I Don’t Have an Emergency Fund: Here’s Why
Written by
Martin Dasko
Edited by
Susan Kim
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Emergency funds can save you when a difficult financial situation arises, like a health issue or a flat tire. While most financial experts advocate having an emergency fund, we spoke with someone who doesn’t.
Paul Gabrail, the founder and host of Everything Money, doesn’t have a traditional emergency fund because he has inherited, saved and invested in ways that could provide him with cash flow if he stopped working tomorrow. He discussed with us the logic behind his stance against emergency funds.
The Case Against an Emergency Fund
Gabrail acknowledged that many Americans don’t have the savings to invest in a way that will provide them with a cash flow, but he still advised against an emergency fund. Here’s why.
1. There Are Programs in Place for Assistance
“The reality is that IF those emergencies occur, you have options,” Gabrail said. “There are programs in place to safeguard against those such as insurance and unemployment benefits.”
Gabrail noted that most people save up an emergency fund to have cash on hand in the event of an injury or a job loss, but he stated that there are programs specifically put in place to help out with these situations.
Gabrail added, “You might even be able to borrow from your family.”
The belief is that people have more support than they realize so they don’t have to make saving up for a rainy day their top financial priority.
2. You’re Missing Out on Retirement Savings
Gabrail noted that saving up for an emergency fund requires you to sacrifice on retirement savings since you’re locking up a decent amount of capital.
Gabrail shared insights on the length of time it takes to save for an emergency fund:
“Let’s say you set aside 15% to save. That means it would take three years to save up that amount. That’s three years of savings that could go into retirement savings instead. So you’re putting money toward an occurrence that MIGHT happen and missing out on savings for the most important years of your life. The idea of an emergency fund taking away from 401(k) and IRA savings at the earliest years of your life is insane to me.”
The logic is that you could benefit more from investing in your future as opposed to leaving funds around just in case something happens.
3. Building an Emergency Fund Has an Opportunity Cost
“By setting aside money for an emergency fund, over a 30- or 40-year period, we are talking about potentially hundreds of thousands of dollars in lost savings for retirement,” Gabrail said. “That seems near-sighted to me for something that is less likely to happen, and if it does, you have plenty of other options.”
When you have months worth of expenses saved up in an account that doesn’t earn much interest, you’re missing out on potential earnings in the eyes of Gabrail. This means that your emergency fund is interfering with your ability to make a decent return on your funds.
4. You Can Rely On Your Credit Card for Emergencies
“Having an emergency fund is cliche advice that is given, in my opinion,” Gabrail said. “This will be shocking to many, but I recommend to have a credit card available to use as your emergency fund. The goal is to use it ONLY when you need to.”
Gabrail elaborated, “I’m not condoning using credit cards to rack up a bill or debt and not be financially responsible, but it can be a great resource for true emergencies.”
The belief is that you could tap into your credit card if you were stuck with a surprise expense.
Why This Strategy Might Work for Others
Does it make sense for everyone to ditch an emergency fund? You could try to get away without building an emergency fund for a few reasons.
You Have Credit Card Debt to Pay Off
“Having high-interest debt, for example, might mean that you’re understandably allocating all of your extra resources to resolving that debt as soon as possible,” said Erika Kullberg, an attorney, personal finance expert and founder of Erika.com. “In this case, the interest saved by paying off high-interest debt could outweigh the benefits of having cash in a low-interest savings account, at least temporarily.”
When you have debt you want to pay off, you could switch up your financial priorities and focus on becoming debt-free instead of building up emergency savings. While this isn’t the best solution for everyone, we all have unique financial situations.
You Have a Strong Support System
Kullberg noted that someone with access to a strong financial support system, such as parents, extended family or a spouse, may not need emergency savings since they have options for handling surprise expenses.
You Have Investments You Can Liquidate Easily
“Another potential is if a person has access to investment assets that can be quickly and easily liquidated,” Kullberg said.
Some people may have investments that they can sell to handle emergency expenses, and this could lead to them believing that they don’t need savings for a rainy day.
Why This Strategy Might Not Work for Others
Gabrail has been able to save money and make financial moves, which put him in this situation. This also means he’s in a better position than many average Americans, so here’s why not having an emergency fund may not work for you.
You May Not Have the Support System
Gabrail acknowledged that some people may not have friends or family they can rely on financially or borrow money from. If someone doesn’t have a support system, they have to create their own by building up an emergency fund.
Self-Employed People Don’t Have the Same Resources
“Those who are self-employed need to have savings in their business,” Gabrail said. “Their goal should be to increase their balance sheet strength and increase the value of their business (through increasing revenue and profit).”
Self-employed people may not have access to government resources if they lose a client or have problems with cash flow. Someone in this situation would definitely want to build up an emergency fund for their business and personal life.
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