Emergency Funds: The Difference Between Success & Failure in Crypto
Saving up 3, 6 or 12 months of expenses in an emergency fund is vital for a crypto investor. We explain why every crypto investor must have one during this bear market.
In this article, we will go over the Nº1 thing every crypto investor should do before investing in any cryptocurrency or project, creating and building an emergency fund. Let’s get into it.
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The Nº1 Thing Every Intelligent Investor Has
The Nº1 thing every intelligent investor should do before investing is create an emergency fund. And I will explain why having this can mean the difference between a successful crypto investor and and some that loses money while investing in crypto.
What is an Emergency Fund
But first of all, what is an emergency fund? An emergency fund is a financial safety net for future unexpected expenses.
In a nutshell, it is saving a specific amount of money which is different for each person, so that if anything happened such as losing a job, crypto investments going down in the short term, or any other unforeseen event, you would be able to afford those expenses without going into debt and without having to sell your investments during a bad moment like a bear market.
The emergency fund should be a separate bank account that you should only use for emergencies. It is a brake only in case of emergency account. And traveling, leisure, and other non-vital expenses are not considered emergencies. This would provide you will multiple benefits we will touch on later.
What amount should you have in your emergency fund?
But what amount should you have in your emergency fund? This amount is based on all of your monthly expenses. Once you know how much you spend each month, you have to multiply that amount by the months you want to have saved up.
Experts differ in how many months you need to have saved up in your emergency fund. Some say 3 months emergency fund, others 6 months, and others even 12 months emergency fund.
After all, it depends on the stability of your income streams and how dependent you are on them. It’s not the same as having multiple income streams so that if one of those fell off you’d still be able to pay all of your expenses, than having just one income stream which is a job in an industry in which if you lost that job it would be hard for you to get a similar one, so you’d be in more risk and may need a bigger emergency fund.
However, all experts agree that emergency funds should cover at least 3 months’ worth of expenses. I prefer having 6 months’ worth of expenses so that I get that peace of mind that even if everything went wrong with my businesses and investments, I would be fine because I have 6 months of expenses covered to get back up if needed.
Emergency Fund Example
If your monthly living expenses are $3000 and you want to build up a 6-month emergency fund, you’ll need to save up 3000x6= $18000 and have that amount liquid. Preferably in FIAT currency like dollars or euros.
You don’t need to save up this amount in one go. You can just set a reacurring transfer from your checking account to a separate savings account with your emergency fund. If you budget accordingly, it could be done in 6–12 months or even less.
Why It Is Vital Having an Emergency Fund?
Now that we know what is an emergency fund. Why it is so important to build one before investing?
That is because emergency funds provide various advantages that make them worth the effort:
- First, they provide you with the peace of mind that if something happened, you have your financials covered for a few months and you can look for solutions without the panic of not making ends meet or having to take on debt.
- Second, it makes you a less emotional investor. If you don’t have an emergency fund and you invest too much, you are essentially investing money you cannot afford to lose. What do you think happens to most people in that situation when a bear market comes? They have to sell at a loss when they could have waited a couple of years and made a healthy profit.
- It broadens your possibilities as an investor. If you don’t have an emergency fund, you may want to invest in more liquid assets you can sell fast if you need to. However, in some cases, this tends to yield lower returns than other assets that require long-term commitment. Having an emergency fund lets you take slightly more risks and think more about the long term, instead of focusing only on the short term.
Why Stablecoins are not enough as an emergency fund
Some of you may be thinking. Well, I have money in stablecoins getting me a return. Isn’t it enough? Well, after seeing what happened with the UST and Terra collapse, you may already know that in crypto, nothing is guaranteed. Algorithmic stablecoins can lose their peg and collateralized stablecoins are too centralized and have other potential problems.
A lot of people lost their life savings in what they thought was a safe investment in the UST stablecoin. You don’t want to have your “break in case of emergency” money in anything else than FIAT money.
Think about it as if it was your emergency parachute. You have your main parachute and you may never need your emergency one. But if you do, you want it to be a reliable parachute or you will have a mediocre one that can fail in the moment you need it the most?
Once you exceed your emergency fund target amount, then you can invest in stablecoins or other crypto-related assets as you wish.
Conclusion & Summary
In conclusion, an emergency fund should be the priority for someone looking to acquire wealth by investing.
It is not only easy to do, by sending money every month to a separate bank account, but also provides a lot of benefits for the ones that build up this safety net as we just explained.
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This article is not financial advice. Do your own research before investing. Some links may be affiliate links.
