Why I (currently) Have a Tiny Emergency Fund

I’ve gotten a few comments in the forums that I frequent about my dismal emergency fund. Right now I’m sitting on an emergency fund of $2,000 which isn’t even enough to cover one month’s expenses. The first thing I would like to say is I am working on building my emergency fund in 2017. If the stars properly align, I may even have a 3 month emergency fund in a couple of months.  Secondly I’m just going to admit that I am being gutsy.

When I first learned about the goodness of Roth IRAs my first inclination was to max it out. I read about the power of compound interest. I wanted the compound interest. I also read how an uninvested Roth IRA could serve as an emergency fund. I really just wanted the compound interest. So I invested my Roth IRA and went without an emergency fund for all of 2016. I worked on maxing out my Roth IRA for both 2015 and 2016 within the 2016 calendar year.  Maybe this is a taboo move in the personal finance blogosphere but hey I did what I wanted.

Still I wasn’t totally without access to “emergency” funds. I established an FSA account in 2016 knowing I had some costly health problems. This helped shelter the blow  of several thousand dollars in medical costs. I fully anticipate 2017 will be a year of high medical costs  due to the nature of my chronic illness. I hope it’s surprisingly less expensive, but I went ahead and funded my FSA even more than last year.  I also purchased disability insurance.  It’s also important to note that my retirement accounts serve as emergency funds for early disability retirement.

I became less compelled to establish an emergency fund as certain dates drew near. In September my lease ended and I began to rent my apartment month-to-month.  This means that if I do experience an emergency the $1,650 I spend in rent can be slashed very quickly.  My family also moved into the area and I now had a place to stay should I experience the emergency of all emergencies. My disability insurance will be effective in 3 months. Once it is effective, if I do get sick or injured I shouldn’t be without income for too long.

So I have no liabilities, and no recurring monthly expenses that are absolutely set in stone other than a $30 cell phone bill. In the worst situation I’d be able to lower my monthly expenses to about $1,000 by moving out of my apartment, placing everything in storage and moving in with my parents. I know one might think that relying on parents for emergencies may burden them, but that’s definitely not the case for my family.My intention wouldn’t be to rely on them financially, but just to have a place to stay. I have been 100% independent since I turned 18. When my older sister lost her job a few years ago, my parents wanted her to move in right away to minimize the damage to her finances.  It’s easier for everyone when you remain in the green versus the red.

So for all those reasons I focused on maxing out my Roth IRA, largely ignoring my emergency fund. I don’t regret my strategy probably because I had no real emergencies. As I said, I’m working on establishing my emergency fund in 2017. January is a month in which I will be seeing three paychecks. Since I only budget for two, the third paycheck will go directly to my emergency fund. It’s the end of the first week in January and my liquid holdings currently stand at:

  • Checking & Savings: $1,000
  • Emergency Fund: $2,000

According to the schedule I laid out, I expect to have an emergency fund large enough to cover 2 months of living expenses ($4,400) by the end of March.  My goal is to have an emergency fund of  $5,500 by the end of the year with an ultimate goal of $10,000 within the next 2-3 years.  Most likely I will be investing anything over $5,500.

Another mental note I’d like to make is that should I experience an emergency in 2017, I will be able to increase my income by $400 a paycheck by lowering my retirement contributions.  Even if I were to become unemployed, my paycheck is delayed enough to do this at least twice, for an additional $800 in one month.



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