF would make sense. But luckily I live in North America where if one is willing to consistently work hard, good things will happen.
    Liquid recently posted…Rising Out of HardshipMy Profile

  9. Hey Charles. We have a $10k emergency fund, with $1k of that in checking as our “buffer” (so, $1,000 in checking = “$0″). I’m fine with it for now, and feel it isn’t an impediment to saving. Though, I suppose we missed out on a few months of investing to put the cash there, and certainly have some opportunity costs with that cash. Jason Hull had an interesting post that supports your point:
    Done by Forty recently posted…President Obama Emailed Me About the Minimum WageMy Profile

    • Hey DBF,
      I would put a month worth of cash in a high yield account, and invest the rest in index funds and high yield bonds. I would take out an equity line against your paid off house that you can access during an emergency. Worse case you pay 4.5% in interest yet will likely earn 8-10%.
      Charles recently posted…The Advantages Of YOLO In Your FinancesMy Profile

  10. Well said Charles, this is actually a goal of mine for 2014, obtain 3 months of salary in an emergency fund. So far I’m bout 1/3 there. Great post
    Jim recently posted…The Business of Blogging ‘Three Pointers’ | Take OneMy Profile

  11. I don’t have an emergency fund per se, but I do have a lot of money CDs/savings account as money for a downpayment. Looking back, it would have been better if I had put that money into my IRA or contributed more into my 401K. But the general consensus in personal finance advice was not to put money you’d likely use in a few years in stocks. Although we thought we’d be buying a place in a year or two…which has now extended to 5 or 6 years.
    Andrew@LivingRichCheaply recently posted…Are We Overworked?My Profile

  12. I suppose some people may use their emergency fund as an excuse to not invest in other things, but I don’t know any. The other side of the coin are people who don’t have any emergency fund because they have alternatives, like credit cards. I think that is a terrible strategy. You don’t want to take on debt to deal with an emergency. What if the emergency is loss of income? How would you pay your debts? (Sorry if I got a little off topic.)
    Bryce @ Save and Conquer recently posted…How to Tell a Customer What They NeedMy Profile

  13. I’ve never really had an emergency fund. I’ve let our annual dividend income play that role. May have initially been psychological in thinking we had it covered by dividends, but over the years as the dividend income has grown, it’s become self fulfilling such that the dividend income is really the emergency fund.
    Integrator recently posted…Early Retirement: What’s our Roadmap?My Profile

  14. Save, save, save. Max out the 401K. Do the Roth IRA if your income allows (mine doesn’t). Do a traditional, even if not deductable, IRA. Save even more by paying off debt. Put some additional money in an investment account.

    Then splurge with what you have left!

    Money compounds and grows. It never hurts to save if you want to retire early. I am over $100K in passive income, I can assure you it works.
    No Nonsense Landlord recently posted…Late FeesMy Profile

  15. “If you have $10,000 in credit card debt, and $5000 in an “emergency” fund, you should use that $5000 to pay that debt down” I kind of don’t agree with this. I don’t think you should use your credit card in an emergency and leave yourself cash poor. However, if you reach 5k and feel comfortable enough THEN I’d say stop doing that and put it all toward debt. I just bought a car that I financed with a very low interest rate and I could have depleted my immediate savings and paid it in cash, but with my freelancing career that leaves me open to a mountain of stress if the shit hits the fan. I think there are different circumstances for different people.
    Tonya@Budget and the Beach recently posted…The Cost of Living in ParadiseMy Profile

  16. I agree with most of your sentiments here. I’m not sure people hide behind their emergency funds though. I definitely agree that if you are in debt, especially credit card debt, that your priority needs to be to pay that off because guess what? Being charged double digit interest on a debt is an emergency! I’ve also never been one to have different savings “funds” or “envelopes” but it works for some.

    I’m late to the game when it comes to investing, so I understand the mind set of those who want to have some cash for “emergencies”. But your example of using a Roth as an emergency fund is a great idea and something I wish I would have known about years ago myself. People should definitely understand the difference however, between withdrawing from a Roth account if they need it and withdrawing from a 401K. You shouldn’t use a 401K as an emergency fund.
    Kay @ Green Money Stream recently posted…What’s the Difference Between an ETF and a Mutual Fund?My Profile

  17. I agree on the point about paying off credit card debt. Get on the path to paying off your high-interest debts, then start investing the rest. I have investment accounts that I could always tap in the event of a true “emergency.” I think people talk about building an emergency fund, but often spend it on non-emergencies.
    Michael@Save-Invest-Grow recently posted…Wealth Building Tip: Avoid Lifestyle InflationMy Profile

  18. Very often under the guise of budgeting.
    Charles recently posted…What It Means To Be Poor In AmericaMy Profile

  19. Thanks for this article! I suppose an emergency fund, like investing, has many strategies for different reasons. I’m a freelancer/contractor who has to worry about finding work every 5 – 6 months on top of the high living expenses in Los Angeles. I have no 401k. Running out of cash scares me! I never want to have to sell an equity or go into credit card debt to pay rent. I keep a little less than a year of expenses in an interest paying savings account and use the rest of my capital for investments to build passive income. This article makes some great points to consider, and in the future when my nest egg is bigger, maybe I’ll be able to lighten up on the emergency fund a bit. :)

  20. I have way too much sitting in cash accounts (over $450k). Despite having a fully funded retirement account, a pension and no debt, I guess I have some kind of irrational fear that I may need access to a large sum of cash. I just turned 50, so perhaps that has something to do with it.


  1. […] @ Getting A Rich Life writes Stop Using Your Emergency Fund As A Crutch – With the fear of investing people too often use the emergency fund as a crutch to not […]

  2. […] @ Getting A Rich Life writes Stop Using Your Emergency Fund As A Crutch – With the fear of investing people too often use the emergency fund as a crutch to not […]

  3. […] presents Stop Using Your Emergency Fund As A Crutch posted at Getting A Rich Life. With the fear of investing people too often use the emergency fund […]

  4. […] matter where you hold them.  Might as well use your money to earn a return.  Charles had an excellent write-up on this a few weeks back at Getting a Rich […]

  5. […] @ Getting A Rich Life writes Stop Using Your Emergency Fund As A Crutch – With the fear of investing people too often use the emergency fund as a crutch to not […]

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