Hey guys, it's sasha, one of the most popular bits of financial advice that everyone loves to repeat over and over is that you must have an emergency fund. Finance youtubers are tripping over each other to tell you that you need to have enough cash to pay for maybe about six months worth of bills and dave ramsey's. First and third, baby steps are to save up your emergency fund. Now i do not have an emergency fund and i think that if most people really thought hard about it, they probably wouldn't want to have one either.

The average person will lose about 250 000 over their lifetime by keeping an emergency fund, and the worst thing is that there are alternative options that solve the same problem without costing you 250 000 in the process. So here is the problem. A lot of people will live paycheck to paycheck, and many of these people will have no savings and mountains of debt, and then life happens. Your car breaks down and it's going to cost you 500 to go and fix it.

An unexpected tax bill will turn up, or you will get an electricity bill that you have to pay that you completely forgot about. Even worse, you might lose your job completely out of the blue. You might not expect it. It happens.

It happened to me twice and if that happens, then you will have no money and you will have no money to pay for those expenses or to pay for your everyday life. If you happen to lose your job, you can't fix your car. You can't pay your bills, so the advice is that you need to build up a little war chest. You should have some cash sitting in a separate bank account somewhere.

That is there, for, when life throws you a lemon now i completely get this problem and i've been in those tough spots myself. But what if i told you that an emergency fund is a really bad solution to that problem? Let's say that a responsible person decides to follow this advice and sort out an emergency fund that covers six months worth of expenses. The average salary in the us is 31 000 and in the uk it's about 31 000 pounds. So the numbers work the same regardless of where you live so after taxes, that salary is a bit over two thousand dollars or two thousand pounds per month.

So let's say that if you were to tighten your belt and only spend what you absolutely have to you can stretch four months worth of your wages to last you six months worth of bills, surrounding it down. That's about eight thousand dollars that you'll need to save up for an all-singing, old dancing, perfect emergency fund, then to follow the same advice you're going to keep this emergency fund for the whole of your life just sitting there just in case you need it for those Emergencies then you're going to go and dip into it. So, let's assume that you build up your emergency fund by 25 and then let's say you retire at 65, at which point you decide, you don't really need one or you need a much smaller one, because you have the certainty of having the benefit of pension payments. That's 40 years, i'm just trying to be conservative here and that emergency fund is going to sit there in the bank account earning you a few cents per year.

If you're really thrifty, you might be able to put it into a fast access savings account or something else like that. That's going to pay you maybe a few more cents per year, but if instead imagine you went and invested that money into the general stock market index that eight thousand dollars would have earned you over that 40 years, 250. 000, at just over nine percent per year, which is the average rate of return in the long term for the s p, 500, and at this point some of you watching might be rapidly scrolling down to the comment section to write. Something like but sasha.

The emergency fund is there for emergencies. What do i do if my car breaks down? What if i lose my job, you completely are missing the point. Well, let me break down exactly what i do and explain why i think it is a lot better than having an emergency fund first off. If you don't have an emergency fund, then you really only have two options when things get tough, the first option is to sell off assets, sell off those investments that you have to raise the cash that you need and the second is to get into debt.

There's no other option because you don't have a pile of cash sitting there for the rainy day now on the surface, both of those sound like a really bad options getting into debt is always a bad thing and selling your investments is a big problem too right. Well, you might lose your job during a market downturn and if that was to happen - and you had to sell off your investments, they might be 40 down, so you'd be losing a lot of money just by selling. It will also take you at least a week with most brokerages to actually get your money out might take even longer than that. You'll have to wait two or three full business days for the money to clear, and then you have to wait at least a few more business days for the transaction to actually process and reach your bank account.

And if your car is broken down, then waiting over a week for the ability to pay for that repair isn't really an option. Well, let me explain why a combination of these two things is actually financially smart, the two things being getting into debt and selling off assets. The things that i just explained are really bad. First, let's talk about the getting into debt bit.

Credit cards are a dirty word for some people, but they can be incredibly powerful tools if you use them in the right way. Most people can easily get a credit card that will have an eight thousand dollars limit. If not, you can get two or certainly, if you wait a little bit over time. Just you know every month spend a tiny bit on it.

You might get enough credit increases to get you there that credit card will have an expensive interest rate. So if you had to ever borrow on it, it's going to cost you a lot of money. Now these interest rates vary, but let's assume a fairly standard, 18.9 compounded as a just standard, general interest rate. Then let's say that once a year you have an emergency that costs you 500.

On average. Let's say your washing machine broke down or something, and it takes you two months to then pay that emergency off on that credit card, and then let's say that at three random times during your working life, you'll unexpectedly lose your job and you'll end up borrowing the Full 8, 000 and you'll pay interest on it for three years before paying it all off. So, let's presume that that sounds fair enough right in terms of assumptions that situation will cost you 16 thousand nine hundred and twenty seven dollars in total in interest, and that's assuming that you don't have a low interest credit card or an introductory offer or anything else. You're, just paying the full amount and paying 16 127 dollars in interest means that you can keep your 8 000 in investments to earn 250 000 over that same amount of time.

Interesting right. The really important thing here is discipline. This is really important, because if you don't have discipline, this approach can really bite. If you go and borrow that 500 of the 8 000 and then don't pay it off as soon as you're able to the interest, can really build up and can hurt your credit and you won't be able to refinance.

You won't be able to reduce the cost and can really get bad. It can spiral out of control. But if you can control yourself and manage things, the difference in numbers is staggering, but let's say you don't want to get into debt for whatever reason. Let's say that at some point you lose your job and you decide to sell off some of your investments to make the money back in the worst possible scenario.

You will lose your jobs soon after you put your emergency fund into investments, and it will happen during a massive market crash when your investments are down 30 percent. In that case, if you do need that six months worth of cash you're going to have to borrow, because you simply won't have it in the investments, but that scenario is very rare and highly improbable. It is extremely unlikely that you're going to invest the full 8 000 pounds at the moment before the market crash and the market crash going down by 30 or 40 will be versus that top point. If you've been investing for several years in the run-up, the likelihood of the impact on your money will be nowhere near as severe, but also i just showed you that, even if it were to happen, it will still cost you 15 times less than how much your Investments will be making in the long run on average.

So even if it does happen, that really isn't the worst thing to do. But here is something really interesting that maybe you haven't thought of if you were to lose your job eight years after you put that emergency fund into the stock market, and if you also got the average rate of nine percent per year in return, you could sell Off eight thousand dollars of your investment to last you, the full six months and after you've, sold off the eight thousand dollars. You still have guess what eight thousand dollars left in your account. Some of the advice that i've heard tells you to build up an emergency fund before paying off debt.

In fact, the first step of dave ramsey tells you to build up the first one thousand dollars before you touch any of your very expensive high interest debt. And if you are in debt and are debted toxic, that can be an incredibly incredibly bad and an incredibly expensive decision, if you're, paying 10 or more interest for your debt. Your first priority should always be to repay that debt. When you repay that debt you're getting a guaranteed 10 return on your money, which is incredible, if you can get a guaranteed 10 return or higher on your money, you should take it and when you're repaying debt that costs you that much.

That is what you're getting in fact. I would repay any debt that cost over 5 as a priority. I would do it before investing and i would certainly do it before. I go anywhere near trying to think about an emergency fund and if i then have an emergency guess what i can go back and load up with that same expensive debt.

If i absolutely have to the debt that i just paid off. Putting me back in exactly the same position as i started, but if there isn't an urgent emergency during that short window, when i'm doing that, then i get to clear my debt instead and i get to stop wasting all of that money on expensive interest. Now, after clearing any toxic and extend expensive debt, i would then begin putting my money into investments instead of building up my war chest instead of putting it into an emergency fund, there are a million ways of doing it, but just putting your money into the s P 500 of the us total market index is a very easy starter. It is super cheap, it is very accessible, you don't need to pay expensive fees and it requires zero effort.

Now investments can go up as well as down and there's a risk that if you choose this option that you will lose money if there is a crash or a correction, especially if that happens very soon after you start, but in the long term. All of these things balance out the value from doing it will far far outweigh the short term cost of having to bridge the gap. If you fall short on money because of an emergency now, as i mentioned, discipline and application is key. Without them, you can get into a whole big load of trouble, applying something like this strategy, so for people where maybe you want the certainty of the cash pile? You might prefer that certainty to having a 250 000 upside from your money being invested instead.

But hopefully this video just gives you some food for thought so that maybe you'll think about emergency funds in a slightly different way. Thank you so much for watching. I really really appreciate it. As always i'll see you guys later, you.

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