Nov 27, 20184m
#431 - Emergency Fund? Nope!
Nov 27 '184m
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Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we're going to be talking about emergency funds, in particular, what emergency funds are and if you should have one. Emergency funds I think are a great idea and concept in the sense that what you’d hear often is that we need to save up somewhere between three and six months of living expenses and put them aside into a liquid checking or savings account to be used in emergency situations. What classifies maybe as an emergency situation? A loss of a job, a car that is maybe wrecked or broke down or you need medical expenses. And I love the idea and the concept of emergency funds, but here's my only rub with emergency funds that I want to talk about today, is that emergency funds in and of themselves are okay, but when you look at them in context of the overall financial picture of most people, what often ends up happening is that people end up saving for these emergency funds which might take them a year, two years to save up for in some cases and they miss an opportunity to pay off non-preferred high interest debt or non-preferred high interest loans.

What do I mean by this? Well, let's say that for example and this probably is not out of the realm of possibility, but you have a family and your monthly expenses are $5,000. The typical emergency fund thought process would be is that you would need to save maybe six months of expenses, so that would be about $30,000. Now, a family of four that's living off of two incomes and paying bills and paying for food and trying to travel and doing all the things that we try to do as just regular humans is probably going to take a little bit of time to save up that $30,000. It might take you a year. It might take you two years or three years to save up that emergency fund kind of net. And so, in the process with just focusing on saving up the emergency fund because it's so important to have the emergency fund, you might forego or forget to maybe divert some of those funds to a high interest credit card or a high interest loan. Let’s say you just had a credit card that was $30,000 on a credit card and it was at 12%. Well, you're paying basically $3,600 a year in interest on that credit card, so why not divert some of those funds to paying off the credit cards.

Look. I’m not a person that says like I totally don't agree with emergency funds. I like what they try to accomplish and I think there's good intentions, but I think for most people, emergency funds only serve as really kind of a backstop once you’ve tried to pay down a lot of these credit cards and the other bills that you have and then maybe set aside a little bit of money in an emergency fund, but ultimately, for me, I look at having lines of credit or the capacity to get credit as more of an emergency than actually having cash in the bank. That's the way I look at it. It’s a little bit different of an approach, but I thought I’d introduce it today. As always, if you guys have any questions, let me know and until next time, happy trading.

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