Emergency fund comes before investment?!


I shared my view on emergency fund in general earlier. At the end that post, I said that EF was a necessary step to start retirement savings and investments, without explaining it. This may seem to be a naïve question. However, I struggled with it when I got started and would like to share my experience here.

Emergency fund gives you a peace of mind which enables you to make better investment decisions. When I started to invest, I got several individual stocks, whose prices vary a lot. I intended to buy-and-hold, which was only possible when you are able to leave the money untouched even in emergency. It was quite tempting to use the emergency fund to buy more stocks. However, without an emergency fund, I realized that I might be forced to sell the stocks at the wrong time. So I need my emergency fund to take that risky investing strategy with individual stocks.

It became clear to me that it’s very important to separate your long-term investment and your cash reserve. When I first worked on my investment strategy, I had so many things in my mind, emergency cash, down-payment for the first house, regular investment, and retirement reinvestment. All these goals have different timeline, thus have different risk tolerance. Without separating them explicitly, I was really making the task much more difficult and even intractable. The good thing was that I was not paralyzed by the complexity, I started anyway; the bad thing was that I got a messy strategy which was not optimal and I had trouble sticking to it. In the end, I ended up selling all my holdings and reshuffled my portfolio in less than two years. I was lucky that I was a graduate student, thus, was not hurt that much in tax.

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2 Responses to “Emergency fund comes before investment?!”

  1. mOOm Says:

    Personally I saved about $10-15k before beginning to look at mutual funds and stocks. But I had relatively low ability to borrow on credit cards. If I had my current credit line I may have started to invest earlier. Once you have plenty of assets you no longer need an emergency fund as such as your borrowing capacity at reasonable interest rates gets bigger and bigger.

  2. Yannick Says:

    Thanks for the sharing. I started when I had about $15k. You certainly have not only very good investment skills, but also a high risk-capacity.

    I would not risk being hit by a 10%+ APR charged by credit cards to invest in stocks (e.g. an accidental late payment may trigger universal default on other credit cards ). As Jacqui shared, I just used some credit line to buy CDs and savings.

    I think so. Now I know my risk capacity much better after these years’ experience. Interestingly, I found my risk preference changed a lot during my early days of investment (having only very limited assets), probably because of my limited financial knowledge. I could be very optimistic and tempted to take more risks at a time, and after some readings, became quite pessimisive and risk-averse. Without a real cash reserve, I could not avoid swings in my emotion and investment decisions. I now keep enough cash for housing downpay any way and feel much more comfortable with my strategy. 🙂


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