( continues...) more. We may lose or we may benefit, so what are the chances you made a bad investment and are being saved? Impossible to say, but I would venture a guess that if an investment was down significantly there is a reasonably good likelihood (I would guess greater than 50%) that the investment was bad one to begin with, and selling it now is saving you money. So if you had to sell at a small loss, that is obviously not a big problem (small loss = small problem), and if you had to sell at a big loss you are likely benefiting. In other words, you don’t really care about this, it is at worst a small problem and on average a fair chance that it is a benefit. Hmm.. once again, the % side of risk has snuck in darn it all. How did that happen? I don't know, but what we have learned from it is that the damage does not necessarily equal the loss. The damage is entirely dependant upon what the investment does after you have to sell it, as shown in the example in the preceding paragraph. Therefore I will put off answering the question directly, until I walk through a more detailed example below.

Regarding the 3rd problem it is essentially identical to the 2nd but implies that you are having to sell anything - whether losers or winners. I just addressed the idea of selling losers, and will not repeat that. Regarding keeping some money in cash cuz you don’t want to sell a winner, well I hope the absurdity of that is obvious, but I will make the case for its absurdity. “Gee I would hate to put all this money into a good investment and then have to sell some of it at a profit in order to pay my big emergency expense. It would really suck to not be able to get all of the appreciation, just part of it”. Get it? The potential damage is $0.00.

Finally regarding the 4th issue. This is the “keeping some powder dry” argument. If you are unfamiliar, I will get into this moronic thinking in more detail later as it is related to a number of issues, but for now suffice it to say, it is essentially impossible to miss out on a “great opportunity for new investing” by not having cash available. In fact, if forgoing a great investment cuz you don’t have cash laying around is something you would do, you have much more serious money management problems than an emergency fund can solve. The reason that you can't miss out on a great investment is that if it is great you simply sell something that isn’t great and buy the great one. Duh. The potential damage is $0.00. Keeping cash un-invested to keep you from “missing” a great investment is nonsensical. Anyone making a blanket recommending like that to clients is should not be allowed to practice financial advisory.

In summary, for 3 of the 4 supposed risks are not real. There is no downside to not having an Emergency Fund. The only issue we must address is the risk (% and $) of selling at a loss vs. the cost of insuring against that.

The one remaining item is the risk of selling at a loss that hurts you. Lets look at this a bit more closely than saying “you may have to sell at a loss”, and implying/assuming that is a bad thing. As I have said above, knowing you “may have to sell at a loss” is worthless information, despite being true. We need to know how likely, and how damaging. As we look at this, remember three things must all occur in a sort of “perfect storm” in order for you to experience this loss that the emergency fund is purporting to protect you from. You must 1) experience an emergency 2) this must happen when your investments are down, and 3) these must be good investments despite having lost a presumably significant amount of money. As you will see, if I ever get to the part that outlines the % risk, the chances of this are very slim. As I am about to show, the loss you would incur is small, no matter what the emergency. Remember that if you experience an emergency and you investments are up, you have benefited by not having an emergency fund.

But lets assume the worst case scenario happens. Assume you have to sell at a loss that is (continued...)

( continues...) hurting rather than helping you avoid greater loss. Lets assume a big emergency. In fact lets assume 2 big emergencies happen at the same time, and lets assume that each of these emergencies is so big that the each would entirely drain your emergency fund (NOTE TO ME: Remember that I have to show that if an emergency is too big the emergency fund dn help either, in other words the size of the emergency has to be just right). Furthermore, lets assume that it happens at the worst possible time – the day after you decide to forgo an emergency fund and invest that money. Even worse in that 1 day all of your investments have lost 20% of their value. On that day, that you lose you job and are out of work for four months, your car’s engine seizes making it worthless. Ouch a quadruple whammy, 2 catastrophes, both at the worst time possible and both as big as you can handle. You need a new car (lets forget for the moment that buying a new car in this situation is a very bad financial decision – a topic I will explore later), and you need four months of living expenses. The new car costs 20k and the living expenses come to 20k. The 20k you put into the mkt instead of in your emergency fund is now only worth 16k. So you sell all of that plus 24k more that you have invested, and you buy your new car and all the stuff you need to live for the next 4 months. The next day the market turns around and continues straight up for the rest of your working life (40 more years) averaging 10% per year tax deferred. At the end of the year you lost out on 10% appreciation on the 4k you had to take out of your investment portfolio. Your total loss for the year is 400dollars. But that is specious. You lost that appreciation for ever (I am assuming you are 25 yrs old and have saved 40k). 10% compounded for 40 years is 177k. 260,000. This also assumes that you do nothing to replace the 4k in your folio, which is the real cost. In other words you would cut back on your expenditures to the tune of 4k over say the next four years (1k per year). If you do that, the cost to you is 4k compounded for 4 years, which we can expect to be in the area of 1,600 dollars. If you tighten the belt a bit more and can replace the 4k in 1 year, you are out 400 bucks on avg (but you may even be ahead of the game if the market was down in that time period). In other words, with a very small amount of effort, your maximum damage is essentially zero (I know some people will say that 400 dollars is not zero, but it certainly is not typically a risk that one must insure against. Also remember that this is the absolute ridiculously worst case scenario! In fact it is an unrealistically catastrophic situation (note I know one could paint a more grim scenario, but the true “worst case” scenario is always utter destitution for the rest of you life. So we must use the most realistic worst case scenario). The vast majority of the time even if 2 huge emergencies befall at the worst possible time, you will lose less than 400 dollars.

David, I'm not sure what your friend is getting at about relative ease of access. I have more credit card credit than I could ever pay off if I actually used it. If I used it all, I would have a hard time paying the interest payments. However, I could take some of the money that I'm not paying to someone else in interest payments and save it, so for me, savings is easier and less risky than credit.

On top of this, like many, I'm not the greatest at tracking my finances. I have, upon occasion, made late payments, lost track of how much I have in my checking and savings accounts, and made various other errors of the like. If I make errors with credit card debt, I get dinged with huge fees and rising interest rates. If I make mistakes with my own money, I may not get the interest I should get, but I won't get dinged right and left.

I fully accept that I'm not financially astute, but combining what I know of finances with what I know of human nature, credit seems risky to me. I do think that house credit is different, because it allows you to build equity. Alas, with houses costing what they do here and with the relatively low wages of my chosen profession, I don't see that happening any time soon.

And Trudes, hie thee to a recruiter!

ION, Jack Chick comic on the evils of homosexuality: [link]

Catholic costumes for children: [link]

I'm down with having 7,500 in savings and having it available in credit too. Especially if the $7,500 in savings is making little babies. Because that would make it unnecessary for $7,500 in debt to make its own bigger babies.

I'm watching a bunch of Mission: Impossibles. Apart from stoking the Nimoy love, it's made me wonder: how is the premise best pitched? I find it doesn't really generate any tension for me. This may be because of a certain snobbishness I retain towards late 60s TV. I do find the plots pretty hard to follow, since I'm used to a more audience-friendly setup of the protagonist's plans. Perhaps I should get over the afore-mentioned snobbishness.

What fruits other than apple have lots of water and lots of fibre?

Trudy, I'm impressed. About Caroline's not the boss being a fucker

Citrus if you eat the white parts?

Berrys.

David, I'm not sure what your friend is getting at about relative ease of access. I have more credit card credit than I could ever pay off if I actually used it. If I used it all, I would have a hard time paying the interest payments. However, I could take some of the money that I'm not paying to someone else in interest payments and save it, so for me, savings is easier and less risky than credit.

I think his argument is that having $7,500 in credit is worth more than having $7,500 in savings. Because the $7,500 you have in savings could be invested in a higher yield that brings you money, and you'd still have the credit.

Also, he thinks the idea of "financial emergency" - while resonant - is actually overstated/overvalued.

Anyway, I won't flog the horse. I'm just putting his argument out because I think it's an interesting refutation of the conventional wisdom about finance.

The Caroline's thing is sweet, Erika.

The voiceover reel is even sweeter -- I'm being "groomed" a bit and all that. By a casting director of some note who needs comedic women and is tired of hearing reels he thinks are crap.

Oh, and if Richard Belzer's hair has gone white I saw him in a health food store today.