= 27d567bc2d48d9f40e9ccc20ea370b15)
ThrustVectoring comments on Open Thread, June 2-15, 2013 - Less Wrong Discussion
You are viewing a comment permalink. View the original post to see all comments and the full post content.
= 783df68a0f980790206b9ea87794c5b6)
Loading…= b715d02e85f7b3b4ae65ca3d3e450868)
Subscribe to RSS Feed
Powered by Reddit
= f037147d6e6c911a85753b9abdedda8d)
You are viewing a comment permalink. View the original post to see all comments and the full post content.
Comments (433)
You only need an emergency fund if you do not have access to credit at reasonable terms. Investments you don't touch outside of emergencies coupled with open lines of credit should outperform excessive "emergency" savings. After all, lines of credit are typically free when you don't use or need them, while not getting the best rate of return on your savings isn't.
EDIT: I was reminded of a relevant saying: If you’ve never missed a flight, you’re spending too much time in airports.. Similarly, if you never have to borrow money for emergencies, your investments are too liquid.
Surely the relevant question is whether I'm likely to not have access to credit at reasonable terms during an emergency, no?
I don't really see many emergencies that can be handled by cash but not by a loan for cash. If you're solvent and people want dollars later, then they will lend you money. If you're not solvent, then whether your immediate liquidity is in credit or cash doesn't make a big difference since you're still not solvent. If nobody wants dollars later (say, asteroid), then it's unlikely that having dollars now is going to fix any emergencies.
I don't find that obvious. There is a whole host of issues here, starting with time constraints (e.g. you need money within 24 hours and you can get a loan in five business days) and ending with information asymmetry issues of which lenders are acutely cognizant ("you say you're solvent, but can you prove it?").
If your "access to credit" is a couple of credit cards, yeah, you can get cash fast enough but the terms are rarely what I'd call "reasonable". If you'd actually need a new loan or a line of credit... I don't think I would want to rely on that in an emergency.
How often do you really need money within 24 hours? If you can't get the cash within a day, what bad consequences are going to happen?
If it's a purchase under $5000, then you can handle it with a credit card. You then have 21 days to come up with the money or else pay 20% APR. That's plenty of time if you have, say, stocks you can sell. For larger purchases, you can either save for it with an explicit plan, or negotiate a payment plan.
In an emergency I expect to need money right now, on the time scale of hours.
How many times have you needed money immediately in your life, and how much money have you needed for those incidents? Personally, I do not recall ever spending more than a hundred dollars without at least a day's warning. Then again, I don't own a car, which is a big cause for emergency spending - but really that ought to have it's own fund treated as self-insurance.
Well, if you want to approach this properly... :-)
...then you'll need to evaluate the probability density of situations in your life where not having a certain amount of cash on hand will lead to severely negative outcomes (aka high costs). I expect that you'll have much difficulty in trying to form a reasonable estimate (see Nassim Taleb and the general Black Swan concept). Notably, limited amount of historical data (as in, e.g. your personal experience) is not all that good a basis for estimations.
There is also a whole bunch of other factors in play -- do you have kids? do you travel much? outside of the US? etc. etc.
What sort of emergency do you have in mind?
Example 1: medevac.
Example 2: You live up north, it's winter, and your house's heating just died. If you don't fix it by the time the house cools down to below freezing, some of your water pipes will burst.
Maybe you could drain all your pipes in the latter case. But I imagine there are other emergencies, of course.
That's fair. I'd been thinking about the general class of "people who need money now for an emergency," many of whom find it difficult to secure credit, rather than the class of "people who have a lot of wealth in non-liquid forms who need money now for an emergency," who presumably don't.
I was thinking more in terms of "there's an expenses function e(t), and a cash availability function s(t), and a cost function f( e(t) - s(t) ), and this cost function is zero at e(t)-s(t) = 0, but is a lot softer at e(t) > s(t) than people fear due to credit cards and lines of credit, and can be quite costly at s(t) >> e(t)"
Except that e(t) and s(t) really should be probability distributions, but that just hurts my head to try and explain coherently. This is literally my fourth attempt at writing up a better description of the reasoning behind my posts.
If e(t) is slightly bigger than s(t), you borrow money from credit cards or other lines of credit at poor interest rates, then pay off those debts in the however many days it takes to get liquid cash from other sources (say, stocks). If e(t) is much bigger than s(t), then you negotiate a payment plan or suffer the consequences of not being able to pay expenses right now.
And of course there's the time costs in optimizing this sort of thing. A percentage point for a thousand dollars over a year comes out to ten dollars, which I roughly approximate as an hour of time. Which means that you probably ought to spend your optimization power on minimizing the amount of work you need to put into your finances. Which, in turn, means automatic bill payment, and regular transfers of excess cash from your checking account into your preferred investment account.
This is a really good point that I can't believe I never thought of before.
I've been doing this wrong, and this advice will likely save me a few thousand dollars. Thanks.
I have a partly irrational aversion to owing money, which I maybe should edit out of myself.
That assumes there is price for liquidity which you are paying. I am not sure this is the case for most normal people (as opposed to, say, those who invest into private equity) now because other than real estate most other available investments are quite liquid.
Essentially, most of people's investments are bank accounts and market securities (again, real estate is the big exception). Liquidity shouldn't be an issue here.
For recent college graduates, their best investment opportunity is early repayment of their student loans. It's essentially guaranteed 4-5% return (whatever their loan rate happens to be). Note that this "investment" is completely illiquid.
That's often but not necessarily true, especially on a post-tax basis (and especially if your alternative is putting money into tax-advantaged vehicle like 401(k) or IRA).
Hm, is it really? If you're paying back your loans early, couldn't you then, in case of need, cease paying for a time equivalent to how much you paid and then resume paying? You'd just be right back on schedule.
It depends on the terms of the loan. Some loans may allow you to skip payments if you're ahead. Most I've seen don't though. But either way, if you need $5000 cash right now because your significant other ran their car into someone's living room and you need to pay bail and a lawyer, or the levees are collapsing and you have to split town, you can't get the $5000 back from an early repaid loan.
Your loan may vary. For me, all it does is give me a few extra dollars a month.
A very good point, and I've considered that. So far I have a very short credit history (I am young and haven't had much time to establish one), so the interest on the credit card I have is quite high and the limit is (relatively) low. There's some possibility I could borrow from my parents, but I'd prefer not to depend on that too much.
The particular advice I gave is less relevant to young people, since they have less savings and tend to have better investment opportunities in terms of paying off student loan and other long-term debt. Paying off student loans is effectively an investment that you can never sell back for ready cash, so you'd need savings in something that's actually somewhat liquid.
More on point, if you don't have access to enough emergency credit, that is the perfect reason to essentially have a self-insurance fund. That fund should cover perhaps a couple thousand dollars - anything more than that and you can typically work out a payment plan or tap your less-liquid investments.