This creates a margin loan, and then at your leisure you can sell your investments to pay the loan, only paying a few days worth of interest at most. Or you can keep the loan. The rates are far better than credit cards and there's no minimum payment or required repayment schedule. Interactive Brokers' current margin rate is 1.57%!
that's not an emergency! And having a few thousand dollars of liquid cash in a bank account is no brainer.
A real emergency might be like a roof collapse, where you need 10-20k to fix. Or a medical emergency, or a family issue where a fair chunk of change is needed. Using margin is a good way, and is much lower interest than a credit card, provided you have the witherall to pay it back.
Also shouldn't discount overdrafts, pretty sure mine (as in, available to me) is <1.57% equivalent, and 'arranged' I believe they tend to be cheaper or at least much bigger.
If the house is an investment, the margin loan interest may even be tax deductible, without the 750k limit that the mortgage interest deduction has.
Sitting on tens of thousands of dollars of cash (six months of income!) in a zero interest rate environment is a mistake that really compounds over the years -- to the point of a few $100k in lost appreciation over your career.
Equities are no longer hard to turn into cash in an emergency. You can pull money out of your investment account the same day using a debit card if need be, no need to even sell your equities.
Keeping access to credit, but not using it unless it's needed, is the better plan. But after several years of saving you won't need it anyway.
It’s about balancing risk management and wealth. That balance is going to be different for everyone, but you always need to be a little cautious.
Have a little bit of your emergency fund in each of these.
Like, my whole department got let go not long after Covid hit. Had I kept my savings in stock, I'd have sold them at a major loss, because stock market falls and job losses tend to happen at the same time. By keeping some savings separate, you can decouple these things, to an extent. You don't want your emergency money to rely on a good economy.
And you need to compare that loss to what you would have had if you sat on cash for all of the time leading up to the crash too.
I'd be willing to bet keeping it cash would have been worse in most cases (depending on specific amounts and time frames and monthly expenses).
Get out of debt. Build an emergency fund. Start investing. Then re-think your emergency fund strategy if you really want.
In reality, your rent/mortgage and other commitments would continue to fall due at a very predictable monthly schedule.
So you sell down only as your liabilities fall due. The majority of your holding stays invested so you can capture the rebound over the following months.
This is an assumption that some people might say is unreasonable. There have been many times in the past where the rebound takes years.
Although, one might be able to make the case that the political winds have changed to ensure the rebound happened in months. But it’s still a riskier assumption than assuming a rebound in a few years.
Other than that you're right. Maintaining an emergency fund is expensive in term of opportunity cost. Like the cost of any insurance. There is no free lunch.
Then never use it. There’s your emergency fund.
Critical thing is that you won’t get approved for one when you need it, so open it when you don’t.
I will say that his recommendation to buy in bulk is in some way an emergency fund (or an aspect of it) because you're saving money on things you know you'll buy in the future.
One thing I did when I lost a job was move some of my retirement account (roth IRA) to money market funds (from short term bonds). Basically moving some of the bond portion of my retirement from slightly risky to not risky/cash.
Roth IRAs let you pull out your contribution. This was basically to augment my emergency fund, just in case finding the right new job took longer than I thought. (I was lucky, it didn't, and I was able to convert the money market funds back to short term bonds).
Not a fan of pulling from retirement, but if I had to, better to take from the tax penalty free, stable portion of it.
I didn't comment on it because I'm living at home right now and am young/commitment-free enough to move back in with my parents if I ever need to - I don't have one so I feel I'm not qualified to discuss it.
Think of the sort of "adult expenses" your parents have - refrigerator failed and too expensive to repair, need to buy a new one - that will be $2,000, right now. My teeth need to be fixed - that will be $3,000. It's winter and the furnace broke - that will be $7,000. You want to be able to have the money on hand to deal with those situations. Those were not random examples - those are things that have come up for me in the last two years
You probably shouldn't have more than a few hundred dollars in an emergency fund if you're paying off high interest loans (10%+)
If you get fired you can live off severance and liquidate some of your investments.
Yes, you have better return on investments if you pay off that 20% interest credit card. But if you become unemployed, it is better to be able to have that fund so you can keep your house and the lights on.