In our last post on emergency funds, we looked at emergency funds at a very high level. We found that over the period 2003-2018 an emergency fund in the market returned more than an emergency fund in an offset account. But after tax, the offset account did better.
But a fair criticism of this type of analysis is that it looks at a single cohort. That is, one cohort that invested their funds at the beginning of 2003.
An improved approach would be to simulate how an emergency fund might work in the real world for a bunch of different cohorts. Then we can compare the performance of those cohorts and look for broad trends.
So in the post we take a closer look at emergency funds to understand when they’re better off in the market and when they’re better off in an offset account.
If you follow big name financial independence bloggers, you’ll notice that there’s a growing trend advocating we put our emergency fund in the stock market.
The theory is that an emergency fund is for people who don’t have the foresight to manage their money properly. But we’re financial independence enthusiasts, we know what we’re doing.
Although this is correct for most people, we Australians have a unique product that has both the liquidity of a savings accounts and the return of the stock market. It’s the mortgage offset account.
But where’s the best place for our emergency fund? Does the offset account trump the market? And if we don’t have an offset account, can we feel comfortable putting all our money in the stock market?
I’m sure that I’m not the only person that wanted to learn more about the Australian share market, opened up Google, and got smacked in the face with jargon and technical terms.
But why? Surely the fundamentals of investing can’t be that hard to understand.
The cynic in me says that finance professionals like to make the easy sound complex to keep themselves sounding smart in their suits.
Either way, I decided to spend some time explaining the basics of the sharemarket. From ‘what is a share’ to ‘what does an index measure’ to ‘how do unfranked and franked dividends work?’.
This article goes out to anybody who’s had an embarrassingly stupid share market question but was too afraid to ask.