We have been pursuing Financial Independence for just about 4 years now. We were semi-frugal in our lifestyle and borderline valuist in our choices for a while before that though without knowing that we were doing anything special.
About 10 years ago we read some financial article somewhere that everyone should have an emergency fund. We had been living paycheck to paycheck at the time so the concept was foreign to me. Savings, emergency funds? These were things spoken about by one’s elders and quickly forgotten about.
Nevertheless, it was time for some grownup financial decisions to happen. We set a goal to have six months of income as an emergency fund. Some money set aside that we could easily access in the event of one – or both of us losing our jobs.
Somehow we never seemed to reach that – car repairs came up, miscellaneous home repairs came up… life came up. As time went by, our salaries went up slowly but surely and our emergency fund was never adjusted to meet it.
Eventually what was left of our “emergency fund” got deposited into a Roth IRA (another financial vehicle that we read about in a vacuum of larger financial guidance) and ceased being anything that would resemble an emergency fund – it wasn’t readily accessible or of any relevant amount.
When we first found out about FI via blogs like Mr. Money Mustache and The Frugalwoods, our goal was to knock out our short term debts, and then start attacking our mortgage until it was gone. Not knowing about strategies that allow you to access retirement funds early, we stopped all 401k contributions other than what we needed for the company match. We knocked out three car loans, one student loan and funded a home addition project. The plan beyond that stood at knocking out our mortgage and starting a taxable brokerage account to invest in index funds like VTSAX. The road to our goal looked like an attainable but bleak 15-17 years
A year or two later, we found out about strategies like the Roth IRA conversion ladder, tax loss harvesting and tax gain harvesting. We decided to start maxing out our retirement accounts again. Being able to access our retirement funds early changed our timeline to look more like 9 years. While making all of these changes, we never did begin to put money aside again for an emergency fund.
Later we realized that we could reach our goals much quicker investing in real estate. We started our plan to buy 5-7 cash flowing rental properties and then pay them off in 6 years. Again, having an emergency fund didn’t play into this equation at all.
Maybe it’s because I didn’t like the idea of having money just sitting there doing nothing more than maybe collecting interest in a savings account. Or maybe it’s simply because putting money into an investment feels exciting, saving up for an emergency fund does not.
HELOC as an Emergency Fund?
My most recent argument against having a reasonably sized emergency fund was that we have a HELOC on our primary residence. When we originally bought our house it was a 2 bedroom ranch – 1050 square feet of living space above grade. Out of desire to better suit our family of six, we added two bedrooms the year after we bought it, taking us up to 1400 square feet.
This addition, along with a healthy amount of appreciation in our area, brought our home value up quite significantly. Seeing this opportunity, we took out a HELOC on our house. We used that to fund the downpayment of our second rental property. This allowed us to pick up a deal when we saw it, rather than wait to find our next investment when we had the money.
While I like that using the HELOC allowed us to pick up a property that has been great for us – it has covered financial for all of the issues that we ran into with property #1 – our preferred use of the HELOC was to act like an emergency fund of sorts.
This comes with its own caveats – if this current economic turmoil continues for a while, home values could plummet and the bank may demand payment in full of any balance that is outstanding. It’s a not a likely scenario but it is worth thinking about.
The current financial crisis stemming from COVID-19 has given me pause about our lack of a liquid emergency fund. The anxiety I feel every day about my wife and I losing our sources of income would probably not feel as acute if I had six months of living expenses sitting there as a fallback.
On the other hand, what if this is the last recession of this kind that we have to worry about before we hit reach financial independence and our passive income is able to cover our expenses? If we weather this just fine, why bother with an emergency fund at all?
In the short term – say the next few months – I think that everyone (short of the most aggressive investors) is likely circling their wagons and holding on for dear life. Our current plan is much the same – we will be shoring up our emergency fund to get to that 6 month mark and then will continue saving for investing purposes after that.
But once the dust clears from all of this – whenever that is – will our investment strategy be changed because of all of this? Will we keep our emergency fund around or dump it into the next great investment that we find? We won’t know for sure until this is all in the rearview mirror, but this is surely going to make us think twice before getting rid of a sizable safety net again.