Emergency Funds

One look around the personal finance blog world is all it takes to see what a love fest there is out there for emergency funds. In theory, they're a good idea. You should have some sort of safety net for just in case the shit hits the fan.

Ideally, I'd want someone to have cash producing assets. If you have monthly income coming from things like revenue property, bonds or secondary employment, suddenly you become less dependent on your primary source of income- your job. As far as I'm concerned that's the best emergency fund you could ever have.

Rather than advocating the traditional idea of an emergency fund, I'm going to introduce something a little different. I'm going to call it "Nelson's Realistic Solution That Doesn't Require You To Tie Up Large Amounts Of Capital For Some Stupid Bullshit What If Scenario" (or NAMBLA for short)

Pretend Scenario #1- A young couple both have decent jobs. The husband works in finance and the wife is a teacher. They have no credit card debt. Experts advocate that they have a minimum 6 month emergency fund. Should they?

Hell No!

What are the chances that they both lose their jobs? What are the chances that they encounter some sort of financial disaster that requires them to have tens of thousands of dollars on hand? The answer is basically zero.

Rather than having all this cash on hand, why not put that cash to work? Put it into a good conservative portfolio of high quality corporate bonds. Use an ETF or even (shudder) a mutual fund. This is going to protect your capital and get you a better return than you'd get in even a high interest savings account. Make your "emergency fund" the ultra conservative fixed income part of your portfolio.

Before you should even start investing, you should pay off your credit card debt. Paying off credit card debt is a terrific guaranteed return. If you have a card with a 0% rate, then I can see the logic of not repaying that, but most of the time, pay the credit card debt.

Your next step should be to start saving. Save up a couple thousand bucks, open up a online brokerage account, and buy one stock. XBB is an ETF that consists only of high quality Canadian corporate bonds. It's basically flat this year, while the TSX is down about 4000%. And it yields 4.5%.

Once you've gotten a good start in that, move onto stocks, then maybe investment real estate or other stuff. Repeat until wealthy.

While you're doing this, make sure you have a credit card with a decent amount of credit available. (say a limit of $10k) Then if the shit ever hits the fan, just charge up the credit card. Then take your time selling off the assets in the bond fund. Since it doesn't move much, you don't have to worry about taking huge losses.

This way, you don't have to keep large chunks of capital on the sidelines for some stupid just in case scenario. And for Christ's sake, start working on other streams on income.