It seems like every expert under the sun recommends an emergency fund, but I don't have one and I'm fine with that
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- Having an emergency fund is a common piece of financial advice, but I choose not to follow it.
- Instead of having cash savings in an emergency fund, I have an emergency plan in case I ever need money quickly.
- I have a lot of credit cards and excellent credit, so I know I could put any unexpected costs on a card, or open a new card and qualify for a 0% balance transfer.
- Also, I'm a freelancer with multiple clients, so it's highly unlikely my income would ever dry up completely. If I relied on a single job for my income, I might consider an emergency fund.
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One of the most common pieces of financial advice is to have an emergency fund in a savings account. Depending on who's giving the advice, it should have enough to cover between three and six months of your living expenses.
However, even though I spend a lot of time thinking and writing about personal finance, I don't really have an emergency fund - and I definitely don't have a large balance in any of my savings accounts. Here's why.
I have several credit cards and lots of available credit
Honestly, this is the main reason. Regardless of the emergency, I'm very unlikely to end up in a situation where I need to immediately come up with thousands of dollars in cash. Unexpected medical bills, travel problems, car trouble, home repairs, or everyday expenses during a period of unemployment are all things that I can finance most or all of with a credit card.
Since I've opened a lot of credit cards to secure miles and points from various offers, I have a lot of credit available - especially on my premium cards like the Chase Sapphire Reserve. I've also got a couple of American Express charge cards, which don't have any set credit limit (though I'd definitely want to give Amex a call before making an unusually large purchase, since they do set internal guidelines based on my past card activity).
Since interest rates on rewards-earning credit cards are extremely high (typically upwards of 20%), this isn't a long term solution, but it gives me four to six weeks to either pay off the balance or find another way to address it longer term.
I have a great credit score and I'm likely to qualify for 0% balance transfer offers
If you have any credit cards, you've probably gotten emails and letters (and maybe even phone calls) advertising promotional offers for balance transfers. This is where you transfer a balance from another credit card or loan account, and pay little or no interest for a defined period of time, typically between six and 18 months.
In exchange, you agree to pay a flat fee up front, typically 2% to 4% of the balance being transferred. This is much lower than the interest rates on credit cards or personal loans, and since it's a one-time fee it doesn't compound and grow larger over time.
Some credit cards even offer this as part of their standard welcome offer for new cardmembers - these are even better since typically you won't have to pay that flat fee up front. These cards include Chase Slate, Discover it® Cash Back, Citi Simplicity® Card, and The Blue Business® Plus Credit Card from American Express. And many of these cards are considered "entry-level' or 'beginner" credit cards - since they're targeted to people who already carry a balance elsewhere, you don't even have to have a great credit score to get approved.
I can put that cash to good use, but still have access to it in an emergency
The closest thing I have to an emergency fund is my Robinhood investment account, which I've been depositing money into and investing for the past two years. I can sell the investments I have in this account at anytime, with no penalty. Though, any profits are subject to taxes.
I also have a Roth IRA and a SEP IRA and I have invested in a total stock market mutual fund over the past few years that's averaged 8% to 10% annual returns - the best savings accounts right now get less than 2.5% interest, and you have to pay taxes on the interest.
With a Roth IRA, you pay taxes on the money you deposit in the account (unlike a Traditional IRA, 401(k), or SEP IRA, which you can deduct from your taxes), but when you make withdrawals during retirement you don't have to pay any taxes on the interest you've earned over the years. This benefit also applies to certain other life events, like paying for school or buying your first home.
Since the principal in the account - the money you've deposited - is funds you've already paid taxes on, there's no penalties or taxes if you withdraw those funds later. That means that if I ever get into a true emergency where credit cards or balance transfers won't cut it, I can still get access to a significant amount of cash quickly.
I'm a freelancer
The chances that all of my income is going to disappear in one fell swoop is slim to none. I am paid by anywhere from six to eight different clients on any given month. If I stop working for one or two of them, it's not going to be the end of the world for me, financially. If I was employed by a company full-time, I might consider having at least one or two months of emergency funds saved in case I was laid off or fired and unemployment wasn't cutting it.
Think about the types of emergency situations you're actually likely to find yourself in. Would you actually need access to a large amount of cash, or could you leverage credit cards and balance transfers to make it through that rough period? Are you willing to take on a bit of risk by putting the bulk of your savings into an investment account (which could lose value)? Depending on your answers and your comfort level, you might want to think about making an emergency plan rather than an emergency fund.
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