Do you need Emergency Fund if you have no expenses?

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Do you need Emergency Fund if you have no expenses?

Postby chemeng » Fri Apr 05, 2013 12:03 pm

Hi everyone,

First, some facts:
Age: 23, single, recent college grad, living at home
Income: $65,200
401k: Currently contributing max to $17,500
Emergency fund: $5000 in 6% savings account.
Fed Tax Bracket: 25%
State Tax Bracket: 9.3% (CA)

Current Student Loans:
Total loan: $28000 all from Fedloan Servicing
1. Fed Unsubsidized: $8000 (6.8% fixed)
2. Fed Subsidized: $3500 (6% fixed)
3. Fed Subsidized: $5500 (5.6% fixed)
4. Fed Subsidized: $4834 (4.5% fixed)
5. Fed Subsidized: $6166 (3.4% fixed)

I recently have developed what I feel is a good personal financial plan (with, of course, the help of this forum) that involves developing an emergency fund amongst other things. BTW, here was the post where I finalized the plan: http://www.bogleheads.org/forum/viewtopic.php?f=2&t=111763#p1633502

However, I have been doing some thinking and realized that since I have close to zero expenses, do I still need to have the emergency fund? The reason I have been thinking this is because after developing the plan above, I have been aggressively putting all of my efforts into paying off my high interest student loans (specifically the 6.8% loans), but with my current $5000 in my emergency fund earning 6%, I feel as if I could pay off a very large amount of principal with that money.

I am currently living at home, so if I were to lose my job (unlikely, as it is a very stable job), or if a potential medical/car emergency came up, I would have my parents to support that (at least partially).

What suggestions do you all have?

Thanks again.
Last edited by chemeng on Fri Apr 05, 2013 3:52 pm, edited 5 times in total.
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Re: Do you need Emergency Fund if you have no expenses?

Postby ShowMeTheER » Fri Apr 05, 2013 12:05 pm

If that E-fund is really earning 6%, I wouldn't bother touching it.
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Re: Do you need Emergency Fund if you have no expenses?

Postby allsop » Fri Apr 05, 2013 12:07 pm

Sorry for the snarky answer, but you should rethink what "having no expenses" means.
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Re: Do you need Emergency Fund if you have no expenses?

Postby Scott S » Fri Apr 05, 2013 12:09 pm

ShowMeTheER wrote:If that E-fund is really earning 6%, I wouldn't bother touching it.

+1. An emergency fund isn't for regular expenses anyway -- it's for things you can't foresee.
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Re: Do you need Emergency Fund if you have no expenses?

Postby chemeng » Fri Apr 05, 2013 12:12 pm

allsop wrote:Sorry for the snarky answer, but you should rethink what "having no expenses" means.


No worries, but could you elaborate?
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Re: Do you need Emergency Fund if you have no expenses?

Postby Grt2bOutdoors » Fri Apr 05, 2013 12:16 pm

chemeng wrote:
allsop wrote:Sorry for the snarky answer, but you should rethink what "having no expenses" means.


No worries, but could you elaborate?


You are living at home in a subsidized "rent free manner". Would you feel the same way if you were out on your own renting an apartment?
You have those student loans - if you lost your job tomorrow, who is going to pay for it? Your parents or would you dip into your own savings (in other words, there comes a time in one's life when you become an adult), the best time to learn this is now, before you do have expenses. You've graduated school, now it's time to start transitioning from "minor" to a responsible adult. The sooner, the better for you.

I graduated grad school with loans and zero job, I didn't think "oh, I have no expenses, so I don't need a savings account" I took the first job available, paid my student loans back, saved/invested and avoided being a "mooch".
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Re: Do you need Emergency Fund if you have no expenses?

Postby chemeng » Fri Apr 05, 2013 12:18 pm

Scott S wrote:
ShowMeTheER wrote:If that E-fund is really earning 6%, I wouldn't bother touching it.

+1. An emergency fund isn't for regular expenses anyway -- it's for things you can't foresee.

It definitely is earning 6%. The reason I am considering closing down that account for now is because I have loans with interest at 6.8%, more than the 6% I am earning from the savings account.

But in regards to things I can't foresee, I have my parents acting sort of as the emergency fund. If/when I begin living on my own/get married, that will be a different story as I would no longer expect them to pay for any unforeseen circumstances. (They are willing to do so now because I live at home).
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Re: Do you need Emergency Fund if you have no expenses?

Postby Grt2bOutdoors » Fri Apr 05, 2013 12:23 pm

Paying back your student loans is not an emergency. Your parents acting as back-up is providing shelter if you lost your job, you wind up in the ER and they need to make a life-saving decision or they pick you up and bring you home. Do you ask them for spending money as well because they are your backup e-fund? If they weren't able to provide this service, would you make the same sort of reckless decision about emptying out your piggybank and paying down almost $5K at once? The answer is no, you would have to make a rational choice. Are your parents in agreement with your plan, have you discussed this and the expected level of support they will provide in addition to free shelter,utilities, food, etc?
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Re: Do you need Emergency Fund if you have no expenses?

Postby chemeng » Fri Apr 05, 2013 12:30 pm

Grt2bOutdoors wrote:
chemeng wrote:
allsop wrote:Sorry for the snarky answer, but you should rethink what "having no expenses" means.


No worries, but could you elaborate?


You are living at home in a subsidized "rent free manner". Would you feel the same way if you were out on your own renting an apartment?
You have those student loans - if you lost your job tomorrow, who is going to pay for it? Your parents or would you dip into your own savings (in other words, there comes a time in one's life when you become an adult), the best time to learn this is now, before you do have expenses. You've graduated school, now it's time to start transitioning from "minor" to a responsible adult. The sooner, the better for you.

I graduated grad school with loans and zero job, I didn't think "oh, I have no expenses, so I don't need a savings account" I took the first job available, paid my student loans back, saved/invested and avoided being a "mooch".


If I was renting my own apartment, this would be a different situation. If I were to lose my job tomorrow, whether or not I have that E-fund, I would apply for an Income-Based Repayment plan, which would lower the monthly repayments substantially, and would be paid by the parents for the time being.

I am, in fact, not "mooching" off of my parents and from living at home. The goal of my decisions has always been direct towards being responsible adult. I have done an extensive amount of researching and thinking about my financial situation, and have developed for myself what I feel is a decent plan. At the same time, I am simply utilizing some of the advantages from living at home that my parents have offered to me until I move out.
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Re: Do you need Emergency Fund if you have no expenses?

Postby chemeng » Fri Apr 05, 2013 12:36 pm

Grt2bOutdoors wrote:Paying back your student loans is not an emergency. Your parents acting as back-up is providing shelter if you lost your job, you wind up in the ER and they need to make a life-saving decision or they pick you up and bring you home. Do you ask them for spending money as well because they are your backup e-fund? If they weren't able to provide this service, would you make the same sort of reckless decision about emptying out your piggybank and paying down almost $5K at once? The answer is no, you would have to make a rational choice. Are your parents in agreement with your plan, have you discussed this and the expected level of support they will provide in addition to free shelter,utilities, food, etc?

This thread was started with the fact that they are able to provide this service, so I clearly would not make that decision to pay down the $5k if my parents were not able to provide this backup e-fund service to me. So yes. They are well aware of the level of support I expect from them, including whether or not I have the $5k, whether or not I lose my job or another emergency comes up, and whether or not I move out.
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Re: Do you need Emergency Fund if you have no expenses?

Postby G-Money » Fri Apr 05, 2013 12:45 pm

You didn't mention anything about a Roth IRA. You can use that as your retirement fund. I believe contributions (but not earnings) can still be pulled out at any time without taxes or penalty.

Although, personally, I'd like having some liquidity (i.e., cash I could pull out of an ATM or funds from which I could write a check immediately), regardless of whether it was called an "emergency fund" or not. But maybe I've just been watching too many back episodes of Mad Men.
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Re: Do you need Emergency Fund if you have no expenses?

Postby RenoJay » Fri Apr 05, 2013 12:50 pm

Given the high return on the emergency fund, I'd keep it while still aggressively paying down the student loan. Once the student loan is almost gone, I wouldn't be surprised if the unexpected "emergency" is that you decide you want to live on your own or that your parents decide it's time for you to live on your own.

In any case, congrats on being so financially literate at a young age. If everyone were like you, we'd have no retirement crisis in America because everyone would have planned early for later life.
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Re: Do you need Emergency Fund if you have no expenses?

Postby Grt2bOutdoors » Fri Apr 05, 2013 12:58 pm

chemeng wrote:
Grt2bOutdoors wrote:
chemeng wrote:
allsop wrote:Sorry for the snarky answer, but you should rethink what "having no expenses" means.


No worries, but could you elaborate?


You are living at home in a subsidized "rent free manner". Would you feel the same way if you were out on your own renting an apartment?
You have those student loans - if you lost your job tomorrow, who is going to pay for it? Your parents or would you dip into your own savings (in other words, there comes a time in one's life when you become an adult), the best time to learn this is now, before you do have expenses. You've graduated school, now it's time to start transitioning from "minor" to a responsible adult. The sooner, the better for you.

I graduated grad school with loans and zero job, I didn't think "oh, I have no expenses, so I don't need a savings account" I took the first job available, paid my student loans back, saved/invested and avoided being a "mooch".


I am, in fact, not "mooching" off of my parents and from living at home. The goal of my decisions has always been direct towards being responsible adult. I have done an extensive amount of researching and thinking about my financial situation, and have developed for myself what I feel is a decent plan. At the same time, I am simply utilizing some of the advantages from living at home that my parents have offered to me until I move out.


I apologize if you felt offended. You asked what was meant by "having no expenses" and I spelled it out. Eventually, when you do make that transition from your parents home into your own apartment or home, you will need an E-fund.
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Re: Do you need Emergency Fund if you have no expenses?

Postby englishgirl » Fri Apr 05, 2013 1:02 pm

You have nice parents. I'd want a 23 year old with a good job to be contributing to the household, personally.

I would be tempted to pay the loan off. But I think I'd say to them first "look, I've been saving money to set myself up and start becoming financially independent, but it seems to me that it might be a better use of the money to knock some of the student loan debt out first. However, that means I'd be reliant on you for longer than I'd planned. Is that OK or do you foresee any problems with that?" If they're fine with it, great.
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Re: Do you need Emergency Fund if you have no expenses?

Postby Twins Fan » Fri Apr 05, 2013 1:05 pm

Well, your financial plan calls for building an emergency fund... but, then you want to completely get rid of it and have no emergency fund???

My vote.... leave that $5K alone, but stop contributing to it for now. That's probably a good EF amount for someone young, single, and with no real expenses. Then I would think about not maxing out the 401k for a bit and paying down the student loans. Can you get a guranteed 5 or 6% return in your 401k?... Like a bunch of the loan interest rates.

Then again, you're young, single, making good money, and living with the folks for a bit.... you can probably continue to max the 401k and pay off those student loans pretty darn quick (within a year or two). $28K isn't all that much compared to some out there... you're sitting pretty good. I believe you might be suffering from a bit of "NOW" thinking. Slow down, grasshopper. :D

Now, share with us where a 6% savings account is available now days!! :happy
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Re: Do you need Emergency Fund if you have no expenses?

Postby stan1 » Fri Apr 05, 2013 1:15 pm

I would keep the emergency fund (especialy since its paying 6%) but reduce your annual 401K contributions by $5K or $10K to pay off the loans quicker.
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Re: Do you need Emergency Fund if you have no expenses?

Postby Random Musings » Fri Apr 05, 2013 1:32 pm

On a cash flow basis - I see $17,500 going into 401K and at least the monthly payments on student loans out the door.

Also, you got SS and tax payments. You don't even mention a car payment, so perhaps that is paid for.

You live at home and it sounds like your parents subsidize most things there. So, I guess you get to spend a couple of grand each month on other expenditures. Gas, clothing, insurance on the car and fun.

Spend a little less on the fun, pay off the student loans. Keep the 6% (inquiring minds want to know) because that I would consider that a bond position - and I would keep that. Once you get rid of that debt, you can afford to move out on your own.

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Re: Do you need Emergency Fund if you have no expenses?

Postby tyrion » Fri Apr 05, 2013 1:43 pm

There's nothing wrong with living with your parents for a little while after graduating college. Family dynamics vary quite a bit. I wouldn't have been able to live with my parents when I was 23, but I could do so pretty easily in my 40s (I think). But staying with them while paying off debt is a good more, as long as everyone gets along. Eventually you will want to find your own way in the world.

Keep the emergency fund. You might have car repairs, or an unexpected tax bill, or ... something. It's a good habit, and your EF is not particularly large in the grand scheme of things.

Keep maxing your 401k.

Start a Roth IRA.

Offer your parents a few hundred dollars a month for rent/food. Or take them out to a nice restaurant and pick up the tab. Or help out around the house with chores. Maybe you have already done these things.

You should still be able to pay down the loans relatively quickly.
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Re: Do you need Emergency Fund if you have no expenses?

Postby Watty » Fri Apr 05, 2013 3:42 pm

Emergency funds are not just for bad things.

I have known people who have who have used their emergency fund to;

1) Buying a car at a steep discount from a relative who wanted to sell the car right away. It was an older relative who they had finally convinced to give up driving and they were willing to sell the car right then. If they were not able to write a check right then the car would have been taken to some place like Car Max to get rid of it before they could change their mind again. It is not uncommon for people want to sell something inexpensively if they can do it easily and not have to go through the hassle of selling it on some place like Craigslist.

2) Taking an unexpected trip. I've seen this happen several times. There are lots of situations where people have made pre-paid reservations for condo's or resorts and their plan falls through. I know someone that got to spend a week with a friend in a Hawaii when the friend broke up with her boyfriend after the reservations had been made. Their only expense was a plane ticket since they had condo that had already been paid for.

3) A great job opportunity comes up unexpectedly but it is 500 miles away and they will not pay for relocation.

There are a lot of good situations where being able to spend the emergency money would make sense.
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Re: Do you need Emergency Fund if you have no expenses?

Postby chemeng » Fri Apr 05, 2013 3:44 pm

Twins Fan wrote:Then I would think about not maxing out the 401k for a bit and paying down the student loans. Can you get a guranteed 5 or 6% return in your 401k?... Like a bunch of the loan interest rates.

stan1 wrote:I would keep the emergency fund (especialy since its paying 6%) but reduce your annual 401K contributions by $5K or $10K to pay off the loans quicker.

Thank you both for the suggestion. After weighing some pros and cons (refer to the other thread), I roughly calculated that contributing the max to my 401k, and thereby reducing my effective tax bracket to 15% from 25% for 2013 taxes, I would save more money overall this way than by decreasing 401k contributions and using that money to pay down the loans. Any thoughts on this?
Last edited by chemeng on Fri Apr 05, 2013 3:48 pm, edited 1 time in total.
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Re: Do you need Emergency Fund if you have no expenses?

Postby abuss368 » Fri Apr 05, 2013 3:44 pm

Who really has zero expenses at any stage of life outside of being a kid?
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Re: Do you need Emergency Fund if you have no expenses?

Postby chemeng » Fri Apr 05, 2013 3:47 pm

Twins Fan wrote:Now, share with us where a 6% savings account is available now days!! :happy

Random Musings wrote:Keep the 6% (inquiring minds want to know) because that I would consider that a bond position - and I would keep that.

Mango prepaid card :happy. There is a $5 charge each month, but that is waived if you transfer $500 into the account each month (then I do a pull of the $500 back into my CIT bank account once it clears in the Mango account). Also, the maximum amount you can put in the account that can earn 6% is only up to $5000. All amounts above $5000 only earns 0.1%.
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Re: Do you need Emergency Fund if you have no expenses?

Postby Twins Fan » Fri Apr 05, 2013 4:37 pm

chemeng wrote:
Twins Fan wrote:Then I would think about not maxing out the 401k for a bit and paying down the student loans. Can you get a guranteed 5 or 6% return in your 401k?... Like a bunch of the loan interest rates.

stan1 wrote:I would keep the emergency fund (especialy since its paying 6%) but reduce your annual 401K contributions by $5K or $10K to pay off the loans quicker.

Thank you both for the suggestion. After weighing some pros and cons (refer to the other thread), I roughly calculated that contributing the max to my 401k, and thereby reducing my effective tax bracket to 15% from 25% for 2013 taxes, I would save more money overall this way than by decreasing 401k contributions and using that money to pay down the loans. Any thoughts on this?


That makes sense and sounds fine. Should give you nice tax return for 2013 then to throw at the student loans also!!

Then I will stick to... continue to max 401k, leave the emergency fund alone, and pay off the loans as quick as you can. Shouldn't take long to knock those out in your situation.
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Re: Do you need Emergency Fund if you have no expenses?

Postby Hikes_With_Dogs » Fri Apr 05, 2013 4:49 pm

Please share where the 6% savings account is found!!! I would love to earn 6%.



I skimmed the other responses - how do you get to work? Do you have a vehicle??
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Re: Do you need Emergency Fund if you have no expenses?

Postby Brian2d » Fri Apr 05, 2013 5:42 pm

It's the Mango prepaid card/savings account. Max $5,000 that earns that, and that's only with a direct deposit. You have to have a card which comes with $5 monthly fee unless you load $500 onto it each month....the only way to get money out (from what I understand) is to use the prepaid card or close the account (which comes with a $10 fee).

Seems like a lot of catches to me, not surprising given the too good to be true rate. If you play it right, you earn $300 in interest a year ($240 if you don't worry a about avoiding the $5 charge, that would be 4.8%)....of course you have to use the debit card somewhat to get out the additional money each month.

It may be worth it, but I'm not yet convinced. Seems like there's a good amount of hassle involved, and it does seem kind of gimmick-y.

https://www.mangomoney.com/what-is-mango#savings
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Re: Do you need Emergency Fund if you have no expenses?

Postby chemeng » Fri Apr 05, 2013 5:49 pm

There is already a thread on this forum about the Mango card (viewtopic.php?f=2&t=94135), and it is true that there are a number of steps to take in order to get the 6% to work, but once you get everything figured out, the 6% is real and it is great.

In regards to taking money out of the account, I have been able to do direct pulls from the Mango acct into my CIT bank account for no charge, despite the "options" that Mango lists, that you either have to pay $10 to get the money sent to you, or withdraw the money from at ATM with a fee.
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Re: Do you need Emergency Fund if you have no expenses?

Postby retiredjg » Fri Apr 05, 2013 5:57 pm

chemeng wrote:However, I have been doing some thinking and realized that since I have close to zero expenses, do I still need to have the emergency fund?

You may not need it today, but you will need it. So I think it would be somewhat foolish to not keep it.

At some point, you will move out. It takes money to move out. You will need deposits for an apartment and utilities, you may need new clothes for a new job, you might need a new form of transportation, etc. When you marry, you will need an emergency fund even more then, especially if kids are involved. If you use what you have now, you will simply have to save one up again later. I think you should keep what you have in the emergency fund, pay the loans aggressively, and save some for retirement. Once the higher interest loans are paid, you could slow down a little and save more for retirement.
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Re: Do you need Emergency Fund if you have no expenses?

Postby kitteh » Fri Apr 05, 2013 8:02 pm

It's time to be an adult. You're 23, a college graduate, and making quite a nice salary..

That means paying your parents rent and having an emergency fund. From your comments, it's clear they are not wealthy, and if you use them as an emergency fund, you are endangering their retirement. Plus your rent could be helping them financially.
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Re: Do you need Emergency Fund if you have no expenses?

Postby enderland » Fri Apr 05, 2013 8:21 pm

Since you have chosen to live a life using your parents post-graduation for your financial stability, most of your potential emergencies will actually be affecting them:

  • Your parents living burns down
  • Your parents die
  • Your parents kick you out
  • Your parents lose their job (which might affect the above)

or if a potential medical/car emergency came up, I would have my parents to support that (at least partially).


It sounds like you absolutely need an emergency fund if your current insurance against needing one (your parents) cannot support these emergencies. If they can only partially support your emergency, then, well, you need an emergency fund.

Since you are making at least $2000 a month post taxes a month and netting nearly all of it, you're going to pay off the 6.8% loan in only four months. The difference in interest from your savings vs paying this off now vs over four months is almost nothing, anyways.
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Re: Do you need Emergency Fund if you have no expenses?

Postby StrayTheHorse » Sat Apr 06, 2013 9:47 am

I'm not sure why everyone is giving the guy such a hard time for living with his parents while he establishes some financial stability. I did the same thing, for two years, right after I graduated. I had a good job that required extended travel 6-8 months of the year. It seemed silly to rent an appartment knowing I wouldn't be using it over half the year. As long as I was gainfully employed, and helped out with basic chores (cut the grass, picked up after myself) my parents didn't mind having me there. The way they looked at it, the additional cost to them was negligible, and it seemed like an appropriate "reward" for finishing college and getting a good job. It allowed me to fully pay off my $28k in student loans in 6 months.

To the original poster - I would still want to try and establish an "emergency fund." For me, this also happens to be my day to day living fund. I try and keep a minimum balance of $10k in my checking (the emergency part of my fund), and everything over that goes towards living. Once it gets above $15k (or more like, once it gets to $16-20k and I get around to it) I'll transfer the funds to some kind of investment fund, typically my Roth first then taxable accounts after that. This works for me, and I figure if I lost my job tomorrow, that $10-15k could float me for 6 months pretty easy if I cut down to bare minimum expenses.

The other reason to start an emergency fund is to offer yourself some protection from your parents. If things start going south, it's nice to know you can grab your stuff and get your own place quickly. And for their sake, it may be nice to know they can get rid of you quickly and not have you go homeless. Good luck.
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Re: Do you need Emergency Fund if you have no expenses?

Postby Buckeye » Sat Apr 06, 2013 10:40 am

Definite yes on the E-fund.

You will probably want your own place very soon. Hopefully lots of funs times ahead for ya the next few years. Don't worry about finances too much....enjoy your 20's!!
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Re: Do you need Emergency Fund if you have no expenses?

Postby retiredjg » Sat Apr 06, 2013 11:13 am

StrayTheHorse wrote:The other reason to start an emergency fund is to offer yourself some protection from your parents. If things start going south, it's nice to know you can grab your stuff and get your own place quickly. And for their sake, it may be nice to know they can get rid of you quickly and not have you go homeless. Good luck.

I had considered this as well. Living at home can be great. It can also not be great, and sometimes, the difference is only a few months. If you have a buffer, you can leave pretty easily without straining your relationship while having to save 6 months for the required deposits, etc. This should be a protection and a comfort for your parents as well.

Welcome to the forum StrayTheHorse!
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Re: Do you need Emergency Fund if you have no expenses?

Postby Saving$ » Sat Apr 06, 2013 4:30 pm

1. You need an emergency fund. Keep the $5k you saved. The difference between your 6.8% student loan and what you are earning is only 0.8%. You are going to aggressively pay off the 6.8% loan in about 4 months anyway, so it is not even worth losing sleep about.

2. You have expenses. Unless your parents are paying your health insurance, your transportation to work, your phone and all your clothing, etc. you have expenses. If you lose your job, you will need money for Cobra health insurance, your phone, maybe car insurance, etc. Be an adult and prepare for that.

3. People are not giving you a hard time for living at home. They are giving you a hard time because you are not acting like an adult. You wrote: "But in regards to things I can't foresee, I have my parents acting sort of as the emergency fund. If/when I begin living on my own/get married, that will be a different story as I would no longer expect them to pay for any unforeseen circumstances...." You are 23. You should not expect your parents to pay for ANYTHING. Your parents should expect you to contribute toward the household expenses.
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