Here’s the deal…
What are the odds that something catastrophic happens and you lose all your income for 3 months or more?
Pretty slim, right?
But “shit happens” you say… and I agree, it does. And in case it does, you want to be prepared for it. I understand you completely.
Still though, you are probably wasting your money with your emergency fund. Let me explain why.
Let’s say you have a meagre $5000 saved aside for emergency purposes. It’s sitting in your bank account earning shit all interest. Basically, your money is not working for you whatsoever.
On the other hand, you could scrap this “emergency fund” idea and slide that $5000 into an investment. How about some long term stocks?
That $5000 could grow at a fairly conservative 5% over, let’s say, 30 years, leaving you with $21,610 after 30 years. That’s without adding any additional dollars. Now, doesn’t the idea of an extra $15000 to spend on golfing when your old and full of time sound nicer than nothing at all?
And that’s why you’re wasting your money when you simply leave it in some bank account earning virtually nothing.
Rethink The Purpose Of Your Emergency Fund
I think most people that have an emergency fund probably don’t need it. I mean, let’s say something catastrophic happens and you can no longer earn income for 6 months. The smart thing to do is to plan for something like this by having the right type of insurance to cover you.
But let’s say you don’t and you’re just screwed for money for the next 6 months without an emergency fund. What do you do now?
Well, you have a home filled with stuff. You probably don’t need any more new clothes, computers, cell phones, or Friday night drinks with the buddies for the time being. Sure they’d be nice, but you don’t need it.
You can eat a little less, in volume and quality, too. And if you have kids, so can they. You can eat out less often and do less things that cost money – like going to the movies (just get Netflix).
What I’m trying to say is, YOU’LL LIVE!
I think people that truly need emergency funds are those who truly truly would be homeless if they didn’t earn any money for a small amount of time. I’m talking those people who’s one more missed rent strike away from losing their home. Or they are on the Mac and Cheese diet for weeks and literally only own 5 shirts.
I’d recommend a small emergency fund. But for most of us average folks who have a closet full of clothes and fancy hair products to look pretty, tough it out when the going gets tough.
Because, really, the trade off is MUCH larger gains in the long run. And sometimes you need to take a step back and look at the deeper picture.
It’s not overly common for the average person to fall into a situation where they are completely out of income and there’s nothing they can do about it. Most people can take a small loan, sell some belongings, and reduce their quality of life a little until they sort it out.
So what I’m trying to say is, make sure you actually NEED an emergency fund before you create one. If you already have one, then ask yourself if you really need it. If you don’t, find ways to make more money out of it. Don’t spend it! I love stocks and you should think about investing it in stocks.
I’m done ranting.