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I've seen several questions (e.g. here) that challenge the need for complete liquidity in an emergency fund. Answers often focus not just on the potential for market downturns to affect your ability to liquidate assets, but even the 2-3 day delay in fund availability being a potential disaster. However, I cannot think of any real-world situation in which this time sensitivity could actually be the case, and no answer that I've seen so far offers any examples.

A year after my bankruptcy in my much younger days I was approved for a credit card with no annual fee and a $3,000 limit. Within a year I was at $10,000. So if someone with bad credit, only 2 years post-bankruptcy, can attain $10,000 in unsecured credit, I imagine most anyone can. As such, home repairs, car repairs, medical expenses, and most anything else can be put on credit for up to 30 days with no interest, which is far longer than is needed to liquidate any kind of stock or mutual fund. And beyond $10,000 also pushes the limits of 3-6 months of salary for many. Yes, I'm assuming that anyone with enough forethought to use an emergency fund would also have their credit cards completely paid off.

Assuming a credit card cannot be used, or for some reason cannot be attained, what sort of emergency requires payment up front for which 2-3 days processing of a stock sale would pose a problem? Any home repairs and car repairs I've had done allow a few days for payment, or accept a personal check at the end of the job (which will often take 2-3 days). All medical bills I've received appear after insurance has processed them, which can take 30 days or more. Short of owing money to the mob, or a zombie apocalypse, what sort of emergency could require immediate liquidity of an emergency fund.

For the purposes of this question I wish to understand only the need for immediate liquidity. Issues with market volatility are a separate discussion.

Stephen
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Nicholas
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    It's worth keeping in mind that the unsecured credit market is much tighter and more carefully controlled since the 2007 financial crash. What used to be true may very well not be anymore. – niemiro Aug 07 '17 at 18:06
  • Just curious: Was this question suggested by my comment here? – Barmar Aug 07 '17 at 20:29
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    A kidnapping where you need to pay ransom the next day to get your loved one back. Maybe I've just been watching too many movies. – Justin Ohms Aug 07 '17 at 21:21
  • @Barmer - what makes you think that? Just a coincidence. (I am kidding. Likely exactly as you believe) – JTP - Apologise to Monica Aug 07 '17 at 21:36
  • Although not sure if this is your intent for the questions but not having a credit card makes a lot of things more difficult. Including renting a car or hotel, buying a plane ticket all of which can be needed in an emergency. Some you can do with a large deposit. – webwake Aug 07 '17 at 21:50
  • @Barmar It was prompted by reading several comments and answers similar to yours in a short time period. I was just wandering about this specific aspect of what appeared to be very common advice. So in a way: yes. :) – Nicholas Aug 07 '17 at 21:59
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    In some cases it could take 11 days: Start the transaction friday at 5:30 Only can sell stock on a business day at before 4:00 (+2 days), mutual funds wait till closing to execute sales (+1 day) after sale is complete unable to initiate ach transfer as business is closed (+1 day) ach transfer (+2 days) bank flags as a large or unusual transaction and puts the money on hold (+5 days) – webwake Aug 07 '17 at 22:05
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    One thing no one seems to have mentioned: bail. – jamesqf Aug 08 '17 at 00:48
  • Also see this question - there are several good answers on this question that also answer yours https://money.stackexchange.com/questions/83692/why-do-i-need-an-emergency-fund-if-i-already-have-investments – pojo-guy Aug 08 '17 at 02:28
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    Does anybody actually say an emergency fund has to be literal cash at your house? I always thought it should be money in the bank, which presumably would involve a check or something to remove in larger quantities... – user541686 Aug 08 '17 at 10:18
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    An emergency fund exists precisely to avoid taking on debt. – henning Aug 08 '17 at 10:25
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    Another situation where you might want quick access to a goodly amount of ready cash: Your car terminally breaks down, is wrecked, or stolen. So you need to buy another fairly quickly (especially if you only have one), and prefer to buy from a private party rather than a dealer. – jamesqf Aug 09 '17 at 04:01
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    @henning But if the debt is short term, no interest, and can be paid almost immediately from the fund, what is the point of avoiding debt? Generally we avoid debt due to its negative repercussions; not just because all debt is bad as a rule. – Nicholas Aug 09 '17 at 15:52
  • @jamesqf Good thought, but this could certainly be covered by selling investments, as I can't imagine ever making a purchase this big without days of research (at a minimum) first. – Nicholas Aug 09 '17 at 15:54
  • @jamesqf, Been there. On a Tuesday my son drove the car through a flash flood, engine ingested water, ruined. Needed a replacement for a European trip by Saturday (including changing insurance details etc. etc.). A bit of a nightmare. Thankfully lots of funds in different places. – Philip Oakley Aug 09 '17 at 17:06
  • @Nicholas: "This big"? We obviously have different parameters: I wouldn't spend more than say $5K on a car, and that's not a terribly significant amount to me - less than what I have in my current cash account at the moment. – jamesqf Aug 09 '17 at 17:32
  • @jamesqf Good point. My car purchases are an order of magnitude different. – Nicholas Aug 09 '17 at 18:43
  • There is also the potential that your other assets could be frozen. Through a case of mistaken identity or even being caught up in larger regional situations. I don't believe that accounts have been frozen in general, but this was/is not an unthinkable scenario with the "GCC Crisis" for say a Qatari that was living and working in the UAE prior to this event. In areas where things get worse than the GCC case has been you may even need liquid assets for necessary bribes to leave safely (there are some places where bribes are expected T.T). – ttbek Aug 09 '17 at 22:13
  • ER visit + messed hospital accounting. This year my hospital sent the bill to wrong address (again, how many times I need to tell them a correct one!) and sent me straight to collection for not paying a bill they haven't sent me (they sent a different bill which I paid in full). It was easier to pay it all by CC and/or liquid funds than get a mark on my report and pay penalties and/or argue with credit reporting agencies. – Maja Piechotka Aug 10 '17 at 06:23
  • The unexpected emergency (think of a car accident for example) is always the one that justifies an extremely highly liquid emergency fund. – NoDataDumpNoContribution Aug 10 '17 at 08:21
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    In the first few days of a Zombie Apocalypse, you still might be able to find someone foolish enough to sell you things like water and gasoline for cash, not realizing that its value will have already dropped to that of the paper it's printed on. – Dan Henderson Aug 10 '17 at 21:10
  • Your assumption about access to credit is flawed. There are plenty of people with "good" credit history (never late, no negative marks) who cant get $10k unsecured, much less with actual negatives in their history. You might as well toss in walking uphill both ways in the snow. – iheanyi Aug 15 '17 at 08:10

14 Answers14

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I suppose this could really depend on the part of the world you're in, but there are still many instances of "emergencies" that need "cash". You have to decide how much cash is the right amount, but I still recommend having $1,000 or so in liquid cash. It can really make a huge difference. Let me give a few examples.

  • Bad weather. I live in Florida and after a hurricane if you want gas, food, or water, you're going to need cash. ATM networks are the last to get repaired. Same for internet. Cell services are not at the top of the list. You could be 4-5 days without access to your accounts. If you need anything in that time frame it's cash or the Red Cross.

  • Children. As a foster parent we keep some cash on hand because as kids come in to our care we want to get them in school right away. How are they going to eat? You can't give them your plastic, you haven't had time to setup "lunch accounts" or the like. Cash always works. Along those same lines are bus tickets, clothes, supplies and what not. Not everywhere will take an ATM card, and if your money is tied up in a stock then what are you supposed to do for 3 days? Tell your new kid that he can't eat?

  • Big Emergency problems. Like your car breaks down on the interstate. Sure it can get towed to the dealership, and yes they will add the tow to your bill, and sure you have a few days to pay it (while your car gets fixed), but how are you going to get around? Not all taxis take plastic around here. Almost none of the busses take plastic even though they are supposed to.

  • Lost Wallet or ID theft. Lose your wallet, good luck getting into your bank accounts. It can take weeks to establish your ID after you lose it in some cases. You want your ID, but you need your birth certificate. You have to GO to the state of birth and request it. Oh but wait, to travel you need an ID. No problem send away for it, but wait, you need to send them money to mail it. To bad all your money is tied up.

  • Running or Evacuating - So you need to evacuate for some reason. No big deal. But all your money is in a place you can't get to it. How do you put gas in your car. Lets stick with it and say you get to "cash out" an account of some kind. Guess what, they're not going to mail it to some random address. Now you're stuck fighting support centers to get them to understand that you need your funds delivered to New York even though you live in Florida.

In short, you don't need $100,000 in liquid funds, but there are a few cases that you need something liquid.

You also make a lot of assumptions. For example, not every one will have health insurance, or a heath problem that is covered by their insurance. Some serious home repairs are "down payment" upfront. Car problems like an accident that means you need a rental can totally be up front. Especially if credit cards can't be used.

yoozer8
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coteyr
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    Thank you; this is a fantastic answer. It covered a variety of issues I hadn't thought of due to location, local policies, or events I thankfully haven't experienced yet. Around here all cabs take cc, our kids' school will take cc or checks, and we have no major weather-related concerns. I've never lived anywhere else, so sometimes I forgot how different other geographic areas can be. – Nicholas Aug 07 '17 at 21:57
  • Much of what you discuss in the point on "Lost Wallet or ID theft" seems to center around lack of an identification document. That's fair enough, and I can certainly see it being a problem, but it's also typically one of the easier things to fix: Just have an alternative form of ID (a passport, maybe, or an ID card other than your normal one?) somewhere else but easily accessible to you. That will at the very least allow you to prove your identity, which is typically a very good start in many "I've lost my ID" situations. – user Aug 08 '17 at 11:14
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    @MichaelKjörling Sure, but many people in the US don't have a pasport. We don't need one. I finally got mine at 33 for a cruise. I could totally see someone not having one. And yes having a backup somewhere would help, except when it won't. See http://www.dmv.org/fl-florida/id-cards.php. You need a valid passport (again most US citizens don't have one) a birth certificate, or a "Certificate of Naturalization". http://andrewhy.de/percent-of-americans-with-passports/ – coteyr Aug 08 '17 at 12:25
  • There were a number of fantastic answers that I really appreciate, but this one best covered the specific examples I asked for, in quantity, and focused solely on liquidity (while many others posed hypotheticals that have more to do with quantity of funds and risk tolerance). So I'm accepting this as the answer. – Nicholas Aug 08 '17 at 12:52
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    Gravity closed the door. Keys, all cards, ID, and landlord's name & phone number all inside. Fortunately, was wearing clothes with a wallet in the pocket, for I had to go outside, prop open the outer door that also auto locks, get a bartender to call a locksmith for me, and pay €70 before he opened the door in five seconds. He used a trick I had learned decades before, but which didn't work when I tried it. – WGroleau Aug 08 '17 at 13:32
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    @coteyr minor nitpick: it's "lose" not "loose". I'd request an edit to fix the spelling but it's too trivial an edit. – zzzzBov Aug 08 '17 at 15:31
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    "Loose your wallet, good luck getting into your bank accounts." ????????????????? I can access my bank account online just fine without needing any of the information in my wallet. And none of the information in my wallet could allow someone else to change my login details ... I think this answer is being just a little paranoid. – user428517 Aug 08 '17 at 22:58
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    @sgroves can you withdraw cash from your online banking? I certainly can't. And i'll need cash to get through the week or so it takes to reissue a card through the app, not everywhere accepts nfc payments through a phone. If I can prove ID, I can do that all in a branch in a few minutes. But proving ID is bloody hard if I can't get home to get the passport stored in a safe location – Leliel Aug 08 '17 at 23:14
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    @Leliel I don't use cash for anything. It's 2017 ;) – user428517 Aug 08 '17 at 23:16
  • @sgroves I'm sure that you use cash very rarely, but not never. – Leliel Aug 08 '17 at 23:16
  • This seems to be more of an answer to "Should I have cash on hand?" as opposed to "How liquid should my emergency fund be". An EF should usually contain at least a month's worth of expense and often more. You're presumably not going to keep all of that under your mattress. – Lilienthal Aug 09 '17 at 14:22
  • @Lilienthal different terms for different people. I call this an emergency fund. I call 6 months of funds for use in the case of something like a job loss as a savings account. But different people call different things, differently. – coteyr Aug 09 '17 at 14:44
  • @Leliel No really, never. – user428517 Aug 09 '17 at 15:02
  • @Leliel: Assuming you have paypal, you can send cash from your bank account to any friend who can withdraw it for you without id; all you need is your password (which you should obviously keep safe). You can also do this if you know (memorize) your debit or credit card number even if you lost the physical card, even if you don't have a bank account attached to paypal. – R.. GitHub STOP HELPING ICE Aug 09 '17 at 16:52
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    Another car related example: many "tow illegally parked vehicles" places specifically only accept cash, and add hefty per-day fees until you show up to redeem your car. If you don't have $200-$300 in cash (plus cost of transportation to get there if you don't Uber) on hand to go get your car right away, you could end up spending twice that once you finally have it. – Bobson Aug 09 '17 at 17:32
  • @Leliel Using my bank's mobile app I can generate a cash code which I can type into an ATM and it will give me the amount I selected in the app. Only works at my bank's and the largest supermarket chain's ATMs though. – Chro Aug 10 '17 at 16:33
  • "heath" -> "health" – ErikE Aug 10 '17 at 19:53
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    The ID theft example is probably the most critical one. It may not be the most likely to happen to a given individual, but for the person it does happen to, it can take several weeks to regain access to just one account, 3-6 months to get enough of the situation fixed to start feeling like things might return to normal, and years to get everything straightened out. – Dan Henderson Aug 10 '17 at 21:04
  • @DanHenderson that justifies a further step: an independent card/account with a different provider to your main accounts, card kept separately. As well as some cash lying around. – Chris H Aug 11 '17 at 07:59
  • @Chro does that work in an emergency where your phone was stolen? – iheanyi Aug 15 '17 at 07:57
  • @iheanyi No, that's a mobile app feature only, it's not available through normal online banking. But if you have lost both your phone and your wallet you really are screwed! (Which I why I shudder at the thought of using those phone cases which also hold your bank card. One thing to lose rather than two) – Chro Aug 18 '17 at 13:34
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You are not wrong - just about anything can be charged and paid off in 30 days with a sale of non-liquid investments. So there are not any emergencies I can think of that require completely liquid funds (cash).

For me, the risks are more behavioral than financial:

  • What if you decide to keep your investments because you think they will earn more than the interest you're paying on the card?
  • What if the market is in a down cycle - will you be so quick to sell those investments knowing that they're worth less that they could be?
  • You might spend more when you float the bill than when using cash. If you need a new washer/dryer - are you going to bargain shop to stay within a set budget, or just find the fanciest model and charge it (maybe applying for the store's credit card to get 0% for 6 months)? Granted, that doesn't work in all situations, but it might make you get a second opinion on a car repair, or try to negotiate with the doctor/hospital to get a cash discount.

I'm not saying it's a ridiculous, stupid idea, and these are all "what-if"s that can be countered with discipline and wise decisions, but having an emergency fund in cash certainly makes all of this simpler and reduces risk.

If you have investments that you would have no hesitation liquidating to cover an emergency, then you can make it work. For most people, the choice is either paying cash, or charging it without having investment funds to pay it off, and they're back in the cycle of paying minimum payments for months and drowning in debt.

D Stanley
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    +1 for (as always) a well articulated answer. On the "People tend to spend less when using cash" - Have you ever seen a study on this that was not contrived? Not a one time experiment at the micro level, but a true study of a family sized budget? The sentiment feels true, but I continue to feel it confuses correlation with causation. Those who are in awful CC debt by definition have been avid card users. The real data would separate the pay-in-full vs the balance carriers. – JTP - Apologise to Monica Aug 07 '17 at 14:28
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    @JoeTaxpayer Thanks. I have not seen extensive study, but I know from personal experience that I spend less when using cash, both macro and micro. It's harder to go to a store and buy something with cash then to just "one-click" buy it on my phone. For larger items, if I only have $500 in cash to spend, that's my limit. I'm less tempted to go one or two models higher, spending an extra $200 for a few bells and whistles. – D Stanley Aug 07 '17 at 14:32
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    @JoeTaxpayer For macro, if we have $200 left in the cash "dining out" budget, it makes me choose my options more carefully. Maybe I take my lunch a few days a week instead of drive-thru when I know that I won't be able to take my family out to dinner on Friday. I also used to drive to the cheapest gas, but realized that I was only saving a few bucks, which was not worth the effort. – D Stanley Aug 07 '17 at 14:39
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    I am talking about the annual budget. Those who profess that it's a fact that card users spend 10% more, and if I say I spent $50K last year on cards, I must have wasted/overspent $5K. In reality, 90% of the spending was on non-discretionary. Home, car, life insurance, medical bills, gas, cable, phone, etc. No study jumps to that level. The level of "What fraction of your budget is 'fixed'?" – JTP - Apologise to Monica Aug 07 '17 at 14:44
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    @JoeTaxpayer I see what you're saying - I doubt it applies to payment of monthly bills (which would be paid by check/EBT otherwise). I would posit that it applies more to retail spending (where cash is an option). – D Stanley Aug 07 '17 at 15:12
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    "What if you decide to keep your investments because they earn more than the interest you're paying on the card?" - What kind of investments typically earn more than typical CC interest? I'd like to move some money there. :) And if you have a low CC interest rate (e.g. a promotional rate,) why is it a problem to keep that balance for the duration of the promo rate if you're earning more than that in investments? – reirab Aug 07 '17 at 16:51
  • @reirab I'm thinking of low/promotional rates (<5%), not typical 18%+ rates. But there's a lot of volatility - returns could range anywhere from -20% to +30%. That's the problem. – D Stanley Aug 07 '17 at 16:56
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    @JoeTaxpayer Re "People tend to spend less when using cash" When I was first working at Sears in sales, this was the first thing they drummed into our heads. People using cards spent 25% more per purchase on average, and were more likely to be repeat customers (i.e. they bought more frequently). This is on a store chain basis, not a family basis, so I'm not sure if it meets the criterion you asked for. – pojo-guy Aug 07 '17 at 17:56
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    @OgrePsalm33 - "Nobody I know has been able to track down this mythical Dun and Bradstreet study. Even Dun and Bradstreet themselves have been unable to locate it. GRS reader Nicole (with the assistance of her trusty librarian Wendi) contacted the company and received this response: “After doing some research with D&B, it turns out that someone made up the statement, and also made up the part where D&B actually said that.” " << From another web site. When something is repeated often enough, it takes on a life of its own. The D&B report is a MYTH. – JTP - Apologise to Monica Aug 07 '17 at 19:00
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    I have removed the implication that "people spend more when using cards" since it's in dispute and not the main point of the answer - can we move comments regarding that point to chat? – D Stanley Aug 07 '17 at 19:55
  • Terminology question: By "cash", do you mean actual paper money, or debit cards, checks, and other non-credit liquid instruments? – Kevin Aug 07 '17 at 20:50
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    @Kevin yes, essentially any unborrowed, completely liquid funds. – D Stanley Aug 07 '17 at 22:22
  • @OgrePsalm33 D&B = Dun and Bradstreet, DNB = DeNederlandscheBank. Just saying – JTP - Apologise to Monica Aug 08 '17 at 13:01
  • @JoeTaxpayer Apparently at some point there has been confusion between dnb.com and dnb.nl? That's my best guess. But it's interesting that the study appears to contain the exact content I've heard described from multiple sources. However, I can see D Stanley's earlier point about the dispute, because I recognize that in human nature, it is hard for people "wired" one way to see the viewpoint of people wired another way ("well why don't they just control their spending??") Therefore, I'll delete my comments of contention. – Ogre Psalm33 Aug 08 '17 at 13:07
  • @DStanley - We are not able to pick and choose the comments moved to chat. Our choices are (a) delete a number of comments, (b) kill all comments, (c) move all comments to chat. It's your answer, D, I'll defer to your choice on this, apologies that I highjacked with comments. I'm inclined to craft a question just on the paper/plastic topic. – JTP - Apologise to Monica Aug 08 '17 at 13:19
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    @pojo-guy: I don't think it does, because it's a self-selecting sample. It might just be that heavy spenders tend to get a credit card. I think Joe is looking for as close as possible to a randomly-assigned trial. Ideally take 1000 homes, watch what they spend for a year, confiscate the credit cards of half of them (leave them an ATM card of course), watch what they spend in the next year, and compare the two groups' mean increase/decrease. Sadly a double-blind randomised trial is impossible. – Steve Jessop Aug 08 '17 at 13:48
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    ... and even then, it might just turn out that people who use cash spend 5% less for the simple reason that 10% of the time they don't have much cash on hand and can't be bothered to walk to the ATM, so they go to the cheaper restaurant instread of the nicer one, then tip less because they empty their pockets and stop. Which may or may not be the ideal outcome for someone who's hoping to cut their expenditure by switching to cash ;-) Some clever micro-economist needs to think of a clever experiment. – Steve Jessop Aug 08 '17 at 13:52
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    I don't understand this part of the bullet point: "What if the market is in a down cycle - will you be so quick to sell those investments knowing that they're worth less that they could be?"

    Do you mean that there's a risk I would not sell the investments? If so then I must not have a true emergency, because I am able to make that choice.

     – Stephen Aug 11 '17 at 22:25
  • @Stephen many people have a hard time "selling low" so there might be temptation to borrow (charge) the expense and paying it off when the investment recovers rather then liquidating an investment – D Stanley Aug 11 '17 at 22:39
  • Ooooh, that makes sense. Yeah I could see myself having trouble with that. That might be the best argument for a separate emergency fund I've seen here. – Stephen Aug 11 '17 at 22:49
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Weather events and aging infrastructure. Cash will buy gasoline, food and water when there is no power or telephone connectivity to process ATMs and credit cards.

user662852
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    This is a great answer to what's really a different question, or rather, why a certain stash of $10s and $20s should be kept on hand. – JTP - Apologise to Monica Aug 07 '17 at 18:48
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    @JoeTaxpayer I agree, it directly answers the title more than the exposition in the post. But it's also the best case I have for immediate liquidity. – user662852 Aug 07 '17 at 18:54
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What sort of emergency requires payment up front for which 2-3 days processing of a stock sale would pose a problem? In my case, the sudden and unexpected death of my wife.

Back in 2011, my wife was struck and killed in a traffic incident. I had to immediately (not in 2 - 3 days) cover 50% of the entire costs of the funeral. The balance was due shortly after, though I now forget if the balance was due in 7 days or in 30. I suspect the latter.

The life insurance paid out in approximately 4 months for this simple case. Even if your mortgage is insured, you still have to pay the entire balance, along with living expenses, until the paperwork is resolved. And, again in simple cases, assume this will take months rather than days or weeks. My point is, the funeral is only one of the expenses you'll have to cover in such a situation, though generally you'll have sufficient lead time for the other expenses, where your investments would likely be sufficiently liquid.

Yes, a credit card would (and did) help in this situation, but if you have no credit card (as your question poses), you need ready access to thousands of dollars to cover this sort of eventuality. My bank told me that many people in such a situation have to take out an emergency loan the very day their spouse dies. Let me assure you this would be... emotionally difficult.

Funerals vary widely in price. The Motley Fool indicates the median cost of a funeral with a vault was $8,343 in 2014. Crematory fees, a headstone, flowers, food, obituaries, all add to this cost. My total cost was closer to three times the median, though some of the expenses (headstone, primarily) came later. I'm sure I could have gone for a cheaper funeral, though it's hard to make rational economic decisions at that sort of time. I don't recall the exact amount I had to put down, but it was somewhere around $6000 - $8000.

(No need to leave a comment expressing condolences; thanks, but I've already had plenty and now my goal is to help share knowledge. :) )

ChrisInEdmonton
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    Skipping the condolences (since you asked), I can't comprehend how awkward and painful it must be like for someone to try to save for this sort of thing. Husband: "We should have an emergency fund." Wife: "Why?" Husband: "In case you pass away."... – user541686 Aug 08 '17 at 10:23
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    @Mehrdad: it's probably politer to express it as, "in case I pass away"! – Steve Jessop Aug 08 '17 at 14:07
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    Also (at least over here in Germany), banks often freeze joint accounts in case one of the holders dies. The time it takes to get the account working again can take anything from few days to several months (I personally know of > half a year) – cbeleites unhappy with SX Aug 08 '17 at 14:33
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I tend to agree that the need for liquidity is overplayed in this day and age. We live in a world of electronic transfers that take only a couple days at most. With my brokerage account I can go from stock to gas in my tank via debit card in about 3 days.

We're a long way away from the days when it took weeks, phone calls, and physical checks in the mail to go from stock to cash in your hand. We've also moved a long way away from limited credit/debit card acceptance. It was not long ago that my mechanic didn't accept credit cards. Locksmiths didn't carry a square reader on their iPhone 10 years ago.

However, don't expect debt to always be available. Many many many people with strong income and stellar credit histories had their credit/HELOC limits slashed from 2008-2010 while banks pared back risk. A cash position of a size that makes sense gives you a high level of short term control; you aren't reliant on someone else's money.

Liquidity isn't the main issue with emergency funds. The main issue is psychological. Build a foundation rather than overly optimistically chasing yield.

quid
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    +1 for "don't expect debt to always be available." In hard times, banks will call notes, slash limits, and in general reduce their risk, just like regular folks tend to do! – Ogre Psalm33 Aug 07 '17 at 17:08
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    I have noticed that overdrafts are easy for me to obtain - up to £2000 plus. I’ve not looked into it thoroughly, but I have a £500 overdraft with no credit history, and I’ve only just turned 18. It seems to me like they’re back to giving out loans to anyone... – Tim Aug 08 '17 at 02:56
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    @Tim Is there an extended notice period for them to stop granting you that overdraft? Or could they just immediately revoke it with a notice to you? Then what would you do? – I'm with Monica Aug 08 '17 at 07:43
  • @AlexanderKosubek no idea - I’ve never thoroughly read the terms (they just activated it for me). I doubt they’d object to me having one - they make a lot of money on that. – Tim Aug 08 '17 at 08:14
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    @Tim I just wanted to point out the fact that "2k overdraft granted now" could very well not be a reliable source of liquidity in times of need... What is basically what quid's answer was all about. – I'm with Monica Aug 08 '17 at 08:19
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If you engage in any kind of dangerous activity, the training courses will often state that an accident is not the result of a simple error. Examples of this include SCUBA and motorcycle training. Properly maintained equipment and training will mitigate many emergencies. Recently my dive buddy was 60' down, and ran out of air due to a tank O ring failure. She did not panic, and all of the dive team rallied to get her to the surface without anyone getting hurt, or even coming close to it.

Financial tragedies are similar. In some cases, a single event triggers an avalanche of events that leads to tragedy. For example, hard economic times may lead to an employer doing 5% pay cuts across the board. However, they also cut bonuses and other ancillary pay items. This leads to a real cut of 20-25% of income. Leading a true cash flow emergency. As such cutbacks are needed, and this might put a strain on an already shaky relationship, this leads to that relationship ending, requiring more cash. Perhaps a car dies in this process or some household item needs repairing. Sure one can borrow money, but this tends to exasperate the avalanche rather than solve it.

Having a low debt and a liquid emergency fund stops the avalanche in its tracks. In the case cited above issues would have been solved if the person lived off of 50% of their income rather than the way most people live (paycheck-to-paycheck). Also if there were savings for the car repair then that becomes a pain, but not a true stress.

Think of a liquid emergency fund as "properly maintained equipment". It allows you to build a financial life on a solid foundation.

In my own case, I attempted to live and invest without an emergency fund. It just did not work. I often had to liquidate investments at in opportune times, and could never really hold onto money. With the foundation of an emergency fund, one can build a prosperous life for one's self.

You are welcome to try it your way, but if you fall, hopefully you will remember this answer and build your foundation first.

JTP - Apologise to Monica
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Pete B.
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    How does this answer the question? Suppose you get laid off, why would you need a large amount of cash that specific day, that couldn't wait a couple of days for an investment sale to settle? You weren't going to get any money from the job until payday anyway. And when you get laid off, employers give you your last paycheck. – Barmar Aug 07 '17 at 15:08
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    @Barmar the question basically asked "why not just borrow the money", and such is my answer. – Pete B. Aug 07 '17 at 15:39
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    @PeteB. I apologize if the question was unclear. Barmar is right; I was wandering why the money needed to be 'liquid'. In other words, in what situation is borrowing $5k on a credit card and selling stocks the same day, then paying the credit card off 4 days later, not feasible. – Nicholas Aug 07 '17 at 16:18
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    He wasn't asking about living on borrowed money for the long term, just to get over the 2-3 day period it takes to get the proceeds from an investment to pay off a single emergency. – Barmar Aug 07 '17 at 16:20
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    @Nicholas, when the bank slashes your credit limit because it's pulling back its credit exposure. – quid Aug 07 '17 at 17:07
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    exacerbate != exasperate :) – dave_thompson_085 Aug 08 '17 at 11:25
  • @quid: so the event is that all my banks slash my credit limits, and I have a sudden need for $5k, all in the same 3-working-day period? OK, that's a genuine example, but quite soon we reach the point where we're considering scenarios that a highly-liquid emergency fund doesn't deal with either because (a) there's a run on the bank so it refuses withdrawals and/or collapses and we have to wait for FDIC; or (b) my house gets burgled or burns down; depending where I keep my liquid emergency fund! – Steve Jessop Aug 08 '17 at 14:01
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    @SteveJessop, events tend to be correlated; expecting only individual failures as opposed to groups of them is where contingency plans are most likely to go wrong. Bail was given as an example in a comment on the question -- if you're accused of a crime, that can cause you to lose your income, have an immediate need of cash, and suddenly be seen as a poor credit risk. – Charles Duffy Aug 12 '17 at 19:29
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Having a highly liquid emergency fund can lubricate the wheels for disaster recovery.

For example, several years ago I returned from a vacation to discover that, during my absence, a plumbing fixture had broken and my house was flooded. Since we had sufficient liquidity to cover the cost of the repairs in our emergency fund, the insurance company was much easier to deal with, and the relationships between the contractor, bank, and insurance company were much smoother. The bank was able to approve the insurance in minutes versus days.

Ironically, we didn't actually have to touch our emergency fund precisely because we had it.

Clarification - I make it a point to have no debt.

pojo-guy
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  • In this example you could have sold shares and paid the repairs within the time it takes for the repairs to be done. Or put it on a credit card if you have one. So it doesn't explain WHY you need a highly liquid fund over one that takes 3-5 days to liquify – coagmano Aug 08 '17 at 00:37
  • Having the liquid capital meant I didn't have to spend any of my money at all. I don't do drugs, and I don't do debt. – pojo-guy Aug 08 '17 at 01:58
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    Well, you certainly had "sufficient liquidity" to cover your house. ba dum tss – RobbG Aug 08 '17 at 09:16
  • @FrederickStark That wouldn't work if the contractors required a down payment before starting. –  Aug 08 '17 at 14:29
  • Maybe it's just where I live, but almost every contractor will take credit cards and don't require down payment – coagmano Aug 08 '17 at 22:59
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    I literally didn't have to put anything out of pocket simply because I could have paid it out of pocket. – pojo-guy Aug 09 '17 at 00:58
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Emergency funds are defined in terms of months of tightened-belt living -- that's according to the usual gurus such as Suze Orman, Dave Ramsey etc.

They aren't for short-term emergencies like a blown transmission. Use other money for those. Why? People with bad financial habits have short-term emergencies all the time, and that emergency fund doesn't have a chance of lasting. This is just their financial habits manifesting.

Here's what an emergency fund is for.

Scenario: big economic bubble bursts. Stock market drops 50%. Credit dries up. This happened in 2007 by the way. The dominoes start falling boom, boom, boom:

  • Your company takes it extra hard. You get laid off.
  • Those options that were part of your emergency fund, voided when you were laid off. They're underwater anyway.
  • The rest of your "8 month emergency fund" was sitting in equities including your company's stock.
  • You now have a 2 month emergency fund if you're willing to sell at a huge loss.
  • Your credit card companies tighten up credit, suddenly your $35k line with $5800 balance has its credit limit dropped to $6000. This may have to do with them learning you were laid off.
  • You hate Obamacare so you don't properly research your rights, and continue the employer's cadillac plan under COBRA at $1000/month.
  • Your house is suddenly way, way, way upside down and you feel stupid paying the mortgage. The mortgage was a stretch even when you were employed.
  • The lender is now super itchy about any late payments. That explodes into foreclosure quicker than you thought. Upside: they pay you $1000 to leave peacefully and not smash all the drywall.
  • Your credit is now burned and you need to get an apartment. At the same time as everyone else. Ouch. Landlords are looking for big deposits. You can't afford it.
  • #VanLife
  • Wife gets fed up, she's outie
  • divorce costs, alimony, child support
  • bankruptcy lawyer is a busy guy. Won't talk to you for less than $3000. Up front.
  • All the stress of this makes it really hard to focus on marketing yourself into a new job

I'm exaggerating a bit here, but a lot of people lived at least half this stuff in 2007-11. Nothing starts those dominoes falling like lack of cash at a key moment. That's what an emergency fund is all about - keeping things tight-normal for long enough to get back on your feet. If you want to keep your emergency fund in something risky -- keep a lot more of it!

Harper - Reinstate Monica
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    I think this is the best answer for why an emergency fund shouldn't be in an investment vehicle, even a fairly liquid one like stocks – coagmano Aug 08 '17 at 23:01
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    @FrederickStark +1 agreed - the emergency fund is an insurance policy, not an investment vehicle. It's not there to make money, it's there to cushion hard blows. Trying to yoke it with two responsibilities means it's not doing either optimally. – Chris Tonkinson Aug 09 '17 at 00:20
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First of all, a person that relies on their ability to tap a line of credit to cover an emergency isn't generally the kind of person that has investments they can cash out to cover the debt.

That being said, my personal reasons for having a liquid emergency fund revolve around bank errors and identify theft. I used to work for a company that made bank software. Errors are a common occurrence. You'd be surprised how many transactions are still input by human hands despite our computerized world. All it takes is one typo to wipe out your ability to swipe plastic for a few days.

This has actually happened to me. My utility company sent me a bill for $240 and wound up taking $2400 by accident, overdrawing my account and sending me into a fee spiral. They fixed their mistake... several days later. The snowball of fees from other transactions that bounced took another two months to correct. In the meantime, I also had my mortgage payment due. In the US, you can't pay your mortgage with credit, and for those who rent, many landlords won't let you pay with credit either.

I have also seen this scenario play out twice with other people I've known who've had their ID stolen. Yes, the bank will cover the fraud after a lengthy process. But the disruption causes fees and overdrafts to quickly snowball out of control.

I have a separate savings account at a different bank for this kind of thing, and I have a few hundred dollars cash in my house at all times. Having a liquid emergency fund allows you to quickly stabilize the situation and gives you walking around money for those times where the banking system becomes your enemy for a time.

Wes Sayeed
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  • You're lucky it ever corrected. Somebody used my bank account to pay his car insurance. It caused five bounces and five fees which the bank refused to ever cover. The bank says it's my job to keep enough money in my account, no matter what. – Harper - Reinstate Monica Aug 08 '17 at 23:08
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This might vary from other answers but I generally prefer to use debt before touching an emergency fund. But one of the reasons I have an emergency fund is to that I can make sure I can cover any debt payments. Essentially, this give you leverage. You might start off with a small emergency such as needing a new refrigerator. If you pull the cash out of the fund to pay this off immediately, you've depleted your account and if something major comes along, you might be short. By using debt, you can often cover the costs with cash-flow and leave your risk buffer in place.

Often, retailers will offer really sweet financing deals. 0% for 12 months or whatever. Often, though, if you don't pay it off in time, they can be costly. I'm not sure if this is legal (in the US) anymore but if it wasn't fully paid off in time, you'd be retroactively charged interest on the whole amount. But if you have an emergency fund, you pretty much guarantee that won't happen. The only time it will is if something else happens that requires the emergency fund to be cashed in. But if things are that dire, the debt is unsecured. You're credit may suffer but they can't come after your assets.

It's not an either-or situation. You give yourself options by having the cash available. It allows you to take advantage of opportunities that might be too risky otherwise. Ultimately what you want to be able to weather the storm in a situation where you have, say, a mortgage on a house that is underwater, the stock market is down, and you have no income. In that situation, you don't want to liquidate your stock when it's down and you (probably) don't want to lose your home equity in a foreclosure.

JimmyJames
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I recently drove past Winslow, Arizona and knocked out the fuel pump in my truck. It cost $500 to repair, and the tow would have been another several hundred if I hadn't had a Good Samaritan's club card, since it was the weekend.

2-3 days would not be acceptable in this sort of scenario.

And that was just the fuel pump!

Wayne Werner
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    In a case like this, what would have prevented you from putting it on a credit card, selling some stocks after your trip, and paying off the card before payment was due thus incurring no interest (and earning 1% - 1.5% cash back)? – Nicholas Aug 07 '17 at 18:39
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    You did specify Assuming a credit card cannot be used, or for some reason cannot be attained... – Wayne Werner Aug 07 '17 at 18:40
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    My apologies. You're correct. – Nicholas Aug 07 '17 at 19:24
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    Otherwise, yeah, a CC would be totally sufficient - assuming that you're somewhere that accepts that CC (which is pretty likely that you can at least find an ATM). – Wayne Werner Aug 07 '17 at 19:26
  • With some discomfort, I thinking I could handle Winslow, AZ for a short while. Death Valley, however..... – WGroleau Aug 08 '17 at 13:49
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Visa card expired while on the other side of the world. Visa from other bank declined for suspected fraud. "You should have told us you were going to a country that has lots of fraud." Nearest ATM, twelve kilometers.

WGroleau
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    Hmm, do you want to take your emergency fund with you while traveling to the other side of the world? – Paŭlo Ebermann Aug 08 '17 at 20:21
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    "Highly liquid" is not exactly the same as "in my pocket" – WGroleau Aug 09 '17 at 00:19
  • Hmm, so how does it help when you are on the other side of the world? – Paŭlo Ebermann Aug 09 '17 at 12:08
  • OP wants to know a situation that justifies having a "complete liquidity in an emergency fund." I offered one more situation to add to the many others offered. It may not be possible to have "complete liquidity in an emergency fund" in that situation, but it still answers the question. – WGroleau Aug 09 '17 at 12:41
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While there have been plenty of good answers I would like to suggest turning it on it's head--the problem is one of perception.

Other than in terms of cash-type emergency funds (my general policy is to have enough cash to get home, however far from there I might be) I consider available credit + assets that can be liquidated reasonably quickly to count as emergency fund money.

Loren Pechtel
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Since no one else mentioned it, there are sometimes amazing deals that require being the first person to take advantage of them. I'm not talking about black Friday sales, I'm talking about the woman who decided to sell the Porsche (she had bought for her cheating husband) for $1000. You might not run into those types of deals often, but having liquid investments will allow you to take advantage of them instead of kicking yourself.

I just bought some real estate with some of my emergency fund that needed several months before I could properly finance it due to some legal issues with the deed that needed to go through court because there was a deceased person on the title. I will make far more on the deal when it's done than I ever could have made with that money invested in the market.

NL - Apologize to Monica
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  • This is not an emergency fund. If you are speculating in real estate in markets where you have to come up with cash immediately (or vehicles, or playing poker) you need a bankroll. You also need a separate emergency fund. – jwg Aug 14 '17 at 09:27
  • @jwg I'm not actively looking for these opportunities, but if an amazing deal falls into my lap, I am happy to dip into my emergency fund while I take the time to tap into my other resources. My point about making money from my emergency fund is that many people have a false sense of economy when they consider the low interest rates from a bank account vs. being invested in a market fund. Sure you can get a little more for it, but you add risk and reduce liquidity, when liquidity is the primary purpose. Having a lot of money liquid will provide more than just security is my point. – NL - Apologize to Monica Aug 14 '17 at 14:29
  • Security is the primary motive, however, that has been covered at length in other answers. – NL - Apologize to Monica Aug 14 '17 at 14:29