Today, if you live in the developed world, you have an unprecedented financial flexibility that will allow you to get your hands on cash very quickly - unlike most of human history. So, do you still need a rainy day fund in the 21st century when you can just use a credit card or sell your investments easily? The answer is YES - read the piece below to understand both sides of the argument and to find out why you still need an emergency fund even in today's modern financial landscape.
Can you not have an emergency fund in place and still be in excellent financial shape? That’s a tough question because a rainy day fund lies at the bedrock of a good financial house and is recommended by most in the financial media and by most financial advisors. However, some say that an emergency fund is an outdated concept in today’s world of very liquid assets and easy access to credit - they argue that you can be in great financial shape without allocating some of your net worth into an emergency fund held in cash. Instead, they would argue, you can have the money you would have allocated to your rainy day fund invested in the market where it would earn a higher return. Are they correct or are is an emergency a timeless piece in your financial puzzle and still required even today?
First, we’ll begin with the argument that AGAINST an emergency fund today…
The World Used To Be Different
Let’s go back 100 years into the past and look at an average middle-class person’s financial house. That person likely had:
So, 100 years ago, and basically any time in human history, your financial situation was a lot less complicated and much less flexible. You would find it difficult to finance a semi-major purchase. Additionally, if you needed money quickly to pay for some sort of financial emergency, you wouldn’t easily and quickly be able to obtain it.
Today There's Much More Financial Flexibility
Today, those in first world countries live in a world filled with more financial options than was ever available. Today we have:
So, do you really need a rainy day fund when you have all of the above options to handle financial emergencies?
Yes - you still need an emergency fund in the 21st century. Although we live in the world with much greater financial flexibility and with a bigger societal safety net, you should still have a 3-month to 6-month emergency fund in place to protect you. It is the case that if you didn't have a rainy day fund today, you would likely fare better in a financial emergency than you would 100 years ago, but that isn't relevant. An emergency fund will still protect your financial well-being by allowing you to weather financial emergencies:
Additionally, a rainy day fund will keep you calm - it will help you sleep better at night. Regardless of the financial innovations that now allow you to have much greater financial flexibility, an emergency fund is still a crucial part of your financial house.
Further Reading: The Most Complete Explanation Ever on Why You Need an Emergency Fund