What the what? $149,816? I could, like, pay Taylor Swift and Katy Perry to have a threesome with me for that much money. I could travel to Antarctica, capture a penguin, and then eat it when it inevitably dies. (I’m assuming it tastes like chicken) I could pay someone to do my bidding for five whole years, assuming I could find somebody for $30,000 per year. I could afford to give 30 women breast implants, with the caveat that they’d let me squeeze them whenever I wanted in exchange for free enhancements.
In short, I would have a lot of fun with $150,000 if I wasn’t such a naturally cheap bastard.
But still, who couldn’t use an extra $149,816? Everyone, right? And just how are you supposed to get it? It’s actually really simple. Don’t have an emergency fund.
At this point, I think I’ve crapped on emergency funds more than I’ve crapped on The Simple Dollar. I’ve said before that you shouldn’t have more than 5% of your net worth as cash, mostly because having $10,000 just sitting around as an extra insurance policy makes no sense. I’ve always said that you should invest it in bonds, and make it the lowest risk portion of your portfolio. Have available credit just in case it hits the fan, and draw on it if you ever need cash. Then you can sell your bonds at your leisure, and our little problem is solved.
A few of you disagreed with my hypothesis, pointing out that available credit lines will go away quickly if you lose your job. There are a couple retorts to that. First, how would your credit card company know unless you told them? I don’t think credit card companies get informed when you get whacked. As long as you keep paying, they’re cool.
And second, it’s not like you won’t have any money. Remember, the second part of my plan, which is to sell your bonds when needed. Unlike with equities, bonds tend to have stable prices. Even if you get laid off during a stock market slump, bonds should still perform relatively well.
Let’s crunch some integers, math bitches!
Let’s assume that you get some sort of return on your emergency fund, but it’s not much. These days high interest savings accounts yield around 1%, but rates are lower than your great aunt’s sagging bosom. For our example, we’ll assume that you’ll be able to average a 2% return on your emergency cash.
Meanwhile, over the last 50 years, U.S. Treasury debt has returned 7.24%. Because I’m good at math, I know that 7.24 > 2. Assuming you do this for 40 years as an adult, just how big is the difference between the two types of emergency funds? I ran the math, and the difference is…
Wait. You already know the answer, cause some moron put it in the title already.
If you have $10,000 in an emergency fund earning 2% over 40 years, it’ll grow to $22,167.
If you have $10,000 in Treasury debt and it returns 7.24% over 40 years, it’ll grow to $171,983.
By leaving your emergency fund in ultra-safe investments, you’re forfeiting $150,000 over your working career. That’s compound interest working against you, and last I checked, that’s bad.
It gets even worse if you have credit card debt. How many times have you heard
experts personal finance dumbasses tell people in credit card debt to have a $1000 emergency fund? That advice is dumber than trying to seduce the ugly girl from Two Broke Girls. (It’s a trick. They’re both ugly.)(Although, upon further thought, maybe that wouldn’t be so dumb, since they’d probably be likely to please.)
If you’re sitting on credit card interest of 18%, paying it off is the best financial move you can make. I would sell all of you into slavery to our secret alien overlords if it would guarantee me an 18% return on my money. If you have a spare thousand dollars and credit card debt, YOU SHOULD PAY THE F’IN CREDIT CARD DEBT. God, how bad are you people at math?
And here’s the beauty of it. If on the off chance that you do have a legitimate emergency that would cost $1000 to fix, you have a credit card that has $1000 worth of credit available, since you just got finished paying the damn thing down. You could just charge the thing back up again, and be back in the same spot you were in before, except you’d likely have saved a few months interest. Six months worth of interest on a $5,000 credit card debt is enough to buy a lot of chips, which I assume you eat exclusively because of me.
Emergency funds are for personal finance amateurs. They’re just additional insurance. But as you can see, they’re costly insurance. If we’re all gonna get rich, we need capital working for us, not sitting in a bank somewhere for an unlikely emergency.