Welcome PT Money and Dinks Finance readers!
Here is my guest post at Dinks Finance: http://www.dinksfinance.com/2012/11/why-1-million-will-never-be-enough/ and PT Money: http://ptmoney.com/not-all-debt-is-bad/
Now, back to today’s post, which is about Emergency Funds (and, why you should NOT have one) …
To me emergency funds are dead money …
This is a controversial idea, so I get a lot of flack every time that I share my thoughts on this … but, I also get some agreement from readers like Milton:
A number of responses to your guest post seemed to misunderstand what you were saying about emergency funds. Your standard PF emergency fund is cash that is sitting in a bank account and earning a microscopic return that is being outpaced by inflation.
Some people … are sinking in debt, paying 18-25% on debt while their emergency fund earns less than 1%. It’s as if they don’t understand that those high-interest debts ARE THE EMERGENCY.
It seems idiotic, as Milton points out, to pay 18% on a $2,000 (say) credit card balance when you may have $10k cash ’emergency fund’ sitting in a CD (earning just 1.05%).
And, if you agree with that …
… then, why is it such a leap to realize that instead of even trying to build up an emergency fund of $10k (so that you can earn 1%) you should be trying to build up an investment fund (so that you can earn 8%+)?
But, that’s not the only ‘dead money’ that you need to mop up:
If you agree that earning 8% is better than earning 1%, why would you try and pay off your 1% student loan instead of investing that money at 8%?
Now, that suddenly opens up a whole new way of thinking about debt, doesn’t it?