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I do not believe in emergency funds.

Tuesday, July 25, 2017

"It will never happen to me."

What if it should happen one day?


Then, die lah.

OK lor.


Reader:
Don't believe in emergency funds. Better to put money in bank preference shares or perpetuals.

AK:
Well, let's hope you never meet with an emergency which might force you to liquidate your investments at prices not of your own choosing.

Reader:
DBS preference share, at any price, still provides a return many times that of a FD. In a situation where the preference shares cannot maintain a payout, is the FD much safer?

While it sounds logical, how often do people who actually set aside an emergency fund found it useful?

Having an emergency fund in a FD is a big opportunity cost.

AK:

I think you could say that you don't have an emergency fund but to say that you don't believe in having an emergency fund boggles the mind.

It might be a good idea to remind ourselves of the GFC and how stock prices plunged terribly. The stock market was, then, in the doldrums for many, many months. 

Many people also lost their jobs.

Imagine someone without an emergency fund who might have an emergency in those months.

Imagine him liquidating his investments at a massive loss only to see the recovery in the stock market later on. Not a pretty thought.

Similar to buying insurance and how we hope we never have to make a claim, we hope that we do not have to draw on our emergency fund.

Similar to buying insurance, there is a cost involved in maintaining an emergency fund.


Should we say we do not believe in having insurance and money paid for insurance is wasted?


"I would rather see you have money you can get at than to worry about the interest rate." 
- Suze Orman

Related posts:
1. Fixed deposits for emergency fund.
2. PMET took 30% pay cut but thankful."... as I have more than 6 months of emergency funds, I was quite relax about this and could take my time to look for a job." 

6 comments:

victorlsl1 said...

I agree with your reader too. its a terrible opportunity cost.

Not all bodies require insurance. For example, to my understanding, the govt is actually self-insured.

Paper loss in shares is the same as actual loss. sometimes realising the loss is better than holding on for "further" paper losses

Spur said...

PS & perps would fit in a portfolio's fixed income portion. But to use them as emergency funds not very practical.

1st off, chances are that you're buying them above par. Talking about good quality ones, not those junkies, where you'll need another emergency fund for your junky emergency fund.

2nd, you're hoping the relatively higher yield will compensate if you have to sell below your cost. You're hoping/predicting that bad stuff will not happen until you collect sufficient dividends/coupons.

3rd, bad stuff happens in clusters. During GFC, DBS 6% NCPS went down to $92.50. You may think OK what, only -$7.50 below par. But chances were you bought them at $110.

http://www.dzhintl.com/stock_overview.php?symbol=D14&cdate=max&code=D14

Today, DBS 4.7% NCPS is trading at $137+. If a major crisis hits closer to Asia this time round, and even if the PS just goes to par, you pretty much f__ked.

AK71 said...

Hi Victor and Spur,

Thanks for providing two opposing views.

No prizes for guessing which view I agree with. ;p

AK71 said...

On my Facebook wall.

David Poh:
Build resilience in the face of adversity. Dun keep riding on your luck and blame the world when something goes wrong. "In this world nothing can be said to be certain, except death and taxes"

1871e1fc-10c3-11e5-a794-7f9fad27c9b8 said...

maybe just call it "funds that can be accessed anytime".
some may combine warchest funds with emergency funds
bcos even when oppty comes, they neber put 100% in oppty
and then replenish.

in any case, the funds best be reachable by someone else.
imagine having to still login and sell pref shares or
login back to terminate FD and transfer to savings/current
account. cham lor.

no right no wrong, just do what you think is right and
live with it.

Imagine asking Buffett(s)/Gates(es) having emergency funds.

That's exaggeration but maybe the reader is already at
a comfortable wealth(say even 1-2M, for calculation)
got 100k - 200k into perps/NCPS. Ok... suay suay kenna,
take a haircut, left 50k - 100k. Probably still sufficient
to arrange a air medivac or something.

His overall "loss" is like 50k/1M = 5%. if using 50k,
he can live, he can literally live with it.

Or he has family/extended family/community to be able
to tap on... crowdfund maybe?

I assume most are similar age groups as AK, so 20 yrs?
Say over 20 years, since prep the emergency funds, 10th
year need to activate.

FD 1.02 ^ 10 = 1.219
NCPS/Perps 1.04 ^ 9 * 0.6 = 1.423 * 0.6 = 0.85

i know the rates are abit weird, but just to illustrate
nia.

fc
(better stick 1-2k under pillow so can 高枕无忧)

AK71 said...

Hi fc,

I know what you mean. I always keep some money at home de. I call it "emergency and convenience cash". ;)

http://singaporeanstocksinvestor.blogspot.sg/2014/05/emergency-and-convenience-cash.html

As for not having an emergency fund, Buffett and Gates? Yes, I see your point. I am not at that level yet where I can do without having an emergency fund. ;p

http://singaporeanstocksinvestor.blogspot.sg/2015/05/how-much-should-we-have-in-our.html

"Someone once denounced me for being fake when I said I maintained an emergency fund enough to cover 24 months' of routine expenses. He didn't believe that I still needed an emergency fund because my passive income stream was strong enough to replace my earned income."

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