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Be warned.
This blog could be considered heavy reading, especially on a weekend.
From time to time, I still read or hear people say that an emergency fund is really over rated and that there is no need to have one.
Of course, regular readers know that I disagree with this and that I even have an emergency fund that does not only cover 24 months of my own expenses but my parents' as well (and then some).
Bad things do happen in life and that is what insurance is for but if we buy insurance for all the things we could possibly think of that could go wrong in life, we could go broke.
Yes, buying insurance for everything that could go wrong in life is wrong and I have blogged about this before too.
See Chapter 1:
How insurance weakened a family?
Then, there are those investors who have an emergency fund but do not believe in having a war chest, preferring to stay almost 100% invested all the time.
To me, there are times to be 100% invested but, most of the time, it probably isn't a good idea.
There are many reasons why and one is that those who do not have a war chest might be tempted to use their emergency fund, if they have one, to invest with if Mr. Market goes into a depression.
No! No! A thousand times, no!
I have said before that we should not invest with money we have earmarked for other purposes.
We do not want to be caught in a situation where we have to sell at whatever price Mr. Market offers because we have no choice.
See Chapter 2:
This way to $50K passive income?
Yes, it can happen.
Remember, if Mr. Market goes into a depression, possibly, it is because the real economy is in a bad shape and we might lose the job we depend on to bring home the bacon.
Of course, if you are born with a spoon made of some precious metal in your mouth, please ignore this blog.
See Chapter 3:
My family almost went bankrupt.
The no emergency fund and no war chest camp sometimes say that the option to borrow money is always available.
Of course, regular readers know that I think it is a bad idea to think like this.
The Global Financial Crisis happened 10 years ago but human beings have a short memory.
Still, some of us might remember how difficult it was to borrow money then.
Don't put ourselves in a situation where we have to borrow money.
It is not a good place to be.
See Chapter 4:
Compared to anger, shame is a thousand times worse!
So, is debt a bad thing?
No, that is not what I am saying.
I am saying that depending too much on debt is a bad thing.
Debt is really just a tool.
If we think about it, it is just a tool that magnifies our financial decisions.
If we make good decisions, they will look better with debt.
If we make bad decisions, they will look worse with debt.
See Chapter 5:
Gear up and receive more income?
Debt cuts both ways but it is just a tool.
The danger always lies in human behavior and their feeling of invincibility.
If we keep using debt, we might get drunk on debt and history has shown this to be the case.
Overly dependent on debt, people over extended themselves.
Overly leveraged, when things did not go as planned, they could not repay their debt sufficiently and went bankrupt.
See Chapter 6:
When are we over leveraged?
So, I did not mention the Global Financial Crisis just for fun.
It should be remembered and be used to stress test our finances as the worst possible financial storm that could hit us.
Without an emergency fund and a war chest but, instead, have quite a bit of debt, could we survive or do better in another Global Financial Crisis?
It doesn't matter if we have good or bad debt, debt is debt and this question should be in our base plan.
Do you believe that good debt can go bad quite quickly during hard times?
See Chapter 7:
Don't think and grow rich!
Yes, it is true that there is an opportunity cost in holding an emergency fund and a war chest.
However, having these will improve our survivability and let us capitalise on opportunities in times of distress.
They are self insurance policies.
Opportunity cost?
It really is a small price to pay.
Of course, I have blogged about how having a steady stream of passive income is self insurance too but that is another topic.
See Chapter 8:
Best insurance in life.
No emergency fund and no war chest?
You could be doing yourself a big disservice.
See Epilogue:
How much should you have in an emergency fund?
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