Briefcase Study

Briefcase Study: Winter 2017

In Briefcase Study, January 2017, Steward Articles by Adam Cufr

The one thing we all seem to want is great reward with very little risk. In the world of celebrities, who wouldn’t want fame and fortune? It’s the tabloid gossip and loss of privacy that become a very high price to pay for the fortune part. In the financial world, we all want our money to grow while we sleep, but we don’t want to see our money lose value right before our eyes. So how can we have both, growth without risk?

In short, you can’t. Sorry. But what if we chose to think differently about something as vanilla as the emergency fund? Everybody should have an emergency fund, an amount of money that’s reasonably accessible for when life happens. This money is typically held at a bank or credit union, in a savings account or even a CD. While this has worked fairly well for generations, something seems to have happened to these accounts: they stopped paying interest. Whereas 15 years ago, you’d earn 6% on your savings at the bank, you’re now earning .6% for the same deposits. As a result, I get the question very often, “Where can we put this money so it works harder for us?”

For the sake of brevity, let’s suspend preconceptions and think differently for a moment, shall we? What if you chose to invest your emergency fund in an account that allowed you reasonable access to the money but put the money into stocks and bonds instead of bank savings? Wait, before you run away in fear, allow me to explain further. See, a very rough year in the stock market might result in stocks falling 30%. While this is not something that happens often, it happens. However, over the long term, stocks have historically averaged well over 8% per year, even after factoring in those nasty drops that can and do occur from time to time.

The thing that makes investing your emergency fund palatable, is the strategy of keeping 30% more in your emergency fund than is ‘needed’ for your likely emergencies. That way, when the market does drop 30%, your fully-invested emergency fund is now back down to the amount that you needed to be in there in the first place! But during the long-term trend of a rising stock market, your emergency fund is growing significantly faster than it would’ve had you left it at the bank. See how that works? This is how you make your money work harder for you. 8% beats .6%

Naturally, this approach isn’t for everybody. For the person who’s looking for any advantage available to maximize the growth and utility of their resources, this is just one way to do so. Leaning into the long-term trends that exist, while properly structuring the rules of your game so that you’re always maintaining a safe financial margin are how some people seem to benefit in unique ways. Over the course of decades where you’ll keep an emergency fund available for yourself, staying fully invested can make a tremendous difference in the financial outcome.

Isn’t the bank just turning the table and doing this with your money? They pay you .6% and turn around and invest it for 6%. Isn’t capitalism great!

If you’d like to learn more about this ‘overfunded emergency fund’ strategy, just give us a call.