Every financially responsible adult I know has a rainy day fund.
I have a non-conventional emergency fund, totaling 220k, of which:
- 50k is 0% interest for next 3-12 months.
- 50k charges 2% transaction fee for 0% interest for 12-18 months; effectively 1.33-2% interest rate.
- The remaining 120k are 0% interest for 45-60 days (ie. grace period).
- 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
- funnel limited cash towards ROTH and back then student loans (providing me with much higher return 6-12% than a liquid account could offer)
- 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
- 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?