MMM vs. The Emergency Fund - MMM Show Episode 9 

So my take away from this graph is that I should become a Homicidal Loan Shark.

The controversy is that when eventually the market crashes and you need money urgently, you will have to sell your depreciated assets and get losses. Big corporations like Apple always hold on to what is called a liquidity buffer, which is cash in banks and very-very short-term highly liquid investments.

"Feeling safe" financially is very valuable and can foster a state of making calmer and better financial decision. Money is an emotional thing by its nature.

Nice work. Video and audio quality have improved quite a lot from the early episodes. I think it might be worth mentioning that that right size emergency fund is whatever helps you sleep at night. There is SOME risk associated with using your investments as your only emergency fund, and those fluctuate with the market, meaning you could lose a lot of value by withdrawing at the wrong time. Cash depreciates with inflation, but at a slow enough rate to give peace of mind through potentially long periods of unemployment.

I think it somewhat depends on the stability of your job and where you're at financially/personally. Some jobs are rock solid, that it would take the Sun exploding for someone to get fired. Other industries have layoffs/mergers seemingly once a quarter.

Really good video! I've never seen that chart before, but the springy debt is a MMM classic. Keep up the good work!

Thanks MMM! That was your most beneficial video so far for me personally. It always felt a little off having an emergency fund but all the gurus said to have one. The info you provided (especially the graphic) makes total sense. And now I feel totally safe getting rid of my “emergency fund” and using those funds toward more investing. : )

This makes a lot more sense than keeping 6-12 months of cash in an emergency fund. thanks!

I love that your son edits and produces these! So well done:)

Sometimes I rewatch these so it really gets ingrained in my head- I love the content! Also, I’ve been cutting my own hair since the early 2000’s!!! So much $$$ saved!

Excellent work with the Money Spectrum visuals. Cool stuff & well produced !

Thank you... I never really understood the huge emergency fund everybody pushes either. I've been following this exact strategy because that's what made sense to me. Glad to see it's MMM approved!

I prefer to have an emergency fund of liquid cash. But I think of it more of my "bug-out" or FU-money than a true emergency fund. I want to have close to a year's worth of living expenses on hand so I always have the option of quitting my job and buying myself several months of sabbatical, more or less. I want that cash easily accessible and with no fees to get it out.

I opened a dedicated savings account for my dividends. So the dividends received in 2018 all go there, and in the beginning of 2019 I put 12 planned transfers of 1/12th to my checking account. This way I see my dividends show up in a monthly fashion. It works really motivating to me. And that's my emergency fund as well. Bonus; if I buy more index funds, I see myself getting a dividend raise the year after ^^ It always puts a smile on my face to see the money showing up without lifting a finger for it AND it makes the income more stable and predictable without having to sell shares.

Thanks so much for explaining this! I'm in the early stages of a mustachian lifestyle and this really helps!

Love this! I think the math on investing the emergency fund wins most of the time vs/ keeping tons of cash lying around so I am surprised how rarely people question the typical advice of keeping 3-6 months or more of cash just sitting around on hand.

This is such a great way to describe it. Being now 41, I have never had an emergency that exceeded our extra monthly cash flow. Keeping your monthly expenses low means 99% of the time you can cover an emergency. The margin is even greater now that our home is paid off...just like you, MMM :-). Great video as always. Thanks for this!

Also, love your videos, I think you set an example of how a fulfilled life looks like! Thanks for that

I've always seen it advised to keep your emergency fund in a savings account, not a checking account. EDIT: It just needs to be easily accessible, or not locked in some kind of investment.

Ramsey fan over here, great explanation of a different perspective. Makes me think stuff!

Great advice. I just realized I’ve been a Moustachian for quite a few years. And I’ve used the line of credit approach as a virtual emergency fund, as you recommend. Keep up the excellent work.

I like the graphic. Smart and simple. Good stuff Mustache.

:o I get it. You have to get to the point where your expenses are so low that you can cash flow emergencies with your income alone. If you are only saving ten or twenty percent and at the same time have a bunch of obligations (like upkeep of a large home or gas guzzling car) you wouldn't be able to cash flow big emergency events. Also, if you lose your job and get another that pays less you could just cover the expenses because you spend way less overall. There's always long term disability insurance as well (since you are more likely to become disabled than to die in your lifetime). I guess most people just have too many obligations/wants or prefer to buy stuff over say making things or fixing things on their own (guilty) .... some people may have medical conditions and bad health insurance coverage so that's why extra cash is nice. But the average frugal investor could do this 🤔. It makes sense to me.

Great video! For us, the "emergency fund" is a purely emotional security blanket. Like many, my husband and I grew up in homes that struggled to make ends meet. Today, a checking account balance close to zero still signals anxiety, an indication that lean times are upon us, even though all our needs are met and everything is going fine. That said, it's good to reflect on how much cash is actually necessary for that security blanket and how much might be better served earning a return somewhere. Thanks!

Thank you for the perspective MMM!

I like when you mention that the underlying asset of Auto Debt is rapidly depreciating in value. It’s also important to note that the underlying asset on a home mortgage is steadily appreciating in value. Coupled with the assumption that your earnings will follow inflation. That means inflation will effectively reduce the cost of your mortgage payment all while the house is increasing in value.

This is gold. I invest me 6 month emergency fund a while ago and I’m glad I did!

Just awesome words of wisdom! MMM you've inspired me to make all these changes in my life and become FI in a couple of years (I hope) being an engineer myself as well. I'm hooked on your blog too! Just great!

Printing out The Money Spectrum and hanging it by my financial laptop/whiteboard. Thanks MMM

100% agree with this approach. We keep our check account at the bare minimum and the rest we put off the mortgage. As we are way further ahead than the scheduled payments, we have the springy debt cushion you mentioned available for redraw anytime we need to pay for something bigger than the monthly surplus allows. So our emergency fund is saving us interest while we throttle our way towards paying off the house. Unsure what we’ll do when we pay it off- a very high quality problem to have to figure out! Probably no EF still - any large spending could be sorted out with the credit card 55 day no interest period or perhaps sale of shares, worse case. Thanks for the great video, MMM!

Love using heloc as emergency fund. Just makes so much sense.

I *love* the graph you put together!

Great video! Loved the Spectrum graphic

Thank you. I needed this. It can feel bad to skip retirement or college savings contributions but it's clearly preferable for the greater returns.

Thank you so much for this episode I was thinking about better ways to diversify my emergency fund and your method is so on point especially home equity line of credit idea 💡

The hardline style is brilliant!

I really like your advice on this! I think the middle ground for this might be to put your emergency fund in a high yield online savings account so it gains more interest than a normal savings account or checking account, and you can still access it fairly quickly.

I totally love these videos, please keep them coming.

You asked for it, you got it: Most people -do- need an emergency fund. While it'd be nice if they were FI or had their finances under sturdy control the vast majority don't. If they did, then I agree they wouldn't need an emergency fund. I'd say it's a step to FI, and a following step is to ditch it once everything is "paid down and saved up". But seeing as the vast majority of Americans are digging out of the hole, most still need it. Which is unfortunate but true.

Good stuff Pete, line of credit is great way for emergency. Then take your pay checks and park into the line. Open line credit you can always get the money back where closed end lines you can't. Live below your means.....is key.

Really a different way to think about money and finance. I'll keep listening to try to wrap my head around these ideas.

Great freaking video! Never thought about the emergency fund like that.

Great video, Mr. Mustace! Love the different perspective about using a Line of Credit rather than selling shares, to minimize interest payments and maximize investment gains: Haven't thought about it this way before. I will say, having a small emergency fund, like 3-6 months (closer to 3), does give people peace of mind about no hassle to pay off an unexpected expense, like a car breakdown or health bill. Which, the emotional security may be more valuable than the gains of keeping $5-10K in a High Interest Money Market. Using a Line of Credit, especially a HELOC, does factor in a small amount of risk, like if you aren't able to make the payment or something, but like you said, you can always just go back and pay this off by selling your stocks/other investments. Anyway, unique perspective that I will have to continue considering as I structure and restructure my finances in order to create financial Independence and retire early! Thanks for sharing Sir!

I love it. Been waiting for someone take this stance

This is interesting. It flies in the face of nearly all the financial advice I've heard. I think I'll continue to keep my emergency fund, but be more willing to start making taxable investments moving forward. (This coming from somebody who is in, for the next year or so, a married student in a single-income household. Lots of financial uncertainty up ahead).

Great stuff, thank you

if you lose your job and can’t find another job for a while and it’s a bad time to sell your stocks (thus the layoff), it’d be nice to have something to fall back on.

First of all love your show. I listen to bigger pockets and they always mention you in the interviews. I dont have tine to read blogs but I drive for a living and can listen all day. 1. Your point on only having what your expenses are great. All the books on entrepreneurs says make all your money work for you and if land short because of expenses it forces you to be creative to make more. 2. I never agreed with using your HELOC to pay your mortgage off quicker, you still have to pay extra for it to work. But if you use your HELOC when you only owe half it pays off the first and still pays off the loan faster without paying extra brilliant. Thanks for the show.

Really good advice from someone who isn't a financial advisor. Kudos.

I keep 6 months. If there is a 15%+ correction in stocks I load up with that cash and then rebuild it.

I just took my financial cushion and moved it into investments, nice to see it earning some interest!

Awesome video!!!! Mahalo for sharing 🤙🏾

Love your stuff. Very timely. I would suggest one modification. As long as you have a house supported line of credit you need to have insurance payable to the bank. My understanding is that, should you ever have a major insurance claim the money may go to the bank and into escrow, and the bank may not be very quick to release the money to you. Two days ago, I closed my mortgage secured line of credit but kept an unsecured line of credit for emergencies. The interest rate is higher but it doesn’t matter too much since it is only for temporary and genuine emergencies. Emergencies that I can reasonably foresee include: Flood or other sudden house damage - may need some money to put things right until the insurance company cuts you a check. Medical expenses while travelling in the USA (I am Canadian). My understanding is that some hospitals require payment from you right now, before treatment.Travel insurance reimbursement comes later. Line of credit can save the day. My experience is that it takes about three days to get money out of investments, at least from my bank. I think your suggestion of a LOC is excellent advice (as long as a person is disciplined enough not to see a hot tub on sale as “an emergency”) BTW, I think I grew up about 40 miles from where you did (Woodstock), and went to University in the same area (Waterloo). Love your stuff! Here is some new info I discovered today. House insurance goes down $300 a year when there is no line of credit/mortgage attached to the house.

The banana on the disco ball tho :) Love the show ❤️

Totally agree. We don’t struggle with credit cards (same as most mustachians). If I have an emergency I simply put it in a card, then like you said sell some stocks (for maximum tax loss) then use that money to pay off the credit card. It may not be the most optimized but it’s easy for me to understand.

I agree. I find myself often with too much cash, not necessarily cash in a bank but uninvested cash in investment accounts.

This really opened my eyes, especially when you worked out how much you're 'losing' by having money on your bank account and not invested. Even if the stock market would be down when you need some money, and you really have to sell some, you're still better off than keeping in month's worth of money on your bank account. Simple maths but never thought about it that way!

I tend to think a true emergency fund should be in cash. Maybe 2-4 grand hidden away. Suppose that amount = “1 month expenses” or “one uh oh”. I think of a house / car / medical bill as being most emergencies. Not “job loss”. Jobs are easy to come by. I would opt for a “layered” emergency system, you go down the list as the emergency gets worse. 1) one month expenses $2-4K in actual cash (good for hurricane prone regions of widespread power outages occur) 2) one month expenses in savings / MM. making 2%. 3) one month expenses you could sell some stuff (hobby stuff, a 2nd car, etc, use this as a chance to spring clean). 4) one month expenses you can take some out your Roth or taxable account. A small hit. 5) float a month on low interest credit card or HELOC. 6) work an odd /second job to make an extra month expense. So each step here is like one standard deviation. #1 will cover 78% of emergencies. #1+#2 covers 90% 1-3 cover 95%. So “six sigma” by the time you get to the end of that “defense in depth” you’ve had a one in a million emergency. Beyond which it’s pointless to plan for such long odd things.

There’s an important common sense element to this , if the stock market goes to crap and you have a large emergency you are selling assets at the bottom. I prefer 3 bucket rule . Savings protect your investments so they can grow unhindered by you pulling out assets

Loved the music on the money spectrum hahaha

Great advice!

Your kid is a much better kid than I was at his age.

Nice video. Solid advice. Canada rocks!

Great explanation. I think the controversy lies in the fact that everyone has a different degree of need for a true cash emergency fund. For me, I just "graduated" from the beginner Ramsey stuff so I'm not quite at the level of being comfortable putting my true emergency fund in anywhere but a savings account. And I'm going to being a missionary, so it's nice to have if I need a sudden plane ticket home or something. But yeah I'd use my other savings first if available. But on the flip side, if I was just going to continue working and living in the States, I think I would be moving towards your approach! Interesting!

I've always had that opinion on emergency funds. It's just money that depreciate 🤷‍♂️

You and I are cut from the same cloth. Alas my very lovely wife, who I love very much, suffers from anxiety and can’t roll with the invested version of an emergency fund. But you’re totally right, so long as you are disciplined (and don’t suffer from anxiety) it makes the most financial sense to invest as much as you can as often as you can to grow your money as fast as you can.

Great video. These videos are really good.

I think their reasoning with an emergency fund is they want you to have INSTANT ACCESS. There aren't really many "emergencies" that require payment on the spot. My ETF "emergency"fund takes about 2-3 days to pay a withdrawal which should be fine.. (and pays a heck of a lot more than 0%!).

For most of the types that follow MMM, an emergency fund is less important for the reasons MMM mentioned. However, I do believe it's worth having a small cushion based on the stability or lack thereof of your family employment. If you have very stable employment, I'd say closer to 1 month extra is fine. If less stable, closer to 2 or 3 months is better. If you're living frugally this won't be that large of an amount. The reason for having some cushion is oftentimes employment is lost during bad economic times when stock prices are lower. Thus, if you lose your job in a recession and have no cushion at all, you will be forced to sell investments at low prices potentially.

Wish you had talked more abt capital gains tax if planning to sell shares in order to cover big expenses. Its the reason we keep an emergency fund in a 2% savings acct rather than in our index fund accts. We like that there’s no fee to take $ out of the saving acct and its making a little $. We can get the $ immediately unlike selling shares, as well.

I agree with keeping enough money to smooth out your payment schedule. But in my situation it makes more sense to rent than to buy a house, therefore I can't use an open line of credit against a house. Also, a huge catastrophe like market crash usually comes hand in hand with job loss and such. I just don't want to be forced to withdraw from my nest egg when markets are low just because I also lost a job. Therefore I keep 6 months of expenses, just enough to be able to look for some other way to make money in the worst case scenario.

Suze and Dave are trying to help people who just want to keep consuming what they cannot afford and going into more and more debts. MMM's advice is appreciated by people who are fiscally responsible.

I started to do Ramsey's 6 months in a savings account but self-adjusted to keep 3 months of spending in the 2% account and 3 months in the 7% account and a couple times had to transfer from the 2% to checking. I also have about a $500 buffer in my checking account that helps with different timing of paychecks. Works well for me.

I agree. I pay all of my bills through my Fidelity money management account and put all of my extra cash into a brokerage account where it is invested into mutual funds and ETF’s. However, I do keep some cash in my brokerage account that I dip into when the market goes on sale (like in March) but I’ve also kept the thought in the back of my mind that I would pull from it first in the event of a financial emergency.

Thanks for the video. You just convinced me to get off my cash cushion. I think I was holding it out of fear and a little bit of ego-like I have this so I’m important. No, you have that because you’re scared. Anyways, I’m moving the cash up the green spectrum. Thanks!

For me it's psychological - I have so much peace-of-mind knowing that if there were a catastrophic event, and I need quick access to cash to cover myself, I can dip into a savings account.

In the UK at the moment we're in the odd situation that good current (checking) accounts have better interest rates than pretty much any "instant access" savings account so you can easily maintain a decent emergency buffer there.

We have several savings accounts set up, each for particular large and ongoing expenses. So one for the house taxes, one for car maintenance, saving for kids' education, etc. And we keep adding to them each month, and then depleting them when the tax bill comes, or the car needs repairs, and so on. And then back to saving. I don't know if that's technically an EF, but it's helped us tremendously over the years since the big but predictable expenses have funds allotted for them. We also have a LOC for the specific purpose of having access to thousands of dollars at a moment's notice.

Can you do a video on surviving divorce. It can totally financially devastate you, sometimes you have to start from scratch if you were just getting started.

It's funny, I'm 22 and this knowledge feels so natural to me. I started off doing this method, and the common knowledge of an E-fund, in the trad sense, made me uneasy and stressed to hold it that way, so I would just skimp on the E-fund and maybe have $500 in a checking, nowhere near 6 months of living, while my investments looked strong in Betterment. One thing to add for newbies that may watch, beware of selling off any pre-tax IRAs or 401ks, that's different than the stocks that MMM suggested selling, which are the taxable accounts you hold. Also, if you ever have the need extract from a Roth you're never getting that tax free growth back, so at the minimum leave the growth alone, only use the principle in an extreme emergency or killer real estate deal or something with extra high returns. What are your thoughts on this MMM?

Homicidal Loan Shark🤣😂🤣😂🤣 Lol I’m dead. 💀☠️ Just recently re-read that “Evil Mister Money” blog post of yours. Great stuff!

Great stuff

love the entrance

The Disco Death Star Banana episode?

Cash Flow is the ideal emergency fund. If you have a decent savings rate then most small "emergencies" can easily be paid off using the extra cash flow that comes in every month.

I understand your reasoning, and it makes sense; especially when stocks are going up. In a prolonged down market. You would have to sell your stocks at a terrible time. Stocks are long term investments. I don't own real estate, so I keep a small amount in a savings account to offset that possibility. Thanks for all your advice.

@8:57 I think the definition of an emergency might be the loss of your job. So in that case your left hand as shown in the video would drop to nothing. FYI, I totally agree with all the points made in the video, I just want to see if there is a subtle flaw in the definition of an emergency. I think the savings & investments in the green accounts would be able to get a person through the jobless period, but I didn't hear this case mentioned in the video. Thanks for the awesome content!

EF is about risk management. Ie, "just sell stocks" after a long/deep drawdown can lock in after TLH losses that wipe off opportunity cost gains using this more aggressive strategy.

Hi MMM, there are so many comments, so not sure you'll get this one. Firstly, thank you so much for existing! Finally an authentic person to just give honest and free advice for the right reasons. You are truly valuable. Secondly, I am debt free and started crawling up from the zero line about 6months ago. It's going surprisingly well :) I currently am not a home owner and that has been my primary objective from 6months ago to save for a deposit. I worked out that it would take about 2 years more to save for the minimum deposit on a house in the UK. Is it worth it to do that and make a 30 year commitment to paying it off or continue renting and just plough that money into investments? I'm guessing the mortgage repayment vs rental expense is what will answer that question, but I know there are other benefits / costs that are more hidden and slightly less obvious. Id appreciate your opinion on this

I agree, I think the point you didn’t address that could warrant a small cash emergency fund would be loss of a job and/or the fact that revolving credit and HELOCs can have a call associated with them and during a recession job loss and stiffer credit conditions could cause a problem with your strategy for those with less margin.

Livin the MMM lifestyle overseas!

Dave Ramsey describes the emergency fund as insurance. It protects your other investments from the unforeseen. If you get laid off, you don’t have to sell your other investments to come up with the money to live. It protects you from having to sell your investments at possibly the worst time, like during a down turn in the stock market or a drop in real estate. Insurance costs you money, investments make you money. It costs you money to hold cash because it is insurance and not an investment. If you are in a stable job (unlikely to be laid off) and have a high savings rate, it would not make sense to carry a large emergency fund like you said. Most people don’t understand money so Dave’s plan works best for them.

This video make me think of another similar question : how much should we spend in a emergency life/injurie assurance? have you ever bought any assurance of some sort? and why?

Totally agree with Mr. Money Mustache

I believe that emergency funds, for some, are meant to be an alternative (and better answer) to unemployment insurance. Without that income, and given that in a good job market (recessions and depressions aside) the average time to find a new job is supposed to take around 3 months, you could find yourself needing to bridge the gap. So, why not sell down shares? Well perhaps not so useful in a depression, but aside from that, many of the most tax efficient ways of saving money are not always so liquid (voluntary contribution arrangements through a workplace pension, for example). Another way I like to think about keeping a certain amount of cash (or even investment grade bonds in your IRA) is as another hedge (along with earned income, bonds, property etc.). Such hedging allows us to draw down on our investments with a timing that is more within our control. Exactly how much an emergency fund should be is going to be partly influenced by how much a months worth of expenses is compared with your savings, and then a bunch of things like job security etc., but it is mostly going to be about what makes you feel comfortable - and yes, for some, that could be zero. To which I say, well done!

I have never heard anyone promoting keeping the emergency fund in a checking account. Usually the advice is to keep in a savings account or cd, etc.

Lower outro levels please! My eeeaaarrrrrsss oooouuuccchhhh!!!!

Man - I love the spectrum. I always new debt was not good and cash was stupid but this is awesome. We paid off our full car loan on a relatively newish Toyota (4 years old) during Covid and saved 5% interest on the principle. Never buying a car again until this one dies. Just planning to invest the hell into the high value yields.

We experience a category 5 huracán ...the city and economy collapsed for at list 3 months. So maybe no an emergency found but a simple cash available to help you out till banks and things get back to normal.🤔

So about the banana on the disco b-ball. Am I the only one that’s having a hard time paying attention with that sitting there?😂😂