Good morning! Want to listen to something new and fun today? OG and Average Joe just launched a brand new podcast called Stacking Benjamins, and chose the awesome Shannon of The Heavy Purse to present activities you can do to raise financially smart kids for this very first edition. Here’s the link on iTunes.
When I was updating my net worth at the beginning of the month, I noticed a rare occurrence: I had lots of cash. I know, life is hard. The main reason why I have so much cash at the moment is because most of my online income is being paid via Paypal in US Dollars. And my Paypal account links to a French Euro account. To access the funds, I can either lose 4% to Paypal to have them convert the balance into Euros,
or send a random amount of dollars to my French bank and let them kill me with the exchange rate. Actually, after double checking with Paypal, the later is not even an option, they want to get the $$ themselves.
So at the moment, like the true procrastinator that I am, I do nothing, and look at how the balance grows every month. I was hoping to buy stuff with this account, like my flight back to Europe in May but few companies accept Paypal as a payment. And for a good reason, there is a 4% fee on transactions. I do hope big merchants have a reduced rate but for small people like me, it is pretty hefty. Nearly as bad as having your savings in a Cyprus bank.
Back to the point, I never had much of an emergency fund. I consider my credit limit on my credit cards (over $15,000) and overdraft facilities on my bank accounts (about $5,000) a free emergency fund, and prefer to invest the rest of my money in something that will earn me some interest. Having never had a health emergency, the biggest emergency I would have to cover may be a flight back to France for a funeral or buying all my stuff again if it gets stolen or my house burns down. If I needed a big medical treatment I could go back to France where I am still covered by social security. I don’t foresee needing more than $5,000, and every time my cash balance gets over that amount I feel the itch to start investing.
The case for the emergency fund
It is one of the basics of personal finance. Start an emergency fund. Get to a first $1,000, then save 3, 6, 12 months of living expenses, or more. You will be able to cover car repairs, the loss of a job, a health problem…
People start accumulating money in a 0.1% interest savings account and never think twice about what they could do with it. Like paying 15% interest debt.
Who really needs one?
With today’s ridiculously low interest rates, your savings are at best making up for inflation. You are probably losing money. This can be worth having one if
- You have a family and are the sole earner, or couldn’t live on your spouse’s income. In my case, I could cover my expenses by shifting down to survival mode, and live a not so fun life on $200 a month since my house is paid for and the cost of food is very low in Guatemala.
- You need the peace of mind to help you sleep at night. Sometimes, it is not about money, but about what makes you feel good.
- You are working freelance. Not knowing what your income will be like tomorrow is scary. I try to look at how much money I have brought in the past year, as well as the leanest month and they both tell me that I will be able to cover my living expenses without any adjustments. It would really take a catastrophe to have to dip into savings. Like my three tenants all leaving at the same time and my UK flat staying empty for months. Or the house burning down and having to build it all again. Not everyone is as lucky as I am and having a cushion can help weather the storms.
You should keep it to a minimum if…
You are in debt. Why keep 6 months worth of living expenses earning you nothing while you repay a credit card balance at 15%? Keep $1,000 or so and pay off your debt with the rest. Should you need more than $1,000 you can still resort to credit, and in the meanwhile you will have saved a lot in interest.
You have access to credit. If a real emergency arises, once more, you could charge your card. Pay it off the next month interest free or over the next few months. Needing new designer shoes is not an emergency. If you can’t pay the balance quickly, you should reduce any unnecessary expense in your budget to have more room for debt payments.
Your employment is safe. Public servants, teachers, etc. are basically guaranteed
You have semi liquid investments. If there is a huge emergency, can you cash out some investments? Even at a loss? I choose to invest in the stock market to get greater returns, but can always sell and exit. This is a risk I am willing to take in hopes of greater rewards rather than watching the money sit there on my account. The odds of an emergency are small but that money can be accessed quickly if needed.