So, ever since I was young, I was always taught to keep a good amount of $ in a savings account. You know, "the rule of thumb" that you should have enough cash around to survive for 3-6 months or so. And looking back, that was generally a good idea. My parents never had a lot of spare cash, and as a student I started with no funds of my own (or my parents) and lived off of loans and jobs, so I can really see the value in that.
Fast forward to 10 years later. I now have a very stable job, and what's more, a bunch of accounts (retirement, HSAs, investment accounts, RSUs, etc) I never thought about 10 years ago. I currently have a near perfect credit score and probably >200k in available credit on the various cards I have around. Yet, I still have this savings account that I've been taught my entire life to keep around. It earns a paltry amount of interest (1-2%), and given the high income tax in the state I live in, and my relatively high tax bracket, half of that interest is taxed away.
I get that I am very fortunate to be in this situation, and that my question probably only applies to a small percent of people here. I don't feel that I am rich or anything, just very comfortably well off. But I have to wonder if it makes sense to keep an emergency fund anymore. Enumerating some of the common reasons to have one:
- You get laid off
- You get unexpected medical bills
- You get unexpected legal bills
- Major house repairs
In any of these cases, I could just charge most of expenses to a credit card, which would provide 30 days to liquidate, and in the case of a medical bills, they would touch the HSA first. Then I could liquidate investment accounts or potentially even retirement if it got to such a dire situation. Even if the investments were to fail, and I were to somehow lose most of the investment account, it wouldn't lose 100% of its value, and I would probably still have enough to "get by" for six months. And if I were somehow to get disabled, my company provides disability insurance, so that would help in those situations as well.
My point here is, that it seems that for some people, only keeping enough cash around to pay bills, and investing any surplus (in reasonable, diverse investments, which can include a significant % of stocks, which are volatile in value) rather than keeping it in a low interest savings account (which will probably lose value against inflation) seems to be a better idea. This appears to be contrary to the common advice given on this sub, which is apparently to never invest your emergency fund (https://www.reddit.com/r/personalfinance/wiki/emergencyfunds).
Let me clarify (since it appears that a lot of people are missing the point): I'm not advocating putting your emergency fund in the market, I'm saying that some people have enough liquid assets that it doesn't make sense to have an emergency fund period.
Using a concrete example:
Assume you calculate that your 6 month requirements = $40K.
Now let's say you have investments worth $500K. Even if the market were to crash and your investments were to lose 50% of the value, you would have $250K of investments. Using credit cards to "float" any expenses while you liquidate (which should take < 30 days), you can survive the emergency by selling off some of those investments. In the case of a crash, some of those investments might not rebound anyway, so you might be better of selling anyway.
The point is in this case a emergency fund doesn't seem really necessary. If you make a average 7% return on your portfolio, then you might actually be better off putting the 40K in your portfolio, since thanks to compounding it will grow to 80K in 10 years.
And if you make much more than you can spend (by a few x), then you should invest all excess, rather than keep large cash reserves around. You're not going to have to sell investments or anything if expenses are higher than usual, you'd just invest less that month. You only have to sell investments in the case of a emergency.
Submitted June 19, 2018 at 02:21PM by greentea45 https://ift.tt/2M6RRX9
