At the turn of the new year, a lot of bloggers shared their 2011 financial goals. One of the big ones on everyone’s list, was building an emergency fund. If you look at my goals, an emergency fund is missing — because I don’t need one.
Now, its not to say I’m invincible to anything bad, but rather, I have a different plan in case a disaster happens, or I get laid off (or fired!), or something completely unexpected pops up. And this plan also gives me the ability to earn money on it too (more than those 2% high interest rate accounts).
So lets say (nock on wood), that my upstairs neighbor’s water pipe bursts, and turns my apartment into an aquarium. That would be bad — really bad. In fact, I would declare it an “emergency.” Even with my tenant insurance, I’m going to need to figure out a lot of things quick, including where to live in the short term, what to eat, what to wear, and how to deal with the loss of all my personal items, and so fourth. Tenant insurance will cover a fair bit of it, but they can be slow to move — so in the short run, I’ll need to come up with cash, and fast.
My answer? My credit card — well, at least at first. My credit card has a $10,000 limit on it, and I never carry a balance, so I have an instant $10k in my pocket.
But with the exorbitant interest rates, that credit card could get dangerous pretty quick. But thats fine, as I’m really only using it to buy me some time as I have money in the stock market I can cash out. My TSFA (tax free savings account), is one of my trading accounts for the stock market, so it has thousands of dollars in it. If I needed the money fast, I could sell my stocks (at whatever the market price is at the time), and then transfer the money back to my personal bank account. Doing this, would probably take a few days at most.
Then, once the money is in my bank account, I can pay off any of the credit card debt, and work from that fund going forward.
Fixing the Financial Damage
After that ‘emergency’ is over, I just need to sit back and wait for the tenant insurance to pay out for the losses that are covered (they pay up to $10,000, with a $1000 deductible). Even though I have to eat the $1000 loss, I’ll take the other amount, and then transfer it back into my TSFA stock trading account and re-buy the stocks I sold.
Doing all of this, essentially puts me back to my original position, less my deductible.
(In the case I lost my job, and had to live off of this money, I’d be able to ride it out for a good 6 months — by then, I’d expect to have a new job, and would be back to rebuilding my TSFA one pay cheque at a time.)
So instead of having an “emergency fund”, I prefer to call it an “emergency plan.” As long as there’s no emergency, the money in my TSFA will be earning a good return (several times better, on average, than being stuck in one of those ‘high interest savings rate’ accounts the bank keep promoting). While it will take a few days to turn completely liquid, my credit card more than bridges the gap.
That, is why I don’t need an emergency fund.
Reader Questions: (answer in the comments)
Do you have an emergency fund and/or plan? If so, what is it, and are you earning money on it, or is it just sitting in a savings account? Why?