How An Emergency Fund Can Sabotage Your Financial Goals

Misunderstood money advice for achieving financial independence

Pull up any list of sage advice from one of today’s personal finance gurus and one of the top 3 suggestions will surely be about building an emergency fund. I’ve heard it so many times, it’s like fingernails on a blackboard. While they mean well, their advice woefully comes short in the bigger picture of securing your financial future.

Today, people are living longer, while company tenure is getting shorter. This means that you’ll have more career changes AND more emergencies than your parents did. While we live more comfortable today than at any other time in history, we haven’t really reduced our financial risk at all. Cars have been around now for decades, yet they cost just as much if not more to fix than ever before. Expenses saved in one area of your life are just replaced by higher expenses in other areas. This is why the emergency fund doesn’t really solve the long-term problem; it’s a stop gap.

The emergency fund never seems to be big enough or last long enough no matter how many financial gurus keep moving the number. And why does the number keep moving? It used to be a three-month emergency fund to cover your expenses (not your take home pay). Now, I hear 9 months to 1 year, especially with all the competition in the job market.

The emergency fund is only as good as the expense it’s trying to cover and your ability to replenish it before the next emergency.

With many families living paycheck to paycheck, building an emergency fund can often involve taking on a side gig to save for this cash cushion.

If you are like most average people who are not wealthy, the only way you make money is by trading in your time. Want more money, you need to give someone more time, who will then give you money.

The problem is that there is only 24 hours within one day. So your time is fixed, thereby fixing how much money you can make to build your emergency fund. The only way to make more money is to find another gig that will give you more money for your time.

Regular cashflow will always beat an emergency fund…

But as soon as you run across your first emergency, all the time you’ve put into building your cushion is immediately cashed in and lost forever. The time you spent building your cushion is a sunk cost and if another emergency comes around before you can rebuild your fund, you are quickly at zero with nothing left but time in the future that’s already been allocated to pay off expenses from today.

This is a terrible way to live and why the emergency fund idea gives me such chills. Yes, you need some savings in an account you can pull from in 48 hours, but the better answer is trading in your time for something that can generate future cashflow forever.

Say you have an extra 10 hours a week to spend earning more money. You can use those hours to get a side gig like driving for Uber and using that money to build your emergency fund. Alternatively, you could trade in that same 10 hours in service to start a second career or business that will pay you future dividends. Imagine starting a dog walking service and building your client list to ten or more dog owners. You could eventually hire an assistant and take them on your rounds then eventually give them more of the business while you take a percent of the fees and still own the company.

The secret here is building an activity that has an exit plan before you even start; one that generates cashflow and allows you to eventually take a more passive role. Regular cashflow will always beat an emergency fund, because it’s auto replenished at some regular interval — maybe once per month, or once per quarter.

The dog walking example is given because it’s completely free to start. But if you have just a few thousand to invest, your options for generating cashflow can become almost infinite. Whether it’s pooling your money to buy an investment property, renting out your vehicle on the weekend, or simply investing in the stock market, once you start generating extra cash regularly and automatically, financial freedom becomes much more realistic. Reality shows us that there is always another emergency around the corner. Constant cashflow is like a forcefield to constantly blow up the barrage of annoying financial surprises.

Two things the wealthy have are multiple streams of income and plenty of insurance. Whatever insurance doesn’t cover is paid for by their streams of income. Even if it can’t be paid in one month, a guaranteed stream of income that may last for years makes everything go a lot smoother financially.

Future cashflow streams are so powerful, people are willing to pay cash upfront to claim them.

Ever hear of buying real estate notes or even music publishers buying the song catalogs of top artists? A strong cashflow stream for many years into the future is what creates financial freedom.

There’s nothing wrong with having an emergency fund, but I’d argue for having the bare minimum necessary, then quickly turning your attention to putting your time into revenue generating activities.

Don’t let the security of having a big emergency fund keep you complacent, thinking your primary income stream will always be there. I’ve seen many people have to switch jobs twice in less than 12 months.

When those emergencies eventually rear their ugly head, you’ll hopefully already be halfway down the field to generating a second reliable income. And you won’t be nearly as stressed about having to rebuild your cash pile from scratch.

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