Posted in Money on September 7th, 2016
Everyone knows this. You know this, right? Or at least I am assuming people in general know this. “Save for a rainy day. Have emergency funds saved up, in case you lose your job and these funds will tie you over until you find another job.”
Financial advisors will tout that a family should keep funds to cover 6 to 12 months of expenses. Practically, these funds are to be used as last resort, for “emergencies” not luxury purchases. Need advice on how to start an emergency fund? You can look online for myriad of advice. Even uber advisor has a blog post, along with an inordinate amount of tags. [SuzeOrman.com]
I think we are missing some vital aspects of why we need to have these funds. Another way to consider is the risks involved when one does not have any emergency funds.
Systemic risks are catastrophic failures in a system or market. [Wikipedia] Systemic risks are real as evidenced in economics, like the financial crisis of 2008-2009. Many mortgages became underwater and many companies had to be bailed out by the government (i.e. taxpayer money) that still had 10 Trillion Dollars of debt.
Or it can be natural disasters, like flooding (recently in Louisiana), earthquakes (recently in Italy), fires (recently in California), tsunami (Thailand in 2004), and many more. Disasters naturally affect economics. However, these events are unexpected and destroys many lives, affecting the surrounding area as well.
Another risk is lack of mobility. When the situation changes, you will have funds to move you (and your family) to better economic areas. Let’s say (hypothetically) you are living in Detroit when the U.S. automotive industry was doing very well. You work in the industry, whether as a factory worker, an engineer, or a middle manager. Japanese car companies are increasingly becoming competitive. Layoffs are occurring as Japanese cars take the lead in sales in America. Increasing marketing to buy “American” and “Made in America.” However, to no avail, consumers like the dependability of Japanese cars and the quality/technology they bring. American car executives tout better sales, a turnaround, and increased margins. They move manufacturing to China and pressure their suppliers for cheaper parts. But the economy gets worse, and then you are finally laid off. What do you do? Look for another job in the same industry in Detroit? Ideally, you would find another job where you do not have to move. However, current situation is dire in Detroit. Tens of thousands of people have literally moved out of their homes without waiting to be foreclosed. The ones left behind have seen their house values plunge with very few prospects of selling their home. You are stuck with an underwater mortgage and unable to sell due to the market. With no extra funds, what would be the next move?
Another risk is safety and health. Flint, Michigan has one of the worst problems in potable water supply. You would think that a modern country like the U.S. would not see issues like this. Flint is not the only case where drinking water from the faucet contains toxic levels of contaminants. There are many other counties and towns with problematic water infrastructure. With a township close to a major city, Detroit, it is hard to believe that city officials lied and made decisions that are a detriment to households living in the city. It is not going to be resolved soon, but those who cannot afford to move away from Flint, they put their health at risk if they continue to drink the water.
Political risk is very real. Situation in Venezuela is getting dire. Venezuela is governed as a federal republic, similarly to the US. However, Venezuela has implemented some generous socialistic economic policies under President Hugo Chávez’s tenure. With price and currency controls, times were good and helped many of the poor populace, especially when the price of oil was high. But, the price of oil dramatically dropped and now there are food shortages. Before, when things were good, people would arbitrage the currency exchange rate. [NPR] Now, prices of basic necessities are too high for many, where IMF estimate 480% inflation rate for 2016 and 1640% for 2017. [WSJ]
In order to minimize these risks and have some sort of peace of mind:
1. Have any sort of emergency savings. Start by saving $1 a day. Build it up to $100, $1000, or $10,000. Save any amount of money that can be used as “last resort.”
2. Have the savings liquid. I highly recommend cash and gold. For cash, you can keep a small amount (<$1000) in case you get burglarized. It is recommended to keep one month of expenses in a separate savings account. Although you will not get any return on this, this is relatively safe and liquid. I suggest for any additional savings where you would not need it immediately, invest a portion in gold bullion and bitcoin. Gold and bitcoin may be converted to other currencies in high inflation times. It may take some time to transact to actual cash, but they are relatively liquid. Investing in stocks and mutual funds may be an option. To liquidate a brokerage account may take several weeks. If you already own an IRA, you may wish to use this as extra buffer, but I would not recommend skipping on actual cash on hand, gold, and bitcoin. There is a small risk that restrictions may be placed on accessing the retirement account. Also, withdrawing from an IRA will have tax implications.
3. Consider what would be enough for your emergency (mini-retirement) fund. With a large enough savings, you can actually travel and ponder your life goals. It doesn’t have to be large, since cost of living is high compared to some countries that are growing out of third-world country status. Ideally, saving 12 months of US expenses will allow you to travel for an extended period of time. Automate your bills and minimize, to Southeast Asia for more than 2 years. There are plenty of blogs out there that can show you how to save on travel and lodging.
4. Make sure your passport is up to date. Samantha Brown tells you why. You may want to keep this with your emergency cash. This will help you stay mobile, where you may not even have to stay in the United States. This way, if you need to travel immediately, you do not have to rush around looking for it and find out it has already expired.
Save what you can. Eventually, you can become a millionaire. [Independent]
“A penny saved is a penny earned.” – Benjamin Franklin