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.

5 comments:

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.