Do you really need a rainy day fund in the 21st century?

Today, if you live in the developed world, you have 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 However, some say that an emergency fund is an outdated concept in today’s world of very liquid assets and easy access to credit – they argue that you can be in great financial shape without allocating some of your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 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:

  • Minimal to no debt: Debt was a far less common thing in the past, although it still existed in many forms. Consumer/personal debt was rare. Additionally, mortgages were often paid off relatively quickly because housing prices were a much smaller multiple of an average year’s income. Without the modern financial system in place (where there are very sophisticated securitization and risk management practices), most of your financial life would occur at your local bank. That local bank would likely hold any debt you had on their own books instead of securitizing it and selling it off as banks commonly do today.
  • No credit cards in place: The just didn’t exist back then
  • Much less liquidity in their portfolio: It could take some time to liquidate portions of your portfolio and get some cash. Without the internet, you actually had to talk to your stock broker, who then had to relay your orders to the stock exchange in New York City. It would take a non-insignificant amount of time to liquidate some of your holdings and get your hands on some cash.
  • No government welfare programs: Social security didn’t exist yet – that would come after the Great Depression as part of Franklin D. Roosevelt’s New Deal. Neither did government-assisted health insurance for low-income households that came along in Lyndon B. Johnson’s Great Society. There was no unemployment insurance or food assistance.

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 were ever available. Today we have:

  • Credit cards are common: You can pretty easily obtain a credit card. It might be too easy, in fact – go to a store and you’re offered card, shop online and you’re offered a card, etc.
  • Personal loans are much easier to obtain: Personal loans are less common than credit cards, but you can pretty easily obtain a personal loan at your bank if you have a decent credit score and a solid financial background (eg. you pay off your debts on time).
  • Retailer financing is rampant: As stated above, every time you go to a store, you’re offered a credit card. Additionally, you can easily get retailer financing for appliances such as kitchen equipment, washing machines, and other things.
  • Far greater portfolio liquidity: Thanks to the internet, you can easily liquidate some of your investments very quickly. You can decide that you need to sell at 12 pm, and by 12:05 pm you could already have initiated and completed the transaction – now you just wait a few days for the funds to clear and reach your checking account.
  • Government welfare programs in place: Today, most nations have various government welfare programs as safety nets in place to protect the old, sick, disabled, and the unlucky amongst us. This provides important relief to people when things go bad.

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 a 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:

  • Without going into debt
  • Without having to liquidate your portfolio at the wrong time

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.

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