Where should I hold my Emergency Fund?

By Slow Dad - December 19, 2016

Where should I hold my Emergency Fund? A lot of FIRE community get this wrong, emergency funds should be held in a reliably accessible bank account.
Where should I hold my Emergency Fund?” is a very frequently asked, and controversial, question.

The short answer is your emergency fund should be held in a reliable and accessible bank account.

Many in the FIRE community get this wrong, blindly chasing investment returns without considering the purpose of an emergency fund.

Emergency Fund

In an emergency, wouldn't you want access to your money?

An emergency fund exists to bail you when the unexpected happens.

It is money you have consciously set aside for those times when things go really wrong.

When an emergency strikes you must be able to depend on your emergency fund being in place.

If the markets experienced a major correction or even a crash, on the day you really need your emergency fund then what good is it? Consider how you would cope if the stock or fund you had invested in had gone bankrupt or was suspended from trading.

When an emergency strikes you need ready access to your emergency fund.

What happens if your broker has gone bankrupt, like Alpari or MF Global did? Regulatory processes exist to transition of your investments to another broker, but this process can be a lengthy one. That doesn’t help you much if your emergency strikes during that period.

The best place to hold your emergency fund is in a fee free savings account, linked to your current account.

This provides visibility of the funds whenever you access your internet banking, and supports instant money transfers when you need to access the funds quickly.

Why you have far more "emergencies" than I do

Now let’s discuss what actually constitutes an “emergency”.

A wise man once told me “piss poor planning does not an emergency make”. While he sounds like Yoda, he makes a really good point.

"piss poor planning does not an emergency make"
People with poor control of their money suffer emergencies or “black swan” events surprisingly regularly. Car repairs one month, unexpectedly high utility bill the next, replacing the fridge, and so on.

People with good control of their money very rarely experience emergencies. Not because they are luckier, but because they are better prepared and have planned ahead.

Avoid emergencies by being prepared and having a plan.
Avoid emergencies by being prepared and having a plan.
What is a genuine emergency?
  • Losing your job, and needing your emergency fund to pay the bills until you start a new one.
  • Paying the insurance excess on a car accident or house fire claim.
  • Emergency dental treatment that leaves you out of pocket
What is not a genuine emergency?
  • Routine maintenance on your car or house.
  • Paying off an unexpectedly high credit card bill after Christmas.
  • Escaping to hotel accommodation when your mother-in-law visits.
If you can reasonably predict something then it should not be an emergency
Consider house repairs. The tax authorities in the US and Australia suggest a building has a useful life of 40 years, which means you should expect to spend on average 2.5% of its current market value (the building component only, not the land) in repairs.

Or you could just rent instead!

Cars, furnishings, appliances and clothing all have a finite useful life, and will need replacing with a reasonable degree of predictability.

So what?

If you can reasonably predict something happening then it should not be an emergency as you should have budgeted for it.

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2 comments

  1. I did to agree with you. Emergency funds should be held in liquid accounts where you can easily get to the money. Emergency funds are not an investment. They are an insurance against something bad happening to you.

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  2. Very true Mustard Seed Money.

    It quite honestly scares me to hear all those financial independence folks on Reddit advising one another to maximise the hell out of their emergency funds by investing it all. The return would be so small on this relatively small stash of cash, yet the downside of not having it accessible could be vast.

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