Emergency fund — Blog

Not an emergency

I think the holy grail of personal finance is having an emergency fund. Obviously that comes after spending less than you make, and paying off whatever debts existing. But the emergency fund, at least for me, has always been a difficult nut to crack. Six months’ (or one year) worth of spending saved in a savings account. That’s a tall order, because it’s a lot of money, even for a miserly person like myself.

It’s easy on paper: I already spend less than I make, so it’s just a matter of slow accumulation. But something always interrupts the process. An errant rock flung into the windshield of the car means a thousand dollar replacement. It’s not always something unfortunate! Earlier this April, I unloaded my entire emergency fund into the stock market because it experienced a 20% correction. The perfect time to buy more. That also means I had to start from scratch vis a vis the emergency fund.

Maybe we’re being too strict about it? In some ways my investments can be an emergency fund. (Some would argue I shouldn’t have investments - that aren’t tax advantaged - before an emergency fund?) It’s not as liquid as a savings account, sure, but there are other monetary vehicles to use in an actual emergency. The first thing to come out of the wallet is the credit card anyways. That gives at least a few weeks lead time to then liquidate the necessary investment to pay for that spend.

It’s not ideal for sure, because any time you sell securities, you have to pay capital gains tax.

The safety and stress-reduction in having a proper emergency fund is undeniable. In fact, it can feel eerie because it leaves you with nothing to worry about financially. No debts, investments are automatic, and there’s enough in savings to sustain me for half a year, should I lose my job. Peace of mind can be surprisingly disconcerting when you first shut off the noise completely.

Get the Michelins

Ally bank is sneaky. They are quick to email me when the interest rate on the savings account goes up, but not a single peep when it goes down. I didn’t even realize it went down until my friend told me that it did. It came as a surprise because the Fed has kept the federal funds rate at the same level for the past several months. So it’s double sneaky: why am I getting less interest when the benchmark rate hasn’t moved at all?

Don’t make me move to SoFi! I really don’t want to do that!

In this post-pandemic era of high inflation, it’s never been more important to have a money cushion. Unexpected items arise and you kind of have to deal with it. For example, my friend recently found a tire defect (a sidewall bulge, likely due to San Francisco’s lovely potholes) on his Tesla Model Y. Because of this - combined with significant mileage on the original set of tries - he had to fork over $2,000 to replace all four Michelins.

If (the royal) you don’t have a savings cushion, that $2,000 will be one of those setbacks that you see in people with heavy debt. They are making steady progress in paying off debt, then boom, an unexpected $2,000 kicks them right back down the chute. Okay, maybe they’re paying $1,000 instead for the Chinese brands. For four split payments with Affirm. Or Klarna.

Honestly, nobody really budgets for tires, right? They see the monthly payment for the car, and petrol, as the only true outlay. The rest is out of sight, out of mind - because they occur not nearly as often. Insurance renewal only comes around twice a year. Maintenance - unless you drive an overwhelming number of miles - is once a year. Tires? Let’s say once every few years. But, if you have a money cushion, then these maintenance events won’t ever be shocks to the finances.

The interest rate may have lowered slightly on my savings account, but that money serves a critical, foundational purpose: emergency fund for unexpected expenses.