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This always felt like banker advice to me. That's an insane percentage of cash to have sitting in an account that's earning less interest than the rate of inflation.
I would suggest everyone have a stock investment account and not worry about the percentage. Setting aside $1 per month is infinitely better than $0.
The goal of an emergency fund is to be available for an eventual emergency. If you lose your job and need to live on saved up money for a few months, you might be forced to sell stock at the wrong time, losing capital. There is a middle ground where you invest that money in a low-risk investment product that will grow with time, without the volatility of the stock market.
To be fair, 6 month is a lot, and most likely not the first goal someone should have when it comes to personal finance starting from zero.Indeed. I think 3 months is reasonable too, that's more than enough time to find another job. And you can leave it in an easy access savings account so it makes a little interest
This always felt like banker advice to me. That’s an insane percentage of cash to have sitting in an account that’s earning less interest than the rate of inflation.
First, if you're getting less than 3% on your savings account rate, find a better bank (or even better a credit union).
Second, you will find that there are times in life when having cash you can lay your hands on immediate solves problems that nothing else can. An extreme example: if you need to get bailed out of jail or retain a lawyer right now, the stock you have in your portfolio is going to take more than 24 hours to liquidate and get transferred into your checking account you can pay the court or a bondsman. More than likely its closer to 48 for the market to open to close your position and perform a wire transfer to get the cash in your hands. A less extreme situation may be a desperate car repair or a dental root canal.
Lastly, you really don't want your emergency money in volatile stocks. Even an boring S&P500 index fund is a bad choice, why? Because there are times of financial crisis that can drive down the value of your stocks or mutual funds. Its entirely possible that is the time when you're going to need cash to float on. Selling at the bottom of the market in a crisis is a bad place to be. This was many people's situation in 2007/2008 during the financial crisis where the market tanked the second worst in US history, and people were losing their jobs left and right.
S&P500 returns over the last 100 years:
All those red years would mean your desperately needed emergency fund is worth a fraction of what you put into it.
Those graphs make it look scary but clearly the stock market had trended upwards. If you're using your emergent fund within a year or two of putting the money in, I would argue it's not an emergency.
Bail is a weird thing to be planning for and I don't think you have the timeline right on how quickly bail is set.
But my main point was to simply put money aside at even the smallest amount rather than make excuses.
Putting it in an investment account rather than a savings account sitting right next to your checking account is too easily to access. The withdrawal delay can be a feature.
The balance of the emergency fundis not something one should be seeing or thinking about as often as one sees and thinks about their bill payment account.
Even if one is only comfortable using a saving account, I would still suggest using a separate financial entity.
Those graphs make it look scary but clearly the stock market had trended upwards.
I don't disagree, but if you're needing money in a emergency, you don't have the luxury of waiting weeks/months/years for it to trend upwards.
If you’re using your emergent fund within a year or two of putting the money in, I would argue it’s not an emergency.
I don't understand that logic at all. The very definition of an emergency is that it is unplanned for, and you can never know when it happens.
Bail is a weird thing to be planning for and I don’t think you have the timeline right on how quickly bail is set.
I'm not planning on bail being needed. I'm using that specifically as an example specially because no one plans for it, which is the point of an emergency fund.
But my main point was to simply put money aside at even the smallest amount rather than make excuses.
You and I are in complete agreement on this point.
Putting it in an investment account rather than a savings account sitting right next to your checking account is too easily to access. The withdrawal delay can be a feature. The balance of the emergency fundis not something one should be seeing or thinking about as often as one sees and thinks about their bill payment account.
YMMV, I don't necessarily think this is true for everyone, but I concede it likely is for a portion of the population. I admit this can be a valid point.
Even if one is only comfortable using a saving account, I would still suggest using a separate financial entity.
I agree with this too. One other emergency that can happen is your banking credentials being breached/identity theft, and it will take some time to sort out. If you at least have a second bank where your E-fund sits, you can live on that while your primary gets sorted out.
Everybody needs to be ready to get bailed out if they can. Shit's gonna get weird here.
This always felt like banker advice to me. That's an insane percentage of cash to have sitting in an account that's earning less interest than the rate of inflation.
The advice is to have access to your funds, you're free to put that anywhere you like. Index funds, bonds, stocks etc
Check what options are available in your country.
Doesn't putting the $$ anywhere that's not retrievable miss the point of having an emergency fund? It's supposed to be liquid assets you can spend if you had to. Putting it anywhere with good returns would keep it from being available at 11:45pm on a Saturday night when the ER is demanding payment now or they won't treat you.
That's what credit cards are for. You have a while to cash in your investment and pay the bill.
Although things are so uncertain right now I'm considering pulling all my savings out of the market. I know the stock market isn't real, it has a good chance to even go up. But I think we're heading for Great Depression part 2 if all the threatened tariffs happen.
that's what high yield savings accounts are for
No one has increased their wealth because of savings account percentages. If that's where the majority of your funds are located, you're wasting the money's potential.
I wouldn't bother giving this advice if it was the same boring play it safe guidance. People who are risk adverse have options that need to be talked about and it's not going to be found in your local banks pamphlets.
People are really bad at measuring risk. Choosing to avoiding direct investments is one such case.
Consider putting $20 in stocks per month instead of $20 on lottery tickets per month and see the difference. I assure you the former has better results than the latter.
No one has increased their wealth because of savings account percentages.
Agreed, but we're talking about having emergency funds that requires high liquidity, and putting them in HYSA, not your typical 0.5% bank savins account. You really wouldn't want to tie your emergency funds to the stock market as the market is volatile in the short term, and you pose a real risk of needing to withdraw funds during a downturn.
If that's where the majority of your funds are located, you're wasting the money's potential.
We're just talking about emergency funds, not an entire portfolio.
Agreed with the rest of your points, though not sure where they come from.
We're just talking about emergency funds, not an entire portfolio.
We're in a shitposting sub and I started the comment thread and I disagree that anyone needs several dozen thousand in an emergency fund that is available within minutes.
Yes if you are okay with accepting market losses which could be significant. Its true that the stock market typically is seen to keep your value on track or better than inflation rate but there are risks.
Rates are pretty good right now (~5%) for a money market fund and it only takes a day or less to free up those funds and transfer them to your bank account.
If you have a 20% loss in the stock market you are forced to realize that loss if an unexpected expense comes up.
And it can be way more risky if you are doing individual stocks or pretending like you know what your doing. Some stocks go through corporate actions that tie up funds for indefinite periods, or of course go bankrupt in some situations. Monthly/daily compounded 5% return on a money market is better than idle cash but still very safe.
Bank advicers usually don't advice people to it either, because the bank doesn't make any money on those accounts,.
They do make money on those accounts as they only have to keep 10% of it to hand and can loan out the other 90
The European deposit protection is fixed at €100000 pr. customer instead of a percentage. They are not allowed to use customer savings for their own investment or loan outs. It's handled completely separately..
Regardless of guarantee, the bank earns a lot more on loans than deposits, so their advisors will always try to push their loan products even when you have money in the bank. They want the customer to be in debt to them. That's how banks earn money and always have.
The idea that a bank is some kind of piggy bank where they use customer deposits for investment is a bedside story. They loan money to loan out and then take a cut. It's loans all the way. Banks have no interest in plain deposit accounts except for being a point of contact to the customer so they can sell loans.