I'll just run some of his paragraphs. Be warned his tone is occasionally obnoxious because he thinks conventional financial advice is STOOPID. But I think his argument is sound, or at least worth considering....

First, the conventional advice. Which he terms "antique-onomics."

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So, I have isolated 7 financial “World is Flatisms” heretofore known as antique-onomics. CHAPTER 1: Emergency fund vs. Fund for emergencies

Well the first item, hopefully soon to be in the annals of Antique-onomic advice, is almost ubiquitous. It is the “Emergency Fund” Recommendation. I am sure you have heard it many times before. In a nutshell, it most commonly goes something like this "You should have 3 to 6 months of expenses set aside for emergencies. You should have this in a money market account or other cash equivalent that wont fluctuate in value and that you can get at quickly” Here are some quotes from some of the heavy hitters in the financial advisory industry (Emphasis is mine).

The Wall St Journals Lifetime Guide to Money: Everything you need to know about managing your finances – for every stage of life.

“ The idea of saving money for a rainy day may seem terribly old-fashioned. It is certainly not exciting. But there is probably nothing more important than having a financial cushion to smooth the way if you lose your job, or the roof has to be replaced or the car suddenly dies” “Financial experts generally recommend that people have an emergency fund equal to between 3 and 6 months’ spending money. A generous emergency fund is critical for families that are relying on a single wage earner to support a couple of kids. Accumulating rainy day money is also particularly important when you are just starting out and do not have many other assets you could tap in a crunch.” p 32

The Wall St Journal Guide to Planning Your Financial Future:

“Cash in the bank – A cash investment is one that you can get your hands on in a hurry – like a money market fund – without risking a big loss in value. For example, while putting your money in a regular savings account has serious limitations as an investment strategy, the logic behind a cash reserve makes a lot of sense. If all your assets are tied up in stocks and long term bonds and you need to liquidate you may take a loss, or you might miss a great opportunity for new investing.”

The Price Waterhouse Book of Personal Financial Planning.

“You should set aside some funds for emergencies in a secure, very liquid investment vehicle that does not fluctuate in market value… How much should you set aside? Many financial advisors suggest 2 to 6 months living expenses.”

The Money Diet by Ginger Applegarth

“Experts usually recommend that you keep an amount equal to 3 to 6 months expenses in bank or money market accounts in case of emergencies.” Pg 131

In addition to this she recommends that everyone who wants a “moderate risk” portfolio regardless of age, net worth, or anything else, should have 10% in cash.

Everyone's Money Book

The 1st goal is to “Build up Emergency Reserve (worth 3 months salary)” pg 23

Personal Finance For Dummies 2nd Edition by Eric Tyson

If your only source of emergency funds right now is a high interest rate credit card, its in your financial interest to save 3 to 6 months of living expenses in an accessible account before funding a retirement acct or saving for other goals…There is simply no reliable way to tell what may happen to your job, health, or family. Because you don’t know what the future holds in store, preparing for the unexpected is financially wise. …

Conventional wisdom says that you should have approximately 6 months of living expenses put away for an emergency… I recommend saving the following amounts under different circumstances.

3 months living expenses if you have other accounts such as a 401k or family members and close friends you could tap for a sort term loan. This minimalist approach makes sense when you are trying to maximize investments elsewhere or have very stable sources of income

6 months living expenses if you don’t have other places to turn for a loan and/or have some instability in your employment situation or (continued...)

( continues...) source of income

Up to 12 months living expenses if you don’t have other places to turn for a loan, and if your income fluctuates wildly form year to year. If your profession involves a high risk of job loss, and if it could take you a long time to find another, you also have a greater need for a significant cash reserve.

Establishing an emergency fund should have priority over saving for other purposes, unless you have access to money through other sources such as a family member, or are willing to borrow from a retirement account. Smart Money: How to be your own financial manager

“No matter what stage of life you are in, you always need liquid investments for emergencies.” They have different recommendations for different age brackets as follows. Before you buy your 1st house, 50% cash. From that age to age 40, 20% in cash. From 40 until retirement 15% cash

“Hmm, what’s the problem?” you may be asking. Sounds like reasonable advice, and it is coming from some of the most prestigious financial institutions and advisors in the world! (the Wall St Journal, Price Waterhouse, etc). Well, lets be clear here. I am not merely saying that the sagaciousness of the advice is debatable. I am saying that it is absolutely unquestionably bad advice. Really bad advice. Well actually, really, really bad advice. Even worse, not only is the advice really really bad, but essentially everything about it is wrong from the definition of the problem to the approach to solving it, to the logic and the assumptions. How’s that for emphatically decrying the established “conservative” and “obvious” (read “World is Flat”) wisdom? Geez, I better be able to back it up J.

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Generally when posed with a problem I think the first thing to do is try to see if it actually is as advertised (is the apparent problem an actual problem). If I agree that it is a problem, I try to think of all the ways I can overcome that problem. Then I try to look at the cost / benefit of each, and then choose that which offers the optimum cost / benefit. Duh. This is actually a simplification. Sometimes it is not good to figure out the best way to do something (But I wont get into that right now, I may touch on that later as a general approach to problem solving). In this instance, some of the first questions that come to mind are as follows. Do we need to guard against financial emergencies? What are our other options besides a emergency fund? Why 3 to 6 months, why not 1 or 24? Why not 50% of your net worth?

So lets start by analyzing this ‘problem’. First, are financial emergencies something we need to worry about? It seems so - without giving any real thought to it. But how can we really know if we need be concerned? To find the answer, we must ask a few questions, three, to be precise, they are as follows:

“What is a financial emergency?”

“What is the risk of a financial emergency” (Define risk, $ risk, % Risk)

“What is the cost to insure?” (Actually this is, “What are the costs to insure for the various means to insure?”)

Only by answering these questions can you then make the comparisons needed to determine if you should guard against such an event occurring. But in all this prudent, well thought out, conservative advice about preparing for emergencies, I've never heard anyone of these sophisticated mavens answer, or even pose for that matter, each of the three questions that must be answered before any sound advice on the matter can be given (Too dripping with sarcasm? I just cant help myself.).

The 1st of these questions is, “What is a financial emergency?” Well, “financial emergency” is not really well defined by anyone, but I will try to err on the side of being overly inclusive. The list of possible individual items may be infinite, but there are really only 2 types of things that constitute a financial emergency.

One is a big unexpected expenditure that you must make, and don’t have the resources to make. This italicized part is critical because, as you will see, as your wealth increases fewer things become financial emergencies.

The other is a loss of income for a big amount of time, which is really the same thing as the first thing (large net negative cash flow that you don’t have the resources to cover), but we come at it from a different angle in that the net negative is caused by decreased revenue rather than increased expense. You have a bunch of small expenses that you must make that, in the aggregate, is one big expense. The biggest difference is that the first is a “one time” hit, and the other is a hit that occurs over time.

The pundits’ comprehensive aggregated list of things that constitute an financial emergency, as gleaned from the 11 sources sighted above, are, loss of job, major household repair, major auto repair, and finally (and oddly) a great investment opportunity. As an aside giving examples of a financial emergency is a poor (continued...)

( continues...) way of defining a financial emergency, and poorly defining a problem, can certainly lead to a poor solution, as is the case here. Saying a major repair to home or auto is a financial emergency is flawed. It may be a financial emergency, but it depends on your circumstances (aka net worth). The same is true of a loss of income. For some this is tragic, for others (those with enough assets) it is a non-event. It is essentially impossible for wealthy people to experience a financial emergency. But from here on I will, like the financial sophisticates, fail to recognize this fact and I will assume, as ludicrous as it is, that a major auto repair is a financial emergency for everyone. Even in doing so the emergency fund recommendation not only fails to hold water, but is a sieve. Now that we have a better idea of what a financial emergency is, we come to the 2nd question.

“What is the risk of a financial emergency?” Before answering this I must talk little bit about risk, because that question can be misleading depending upon your definition of risk. Risk is a topic that I will cover in detail later, since it is one of the most important antique-onomics concepts still in use today. But for now, I will simply mention the most basic concept – the definition.

And that most non-seven-figure people would pull this from their savings account if they could rather than pay credit card interest on it.

I suspect the point of his that we're missing in this convo is that if you're already carrying credit card debt, then we're effectively already paying that interest by keeping the money in savings rather than clearing the debt.

I define risk as, "the chance of loss". Surprisingly, this is NOT the financial community’s definition of risk (I will get to their definition in chapter ______). So by what authority do I discard the wisdom of the financial leadership of the nation ? Because they are, um nuts. Now maybe I am the one who is nuts, cuz someone certainly is, but you be the judge. If you think my definition of risk is off base, then read the chapter on their view of risk. I think you will agree, for all of their sophistication, something has gone awry.

“My” definition, aside from being staggeringly simple, is frighteningly intuitive, and it also just happens to be, drum roll please, the dictionary definition. I feel pretty good about the fact that Webster comes down on my side, cuz that means that maybe it actually is not I, but they who are nuts, but I am getting ahead of myself.

It is critical to never lose sight of the fact that there are two key items in that simple definition. First there is, "the chance" part. This is most easily represented by a percentage, as in “There is a 20% chance of losing money here”. The second part is the, "loss" part. With regards to financial matters, this is most easily represented by a dollar amount. For example, “The worst case scenario is that I lose 100 bucks”. Put them together and you have, “ I have a 20% chance of losing 100 dollars” (This is simplified, but will suffice for now). You need to know both the 20% part and the $100 part otherwise you have not fully described the risk. It is essentially meaningless to simply say I have a 10% chance of loss. Loss of what?! You must know what you stand to lose, and the odds or you know nothing. This is patently obvious, so why bother to point out? Because, even if everybody knows this at some level, they don't seem to incorporate this knowledge into their everyday conversation on the subject when it comes to investing, which is scary, dangerous and amazing to me. What I mean by this is that people will often describe something as, "risky". That it is about as meaningful as calling something a thing, it may be true but it doesn't really provide any useful knowledge. Do they mean I stand to lose a lot, or I will likely lose, or both? This is a very important distinction, but your average mutual fund or brokerage client will never have this distinction made for them. They are simply told an investment is high risk or low risk. I could understand laypeople using the term in such a loose manner but certainly the professional investor should not do so. Literally everything we do is risky, right down to the most basic life sustaining things like, um, breathing. So calling something risky is an essentially meaningless statement.

This is best illustrated by asking you which of two options is riskier. The 1st choice has a 90% chance of losing money and the 2nd has a 10% chance of losing money. Easy choice right? Not so fast. What if with the choice with a 90% chance of loss you stood to lose 10$ and the choice with only a 10% chance of loss you stood to lose your entire net worth plus all of you future earnings capacity? Now which would you say is riskier? Probably everyone would agree the 10% chance of losing everything you have or will make is riskier than the 90% chance of losing 10$. So you might say, well it is still easy, the chance of losing big is always riskier a big chance of losing a small amount, so the magnitude of loss is the key definer of risk. Again, not so fast. What if the chance of losing your life (presumably the biggest loss possible) were 1 in a megajabillion, and the chance of losing your entire net worth was 99.9%. Would you give up your entire net worth to prevent a 1 in a megajabillion (I made that number up, by the way)? Almost certainly not (it really depends on you net worth too, but lets forget about that for the time being). In other words, just as the dictionary (and I) say, it is the combination of chance and loss that defines risk. If I could wave a magic wand, it would be illegal for (continued...)

( continues...) a licensed investment professional to say, “That is a risky investment”. I am actually not being sarcastic here, I really think it is criminal. Professionals would have to say something like, “That has a high % risk and a low damage risk” or “That investment has a low likelihood of losing you money, but if it happens you will lose a lot”. In other words, you should not lump the two components together. It can be very misleading, and as a result it can, and does in my opinion, lead to very bad decision making.

Now that we have clarified the basic elements of risk, we now know that when we ask

“What is the risk of some event (a financial emergency for example)?”, this is really two questions rolled into one. The 1st question is what is the likelihood of the event occurring (the % risk), and the 2nd is what is the potential harm (the damage, or in this case, the $ risk).

By the way, we may only have to answer 1 of the 2 questions depending on what we learn from asking the 1st one. For example if we find that the maximum potential damage is 1 cent, we need not bother determining the likelihood. Similarly, if we determine the likelihood to be 1 in a megajabillionplex, we need not determine the maximum damage (another made up number by me)

For this reason I want to first explore the damage we may suffer by not keeping cash available, as it may preempt the need to even determine the likelihood of it occurring, which is a much tougher task.

Once again, the Emergency Fund supporters do not make the downside entirely clear. I have heard different things from different sources. Putting them all together, there are, apparently, four things an emergency fund does for you. 1st is that it allows you to get access to money ‘fast’ in the case of an emergency. 2nd is that it protects you from the possibility of having to sell your investment[s] at a loss by being forced to sell, due to the emergency, at an inopportune time. The 3rd, almost identical to the 2nd, it keeps you from selling off your investment portfolio [aka your future well being] if something unexpected comes up. The 4th is that it keeps you from missing out on a great investment

Lets take a look at each of these.

Regarding the idea that you need to get access to money ‘fast’ in the case of an emergency I would have thought this was a joke if it hadn’t come from so many reputable sources of financial advice. What ‘emergency’ could possibly require that you get money in less than a week? I can't think of one. I really can’t, I am not joking. Certainly not the things the advocates of an emergency fund mention. Lets run through the list. Loss of Job…no. Major repair on the house…no. Major auto repair…no. Medical emergency…no. The need to take advantage of, as the Wall St Journal puts it, the “great opportunity for new investing”,…no. So, if fast access is the reason for an emergency fund, it is not a valid reason. In our modern society you never, realistically, need to get money “fast”.

What makes the advice even worse is that even if quick access were a concern, the solution you are advised to take is to put the money in a ‘money market’ account! This is silly. So silly in fact, that if my kids are sad I tell them the story of the big bad financial planner’s money market advice and that always laugh and laugh and laugh. If you want money fast (which we just determined you will never want), you may want to avoid things like real estate (probably not –I may get to that later, depending on my mood) which can take months, but you can get your money very quickly from liquid investments. Stocks, bonds, and mutual funds all qualify. You can literally (Please note that I am not using “literally” to mean “figuratively”, as is almost always the case nowadays – this drives me nuts, as in “I literally jumped out of my skin” and other such literal impossibilities) sell a stock or mutual fund in a matter of seconds, it is hard to beat that for speed. In other words you can get access to your money very quickly, (continued...)

( continues...) more quickly than you need. In fact there are even some brokerage accts that have check writing, so the money is as available as your checking account. In short, the investment gurus, as they have done with the larger emergency fund problem, they have done with this sub-problem - they first incorrectly isolated a problem (you don’t really ever need money fast), and then have provided an illogical solution (even if you did need it fast you don’t need to put it in the lowest returning asset class). I love those guys.

So to directly answer the question of “what is the maximum potential damage” of not having a emergency fund for this item is $0.00.

Now we move to the 2nd risk, the risk that you “may have to sell at a loss”. Let me start by saying this is true, you really may have to sell investments at a loss if you don’t have an emergency fund.. However, there are a number of problems with this. First, whenever I am told something may happen, it literally makes me jump out of my skin, and drives me absolutely unequivocally nuts. Why? Because as with calling something risky, it provides essentially zero information, despite the fact that it is an unquestionably true statement. This is probably why you hear it so much from paid advisors. Because despite seeming to have given helpful information, they have avoided giving any information at all and therefore they can't be wrong. So whenever I am given such non-information disguised as information, I ask for at least some real information. For example in this instance, “When you say I may have to sell at a loss, is it 1 in a million or 50-50 chance that I “may” have to sell a loss due to a financial emergency? Furthermore, what is the potential size of the loss. Throw me a freakin bone here….literally.

I am not suggesting you need precision either. You don’t have to nail it down to “there is a 22.7% chance you will have to sell at a loss”. Such exactitude is almost always impossible. But even saying simple things like “almost always impossible” vs. “may not be possible” is a huge difference. All sorts of vague statements like “It is likely”, “It is unlikely, but possible”, “More often than not”, while not perfect due to their vagueness, they are infinitely (literally) better than the overly vague, “it may happen”. These other statements at least provide information, and therefore have a chance of being helpful, and to be more helpful in this sentence I would say they have a good chance of being helpful, literally.

So what is the case in this instance? Sure I may have to sell, but I may get abducted by tin-foil fearing aliens, so should I set up an emergency fund, and sleep in tin-foil sheets? Or should I laugh at those who do either? As I will show below, when you do the math here it is clear that the potential loss from a forced sale is far far far far far far far (I may have used “far” 3 too many times) outweighed (literally) by the essentially guaranteed loss of not investing the money. In other words, laugh at those who feel secure with a tin foil security blanket, and those who fee secure with an emergency fund security blanket. They are both deluding themselves. But I digress I will address the % chances later. This part is about the max potential damages.

The question here is how damaging is it to sell at a loss. Well, you might be saying “duh” right back at me here. Isn’t the damage of the loss equal to the loss? If I invested 100 and lost 25 haven’t I been damaged to the tune of 25? This is another in the long line of specious reasoning that helps to perpetuate misinformitude (I made that word up). It sounds so obvious why would any question it, I mean I can see that the ground is flat ergo…duh. Well the damage is not necessarily equal to the loss. Why? Because there is a huge assumption that is being made. Everyone is assuming that selling at a loss is bad. This is a huge assumption. Think about it for a second. If you made a bad investment and you are forced to sell at a loss, only to have the investment become worthless after you sold it, you have benefited by having to endure the “misfortune” of having to sell at a loss! In other words, the pundits are right when they say you may lose out by having to sell at a loss, but the leave out the fact that you may benefit by having to sell at a loss. To continue with my example above, you invest 100, sell at 75 for a loss of 25 then the stock goes to 0. You are 75 richer by losing 25 in the short term. No damage despite a loss of 25.

But if I left it at that, saying you may benefit from such a sale, I would be as guilty as them for making a true statement that was meaningless. So lets think about it a bit (continued...)