Make Nothing, Be Happy!
DO YOU HAVE “EMERGENCY” MONEY? Many people do. This is money that you can get your hands on quickly. Maybe not in an instant, but possibly a day or two; or week or two; or even in the next couple of months. It should be available so you don’t have to sell something or take out a loan. If you have emergency money, how do you invest it? What do you earn on it?
MOST PEOPLE KEEP THEIR EMERGENCY MONEY IN A SAVINGS ACCOUNT. This is fine by me! However, I am frequently asked if it wise to try and earn something on this money. While this might seem desirable, the smart approach is to sacrifice returns for availability.
THE KEY ASPECT OF EMERGENCY MONEY IS THAT IT IS ACCESSIBLE – QUICKLY. This money provides piece of mind. You should feel more comfortable about your life knowing that if something out of your control happens, something you didn’t anticipate. something unfortunate, you have resources to help. It is a form of insurance for unexpected events.
NEVERTHELESS, YOU MIGHT BE TEMPTED. Why not invest and make a little money on it? You could easily put your $3,000, $6,000, $10,000, $20,000, $50,000 or whatever you need in a diversified stock fund. Or maybe a diversified balanced fund. This may sound smart and seem like the right thing to do – have your money work for you a bit.
BUT IF YOU WANT TO EARN MORE YOU HAVE TO TAKE ON RISK!! You can’t time investing correctly and you certainly can’t time your life. It could take just a few weeks or months for an investment to lose, say, 22%. This type of loss would not be unusual or unprecedented. (It could be a lot worse). A $6,000 emergency fund would now be worth $4,680. And right at this time your basement is flooded; or your car finally fails; or you have a family emergency and unexpected travel expenses; or you have medical bills; or whatever. It would not be good to compound your problem by having less money available.
THE AMOUNT YOU NEED IN EMERGENCY SAVINGS WILL LIKELY CHANGE OVER TIME. You might retire debts, add reliable second income, come into an inheritance, land more secure work, the kids move out (for good), or any other number of developments. Any of these could change your attitude and need for emergency funds. As your financial condition changes your need for emergency funds may allow you to invest more.
I AM AWARE OF THE ARGUMENTS FOR INVESTING SAVINGS MONEY. I am not persuaded. I have more than twenty years experience working with ordinary people trying to pay their bills and save for their future. Those who get cute with their savings and try to maximize their earnings are asking for trouble.
DON’T GET FRUSTRATED BECAUSE YOU EARN SO LITTLE ON YOUR SAVINGS. If you are, you’re missing the point. Your long term investments and retirement funds should target higher returns with more risk. Even though this can be frustrating, it’s smart to have an account which sacrifices return in exchange for piece of mind.