Wednesday, March 28, 2007

Emergency Funds

I have a whole list of planned posts on investment performance and asset allocation - but they can wait. This is a great post. Yes, it's all about financial freedom. I think the term "emergency fund" is bad. First it's negative rather than positive. Maybe it works for some people to scare them into saving. But by defining the only purpose for saving outside of retirement accounts and house buying as dealing with emergencies keeps people away from financial freedom and pushes them towards the standard wage/mortgage slave until some far off retirement date. As I wrote in my comment on English Major's post - why do people want to live "paycheck to paycheck"? Of course that's rhetorical... Obviously, some people can't save without the forced mechanisms of retirement schemes and mortgage paydowns. But I think others are brainwashed into thinking this is normal. Not all PF Bloggers fall into this model of behavior but quite a high proportion of them do. This isn't the case among "investment bloggers". They are trying to create financial freedom right now. Of course these aren't mutually exclusive sets - there is a lot of overlap.

Freedom fund is a better term than emergency fund, but once you have a decent amount of money you don't want to be holding it all in cash...


I'm now back to being ahead for the month in trading after a couple of good days. When I am in the groove it seems really easy to make money at this. But then there are times when I completely screw up... I just closed out the short I had set up to hold overnight. The oil price suddenly spiked at 4:53pm and stock futures fell. But now the oil price is going back down. Not clear what rumors exactly triggered the huge spike - from $63 to $68 in 8 minutes! I didn't notice that that was the cause of the fall in stock futures until someone on Silicon Investor pointed that out to me. Following on from Sunday's post - this sounds somewhat similar but even less coherent :)


L. Marie Joseph said...

I love this post !!!

Everyone is different, I agree with you--some people are scared into saving.

Financial freedom is living now, rather looking forward to your 60th birthday. Some people create ways to enjoy freedom now and some rather wait/delay it until 60.

mOOm said...

Thanks Moneymonk - I should have added that the words "tax break" are the easiest way to get people to do things that would otherwise be dumb, like lock your money away for 35 years.

Yannick said...

moom: I don't think most people are putting all their dispersible savings into retirement fund. I will check my budget to see if it's too stringent. It certainly does not make sense to either pay 10% penalty to Uncle Sam some day or suffering an unnecessary financial hardship. I agree that Roth is the best as you can withdraw your contributions any time without any penalty or taxes. I started my investment and savings a few years back with a Roth.

mOOm said...

Go check a bunch of profiles on NetWorthIQ and see how many have practically zero outside retirement accounts. Or I could point you to some particular bloggers but wouldn't like to pick on them.

Yannick said...

thanks for the pointer. i didn't look at those profiles before. Just took a look at those profiles. There are quite a few very rich ones with zero or minimal retirement balance. It seems that there's an inverse relationship between retirement balance ratio and the total net worth.

I hope it's not causal relationship as Jacqui and I are trying to catch up with our retirement savings. :-)

mOOm said...

Some of the highest net worths on NetWorthIQ are obviously fake. I think others may prefer not to break things down based on the account type. Then for example say I am a stocktrader and make it big. The only way to make retirement contributions is to form a management company and then pay myself a salary from that management company. And then I am going to have to pay the Social Security tax which otherwise I would avoid etc. And I can't do a Roth because I am making too much.... So these kind of considerations might explain this.

Yannick said...

moom said:
I always invested the minimum required into retirement accounts, until last year I discovered the Roth. And then once I began to see my "taxable accounts" reaching the financial freedom level (with active trading) I began to invest the maximum in my 403b with the intention of eventually rolling it into a Roth. So my "emergency fund" has more than $200k in it :)

yes, i found out about Roth about 3.5 years ago. i wish i had discovered it earlier. of course, i wasn't qualified for other types of retirement account until this year.

"I began to invest the maximum in my 403b with the intention of eventually rolling it into a Roth."
Yep, I'm waiting for 2010 as well. 200K is quite some EF, more than our total networth!

Yannick said...

Thanks for the explanation. I had no clue that people would take the trouble to post fake profile. How did you tell which are fake? Maybe a post on it when your life is not this crazy?

Right, I thought 401K or SEP would be more significant than Roth, which high income people don't qualify for it.

mOOm said...

Well, it's not really an EF. The whole idea of EFs is silly and limiting really.

mOOm said...

This person is under 30 and has supposedly $1.5 million in a retirement account:

You'd have to be an amazing trader to achieve that! But they supposedly earn more than a 1/4 million a year in aerospace in Kentucky so they must be pretty busy (unless it is an inherited IRA but they are pretty young for that too).

This one looks pretty fake. All the likely fakes only post once.

Yannick said...

Thanks! Yes, this makes sense. "All the likely fakes only post once." is a good criteria.

Anonymous said...

I think the term "emergency fund" is good to get the newbie PFers thinking about taking baby steps.

I think we all know folks who use CCs for everything, don't have a budget, and don't have a connection between their money and a bigger picture.

Thus I think, for getting those folks to think more proactively, saying "get an EF" makes sense.

Our EF is in our non-retirement accounts (I use that term for our brokerage accounts for simplicity's sake).

We just started Roth 401(k) this month, although we've been piling $ into traditional 401(k) forever, but the Roth 401(k) is something I just got my head around recently to take advantage of.

Will be shifting more towards it and away from traditional 401k in the coming months.

mOOm said...

Finance Girl - problem with the one size fits all financial advice in the media is that people don't know when they're ready to outgrow it. So people can do things which don't make a lot of sense for them personally because some "guru" said it was the right thing to do. As you say, a large segment aren't even at the level of the mass-media guru, and others are savvy and know they are beyond that (i.e. us two for example). But there are some in the middle who are doing peculiar things and arguing with people that they should have an "emergency fund" when it doesn't really fit that person.

fin_indie said...

Great post. I've always had a problem with the EF term as well. Some PF bloggers swear by them, but separate funds don't make sense to me. Like Fin. Girl, my brokerage account steps up to the plate in emergency situations. Why not have that money working for you unless-and-until you actually need it. I mean, seriously, how many emergencies do people expect to have? Hopefully they are few and far between. Also, since I regularly have cash on hand in my brokerage account, cashing out of a position and realizing cap gains is not an issue. Even so, in a serious emergency, would I take a cap gains tax hit? I sure would.

Btw, Moom, I like the way you're thinking about the media problem: "When do you outgrow advice?". People have to realize that their situation is always going to have some unique wrinkles that warrants a customized plan. One size fits all advice is only a starting point.