When Should You Raid Your Emergency Fund?
My tweet earlier this week got me thinking about emergency funds:
What counts as an emergency?
According to Vanguard, an emergency fund is a stash of money set aside to cover the financial surprises life throws your way. Commenters noted that a wedding “obviously did not fit the definition of emergency.” But, as a lawyer, I have to say, it depends on your definition of emergency.
According to Merriam-Webster, an emergency is:
an unforeseen combination of circumstances or the resulting state that calls for immediate action
Does a Once in a Lifetime Trip Count as an Emergency?
So does a last minute destination wedding count as an emergency? Some people say a wedding is not unforeseen or does not require immediate action. But this year, I’ve attended four weddings. Three were destination weddings and all four occurred between three to eight months after the engagement. For a destination wedding, given that kind of notice, I needed to buy a plane ticket quickly. It’s hard to start saving money for a significant purchase in a few weeks (especially assuming you couldn’t save prior to knowing about the wedding).
[As a side note, commenters asked what jerks have short-notice destination weddings. My friends are wonderful thoughtful people. The weddings were in the most convenient locations and times for the most relatives, particularly the elderly ones. So though it’s a destination wedding for me, it’s the closest one for a majority of the guests. And finally, it’s an invitation, not a subpoena! I have the choice to say no. I chose to go.]
So I think last minute destination weddings can meet the definition of “emergency.” But does that matter if you value having the money in your account more than going to a last minute destination wedding? No. What matters if what you think matters.
Your Definition of Emergency Will Vary (And It’s Ok)
A number of commenters noted that they prefer to have separate savings accounts for unexpected good things. I mean, yeah, if you have a wedding fund, take the money out of that instead of the emergency fund. Duh. But let’s say you only have one batch of savings and you call it emergency savings. If there’s enough money to carve out a section for wedding savings, that’s the same thing as having a separate wedding fund. So there’s no real reason to get angry at someone for dipping into their emergency funds when there’s enough money to get everything done.
If all your savings in the whole world equals the amount you would spend on this wedding, then yes, that’s a risky idea. But you are entitled to make that risky choice. And it might be a rational choice. As much as personal finance bloggers talk a big deal about preparing for once-in-a-lifetime doom and gloom moments, sometimes once-in-a-lifetime happy events turn up on your doorstep. I think, for most people, unexpected happy events are more likely to occur than worst case scenarios.
Do You Always Need to Plan for the Worst?
There is a chance that you will lose your job and your life will collapse all at the same time. There is also a chance that you will miss out on all sorts of fun events and the worst never happens. And even if the worst happens, it’s ok to believe that you’ll be ok and find a way that doesn’t mean your life is an utter disaster.
But if you prefer to have the money in your emergency fund and never use it, you are entitled to make that choice too! When we think of emergency funds, we have to think of what we value, the odds that the worst will happen, and most importantly, what we are most comfortable with.
My Emergency Fund
I don’t have an emergency fund anymore. When I had just started working, I squirreled money away in case of an emergency. And that money started to accumulate until I had saved the recommended 3 months. 6 months. 9 months. That was quite a bit of money sitting in a savings account. And not that I was complaining, but I barely dipped into it.
I was steadily employed. My car was 13 years old, and lasted for 5 years after that, and then I went car-free for 3 years after that. My laptop was 4 years old, but lasted another 3 years, and actually buying another laptop wasn’t that expensive. I had an unexpected medical emergency but that didn’t cost as much as I expected it to. So I just had a bunch of money sitting around.
How I Manage My Emergency Fund
Meanwhile, I was also saving in my 401k and my Roth IRA. I had paid off my loans. And I got to thinking, let’s say I lost my job. I wouldn’t need all of the money immediately. If I lost my job, I would get a 0% interest credit card to float me for a year. Even if I lost my job during a recession, I would have that year to liquidate a month or a few months of stocks assuming I didn’t get another job for over a year.
I don’t have any dependents or a mortgage, so if needed, I could drastically reduce my lifestyle rather quickly. And there’s also the possibility that I wouldn’t lose my job and that I would have missed out on all the dividends and growth from keeping my money earning 1% in a savings account for years.
So I started moving money from my emergency fund into my investment accounts. I haven’t looked back. This is a bit of a moot point now because I quit my job in February without pre-planning. The stock market is booming and I’m happy that I’ve let my money grow over the years. That was the choice that I was the most comfortable with.
Conclusion – Should You Raid Your Emergency Fund?
What’s an emergency fund? It’s the savings you have to give yourself peace of mind in light of the existence of unexpected events. It can be any amount, and it can go up or down. You can dip into it for any kind of unexpected event and you shouldn’t have to answer to anyone else about what constitutes an “emergency.”
Also check out J. Money‘s great post about this topic!