What emergencies could justify a highly liquid emergency fund?

Question

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.

Answer 1

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.

Answer 2

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 than 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.

Answer 3

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.

• Hurricane Katrina
• Superstorm Sandy power outages lasted for weeks,
• If contractors dredge the power cable to the island.

Answer 4

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. :) )

Answer 5

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.

Answer 6

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.

Answer 7

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.

Answer 8

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!

Answer 9

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.

Answer 10

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.

Answer 11

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!

Answer 12

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.

Answer 13

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.

Answer 14

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.