You Don’t Need an Emergency Fund (You Need an Emergency Plan)

$0 emergency fund—my rationale/plan

I choose not to have a nebulous emergency fund for unknown future emergencies. Instead, we have an emergency plan.

Here’s my detailed rationale for our $0 emergency fund, and a plan for how to handle the emergencies:

What kinds of emergencies could we encounter?

First I need to know what we’re planning for. Otherwise, I’m just guessing! Our emergencies can be broken down into two main categories:

1. Loss of income:

• Job loss.
• Serious injury or illness.

2. Unexpected expenses:

• Major home expenses.
• Major car expenses.
• Lawsuits (rare, especially in Canada—but you still have to mitigate the risks).

How we’re covered for loss of income

1. Steady job: M’s a hard-working, well-liked, and respected employee. His job is also relatively stable—so job loss is highly unlikely.
2. Severance pay: If M was laid off, he’d receive severance pay of one month per year of employment. At 15+ years of employment, we’d be well-covered.
3. Government employment insurance: If M was still unemployed once his severance ended, he’d receive EI. While it’s not much, it would cover some of our expenses.
4. House hacking: We’d continue hosting students, and could increase our efforts to host more students, more frequently.
5. Go back to work: I’d be happy to swap with M and go back to work so he could stay home with the kids. (I haven’t earned income as a graphic designer in over a decade, but I’ve maintained my skills through designing pro-bono projects and working on this blog. It wouldn’t be difficult to pick up freelance graphic design work or find an in-house position.)
6. Insurance: We have life insurance, and M has good disability insurance at work.
7. Universal healthcare: Fortunately, we’re Canadian—so we don’t have to worry about most healthcare costs.
8. Family support: If I was the one who was injured or ill, M could keep working because we have plenty of family nearby to help with getting the kids to school and other day-to-day stuff.

How we’re covered for unexpected expenses

• Insurance: We have home and car insurance to cover what we can’t afford to replace.
• Personal liability coverage: Our home and car insurance includes personal liability coverage in case someone sues us.
• YNAB categories: This is the closest thing we have to a cash emergency fund. I use categories in YNAB to save towards unexpected home and car expenses*. These categories are essentially super-efficient, mini emergency funds**.

*I do this by allocating a certain amount of our monthly income to be saved towards specific categories. For example, I allocate $100/month to save up for home maintenance. The balance in the category grows and shrinks, but we always have enough.

**Because these categories are targeted and small, they’re way better than an amorphous general emergency fund where money sits around ‘just in case’.

Note: I don’t include large expenses (e.g. new roof or car) in this plan because they’re typically not ’emergencies’. They tend to be pretty predictable—you can see them coming years ahead. I’ll write about my plan to deal with these large expenses in a future article.

Accessing cash in an emergency

We have a variety of options for quickly accessing cash in an emergency:

No-cost options

1. Regular cash flow: The excess cash we’d normally send to investments could temporarily be redirected to emergency expenses.
2. YNAB categories: Each month, we put money aside for annual expenses such as insurance, property tax, investments, vacations, etc. In an emergency, we could easily pull the cash from these categories since not all of it is needed right away. We’d need to replenish the money eventually, but it could tide us over for several months.
3. Credit cards: M and I each have several, and they could be used as one-month interest-free ‘loans’.
4. US cash: We keep some in a savings account for our US travels and expenditures. We could easily and cheaply exchange this cash for Canadian dollars. (I do this using Norbert’s Gambit in our non-registered Questrade account.)
5. Discretionary spending: We could easily cut all discretionary spending (clothing, home improvement, dining out) until the emergency is over and paid for.

“Some cost” options

1. Sell our investments: We could liquidate investments in our taxable accounts for cash within a few days.
2. Sell the kids’ investments: Our kids have informal trust accounts, which we could also liquidate. (We’d pay them back, with interest, later.) 
3. Use our personal LOCs: It’s not cheap, but it’s not exorbitant either. And it’s readily accessible—a good backup if all else fails.

How to “safely” use an LOC as part of an emergency plan

Our LOCs are the most risky part of this plan, and deserves further explanation. It makes sense for us to use LOCs as part of our emergency plan because:

• Even if we were to use the LOC and pay some interest, we’d still be further ahead by investing our emergency fund instead of keeping it in a savings account. (See Unchained55’s excellent article for a thorough analysis.)
• The LOC is only there for TRUE emergencies (which are statistically rare). With all the other backups in place, it’s unlikely we’d actually need to use it.
• Having an LOC gives us peace of mind—we know there’s a stash of cash that we can access quickly and easily.
• LOC interest is nothing to scoff at, but it’s low enough that it’s reasonable for temporary use.