Is Our Emergency Fund Redundant?

For years, I’ve kept an emergency fund.  This is split between an ING Direct (soon to be Capital One Direct) and Ally Demand Notes account.

Along with the emergency fund, we have money set aside for other savings goals.   These include things like:

  • New Car – Eventually we’ll need to replace one or both of our cars and this would be so that we could avoid or reduce a monthly payment obligation.  This should probably, in reality, say ‘Car Replacement’ since new car implies that we would buy a brand new one, which in all likelihood is not something we would probably do.
  • Home Repairs – Right now we have a good chunk of money in here but will probably be depleted next year when we have to replace the roof on our home
  • Car Repairs – A fund that I keep for things like brake jobs, new tires, and if we would ever have to pay a deductible if there was an accident
  • Cashback Rewards – When we cash in our checks from our cashback reward credit cards, we stash the money here.  So far, both of the flat screen TVs we’ve bought have been funded entirely out of this account.
  • Next Years Tax Refund – When we make withholding adjustments to avoid giving the government a big free loan, I stick most of the money here, and then we divvy it out come tax refund time next year.  This is pretty boring and generally goes to bulk up most of the other accounts here.

There are a few other categories here, but I guess after thinking about it awhile, I’m wondering if our emergency fund is entirely or partially redundant.  It seems to me that if there were an emergency, the funds could be used from other allocations to cover the immediate needs that would be required.

Let’s look at a few potential emergency situations which could require access to these funds:

Job Loss

Say that I lost my job. This would take away all income from our family.  If this were to happen, we could tap into the fund for a replacement car to cover bills until I found a new job.  The reason I would consider this is because if I have just lost my job, there is no way I’m going to be putting any thought into buying a new car, so wouldn’t that, in a sense, free up that money for immediate use?

Medical Emergency

The same goes with a medical emergency that required a large payment.  If one of us were to get sick or severely injured and have a large medical bill, chances are your entire focus is going to change anyways.  The ‘new car’ fund could again be looked at as that wouldn’t be an immediate need.  Buying gadgets and such with the money in our cashback rewards allocation would no longer be a priority and that money could be put toward the purpose of covering us in the event of an emergency.

The Car Gets Totaled

If we were to get into an automobile accident to the point where the car would need to be replaced, the insurance company would likely give us a check for the value of the car less our deductible.  We could use this to buy a similar year and model type car, or use the money in our new car fund to buy a newer car.  Either way, unless there was an associated medical or legal cost involved, the subcategories that we have allocated would seem to cover most of the potential expenses here.

To summarize, if we were to change direction here, we wouldn’t be eliminating our emergency fund, we would just be giving multiple purposes to the funds that we have allocated for other items, keeping those allocations the same, but adding a secondary ‘emergency’ fund to many of the categories.

Allocation

If we were to take these funds out of ‘dedicated’ emergency duty, the question would be what we would do with the money.  We could go out and take a great big vacation or do a big project around the house or find some other way to spend it…but if you know me well enough, you know none of those things are going to happen. Spending the money is not an option.

We would look at doing something along the lines of:

  • Investing it in a standard brokerage – This would give greater opportunity to increase the value of these funds (of course increasing the risk of losing them, as well).  It would also be pretty easy to access these funds should the need arise.  We could manage the money ourselves or see about setting something up with a financial adviser.
  • Investing it in a retirement account – We could boost our retirement savings with this money.  This would keep our net worth the same, but would reduce our cash liquidity, and the rules surrounding retirement accounts would make it so that these funds would be pretty much inaccessible for many years.  There could be tax advantages or other reasons where this would make sense.
  • Pay off debt – The only debt we have is our mortgage and one remaining student loan.  The student loan could be paid off in full, which would free up around $100 per month.  This could, in essence, be used to re-build the emergency fund over time if I wanted to stay somewhat conservative, or that money could be funneled toward investment, retirement, or saving for some of the other goals I already mentioned.

I’m a pretty conservative person when it comes to our money, but at the same time, I don’t want to have money that’s sitting around doing not much of anything if there are opportunities to grow it faster.  Back in the day when the rates were 5-6%, you could justify having this money sitting there, but with the average rate between our two accounts at barely over 1%, it’s probably not even holding its value over time if you consider the effect of inflation.

Readers, I would love your opinion?  Do I keep things as is, make the other funding categories dual purpose or do you have some other potential approach that I haven’t yet considered?  I’m always up for new ways of thinking.

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30 thoughts on “Is Our Emergency Fund Redundant?

  1. We do a lot of the same things and have the money segmented for different needs/goals. I know rates are crappy, but I see the E-Fund as a way to help if one happens and not to be making money. Any money I make on it is great, but I want security for it. We have other funds for investing, but our E-Fund will stay in some sort of savings vehicle.
    John S @ Frugal Rules recently posted..Why Rebalancing Your Portfolio is Like Buying a Carton of EggsMy Profile

    • I’m pretty conservative regardless, so whatever direction I take, preserving the capital will be a top priority.

  2. As always it depends. If your car is toward the end of its life then you might need a job loss and car replacement fund. Who says you don’t total the car after driving home distraught after you lost your job? That said as long as you don’t blow the money you could invest it. That or if the new car is a few years away why not put it in a more appropriate investment vehicle rather than cash? Just my two cents.
    Lance@MoneyLife&More recently posted..5 Affordable Home Makeover Project IdeasMy Profile

    • I think the trick is to keep it as liquid as possible. If you needed to use the emergency fund, would you be able to put the expense on a credit card for up to 30 days, giving you time to move the money out of wherever it was being held?
      Jon recently posted..Free alternatives to cable TVMy Profile

      • Yes, we definitely have the means to get us through the short term, which is why I wouldn’t feel we’d be increasing our risk of not having the ability to pay for a large, unexpected expense.

    • Yeah, there are multiple angles. Our cars are 6 and 7 years old but both have low mileage (both around 55,000) so I’m hoping they last for at least another few years.

    • That’s exactly the reasoning that got me here, I’m just trying to think outside the box and decide if I’m being overly-organized

  3. I think some of the things are redundant in your emergency savings while others are not. I would say that repairs to cars, appliances, or something else would come out of our EF. But if it works for you, I’d go with it. Better to err on the side of being too cautious.
    Greg@ClubThrifty recently posted..How Much Money Is Enough?My Profile

    • True, though the effective rate difference is around 1%, so not that much. We locked in the rate sometime in 2005 or 2006 when you could lock in super low rates.

  4. For me, savings are savings. I never really think of a particular savings account to be used for a specific purpose. I have additional sources as backup as well. It is indicative of how I think. In accounting, they call it “belts and suspenders”. If one fails, there is another resource.
    krantcents recently posted..5 Awesome Money Saving TipsMy Profile

    • If you don’t have that safety net elsewhere, that definitely changes things. It’s always so interesting how everybody has such vast differences in our financial situations!

  5. If preserving the capital is your top priority, I would pull it out of the bank and away from any accounts earning paltry rates because they are just gnawing through your purchasing power. Invest it in a wise and conservative area that you’re comfortable with. There is just no ‘easy’ answer in this economic climate, unfortunately.
    Jennifer Lynn @ Broke-Ass Mommy recently posted..Plumping Our Family Coffers with an Itty-Bitty Gold UnicornMy Profile

    • True, but most of the conservative investments don’t pay much better. You have to be willing to increase your risk to get the payout.

  6. I am struggling with this a bit myself. I have a certain dollar amount in my mind that I feel needs to be liquid, but maybe that should be somewhere else if we have a credit card or HELOC that could get us through the short term to pull money out of another investment. I think it will be an evolving process as I am selling my business and will be a contract employee next year. If my income is stable, I will feel more able to take money out of savings and put into other investments. I’m curious to see what you decide.
    Kim@Eyesonthedollar recently posted..Do Your Purchases Reflect Your Values?My Profile

  7. For certain goals that are longer in the future, maybe 2-3 years you could do a CD ladder. The rates wouldn’t be a whole lot better, but you’d make a little more money to go towards the goal.
    But it’s best to not see things that will happen as an emergency. We were told our roof was going to need to be repaired within five years of owning the house. It was not going to sneak up on us. We didn’t save for repairs it became an emergency.
    If you have money allotted for something it’s less of a hassle.
    Justin@TheFrugalPath recently posted..Coupon Folders: A System that Works for MeMy Profile

    • I have thought of a CD ladder though the rates don’t seem to be much better than with a money market these days. Maybe it’s worth another look.

  8. I am with John on this one and feel the E-fund is there for an emergency only even if it is crappy rates. I get 2% and that’s nothing to write home about but I’ll keep 6 months of savings there just to be safe. You can invest your money however you want to it’s up to your personal goals and values. What would you like to do with your money?
    Canadian Budget Binder recently posted..CBB Net Worth Update~November 2012My Profile

    • The effective rate on the student loan is only a percent or so higher than what we’re earning on the account, so the interest savings would be negligible as far as that goes. We were lucky to lock in the student loan at an ultra low rate, so it’s more of a nuisance than anything else. Your suggestion is one of the ideas on the table!

  9. I’m thinking about I-Bonds for some of my emergency fund stash. They are paying higher interest than savings accounts or CDs. The money would be reasonably liquid, though you have to hold them for 5 years to get the full interest earned. Still the principal would be available for an emergency. I wouldn’t put all my emergency fund in I-Bonds though. Thoughts on this?

    • I would have to look into it. Five years seems a long time to tie up your money unless the rates are absolutely incredible.

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