Some people are reluctant to build up an emergency fund in cash because they think it’s a waste. They’d rather have all their money in the market.
But there are ways to get good returns on your emergency fund, lots of hidden benefits, and non-financial returns to consider.
So right off the bat, if you have $15,000 sitting in a chequing account earning 0.05%, that is a waste. But there are way better places to keep your emergency fund, either in:
1. A high-interest savings account that should pay 3% or more
2. If you own your home and have a HELOC, you can keep the balance there, effectively lowering your interest payments each month
3. Or you can put in a Whole Life policy optimized for cash value that should return 3-4% over time
You won’t get the same return you would in the stock market, but it’s not a bad start. And then you have to consider the additional benefits. In case of emergency, you avoid:
– Using your credit card and carrying a balance you pay 20% on until you have the cash
– Or being forced to sell your investments in the market at a bad time, which in turn means you can be more aggressive with your asset allocation
And then there’s all the psychological benefits.
You feel more confident and secure. Have greater peace of mind. Aren’t worried about every little bump in the road. You aren’t super stressed about potentially losing your job, which might make you even more productive and effective at work. If opportunities come along, you’re in a position where you can take advantage.
The list goes on and on.