Rainy Day Fund and Missed Opportunities

By Pinyo, on July 18, 2007

First, I have little experience investing in IOUs like bills, notes, and bonds — except for the occasional dabble in bond funds. I came across Treasury bills for ordinary folks at Wise Bread last night and thought the article was well written — definitely worth a read if you are inexperience with fixed income investments. The article also went on to say that investing in Treasury Bills is a good option for your Rainy Day Fund.

I think the concept of having an emergency fund equal to 3-6 months of living expense has its merit. However, like other insurance plan (you are basically insuring yourself against emergencies), the plan may not be right for everyone. Here’s why…

Personally, I don’t have a true emergency fund except for $20,000 in mutual funds that I can readily liquidate. Yes, the stock market can crash tomorrow, and I can lose 30%. But accepting this risk allowed me to double its value since I first put it together in 2002. This sure beats having my money linger in low yielding money market account or fixed income investments. This is especially true for young people who are just starting out in their work and investment career. Not only are they losing out on the potential gain, they are also losing out on the opportunity learn about investing.

According to Ibbotson Associates, during the period spanning 1925 to 2000 equities/why/ibbotson_chart.pdf”>stock market grew on average 11% per year compared to Treasury Bills 3.8%. Based on this, money invested in the stock market could double in 7 years, but money invested in Treasury Bills would grow only 30%…barely beating inflation.

Another situation where having a Rainy Day Fund is not a good choice is when you have outstanding liabilities; especially bad debt like credit card debt and consumer loans.

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Pinyo is the brain behind Moolanomy personal finance blog and a few other web sites. If you like this article, please subscribe for free daily email updates.

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