How Big is Your Emergency Fund?

Early Retirement Now had a post out about the continued uselessness of an emergency fund. He discussed how they kept all their funds in an equity index fund portfolio, with only $1K – $2K in a checking account. They assumed they’d use credit cards and/or Home Equity Line of Credit (HELOC) “if any larger expenses came up that exceeded my monthly cash flow, e.g., car and home repairs, medical bills, etc.”

The general comment back in 2016 was “my point here, I most definitely advocate stashing a large pile of money. I simply advocate for moving all that money into an investment with high expected returns, ideally equities, instead of letting the money languish in a money market account at 0.03% interest.”

The plan, if something went wrong, is:

  • Use credit cards, with a long “float” of interest free loan
  • Use the HELOC to pay for the credit card if the issue continues for longer
  • Only sell investments if they have to – but they’ll have had years of  positive growth to offset selling at a loss

I think this argument falls into the “sleep at night” problem. The issue here is there are so many people now investing and in the FIRE movement that weren’t very aware during the 2000 and 2008 recessions, or remember the 1970 “stagflation” period (where the market went nowhere for 10+ years).

Let’s look at some holes in the plan.

  1. Assumption that credit extended will continue to be extended: Just because you have credit cards now, doesn’t mean they will issue you new ones, or not close down your existing ones (or at least reduce what you can borrow). A HELOC can be pulled back as well. Suddenly, you’ve got no credit – and you’ve got to sell investments
  2. For this sort of credit crunch, think the 2008 recession. How was the market doing at this time? 50% drop in value, erasing everything gained back to 2000, and even before that. In 1968-1970 the market dropped 35.9%, and never regained its numbers till 1982.

I also think the creation of an emergency fund is the first step in working towards FI. It could be $500 or $1000 (the number in ERN’s checking) but by building on that, you reach the point where you can shrug off medium level issues.

In ERNs defense, he does end his article stating that folks should not leave their emergency fund in the market if they are retired, or within 2-5 years of retirement.

Earlier in the year, I pulled money out of bonds and put it in the dividend stocks – only to turn around within 30 days because I just couldn’t sleep at night. It’s a personal choice, and you need to do what makes sense for you.

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Mr. 39 Months

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