Pennies and Pounds
Menu

​


​the blog

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

12/13/2015

Comments

 
Picture
Life was more simple in the past - including your financial life. In today's world, however, much more financial flexibility exists than in the past.
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 However, some say that an emergency fund is an outdated concept in today’s world of very liquid assets and easy access to credit - they argue that you can be in great financial shape without allocating some of your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:
  • 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 income. Without the modern financial system in place (where there are very sophisticated securitization and risk management practices), most of your finaical 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 gin 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 was 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 saftey 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 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:
  • 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. 
Enjoyed this Piece? - Sign Up For More
Further Reading: The Most Complete Explanation Ever on Why You Need an Emergency Fund
Comments

    Archives

    January 2018
    December 2017
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    October 2016
    July 2016
    April 2016
    January 2016
    December 2015
    November 2015
    August 2015
    October 2014
    July 2014
    June 2014
    May 2014

    Categories

    All
    Beta
    Bitcoin
    Bitcoin Cash
    Book Reviews
    Cardano
    Commodities
    Cryptoassets
    Cryptocurrency
    Dash
    Derivatives
    Dow Jones
    Economics
    Emergency Fund
    Entrepreneurship
    Ethereum
    Finance
    History
    Income
    Infographics
    Inspiring Quotes
    Investing
    IOTA
    Litecoin
    Money
    Options
    Personal Finance
    Poems
    Professional Development
    Psychology
    Random
    Retirement
    Ripple
    Risk
    Saving
    Small Business
    Stocks
    Stock Screening
    Taxes
    Videos
    Warren Buffett

    email list

    RSS Feed

Home

CryptoHub

Saving

Investing

Personal Finance

Stocks

Pennies and Pounds is a site dedicated to your financial well-being. From saving, investing, and earning more income, we've got great financial content covering the spectrum of modern personal finance. This site's goal is to be more than just a regular personal finance site - we want to be an all-encompassing place for all things finance-related including topics such as earning more money, saving more money, investing better and more effective ways, planning for your financial future properly, and appreciating what you have now.

And now, given the rise of cyrptocurrencies and crypto assets to quasi-mainstream financial assets, we're dedicated to providing quality, relevant, and interesting material on cryptocurrencies and cryptoassets. Articles on Bitcoin, Ethereum, Ripple, Cardano, and many more cryptocurrencies and cryptoassets can be found on Pennies and Pounds - all that in addition to a plethora of information on what cryptoassets are, how the entire crypto industry came to be, blockchain/immutable ledge technology, mining, proof of work, proof of stake, and how to prudently invest in crypto if you are so inclined (based on your risk tolerance and ability to withstand the volatility that will come with a crypto portfolio).  

Terms and Conditions - Please Read Them Carefully
Pennies and Pounds | Copyright © 2018
  • Home
  • CryptoHub
  • Life's Milestones +
  • Investing Philosophy
  • Investing Basics
  • Rainy Day Fund
  • Advanced Topics
    • Sequential Stock Screening
  • Learn & Grow
  • Terms and Conditions
  • Blog
  • Home
  • CryptoHub
  • Life's Milestones +
  • Investing Philosophy
  • Investing Basics
  • Rainy Day Fund
  • Advanced Topics
    • Sequential Stock Screening
  • Learn & Grow
  • Terms and Conditions
  • Blog