You likely know all the essential investment principles. You know you shouldn’t save what is left after spending but spend what is left after saving. You know your salary won’t make you rich, but your spending habits will, and most importantly, you know the single best investment you can make is one in yourself.
By following these basics, you might’ve already made your money work for you. But unless you’ve built an emergency fund, your progress might be gone from one day to the next.
Here are the three dangerous downsides of not having a safety net:
- Compromising your future returns to deal with an emergency
- Building workarounds with high-interest loans
- Lowering your credit score (making future loans even more expensive)
Growing Your Money is a Marathon, Not a Sprint
If it were a sprint, I would ditch the emergency fund advice and, instead, tell you to find the highest risk/return rate and go all in.
And there are people following this sprint scheme. But once the market hits rock bottom and becomes liquid, they lose a ton of money by selling at a low price. Then, they will blame ‘the market’ for the rest of their lives.
By looking at investments like a sprint, people throw away their money.
By seeing them as a marathon, you can slowly but steadily increase your net worth.
Two Benefits of Having a Safety Net
Precaution isn’t sexy. That’s why most people avoid it altogether. But once you understand the rationale behind it, you can’t help yourself but building one by yourself.
An emergency fund is no investment. Investments have the potential to grow. Your safety net hasn’t. It will always equal the amount you put in. And, factoring in inflation, it will even lose its value over time.
Yet, all of the 14 finance books I read highlight the upsides of an emergency fund. Here are my favorite two: