My earlier post on how I want to get rid of my emergency fund and instead invest the money into stocks led to a few commenters practically saying that’s the dumbest idea in the world — after all, an emergency fund is for, well, emergencies, and should be available in case something bad happens.
I don’t think I’d want to put the entire $8k into stocks, but at .35% or even 1% interest, it’s just a wasted investment opportunity, esp with the market still probably at a lowish point. I could be wrong and the market could collapse again at any moment, but I’m confident that I can find a way to earn enough per month to pay my basic necessities (probably $1000 / month total including rent if I get desperate and need to cut back.)
This is why I prefer to invest with my savings then buy a house/condo. My rent is cheap and if it so happens I can’t pay rent, it would really suck, I’d have to move out and crash with a friend or find an even cheaper place to live, but I wouldn’t loose all the money I invested in a house, paying off the giant gobs of interest that you have to pay to afford a house in the first place.
Now, the shit could hit the fan and all stocks could drop to $0, and I’d be poor with no emergency fund, but chances are that isn’t going to happen. Worst case the market goes down for a while and I end up losing money instead of making money. Best (reasonable) case that $8000 earns 10% interest in the stock market and in one year I have $8800 plus dividends.
Emergency funds are important if you don’t have a back up plan, or you have kids and other major responsibilities. I know I could manage to get enough freelance work to cover my basic living expenses month to month — because I am focused on keeping those expenses low. Without a mortgage, I think it’s more reasonable to live without an emergency fund. Just don’t spend that money on random stuff, invest it in something you could sell if you needed to, even if it loses some of its value and you have to pull it out for less than you put in. I’m probably going to cancel my CD this week with the $8k, but I haven’t fully decided what to do with the cash yet. At least I can save $2k per month if needed, so I could quickly build up my emergency fund again as long as remain employed. I guess if I get hit by a car and can’t work and lose my health insurance I’d be screwed, but even with a sizable emergency fund, $8k isn’t exactly going to cover medical bills like that anyway, I’d be better off taking my chances and trying to turn that $8k into more money before I need to use it for an emergency.