At what point is an emergency fund NOT needed?

[Teamworker]

I'm wondering if there is a certain time when its better for an individual to invest rather than have an emergency fund. If a person has a certain net worth, and hopefully someone here has a general idea as to that amount, can they avoid the emergency fund? I think of this similar to being self insured with a life insurance policy but don't know if that's correct.

Drawing money from an investment like a 401k or just a personal investment will have tax implications and possibly a penalty, but if a person makes good money and has a lot saved for retirement, is there ever a time it could be worth the risk of this taxes? I'm assuming the money could be invested in something like S&P Index Fund. Would that potential interst earned over a lifetime be worth the potential risk of taxes/penalties? Opinions are welcomed but facts/real numbers, would be appreciated

[lorraineb]

In my mind, you'll always want an emergency fund that you can access in a relatively short period of time. What you seem to be asking is where can you place the emergency fund, and that all depends on what your risk tolerance it. A good example is that a friend of mine has almost no extra cash in his savings accounts. He uses his credit cards as his emergency fund. He has a limit of over $50,000 over a number of cards. If he needs quick money, he uses them and then transfers money from other accounts to cover the expenses so he never has a balance. it's not how I like to do it, but it works for him.

I think as long as you can get access to your money relatively easy without it costing you a lot to access it, then where you keep it is up to you. You asked for hard numbers, but again, this would vary from person to person depending on what they felt an emergency fund should hold plus what their monthly expenses were.

[dczech09]

You will always need an emergency fund. An emergency fund is used to cover stints of unemployment, the car breakind down, roof leaking, furnace going out, water heater breaking, etc. Basically, it is cash to cover unexpected items that you cannot necessarily budget for. It is important for ANYBODY to keep it in cash so that it is easily accessible when you need it.

As far as getting to a certain point where you don't need it...

If you have a net worth of like $2,000,000, you may argue that you do not need an emergency fund. So why not just put the emergency fund money into an investment for growth? The truth is that once you have such a large amount of money in investments and have a nice sizeable net worth, what difference does it make to put another $20,000 into investments? See what I'm saying?

Regardless of your net worth, you are not immune to emergencies. You will always be living on a "fixed budget;" it is just that your budget may be a lot bigger when you have more money and more income.

To me, it makes sense to ALWAYS have an emergency fund.

[feh]

As far as getting to a certain point where you don't need it...

If you have a net worth of like $2,000,000, you may argue that you do not need an emergency fund. So why not just put the emergency fund money into an investment for growth? The truth is that once you have such a large amount of money in investments and have a nice sizeable net worth, what difference does it make to put another $20,000 into investments? See what I'm saying?

I agree with this statement. By the time your investments get to the point where an EF really isn't necessary, you won't care if that $20K (or whatever amount) is in the market or not.

I'm preparing for early retirement in a couple years. Our EF is smaller than it was 10 years ago, but we still have one, even though we are essentially financially independent. It's going to come in very handy next month; I underestimated what our 2013 tax liability would be, and I owe large numbers to the state and IRS.

[Nika]

If someone has big enough cushion in their monthly budget to absorb minor things.

Plus, you can put most emergencies on a credit card and have 30 days to transfer the money out of investments to pay the bill.

I think if your EF is large enough that if the market goes down 30%, your emergency can still be covered, there is no reason to keep that money doing nothing.

Sure, there is a small chance that you will need the money when the market is down. There is also a chance that you won't have an emergency for years, in which case the gains from the market would offset the losses in that scenario.

I consider my taxable investments my EF.

[autoxer]

I've been gradually lowering the amount in my savings account and shifting my EF fund to investments. I currently have 15% of my yearly income held in a savings account, but I've been working on reducing my spending, so this would cover 4 - 5 months of expenses. As I build up more in my taxable account and my Roths, I would feel comfortable reducing my savings account to about 1 or 2 months worth of expenses. I don't have any large expenses planned in the next year, my debt ratio is very low and my savings rate is very high, so I might as well get my money working for me.

[Eagle]

I would say that I'll always want an emergency fund. The peace of mind alone would be well worth it. I'd always like to have 6-8 months of savings in an emergency fund. Just my comfort level I guess.

[mholl95]

Hi Teamworker....To me, you don't always need to have piles of cash sitting in a simple savings account as an emergency fund. I've never had a formal emergency fund and have been laid off from a job or two over my career. I have a formula that I work with, but here's the gist of my thinking.

1. You should have enough money in savings/investments that you could pay off a all your debts if you wanted to. (Note: For new savers/investors, I can see adjusting this a bit to exclude a home mortgage, but the important point is to have adequate coverage for your outstanding debts.)

2. At least 50% of your debt total should be matched by savings/investments that are not in investment accounts that would result in a tax penalty if you withdrew those funds. So, for example, the money could be invested in stand alone mutual funds which are easily accessible.

It's fine to have a few thousand dollars in pocket money sitting in a saving account to take care of small things. Plus, you should have a designated credit card to handle minor emergencies. But if you've done dollar cost averaging over a number of years, and your portfolio is well diversified, I think you'll be fine. I tend to sleep better when I know that I can easily take care of my debts versus several months of expenses.

Cheers
Michael