Emergency fund is for Emergencies
I think Captain Obvious would be proud of me if he read this quote. Let’s do it one more time.
Emergency Fund is for Emergencies
© Friendly Russian
Recently I spoke with a friend of mine about having a good, solid emergency fund for 5-6 months of expenses and he asked me why didn’t we invest this money. “It’s $30K sitting idle and doing nothing. You should invest them in mutual funds or bonds”, he said.
And he made me thinking, I started doing some research and analysis of different Mutual Funds and Bonds that would work for my Emergency Fund. But after a couple of days of thinking it finally hit me that emergency funds are not for investment, they are not supposed to make you any extra money.
Emergency Fund is not for investment, it’s for Emergencies.
It’s really easy to get into this trap, especially when you have a big chunk of money that could’ve been invested and make you more money. My emergency fund is rather an insurance for me and my investment. And the difference between investment and insurance is primitively easy:
Insurance costs you money. Investment makes you money.
I buy car insurance, hope you too, and it cost me $710 per year. Every time when I push
“Pay” button, a small investor sitting on my shoulder is crying. But the reason why I spend $710 every year on car insurance is really simple – I cannot afford another car right now if something happens to my vehicle. If something happens to my car, I cannot afford to spend $8-10K on a “new” car. It’s too high percentage of our current net worth. And I transfer a risk of getting my car damaged or stolen, from my pocket to an insurance company. Car insurance protects your vehicle(s) and your pocket. But it costs you money.
The same with health insurance, can we just stop paying $214.96 every month for health insurance and invest these money instead? Sure we can, but we will not. Why?! Because there is a risk involved, risk of being bankrupted after getting one of these fat and ridiculously huge medical bills. Health insurance protects us and our money including money we’ve invested. But we have to pay for this protection
Insurance costs you money.
And when I take a look at our $30,000 emergency fund I see an insurance policy. Insurance which is aimed to protect my family is in case of emergency. But WHY?! Why don’t I invest those money? There are short-term bonds from 6 months to 1,5 years. What can happen in 6 months or 1,5 years? Exactly – nobody knows WHAT and WHEN it is going to happen. But if it happens then it goes in the worst possible time you could have imagined. Either the market would be down, or you would have to pay early withdrawal fees.
It’s really hard to beat a Russian wisdom that have been said more than two times, and I’ve already said it more than enough – Emergency Fund is not for investment. It’s for Emergencies.
Of course, we could’ve lowered our emergency fund from 6 months to 3 months rate, but, to be honest, we would not feel confident knowing that we have only 3 months worth of expenses.
And what about you? Do you have emergency fund and if you do, where do you keep it?