Every financially responsible adult I know has a rainy day fund.

I have a non-conventional emergency fund, totaling 220k, of which:

  1. 50k is 0% interest for next 3-12 months.
  2. 50k charges 2% transaction fee for 0% interest for 12-18 months; effectively 1.33-2% interest rate.
  3. The remaining 120k are 0% interest for 45-60 days (ie. grace period).
  4. I can open additional new credit cards, at any time, with 0% interest for 12-21 months (citibank has the longest introductory 0% rate) if there are additional incentives.

Because of my credit limit and credit score (allowing me to qualify for additional credit with great terms at any time), I am reluctant to put any actual money into a rainy day fund.

Why would I put cash away in liquid accounts making 0.1% interest when I can put it into a ROTH account @ the cheapest tax available to me in my life going forward & can get 8-10% return in the long run?

The whole concept of emergency fund is that you may need the money unexpectedly. But once you use the emergency fund, you know exactly what to expect. My point is people guess/estimate and save 6 months of expenditure for rainy day fund, and they lose out on interest/return if rainy day never hits or hits much later than now… they lose also if rainy day hits, whether they saved up in advance or they pay of their credit cards 12 months later


 

So I like my rainy day fund to be THERE but not costing me anything in the form of missing higher interests/ returns. I can use my rainy day fund interest free for greater than 1 year, make a little cash back bonus, and easily afford the monthly payment, and just pay off the balance before the promotion ends.

For example, I charged my brand new roof and AC on a new credit card when we first moved in last year. 15k @ 0% interest rate for 15 months, monthly payment of ~$150.

More importantly, I knew how much I needed to save to pay this off when the promotional 0% interest ends. With 2.5 months left, I have pretty much saved enough to pay off the card entirely, and for any amount I do not pay off, I have multiple balance transfer checks I can write to pay it off, and get to ride low interest rate 1.33-2% for another 1+ year. Using my credit card as my rainy day fund allowed me to

  1. funnel limited cash towards ROTH and back then student loans (providing me with much higher return 6-12% than a liquid account could offer)
  2. i borrowed my rainy day fund @ 0% for 15 months, and a smaller portion of it possibly @ max 2% interest (near inflation rate) for the next 1+ year
  3. i knew exactly how much i needed to save to pay off my “used” rainy day fund, giving me tremendous flexibility/hindsight in managing my cash flow

 

Traditionally, people make educated, or not, guesses and save for emergencies. When emergencies arise, they have the cash sitting to pay for them.

I like to put my money, as much as I’m comfortable with, where I can generate the MOST return/gain/avoid loss at every given moment. I rest well at night, knowing that I have a pretty enormous emergency fund available, that buys me plenty of time to save and pay it off when the rate gets ugly.

In summary, my rainy fund works as such:

Emergency hits-> Charge onto credit cards OR if cash is needed, use balance transfer checks -> devise pay off plan so that the credit card is paid off by end of promotional rate   -> extra cash flow beyond paying off non 0% debt go towards higher return investment instead of sitting in “emergency fund”

This takes the guessing out of building an emergency fund, and allows me to funnel all my resources towards higher return.

 


I’d imagine at the rate I’m able to channel my limited income as a pgy1 towards paying off my student loan, now maxing out 23.5k of annual roth space, I would one day have a liquid saving account/money market account for rainy day fund.

Using my credit limit that gives me 12-18 months to pay back interest-free money is likely only useful to me for the next 5 years while I’m still in training.

 


 

  • What is your emergency fund?
  • How much do you save per month in your rainy day fund?
  • Are you comfortable with using credit cards for emergencies? why and why not?

 

Comment below!

 

Rainy Day Fund

7 thoughts on “Rainy Day Fund

  • June 9, 2016 at 9:01 am
    Permalink

    Hello, it is always interesting to learn how you make your money work for you. I wonder why you have cash (50k +120k) with 0% interest. Why not put them in online savings or money market accounts? You can withdraw or transfer them at any time. Thank you for responding!

    Reply
    • June 9, 2016 at 6:27 pm
      Permalink

      the reason is online savings only yield 1% interest rate but putting said cash in index funds yield annualized return of 8%. we always want the largest spread possible (highest return on cash we lend others–in this case in stock market, lending to major companies) & lowest interest on cash we borrow.
      that’s exactly what big banks do to us… borrow tax-payer money @ 0% interest rate (now it’s at 0.25%) and then turn around to charge people with credit cards at 30% interest rate (if they miss a payment or make some minor mistake.)

      Reply
  • June 8, 2016 at 9:46 am
    Permalink

    I think one reason most people cannot have a rainy fund using this method is because most people (including myself) don’t have large credit limits. How did you manage to build up your credit limit to such a large amount?

    Reply
  • June 22, 2015 at 11:54 am
    Permalink

    I agree that your approach is “non-conventional,” but I disagree on the following points:

    1. Yes you may borrow from different lenders on credit at a cheap rate if you have an emergency, but if you are paying 2%, you’re losing out on more than that which is illustrated by #2.

    2. Most people keep their emergency fund in accessible liquid deposit accounts where it can be rapidly accessed if needed. So even if the savings account only generate 1% interest, you’ll still be coming out ahead. I personally keep my emergency fund in Betterment which has generated 6.5% since 2013.

    3. I would argue your ROTH funding and student loan payments should be budgeted separately from your emergency fund as they are by definition, not emergencies.

    I think the key distinction is that most people want their emergency fund to be as close to risk-free as possible (I obviously have a slightly higher risk tolerance since I choose to keep mine in an investment account). For example, if a multi-year recession were to hit again and your ROTH loses half of its value, you lose your income, and the 0% APR promo deadline is quickly approaching on your non-conventional emergency fund, then you would be in a lot of hurt.

    Reply
    • June 22, 2015 at 2:43 pm
      Permalink

      great points!
      thanks for the comment.
      reasons that i’m not afraid of the catastrophe you described
      “multi-year recession were to hit again and your ROTH loses half of its value, you lose your income” are
      1. i have additional sources of income aside from my medical job. (tutoring/consulting/book royalties) if i were to even work half time in tutoring, i would do much better than being medical resident
      2. i’m not concerned with rate of return on my ROTH/retirement fund in general in my 30’s. i’m focused on rate of savings in my early years, I’d be more concerned with rate of return in my 60’s near retirement. i’ll be re-balancing my portfolio as I age to adjust for less risk tolerance when rate of return is of greater concern.
      3. it is never a problem to come up with 10-20k of saving above and beyond living expenses over the span of 1-1.5 year. even if i lose my job as a radiologist due to fewer jobs/recession, I’ve always had too much work, not to little… even through the prior recession when I didn’t have the medical degree under my belt, i had more than enough income to support my family AND save for medical school.
      4. i don’t plan to use credit limit as emergency fund forever, i’m pretty sure in 5 years, at my rate of savings, i will HAVE to put some actual cash into Betterment or a liquid savings. in other words, i am not much of spender and don’t think that my lifestyle will catch up to my attending income. i will have more than enough cash flow to max out all retirement accounts available to me, pay off my house, AND put cash into a rainy day fund.

      Reply
      • July 2, 2015 at 2:40 pm
        Permalink

        A comment via email by Cole,

        “I saw your rainy day fund post and wanted to provide a different perspective on the objective for having a set amount of liquidity available. By emergency fund, I define this as having cash set aside in an interest bearing savings or operating account sufficient to cover at least 3-6 months of core expenses which should be about $10,000.00 – $20,000.00 for most people.

        Unlike credit cards, your emergency funds can be used for any type of transaction. You can pull out cash, cut a check, wire money internationally; in addition to being able to pay with plastic. Most credit cards have strict cash advance limits, and don’t have much purchasing flexibility especially for private transactions.

        I also want you to consider this from a balance sheet perspective. In using a credit card, you are increasing your liabilities and paying interest on those liabilities. When using your own capital you decrease an existing asset without incurring any interest or having an obligation to payback that money under set terms. Effectively, both transactions cause your net worth to decrease but credit cards have ongoing financial obligations.

        This leads me to the most important point, considering your financial situation in an emergency. The objective of an emergency fund isn’t for convenience or flexibility, but providing a comfortable buffer in the event of an emergency. The primary emergency to consider would be loss of income due to not being able to work from being injured or laid off. In that situation, you want to be able to still take care of your immediate expenses without increasing your debt. As stated in my previous point, you’re in a much healthier financial condition paying for your expenses using your own money instead of adding to your monthly credit card payments, especially if you’re unable to earn income. You can still earn credit card points as well in paying off charges with cash on hand each month.

        I hope this improves your understanding of why most financially minded people keep cash on hand in case of emergencies. I think of using credit cards as a last resort in an emergency should you burn through your rainy day funds. It eases the worry during an emergency and provides that comfortable buffer while you resolve the emergency, such as reestablishing income or waiting to liquidate investment assets / insurance funds if needed.”

        Reply

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