Comments on: Emergencies Versus Opportunities

By: Ouida Vincent

Ouida Vincent — Sun, 31 Jan 2010 14:38:04 +0000

These comments are all awesome and a great study about how we all deal with losses of various kinds. First of all the retirement money did not come back. I contribute maximally to my retirement account with a generous employer match. My 2009 balance is now the same as my 2007 balance, despite the regular contributions during the 2 year interim. That means that I am still at a principal deficit that is equal to the contributions for the past 2 years. Based on the numbers my portfolio is still down. Tim is really worried about opportunity costs while he saves his emergency fund. Emergency funds are vitally important so I believe he should automate his savings, but go a step further as others have suggested and determine how long he can wait until he has his emergency fund in place, automate the savings at that rate then set aside funds for opportunity.

By: Nicole

Nicole — Sat, 30 Jan 2010 16:10:43 +0000

Lily– that retirement money came back… maybe not from the peak or the gains, but definitely from what people put in, assuming they were saving for retirement regularly and were diversified. They lost paper money only at this point. Their principle is back in the black. That’s the way it works with long term savings.

By: Lily

Lily — Sat, 30 Jan 2010 05:15:10 +0000

I used to feel guilty about not having a retirement fund. My finances were a mess and I just knew that disaster was at the door. Seemed like all of my friends were so much more “together” financially than I. And then last year, I heard about all the $ people lost in their retirement funds. I didn’t have one. So I lost nothing.

Sometimes I lament with my husband about how we’ve squandered all of our money, spending wrecklessly. And he said, “Yes, but we’ve had a lot of fun.”

We need to balance security with living. Having no security is like walking on a tightrope six stories high. Yet all the security in the world won’t keep away the biggest insult to our ego: death.

What I got from Trent’s article is: find your own balance.

By: getagrip

getagrip — Fri, 29 Jan 2010 19:54:20 +0000

In general I like idea of an opportunity fund as part of your spending plan.

That said, the emergency fund isn’t an investment, it’s insurance.
It’s insurance so you can risk other money on speculative opportunities.
It’s insurance so you can step up and take that risk at work that may get you a promotion or end up costing you your job.
It’s insurance that you can quit your day job and take a shot at making it in your own business. It’s insurance so you can drive that beater one more year while saving other money in the car account for a newer vehicle.

Woulda coulda shoulda are all BS dreams. Did you honestly learn from it so you know what to look for today to base a real decision on or are you crying over get rich quick dreams?

Make your plan, work your plan, tweak your plan as needed. Otherwise you don’t have a plan, you have a one paddle canoe spinning in the middle of the lake heading everywhere and going nowhere.

By: Elizabeth

Elizabeth — Fri, 29 Jan 2010 18:46:42 +0000

For me, the emergency fund is an investment- in my mental sanity. Knowing that I have one makes me less afraid to take risks in other parts of my life because I have a cushion to fall back if things don’t work out. Investing in stocks might be fun, but it will never give me peace of mind.

By: Curtis

Curtis — Fri, 29 Jan 2010 16:08:07 +0000

Note that GOOG is only a “winner” if you sell now. It could still be replaced, a la altavista, any time, sending the stock price right into the dumper. You have to be right twice in order to make money buying individual stocks low and selling them high. If Tim had bought F at $4, would he now be selling at $12? I doubt it, he’d be saying, “How much higher will it go?” Next thing he knows it could be back to $4. Better to build up the emergency fund and thereby have the security to take big risks like buying individual stocks.

By: sjw

sjw — Fri, 29 Jan 2010 13:36:45 +0000

“But our minds work in an interesting way. Once we make our way through those unfortunate events, we tend to forget about them and gloss over them, putting them into the past and not thinking about them any more. Most of the time, we move on from those rough events. It’s how we’re able to deal with our day to day lives. (I covered this idea in detail before.)”

This is particularly true when one has an emergency fund. Because it makes that time you found out that the chimney is missing 1/3 of its bricks an annoyance, not a catastrophe.

By: David/Yourfinances101

David/Yourfinances101 — Fri, 29 Jan 2010 13:09:21 +0000

When I first began to fund my emergency fund I was under the mistaken impression that it had to be in a cash account that just sat there, waiting to be used.

There is nothing that says that this emergency fund can be used to generate money for you.

Maybe not in risky Wall St. investments, but why not at least put it in a high-interest checking account earning 4% or something like that.

At least get it to do something for you.

By: Ace of Wealth

Ace of Wealth — Fri, 29 Jan 2010 02:58:46 +0000

I see this as really a matter of risk vs reward. What is the risk of putting money away in your emergency? The risk is that you *may* miss out on some good opportunities. What is the risk of *NOT* putting money into your emergency fund? Can’t make credit card payments? Can’t make mortgage payments?

Trent put it perfectly in the last line…Pay yourself first.

By: Moom

Moom — Fri, 29 Jan 2010 02:45:10 +0000

You should think of it as emergency/opportunity/freedom fund. But you should start investing in riskier things until you have a reasonable cash base. Once you have enough cash in non-retirement accounts you can begin to make riskier investments too. I think the “emergency fund” title turns people off.

By: Russ

Russ — Fri, 29 Jan 2010 02:16:43 +0000

I thought Vonage would be a good investment. I had used them for years. I considered investing $10k (emergency money). IPO started around $17 and unfortunatley it drop a lot shortly after. Now it’s $1.43. As much as I thought it was the next best thing I was wrong! I did not invest in it. Why? Dumb luck! Intuition? No, I believe in investing in mutal funds not individual stocks. WHEW!!

By: Anne KD

Anne KD — Fri, 29 Jan 2010 01:30:12 +0000

I’ve started an emergency fund but named it ‘water heater’ with a number that my fast’n'dirty google search on replacement costs suggested. For the moment, I put in $50/month, which is all I can handle out of my ‘allowance’ for the moment. When I can, I’ll start another fund called ‘car repair or replacement’ and throw money at that. My husband doesn’t believe my savings plan is going to work- maybe he’ll believe it when the water heater breaks down and we can replace it using cash instead of taking on more debt on the credit card.

By: Ryan

Ryan — Fri, 29 Jan 2010 01:19:43 +0000

I think savings of any kind, especially for young people, is a hard habit to adopt. This factor is multiplied even more when you realize that an emergency fund might not get used for quite some time.

Trent, I’m 100% with you on the Google IPO. Granted, I was only in the 7th grade, but I definitely wish I would/could have bought some shares.

By: jim

jim — Fri, 29 Jan 2010 01:11:37 +0000

What if his speculative stock gamble had been to buy GM? Trent is right, hindsight is 20/20 and you shouldn’t be gambling with money that ought to be in an emergency fund.

By: NMPatricia

NMPatricia — Thu, 28 Jan 2010 23:58:08 +0000

I would like to echo PsychSara. Doing the “right” thing is usually not popular nor glamorous as Trent expressed it. People will say Wow if you make a stock killing but will be curiously silent when you have the money to pay for a huge emergency room visit. I know that right now, I get frustrated by the limitations we have because we are living a responsible life. But I also know that if something should happen, we could handle it. But it isn’t glamorous and not exciting.

By: chacha1

chacha1 — Thu, 28 Jan 2010 23:47:27 +0000

Good question, good answer, and good comments! The opportunity fund is a terrific idea and could go a long way toward helping people not feel deprived by saving. Because it’s still SAVING, but it’s saving deliberately for a chance or a risk or just for fun, not only for “if the roof falls in/car dies/company folds.”

The emergency fund is, to me and maybe to a lot of us, saving in case of something BAD that happens. The opportunity fund could be saving in case of something GOOD.

As noted, everyone’s idea of a great opportunity is different – for me it might be cheap tickets to Auckland, for J.D. Roth it was a used Mini Cooper, for someone else it might be a barn for sale down the road.

Missing out on a rare opportunity can really cause that late-night heartburn of regret. Even if you only see in hindsight that it was a *winning* opportunity, like Ford at $4. (And also as noted, a great run-up on a stock is only a winner if you sell the stock at the top.)

By: Des

Des — Thu, 28 Jan 2010 22:42:24 +0000

If it’s ok to have an entertainment budget while you are still building an e-fund, why wouldn’t it be ok to have an “opportunity” or rather “gamble” budget? As long as you’re only risking what you can afford to lose, it can be a huge benefit. Not only does it provide an opportunity to grow your existing funds, but you begin to learn how to invest. I am firmly in the camp that says it is smarter to take $100 and spend it learning how to trade stocks than it is to wait until you have $10,000 before you jump in the water.

People get into trouble when they risk everything they have on a single venture that doesn’t pan out. Failing will always suck. Just make sure it doesn’t break you.

By: Not My Mother

Not My Mother — Thu, 28 Jan 2010 22:32:43 +0000

While an emergency fund is very important, I think the key here is that Tim is putting in “almost all our extra income into the fund”. That can and does lead you to end up feeling like you’re being deprived. Also, you’ve made the assumption that all ‘oppurtunities’ are risky investment ventures. They’re not, they can just as easily be an unexpected change to visit an old friend or see a band, whatever. (And discounting all missed investments as only looking good with hindsight is very conservative view.)

I second the suggestion that Tim also create an ‘oppurtunity fund’. Maybe only fund it with $50 or $100 per month depending on what you feel comfortable diverting away from the emergency fund, but enough that it is there if you decide you need it.

And if it turns out you don’t need it and it gets really big, then you can sweep it into your emergency fund at a later date.

By: Debbie M

Debbie M — Thu, 28 Jan 2010 22:18:59 +0000

I think it’s reasonable to have an opportunity fund as well as an emergency fund. I have used money from this fund to buy a year of retirement just before that option was canceled, to visit my sister when her husband was stationed in Belgium, and to visit a friend when she got a postdoc in Switzerland.

Probably most “extra” money should go into the emergency fund at first, but as that gets more and more stable you can add more money to the opportunity fund. Of course, any money in the opportunity is also available for emergencies.

By: Lori

Lori — Thu, 28 Jan 2010 22:01:23 +0000

We took one-half of our 6 month emergency fund and bought stock in the company I work for (large bank)and I was familiar with the track record of the stock. We were able to turn our 6 month emergency fund into a 12 month emergency fund in less that 6 months. we knew it was a risk but we are very happy that we took that risk.