Physician Life Cycle Part Five: Do You Really Need an Emergency Fund? Section one- An Introduction to the Controversy
Most conventional finance authorities emphasize the need for an emergency fund. Several well respected medical finance bloggers have come out against the idea. It’s easy to become confused.
Author: Robert A Felberg MD
Topic: Physician Finance
Of all the topics in Physician Finance, the one that struck me as the least controversial is maintaining an emergency fund. Yet, it always seems to be a point of heated debate. Like all complex topics, this one will take a little more explanation, so I split the post into three sections.
The idea behind an emergency fund is simple, you accumulate a cushion of cash (we’ll define “cash” later) and use it for any unexpected financial emergencies. This helps you avoid borrowing at a high interest rate from credit cards, selling assets in a bear market, making career moves out of desperation or going belly-up due to poor planning. It also has a few other benefits, for instance being able to choose high-quality costly health care. For instance, if you become ill overseas you may tap your emergency fund to pay cash for a medical flight. You can easily come up with several other scenarios where ready cash could make a large difference.
The argument against an emergency fund usually follows along this line: 1. You are a doctor and are guaranteed to have some type of salary. 2. You will never face a really financial emergency because they are rare. 3. That money you are holding in “cash” could earn much more in the equity market and you are losing out on a small fortune. 4. The only way you’ll be out of work long term is if you are disabled.
I can see why this can be so confusing. Both arguments have their points, but one is fatally flawed.
Editor: There are several good physician finance bloggers out there in the blog-o-sphere. Unfortunately, many are highly technical in a confusing way and this can easily lead to “decision paralysis”. This popular blog series brought to you by NegotiationMD addresses common physician finance quandaries in a more explanatory and theoretical manner. The posts follow a logical order, so starting at the first one and working your way through makes sense. Please sign up for our newsletter to keep up with future installments.
Here’s the main problems I see with the arguments against an emergency fund. One is minor the other is where you can really can into trouble.
- The definition of “cash”. Cash should be defined as being liquid or having a certain degree of high “auctionability”. That is, when you need the cash, you can get at it in a reasonable short time frame. If it is held in a non-cash asset, you can auction it rapidly. The classic example is a checking or saving account. There are other auctionable and relatively liquid assets such as CD’s, money market accounts, bond and stock ETF’s. You must balance return risk with liquidity, but there is no need to dump all your emergency funds in a checking account paying 0.01% interest. You will never match the long term stock market, but you can hope to beat inflation by 1-2% making your emergency fund a bit more palatable. This is the lesser of the arguments, but needs to be mentioned since so many people are convinced that emergency funds must be in a check or saving account.
- The real fatal flaw is the underestimation or prediction of risk and a lack of understanding of the unique set of risk that doctors face. You have a high likelihood of needing to tap your emergency fund at least a few times in your career. And, there are some risks unique to physicians that many bloggers do not realize or skip over. I am going to spend much of the post discussing these risks in the setting of real events that have occurred to colleagues or clients of mine. Of course, the details will be changed to respect confidentiality unless they are publicly known events.
In the Part Two of this post, I will go further into the unique set of risks that physicians face. The risks are usually linked to the physician’s professional code of conduct, medical board and licensing, and the tie between physician and community. I’m guessing that you may be shocked to learn of some real life case studies. I’m hoping, at least, you gain an appreciation for usefulness of an emergency fund, beyond your typical broken air conditioner or flooded basement.
What are your thoughts? Do you have an emergency fund? How much do you keep in your fund? Do you think physicians really don’t need an emergency fund? Share your thoughts in the comment section