How much does your emergency fund cost you?

How an emergency fund causes you to play the Russian Roulette Mortgage game an additional 5 years, while costing you nearly three times your emergency fund savings.

First, your debt is an emergency.  If you have any debt at all, especially mortgage debt, it should be viewed as an emergent situation that needs to be resolved ASAP.  Remember, the premise behind this FIRE blog is to reduce your debt to 0.00, as quickly as humanly possible so you can enjoy your life and qualify for Medicaid.  Most financial advisers, bloggers, and news agencies will preach the need for an emergency fund, but I do not think they are outdated.  Just like those who preached the necessity of college to achieve success without fully understanding the situation, I feel these analysts preach the need for a savings fund that is more detrimental than helpful on the pathway to FIRE.

Most advisors claim you need at least 3-6 months of cash on hand to cover expenses, in case of a job loss, disability or other unforeseen circumstances that would lead to your inability to pay your bills, but my belief is you need exactly 0.00 in your emergency fund, and here are the two reasons why.

First, as we have seen with the COVID-19 bailout of 2020, and the Emergency Economic Stabilization Act of 2008, should there be any significant unforeseen economic disaster, the government will bail you out.  This is an extremely dangerous road to travel, but its one that has been repeated multiple times over the last decade when financial hardship struck.  My theory is our government knows that so many people are overextended, they have no choice other than to try to bail out the masses in any financial crisis, or risk total collapse of our economy. Due to the way most employees are paid, should you lose your job, you will still have a couple of weeks before your last paycheck hits your account, giving you ample time to find other employment during normal times.

Second and most important, the long-term cost of an emergency fund to your FIRE pathway is enormous.  For example, based on a popular emergency fund calculator, I should have 20k in my emergency account for unforeseen expenses (I included my previous mortgage payment of $1200.00 monthly, to be more consistent with average mortgage costs, compared to our current butterfly loan payment).  Here is where the problem arises, the cost of holding onto that money instead of paying down mortgage debt, results in the emergency fund holder losing nearly 3 times the value of the emergency fund. This then requires them to pay longer on the mortgage, thus playing Russian roulette mortgage game far longer than necessary.  Here is how it works:  A one-time mortgage payment of 20k (the recommended amount of the emergency fund) on a 30-year, $300,000.00 mortgage at 4% yields a savings of $53,142.24 in interest, and over 5 years of payments on the mortgage.  So here is the million-dollar question or in this case $53,000.00 question: Does it make sense to save 20k now at 0% interest and hold onto it for 30 years in case of an emergency, or does it make more sense to take that 20k, and reduce your total debt by over $53,000.00, while reducing the need for the fund by 5 years?  To me your debt is an emergency, on the FIRE pathway, it makes more sense to reduce your debt, and save the extra 53k of interest and 5 years of payments.  Either way, it is a gamble. On one hand you are gambling that you may have an adverse event that needs your 20k reserve where you can pay your bills but will still have bills when the money runs out, on the other hand you can guarantee you reduce the amount of time an adverse event could bankrupt you, while saving $53,000.00 at the same time.  For me, the answer is clear: eliminate your “emergency fund “by reducing the number of years you may need the account. The longer you live, the higher the chances a medical complication could cause you to be unable to work and pay your bills.  By shaving 5 years off of your mortgage, you effectively reduce these odds, during the most likely years of your life to even need the emergency fund.

In conclusion, as far as an emergency fund goes you have two choices: save your emergency fund yielding nearly no return for the possibility of a rainy day which will most likely occur near the end of your mortgage, or put that same emergency fund towards your mortgage now, and save yourself years of payments and interest.  Personally, I choose to save time and money. By shaving years off your mortgage, you help reduce the risk that the bank can steal your home from your family, leaving only the government to worry about.