Ok, I lied. I have a little bit of an emergency fund – I keep $300 in my savings account, which I draw down to that amount each time I reach $1,000. I use that money to pay off more debt. But I don’t have, and don’t intend to have at the moment, 3-6 months of savings set aside as liquid cash in a rainy day fund (or whatever other arbitrary amount you want to use).
But Dumpling, Why? *whine*
I have a few reasons for this. But the main one is debt at the moment. My Savings account pays a whopping 0.01%. Even a good online-only savings bank tops out at about 1.5% these days. Even at that top rate, you’re losing money to inflation you’re not investing. My debt is at either 6% (my whole life insurance loan), 7% (my HELOC), or 0% (my credit cards). I would still pay off the 0% credit cards instead of saving, because eventually that 0% rate will expire, and paying them off early allows me to avoid a 3% balance transfer fee when they do.
I’ve also always been a little dismissive of emergency funds in general because while I may not have an emergency fund I have access to emergency funds, which is what is important. I look at it this way – I can draw on my HELOC up to $20,000, and I have total available credit through my cards of about $67,000. Any emergency that comes up I can put on a card and pay it off interest free, as long as I can pay that amount in about 30 days. So most things I can fund out of monthly cash flow. Anything I can’t, I can put on the card and pay off what I can with cash flow, and the remainder I can pay from the HELOC. In that way I can minimize the interest I’m paying for the short-term float of an emergency.
Mathy-Math Example
So, let’s say I have a $1,000 emergency on the 4th of the month. I put that on my Discover card (which currently carries a 20.49% rate) which currently has a zero balance. The statement cycles on the 13th and the payment for that statement cycle is due the next month on the 8th. Let’s further say I can afford (with a little scrimping) to pay $500 per month toward this emergency. The $1,000 posts on the 4th; the statement cycles on the 13th; I get paid on the 15th – generating the first $500 repayment which I add to my HELOC to decrease that balance; the Discover card is due (and paid in full) on/before the 8th – I pay this full amount out of the HELOC, ensuring that I’m paying 7% on $500 (because remember I already added $500 to the HELOC earlier) instead of 20.49% on $1000; I get paid on the 15th and I transfer the other $500 to the HELOC. In essence, instead of paying 20.49% on $1000 for a full statement cycle, I’m paying 7% on $500 for 8 days. Sure beats the hell out of losing 2.99% (assuming 3% inflation) all day every day on cash just sitting there decaying.
So, What If You Had No Debt?
Wait, give me just a minute, I want to bask in that thought for a little while. *sigh* Ok, I’m done. If I had no non-mortgage debt – and hopefully I’ll be able to experience that someday soon – I still wouldn’t keep liquid cash in a savings vehicle. I would be fully invested in stocks (likely in VTI or similar through my brokerage account). I want my money working for me instead of rotting slowly on some bank’s balance sheet (and allowing them to make money off of it instead of me). Literally anything you could do with money – invest in stocks, pay off mortgage debt, stockpile canned goods for the coming zombie apocalypse – is better than saving in cash/CDs. Yes, there is market risk in investing, but there’s a guaranteed downside when you’re saving. You’re guaranteed to lose whatever the difference is between the rate you’re getting and inflation.
In any case, that’s how I see it. If I’m wrong, let me know in the comments below!
