What if I lose my job? What if my car breaks down? What happens if I have unexpected medical emergencies?
Life is unpredictable and sometimes things won’t always turn out the way we would like. These kinds of events are all stressful enough without having to worry about the cost of it all. That’s why people create emergency funds. We all stash away some money in anticipation of these financial mishaps.
Except I don’t.
Now don’t get me wrong. I still worry about the same things as most people but I think the idea of an emergency fund is definitely outdated for younger people especially. Common advice many people still hear today is to save up at least three to six months of expenses in case of emergencies. Dave Ramsey says the same thing. He tells everyone to save up $1,000 in their emergency fund first if they have debt and then later on beef it up to three to six months worth of expenses. For the majority of people, this will be a smart financial decision.
For me? I don’t think so. I am a single guy in my early twenties living in the Midwest where cost of living is relatively low. I don’t have many expenses and no family to be responsible for yet. When I think about my personal finances, I have a very aggressive and risk tolerant mindset. I want to be financially independent by the time I am forty years old. Maybe not fully retired, but I would like to stop having to depend on a paycheck from my employer and be able to live totally off my investments by then.
I don’t want my money sitting in a high yield savings account or money market fund. Especially now with interest rates so low, putting money into any of these vehicles now will most likely only generate returns of a hundred basis points or so at most. The days of expecting savings accounts with 2–3% rates are long behind us. The current Federal Reserve Chair, Jerome Powell, stated in an announcement on September 16th that he doesn’t expect interest rates rising above zero at least for the next few years.
Instead of creating an emergency fund, using my income to pay off debt or fund investments seems like a much smarter plan to me. I would much rather secure a guaranteed rate of return by paying off debt or generate much higher expected returns by investing into stocks or real estate. Now I know what most of you are thinking. Paying off debt before anything else will make sense to most people, but investing into stocks or leveraging into real estate before creating an emergency fund?
Am I just stupid?
I said I was pretty risk tolerant but I’m also not just throwing my money away into risky investments. Since starting my job, I have not saved a single penny and instead choose to invest a couple thousand dollars each month into a few different index funds(S&P500, Total Market, Emerging Markets, etc) that have historically averaged returns between 6–15%. This is all money I don’t plan on touching until retirement or any big purchases before then.
Comparing these index funds to a high yield savings accounts shows a huge difference when taking into account the power of compounding interest. For example, in twenty years, if I invested $1,000 into a high yield savings account with an interest rate of 2% and the same amount into the S&P500(let’s assume a conservative 6% rate of return), I would only have $1,485 in my savings account but a total whopping $3,207 in the S&P500!
This comparison seems great on paper but what about emergencies? True, I won’t have an emergency fund to rely on but this is where I have creatively built a few lifelines in case of any unfortunate events.
Emergency Fund Alternatives
- The first of which I have already listed, my investments. In the case I need some quick money and I have been seeing some gains in my investments, I can always sell off some, take profits, and pay off whatever bills I need to. In the case that my investments are in the red or performing badly, I will most likely defer to a different strategy.
- The second emergency lifeline I have is taking advantage of debt and more specifically credit cards. This may sound like a terrible idea to some but I truly believe credit cards can be a great thing and almost like a life hack if used in the right way. Credit cards can definitely ruin someone’s financial life with their absurdly high APR’s and countless fees but when used responsibly, they can be great tools to get cash back on purchases or travel for free. In this case, they can even be manipulated into a sort of faux emergency fund.
- I have built up my credit score over time and am now able to get approved for most of the credit cards out there. On the other hand, creditors and lenders are trying to convince people to open up credit cards with them and give out sign up bonuses or great spending rewards alongside their cards to attract more users.
- A commonly used marketing tactic is to offer a 0% introductory APR for anywhere between 12–24 months. This is exactly what I am looking for so that if needed, I can just sign up for another credit card and essentially score a 0% interest loan for the duration of the introductory APR period. This same strategy can be used on credit cards with similar 0% APR balance transfer promotions as well.
- This way I can create a year or two year window in which I can pay off the emergency expense at no cost at all to me. Unfortunately, this is definitely not the best option for many and may only be available to those with a decent credit score.
Should you keep an emergency fund?
Overall, emergency funds are definitely great options when saving and budgeting. They help keep stress at bay when worrying about life’s unpredictable expenses as well as promote good saving habits.
What I want to show is that having an emergency fund isn’t necessarily all about saving a certain number of months of expenses. Emergency funds should be flexible and subject to everyone’s different circumstances. If you have a family and more responsibilities, you might need a larger emergency fund. Contrarily, if you are a single college grad still living with their parents, you might be better off investing rather than saving for an emergency fund. The one thing that shouldn’t change is to save and invest regularly.
This article is for informational purposes only not all information will be accurate. This should not be considered Financial or Legal Advice. Consult a financial professional before making any significant financial decisions.