- Traditional financial advice says you should have three to six months of expenses in savings.
- But I wiped out my emergency savings years ago and have no regrets.
- I have plenty of money invested, and I’d rather let it grow there than sit in a savings account.
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There are quite a few tenets of personal finance that can make a huge difference in your life if you follow them. For example, avoiding unsecured debt can help you build wealth faster, and learning to live within your means can help you avoid unnecessary stress. The advice to “save a certain percentage of your paycheck” for retirement and to “invest early and often” also make sense for pretty much everyone.
But, what about advice on emergency funds? As a financial writer who frequently interviews financial advisors on the topic of emergency funds, I have been told over and over again that everyone should have three to six months of expenses stashed away in a bank account they can quickly and easily access.
I did that for quite a while, but I depleted my emergency fund a few years ago and have never, ever looked back. Here’s why this strategy has left me better off so far.
1. My savings account is earning 0.40% APY
I opened a CIT Bank Savings Builder account specifically for my emergency fund several years ago, mostly because the interest rate was over 2% at the time. I had more than $25,000 in my e-fund, and that helped me qualify for this rate of return without any fees. I also liked how easy the account was to use, and the fact I could make transfers to and from this online bank to my normal accounts with ease.
This high-yield savings account is still “good” when you compare it to others, yet the current rate of return is 0.40% APY. Considering inflation is ongoing and especially high right now, I’m so glad I haven’t had $25,000 languishing in this account for the last few years. I think I have around $1,000 total in my savings account right now, and I’m perfectly fine with that.
2. I have easy access to credit
I have always been told that I need an emergency fund in case my car breaks down or I face unexpected medical bills or other surprise costs I didn’t specifically save for. However, I use rewards credit cards faithfully and pay down my balances to $0 every month. Due to my excellent credit score, I also have six figures in available open credit at any given time.
If I had a true “emergency” expense, I would probably charge it to my credit card to earn rewards anyway. I never, ever want to pay interest on my purchases, but this would buy me some time to access the cash I need to pay off the debt before my credit card’s due date.
3. We have ample assets outside of retirement
My husband and I save for retirement in Solo 401(k) accounts with Vanguard, but we also invest our extra funds in index funds every month. By and large, this is the main reason I depleted our emergency fund. We do have extra money we could use in an emergency. We would just have to sell investments (and pay taxes) to use it.
However, I am very happy with the tradeoff I have made here. Where I could have had $25,000 sitting in CIT Bank the last few years earning 0.40% APY, I invested my emergency fund in the Vanguard Total Stock Market Index Fund (VTSAX), which is up 24.48% YTD (as of this writing). Also note that the three-year return on VTSAX is over 21%.
While I would owe the tax man if I had to sell investments to cover emergency expenses, the return I have earned makes this sacrifice well worth it. Also, note that I have not needed to access this money since I depleted my emergency fund. If I can keep my money invested and growing without having to sell in an emergency, I’m increasing my returns even more.
4. We have multiple income streams
Finally, emergency funds are sold as a backstop you can lean on if you lose your job. The fact I’m self-employed has taught me this reasoning for an e-fund doesn’t really apply to me.
My husband and I have several businesses going, including my writing business. Our income fluctuates in huge swings from year to year, but we have never been in a situation where it has been a problem.
Having multiple income sources means we never rely on just one thing to work the way we want. We have money coming in from different directions, and the fact we don’t have traditional jobs means we can never be “fired.”
Most traditional financial advice is definitely worth heeding, but you should still take the time to decide whether every rule applies to your situation. There are so many nuances in personal finance that it’s likely some advice is outdated, too generic, or not really suited to help you where you’re at.
At the end of the day, that’s why it’s called personal finance. Money moves are personal, and the best financial moves for one person won’t work for everyone. The key to getting ahead is understanding how to work the system and doing your research so you can make an informed decision.