I do not have a dedicated emergency fund, the second account we advise you to open in the Phippen Tax & Financial Services Financial Accounts Series. If we know each other personally, you know I love reading everything about personal finance and am a risk-averse super-planner. So this sounds shocking.
When you are starting out, you absolutely need an emergency fund. You need a cushion to protect you in the event of an unpredictable financial emergency. Keeping the emergency fund in a high-yield savings account (HYSA) keeps the money safe and allows it to grow to at least partially account for inflation, so enough money will be there if you need it.
However, as you grow financially and increase your net worth, you will accumulate a number of different accounts of money, many of which could be accessed in case of emergency. As your portfolio grows, your options grow, and it is eventually worth considering whether you still need a specific emergency fund.
The Non-Emergency Emergency HYSA
The HYSA buckets deep dive outlined the idea of opening additional HYSAs in addition to your emergency fund for specific safety nets and happiness spending goals. Particularly if you have a number of specific safety nets, you will find that these accounts gradually grow over time. At some point they may even equal or surpass the amount in your emergency fund.
At the point that your HYSA buckets exceed your emergency fund, assuming you are not planning to drain a particularly large one in the near future, you may be able to overlap your HYSAs and your emergency fund. For example, if you built an emergency fund to cover six-months of expenses because that allows you to sleep soundly at night, and your other HYSAs could now theoretically cover nine months of expenses, you could probably do away with your emergency fund.
Prior to your encounter with an emergency situation, you are unlikely to drain all HYSAs at the same time. You are not going to spend your Super Bowl fund at the same time you spend your summer vacation fund because they never happen at the same time. Particularly if you have accounts targeted for spending that only happens at certain times of the year, you do not have to worry about all the money being gone at any one point. Even when it comes to the specific safety nets, you usually will not total your car, pay $6,000 for your pet’s emergency surgery, pay for your child’s braces, and have the roof cave in during the same month. (If this did happen to you in one month, I am so sorry. At least you did not also have time to go to the Super Bowl.) In other words, there is a high probability that you will have money in at least some of your HYSAs at any point.
Then, when the emergency situation occurs, you shift your mindset. You press pause on the Super Bowl, summer vacation, and any other happiness spending goal accounts you have because you are in an emergency situation. Use the money from your HYSAs as if they were an emergency fund until the situation stabilizes. Then, you can go back to growing them so they can hopefully cover fun events, but also cover emergencies if needed.
Consider the Contingencies
Before you commit to scrapping your emergency fund in favor of overlapping funds for an emergency with your other HYSAs, consider all the worst-case scenarios to make sure you feel protected with the model you are using. Three particular scenarios that I examined when assessing my financial security are:
1. In a personal health emergency, do you feel protected?
Right now, we have health insurance and a Health Savings Account that has enough money to theoretically cover our deductible and annual out-of-pocket maximum in a catastrophic event. My HYSAs dedicated to specific safety nets and happiness spending goals would also cover our deductible. In the event of a completely unpredictable and unquantifiable strange illness or injury with only experimental treatments or treatments offered in other countries, we have brokerage accounts. Money is just a tool to enjoy life, so I believe it is absolutely worth draining a six-figure account to restore my ability to live a full life if necessary.
This financial structure may change in the future and may be different from your reality. When I decide to leave my salaried job, our health insurance situation will change, and we will need to assess whether we prefer to have more money saved in case of an emergency. Ideally, our HSAs will be higher by then, but we will still assess whether we have proper contingencies.
2. If you lost your job, do you feel protected?
A huge component in job loss planning is not financial: Keep your resume up-to-date, know what other companies are hiring in your area of expertise, and have a general idea of how long it would realistically take you to get another job. Knowing you can get a job within a couple months provides security versus wondering whether you could get another in six months or a year.
No job is perfectly safe, but I am in an industry that will never go away, have subject-matter expertise, and have more technological understanding than most folks who have similar subject-matter expertise. This means my job is pretty in-demand. I have also been recruited by different offices and employers, so I feel pretty confident that I could get a comparable role with a comparable salary in a short time if I wanted to do so. If you conduct similar market research, you will likely improve your feeling of security, even if your assessment shows it may take a bit longer to find a job. Having a plan is security.
3. If you needed to take time off from earning money for family crises, do you feel protected?
Consider how you would cope with needing to take long periods of time off for the health or well-being of a family member (whether a child or elderly parent) or the death of a family member. (Being the executor of a will when someone dies unexpectedly is not easy and takes time! Patrick would know and can also help you navigate this if you need assistance.) Have a plan for the unexpected work hiatus, just in case.
Smaller contingencies should be covered by your specific safety nets, so you do not have to worry about them surprising you financially. If you have any other potentially large emergencies, account for those as well in your planning.
Feel Secure
Whatever parameters you set should make you feel safe. Even in the event that I fly to LA to go to the World Series during the last week of October before heading to Bali for an expensive November vacation—draining two of my HYSAs within a month with November/December giving season approaching—and then the car dies suddenly, I have other accounts in case the big emergency hits at the worst possible time. Since emergencies rarely choose good times, this is important. Chances are, not all your accounts will drain at once, but you should probably have other money that you could use in case the health catastrophe happens right after all the fun events.
You never plan to use your brokerage account, the principal of your Roth IRA, or your long-term investments as a first choice for an emergency fund, but they are there for the true catastrophic, life-altering event if needed. Every account you grow bolsters your financial stability and helps you sleep better at night. As your financial stability improves, you do not need a specific emergency fund because your whole financial position is a giant safety net protecting you from financial emergencies.
Yorumlar