We’ve all heard the personal finance truism: Keep three to six months of living expenses in the bank just in case. But do folks pursuing Financial Independence and Early Retirement (FIRE) really need an emergency fund?
Originally the emergency fund was conceived in response to the all too common cycle of debt and poverty. People who scrape by, living paycheck to paycheck, can be utterly devastated by an unexpected one time expense.
But we’re not living paycheck to paycheck. In a more established financially savvy household there are a couple of options instead of a traditional emergency fund:
- We have a sizable taxable investment account that could be tapped in an emergency. Since both our checking account and our taxable investment account are held at Fidelity, we can do same day transfers between them. The downside of this is that an emergency could conceivably force us to sell assets during a down market.
- We also have credit cards with high limits and no balance that could be used to smooth out a temporary cash flow crunch. We have two cards, both with limits above $15,000. Of course we always pay them off in full each month, so we usually have a sizable amount of accessible credit.
- We’re saving between $5k and $6k per month. An emergency that fell under that amount could be taken care of with pure cashflow.
With all of these options available, a dedicated “emergency fund” for people pursuing financial independence and early retirement seems redundant.
That being said, an emergency fund is the first thing I bring up when talking to a “normal” (non FIRE) friend about personal finance. It’s an essential set of training wheels on the way to being more financially responsible.
(CC photo courtesy of flickr user dumbledad)