How to Use an Emergency Fund Without the Stress

By Jimmy Turner, MD
The Physician Philosopher

A lot of time is spent in the financial world discussing emergency funds.  We all know the basics.  You need 3-6 months of basic living expenses in an emergency fund.  This is to be used for unanticipated, emergency expenses.  It should be kept in a high-yield savings account when possible.  Yet, very few posts discuss actually using an emergency fund and anything beyond the basics.  Having used this fund multiple times over the past two years, I thought it was time to discuss the practical application of an emergency fund.

Here are 5 principles that are not discussed frequently enough around the all-important emergency fund.

1. The Purpose is to NOT Cause Financial Stress

When I finished training, we worked hard to save our emergency fund – which is often sometimes called a Rainy Day Fund.  We saved up $30,000 and we were super proud.  The financial security we felt from having the money around was very real.

Until our water heater went out.

With high student loan payments each month (at an average clip of $10,000) and other living expenses, we had to use our emergency fund for the $1,500 repair.

What I experienced that day is that everyone talks about the financial security we realized with an emergency fund. Yet, no one talks about the very real stress it creates when we have to dip into that rainy day fund the first time (or the second, third, or fourth time).

I am here to tell you that it is okay to use an emergency fund!  That’s what it is there for: emergencies.

After realizing this the first time, it was a little bit easier the first time we had to drop $4500 into an air conditioner replacement on our new house.  Yes, I said first time, because we have two.  And the second one went out about 8 months later.

And, you know what? That’s okay!

2. Don’t Stress About the Location

All sorts of time is spent on optimizing the high-yield returns of emergency funds.  People often ask, “where should I put my emergency fund?”

The purpose of this fund is two-fold.  First, it should be easily accessible in the case of an emergency, but not TOO successful.  Otherwise, you’ll just spend it.

What this means in real life is that you should aim to have a separate account.

Yet, people banter and bicker over their favorite high-yield savings account.  Honestly, my time is probably spent elsewhere rather than chasing a 1% return instead of a 0.6% annual return on my $30,000 – $50,000 emergency fund.  We are talking about $200 per year here, people.

As long as your emergency fund is separate – and relatively easily accessible – that is about all you need.  If you can find a high-yield account that accomplishes this goal, great!

However, don’t lose site of the purpose of an emergency fund.  It is not an investment.  The purpose of a rainy day fund is financial security and being able to sleep at night.

3.  Emergency Funds Fill Up First

In my course Medical Degree to Financially Free, I teach my students something called The 10-Step Cash Flow Waterfall.  The purpose of this is to take the tension out of deciding where money should go next.

When it comes to emergency funds, this step is pretty high in the waterfall.  Practically speaking, what this means is that when you dip into your emergency fund all other cash flow should cease in order to fill this bad boy back up.

For example, if you have money cash-flowing into a taxable or brokerage account and you just took out $5,000 from your emergency fund to pay for that AC repair, then your money should stop going into the brokerage account so that you can replace the money spent from the emergency fund.

Like Jail in Monopoly, you do not pass go.  You do not collect $200.  Instead, you go straight to putting money back in the emergency fund until it is replaced.

4. Credit Cards Are Not an Emergency Fund

Sometimes people like to use lines of credit as an emergency fund.  For multiple reasons, this is not wise.

In fact, I know people who like to use lines of credit for spending that they don’t quite have.  Instead of saving, they spend money on their credit card, from their home equity, or from their emergency fund.

This is not the purpose of an emergency fund.

Likewise, a credit card is not to be used in place of an emergency fund.  Why?  Because credit card debt is an emergency!!!

At 17% APR a credit card is one of the fastest ways into more debt.  Don’t use lines of credit.  Save the money.  Create a real emergency fund to avoid the stress.

5. An Emegency Fund = An Emergency

The last thing that I’ll mention about emergency funds is that they are to be used for exactly that – emergencies.

Note: This does not mean variable expenses.  An emergency fund is not meant for the Disney trip you forgot or the wedding expenses that you knew were coming.

An emergency fund is a truly unique and emergent kind of variable expense.  It is unknown and – somewhat – unpredictable.  The AC unit going out.  The car tire that gets a nail in it.  The death in the family that requires a flight and stay in a long-distance place.

For more common variable expenses like home repairs, vacations, and trips… plan for those through proper budgeting and cash flow.

You can even use multiple savings accounts to help you in this regard.  A little planning goes a long way!!

Take Home

Emergency funds are meant to help with financial stress, not cause it.  Make sure you are using your emergency fund in a stress-free way.

Know that it is okay to use the fund, but that you should replace any costs out of it ASAP!  Just make sure it is a true emergency and – if possible – plan accordingly for the things that can be anticipated.

Did you experience stress/anxiety the first time you used your emergency fund?  How do you deal with that now? Where do you keep your emergency fund?  Leave a comment below.


1 Comment

  1. PrudentPlasticSurgeon

    So important and I completely agree.

    I still have a ton of debt and financial goals that I am working towards but #1 on my financial priorities in my written financial plan is “establish emergency fund.” Too many doctors found out the hard way during this pandemic the necessity of an emergency fund. I want to be prepared and secure…a huge part of financial well being.

    The Prudent Plastic Surgeon


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