Dear DTA,
Just have a quick question. I’m just starting out. While I’m excited to invest, I also have to think about being able to cover emergencies. Where does an emergency fund fit? Should I fund that before investing? Thanks.
-Nick D.
Hi, Nick.
Appreciate you writing in!
This is a very exciting time for you.
I still remember back when I was just starting out. I could see this whole world of possibilities in front of me. It was thrilling to make that transition in my life toward an empowered investor.
The potential is incredible.
I got a bit of a late start myself. Didn’t start saving and investing until I was almost 28 years old.
Yet I was still able to become financially independent and retire in my early 30s, as I describe in my Early Retirement Blueprint.
By following the tenets of dividend growth investing, which fellow contributor Dave Van Knapp has described in his DGI Lessons, I’ve been able to build the life of my dreams.
I simply lived below my means.
And I invested in high-quality dividend growth stocks like those you can find on the Dividend Champions, Contenders, and Challengers list.
My real-money early retirement stock portfolio, the FIRE Fund, generates enough passive dividend income for me to live off off.
I’m sharing all of this with you so that you can see the full power of investing, specifically dividend growth investing.
Now, what about an emergency fund?
Well, Nick, there’s no right or wrong answer here.
Some people believe it’s imperative to have a big emergency fund. Some people need that cash cushion to be able to sleep soundly at night.
Others will tell you that the opportunity cost of having a lot of cash sitting around is too much.
I’ll tell you that I never much believed in having some massive emergency fund.
But this comes from the mindset of someone who was extremely focused on building serious wealth and passive income.
I wanted to become financially independent as soon as possible, which is a goal that many investors have.
And having a bunch of cash sitting around wasn’t gonna help me accomplish that.
It comes down to a simple realization that I came across on my own journey to financial independence.
An emergency fund is almost always unnecessary for serious investors.
If you’re fully intent on building substantial wealth and passive income as fast as possible, you’re going to be awash in cash flow anyhow.
A serious investor is going to have plenty of regular cash flow to invest.
Concurrently, they’re building liquid investments that often produce cash flow of their own.
Look, I was regularly saving over 50% of my net income and investing it. Even today, I spend less than 50% of my net income.
That means I was regularly sitting on thousands of dollars, upon which time it could be invested. There was always a bit of a “lag” between collecting money and investing it. I was practically never sitting on less than a few grand at any given point in time.
If some kind of $1,000 emergency occurred, the cash was flowing to take care of that.
Plus, I had the liquid investments I could pull from, in case a sizable emergency struck. Those investments, by the way, were producing growing dividends that I could also use in a pinch.
The portfolio was my “break glass in case of emergency”.
And there are also credit cards that can be used in case of a serious emergency.
Now, if you were a regular American, Nick, I’d tell you that you should have at least six months of cash set aside in case of emergencies.
No doubt about that.
But if you’re the kind of person who’s reading DTA, writing in, and focused on maximizing your opportunities, putting aside five-figure cash as some kind of “emergency fund” takes away some of your opportunities to compound your money and build your wealth.
Cash isn’t king.
Compounding is king.
That said, I’m not saying you should invest every single dime.
Keep a little cash to run your life and keep things smooth.
Also, you have to be able to sleep at night.
Even when I was saving and investing like a maniac, I never let my cash on hand get below ~$2,000.
That was a bare minimum for me.
I thought it was necessary to have a little something just in case something weird did pop up.
But having six months of expenses set aside – say, $10,000 or more – is, in my experience, totally unnecessary, and possibly harmful, for serious investors who are aiming to become wealthy.
Don’t totally ignore your defense.
But focus more of your resources on offense, Nick.
Speaking of which, make sure to check out my Undervalued Dividend Growth Stock of the Week series.
These are compelling long-term dividend growth stock investment opportunities that undergo a rigorous analysis and valuation.
I then share them. These articles are totally free!
Be defensive enough to sleep at night.
But be offensive enough to become wealthy ASAP.
And make sure you get started today.
I wish you luck and success.
Jason Fieber
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Disclaimer: Jason Fieber is not a licensed financial advisor, tax professional, or stock broker. Please consult with a licensed investment professional before investing any of your money. If your money is not FDIC insured, it may decline in value. To protect the privacy of our readers, any names published in this article are under aliases. In addition, text may be edited, omitted or paraphrased for grammar or length.