A Different Alternative to Your Emergency Stash
The majority of finance buffs out there say to save 3-6 months worth of expenses in a savings account for emergency. Just in case you lose your job or a medical issue. I have the hardest time with this because the ultimate financial goal in life is to have your money make money. Does that happen in a savings account? Not really at just a little over 1% interest. If you’re adamant about sticking with a savings account I have an article on them bad boys. But if you’re open to an alternative approach then hear me out.
I am pro-rainy day fund. But what about investing it instead? It doesn’t even have to be in stocks. There are plenty of index funds that pay a 3 to 5 to even 8 percent dividend yield. 5-8 percent compared to 1.7% in a savings account is a huge difference. $30,000 at 1.7% will pay you $510 whereas 30,000 at 6% is $1,500 and 8% is 2,400. The difference between savings and index funds are in the thousands. Dividend compounding interest is such a beautiful thing. There are so many index funds to choose from. Real estate, retail, financial. There are ones with more recession proof companies such as McDonalds and Procter & Gamble for example.
I’m a firm believer that the easier your emergency fund is to get to the more likely you are to spend it. Transferring your money from your online savings account takes three business days. Selling an investment, waiting for it to clear then transferring it to your checking account can take over a week. That’s a hassle. But a good hassle.
Let’s say you lose your job and the stock market plummets 50%. Everything that could possibly go wrong goes wrong. Even then there are ways to get around that. You can sign up for unemployment. You will still have money left in investments. Just not as much. And when the stock market has gone down it has always gone back up. I would sign up for a credit card that pays zero percent interest the first year. You can make minimum monthly payments until the market rebounds. The great thing about an index fund going down in price is the dividend yield will go up. So that 8% might be a 12% now. Index funds get rebalanced every 6 months to a year to alleviate massive downturns. That’s why I would pick them over a common stock as your investment of choice in a rainy day fund.
With the worst case scenario being highly unlikely I would take advantage of brokerage companies charging zero dollar commissions and invest into high yield dividend index funds every month instead of having your money do absolutely nothing in a savings account. Index funds usually stay in a tight range, and if they go down you’re just buying at a cheaper price and getting a better yield in the process. People might laugh or even get mad at this approach to an emergency fund. But I think it’s fun and interesting to discuss. I won’t say to not have any money at all in a savings account. It’s ok to have some liquidity and some easy to access money. But 3-6 months worth of it not being invested and not growing is worth questioning in my opinion.