I saw a great thread on Twitter/X a few weeks ago that questioned the logic of having an ’emergency’ fund. At first, I was taken aback. I imagine the voice inside my head was exclaiming, “If you don’t have an emergency fund, you’re a fu*king idiot.” However, in recent weeks, there have been several times when I’ve questioned my own thoughts on the necessity of having an emergency fund. Determining if setting aside a good chunk of money as if it doesn’t even exist is the best form of financial management.
I’ve had an emergency fund, in some form or fashion since becoming an adult. As I wrote in an article about financial literacy and how few Americans have it, the ability to cover a $500-$1000 expense with money from a savings account is something only a minority of us can do. Forget about having enough to cover expenses for 3, 6, 9, or even 12 months should life get completely turned upside down. But is storing that kind of money away with next to no benefit the smartest thing to do?
I used to think it was. And maybe it still is. After all, the title of this article is, “Why I Am Thinking About Getting Rid Of My Emergency Fund.”
However, the reason I’m thinking about it is because my situation is unique to the average American for a variety of reasons besides the fact that I already have a true emergency fund. Besides the money sitting in a savings account, I have multiple brokerage accounts consisting of investments in index funds and individual stocks. So even if my emergency fund bled out and the market tanked, I would still have many thousands in said brokerage accounts to weather the storm.
Right now I bank through Ally because: 1) I have no use for a physical branch, 2) they have high-yield savings accounts (HYSA) and 3) for the times I do need an ATM, I get reimbursed up to $15 per month in fees. Ally is in a long line of banks that offer these relatively straightforward perks, so you could really sub them out for anyone. As long as there is a HYSA.
You may be asking, “What’s a HYSA?” It is basically a savings account offering many multiples higher interest rates than the big boys like Chase and Bank of America offer. For instance, the basic savings rate at Chase is a paltry .01%. Compare that to my 4.2% rate at Ally. For illustrative purposes, if you have $1,000 to save, you’d end up with $1,042 at the end of the year with Ally, while banking at Chase would result in $1,001 on December 31. If you’re going to have an emergency fund, the worst possible thing you can do, besides using it on booze, gambling, or low-end prostitutes, is park it in a big bank savings account.
Now, if that 4.2% stayed there in perpetuity I wouldn’t be typing this sentence, nor would I dedicate time to write an article. A yearly increase of 4.2% on my savings balance with absolutely no risk is a nice tool to use. But, even though Biden and Harris are doing their best to prevent it, inflation will eventually decrease and interest rates on everything from your savings account to car loans and mortgages will dip with it. Within a couple years, the HYSA rate at places like Ally will be in the mid-to-low twos.
Once the savings rates drop, I’ll have a decision to make. Do I want to have $15,000 sitting in an account gaining modest interest on the off-chance disaster strikes, or do I want to add that money to my already existing investments in stocks and index funds? My worst-case scenario at that point would be that my portfolio drops 50% in a day and I’d still have roughly $15,000 for use in an emergency. My best case scenario is that nothing bad ever happens and that $15,000 grows at the approximately 10% annual rate that the S&P 500 has delivered since Dwight Eisenhower was in office.
Thirty years from now, assuming an emergency hasn’t struck, that $15,000 if left in a savings account with a 2.5% annual return would yield just short of $32,000. If I invest it into an S&P 500 index fund, I’d have $297,000 by the time I’m 65. I could run calculations for 5, 10, 15, or even 20 years, and I would still be significantly ahead by going the S&P 500 route. So far ahead that if disaster struck, there’s a strong likelihood that even if the market dropped 25% in a day, I would still have more money in the brokerage account than the savings one.
Sh*t, I think I’ve talked myself into something.
For the record, my risk tolerance is high. I’m in my mid-30s, so time is certainly on my side. There isn’t a realistic mistake I could make in the next 5-10 years that couldn’t be fixed with 20-25 years of compound interest. I also don’t want to take that time for granted by sitting on my hands. If you extrapolate a 10% annual return on $10,000 then you’re looking at $2.73 of earnings every day. If you’re wasting time, you’re quite literally wasting money!
Someone might be reading this who is in their mid-40s thinking I’m the dumbest POS alive. You could be right! But that same person probably has very little, if any, risk tolerance. And that’s okay, too.
As with anything on this site, my opinion isn’t necessarily to get you to change your mind. After all, your decisions in life are probably not going to have an effect, let alone a lasting one, on either me or my family. It’s meant to get you to think. So think. Are you in the position to weather a potential storm should your money, instead of being tied to a low-interest savings account, be invested in something more substantial? If so, I strongly recommend you think about getting rid of your emergency fund.
