Sunday, June 10, 2007

I Don't Feel Like Building an Emergency Fund

I don't have a proper emergency fund, and, to tell the truth, I'm not willing to set up one. I'm inclined to put almost all my money in mutual funds, and I don't usually have much money in my savings account.

I will try to explain why. First of all, I must evaluate what is one month's worth of living expenses for me. Besides the money that I sock away, I have about $300-400 to spend every month. So, if I followed the rule of three to six months, I would have to keep at least $900 ($300 * 3 months) in an emergency fund. I don't want to do this because the interest rate of my savings account is much less than the inflation rate. I once said that Russian banks give generous interest, sometimes up to 8 percent. But to get the APY like this one has to deposit a big sum as a required minimum, and the money must be kept on deposit for a minimum length of time, like one year. If one wants to take the money earlier, the accumulated interest will be lost.

So, if I put the money in the high-yield savings account, my money would be tied in case of emergency. I would have to forgo interest to get it. If I kept the money in my current low-yield but flexible account, it would be lessened by inflation. A loss either way.

Putting money into the mutual funds doesn't seem to be a bad decision, really. True, the stock market can go up and can go down. But I'm almost sure that over a long period my mutual funds will outperform bank deposits. And I can cash out this money at any time. I will only have to pay 13 percent in income tax, so I will get my 87 percent of capital gains. The only problem is that I won't get the cash immediately. My investment management company says that it will take up to 15 days to transfer the money back on my checking account. That's why I always keep about one month's worth of expenses in the savings account and put the rest in the mutual funds.


Krystal said...

It sounds like what you're doing might be best for your situation, if the banks make you keep your money in a savings account for a set amount of time.

matt said...

I don't have an emergency account, and I do keep a large portion of my money invested, but I always make sure that I have at least $15,000 in my bank accounts. I don't separate funds into 'emergency' and 'general' and 'down payment' funds--I keep as much as I need available and invest the rest. I don't have definitive goals--my goal is to save as much as possible, not $xxxx.xx.

J at IHB and HFF said...

Hello. You have 8 months of emergency funds ($2,500 @ $300/mo) because you have scheduled liquidity so that your savings will last long enough to begin withdrawing your investments if necessary. The investment risk is a concern but you weighed the risk and made your decision. I agree with Matt that it is not useful to separate money into artificial piles.

Olga said...

Hmm. 8 months of emergency funds sounds really good. From now on, I must see my investments in this light.

building an emergency fund said...

Great post. According to me there is a great possibility of unexpected expenses for which we should keep some money as emergency fund.