A Kibosh on the Rainy Day Fund


Do you really need to have several months of expenses sitting in an emergency fund, AKA a rainy day fund, earning no real return? I have offered such advice for most of my clients for years, even while I personally don’t maintain one. If you hate the idea of having a large chunk of money not working towards a goal, you might just be able to forego having an emergency fund altogether.


First, it helps to know the opportunity cost that comes with dollars sitting in cash. Imagine that your 6-months-of-expenses rule puts $50,000 in your bank (in addition to the cash already in your checking account to pay bills). Over a period of 20 years, that cash could grow to nearly $200,000 if it earned a 7% annualized return. Here are a few things you should consider if you want to reduce or put the kibosh on your rainy day fund.

The Untapped HELOC

My colleague Gabe wrote about how to properly use a home equity line of credit (HELOC) if you need cash in a bind. The danger of having an untapped HELOC, in our view, is more about the risk that a person will commit “lifestyle creep” and start treating their home like free money in an ATM. Gabe rightfully encourages that you get a HELOC established, but then leave it alone. Given the rise of home values, many people may find it easier to qualify for a HELOC today than it was several years ago.

A Brokerage Account

Hopefully, you’re saving for the future beyond what Uncle Sam lets you add to a 401(k) or IRA account. If you’ve built up a healthy individual or joint brokerage account balance, you now have a second resource for accessing cash. Yes, there may be capital gains taxes if it’s risen in value, but only the growth is taxable. If you are tax sensitive, you can cherry pick from the portfolio when the emergency occurs (for example, you could withdraw from your bonds if you want to minimize taxes or if it’s in the midst of a market correction and you want to leave your stocks alone to recover).

Spending Buckets

Many people tap their emergency funds for things that are not emergencies – they’re just lumpy expenses that you forgot to plan for because you’re accustomed to most of your expenses getting paid monthly when your paychecks arrive. To avoid this surprise, you can create multiple savings accounts at your bank that act as “allowance” accounts. I personally do this for property taxes, travel, home repairs, and charitable giving. For example, if you want to spend $10,000 per year on travel, just move $833 automatically to that account each month. Then, reimburse your checking account from the travel account when you book a trip.

If you haven’t yet built up a portfolio balance away from your retirement accounts, or if your work comes with extremely unpredictable or volatile income, then it may be worth keeping some extra cash on the sidelines. Otherwise, you may just be in need of an emergency plan, rather than a fund. The more dollars you have working for you, the sooner you will reach your goal of achieving financial independence. Talk to your advisor to see what makes sense for you.

Happy planning,