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Real talk about emergency savings funds

squirrel nuts meme how big an emergency savings fund do you really need Imgur

Pretty much every personal finance article, book, and advisor says you should save enough cash for three months of living expenses in an emergency... but is this advice out of date?

Don't get me wrong... I'm totally down with saving. Investing is just saving towards a goal, right? But in the modern era do you need to build up fat stacks of cash equal to three months of your ENTIRE living expenses JUST IN CASE? Halibutboy says NO. What you need today is good credit and paid-down credit cards.

Even 5 years ago, you needed a big fund of cash money for emergencies because it was impossible to pay a lot of important bills -- like utilities, taxes, insurance, and transportation -- with credit. But times have changed, and now in the era of Uber you can't even pay for things with cash if you want to. Today even the ticket machines for a lot of public transit systems take cash grudgingly if at all.

The new rule for emergency savings is that you need 3 months of cash FOR RENT/MORTGAGE, MAYBE CAR PAYMENT, and MINIMUM CREDIT CARD PAYMENTS... plus enough credit for the rest.

Why does this make sense? Even in the worst recessions of the past decades, unemployment rarely and barely broke 10% -- at worst maybe 20% for Millennials without significant job experience or hard skills. Meanwhile credit cards might charge 29% annual interest. If you have a job, you are trading the 20% POSSIBILITY of future job loss for the 100% CERTAINTY of paying high interest on credit card debt.

If you have decent credit and a job, it makes more sense today to pay down the credit cards, only stash enough cash for the things that truly require cash, and stop being stuck in the past.

Just to be clear: an emergency fund means money you tap if you lose your job or find out you need chemo or your parents die. It does NOT mean cash you stash because you feel like taking the summer off to surf every day. Nothing wrong with that, but that's a separate savings goal.

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You make an excellent point.

The only things that need cash these days are rent/mortgage and making each credit card payment.

If only we could put the rent/mortgage on our credit cards too!

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