Many people do not set aside funds for emergencies, which means if something happens that requires immediate cash financing, they would probably turn to borrowing. In borrowing, some just head straight to the bank and take a bank overdraft, while others are a little bit smarter and opt to evaluate available debt opportunities and short-term loans.
However, very few actually know how to get the best deals when it comes to finding short-term financing options. In fact, a recent survey conducted at the heart of London found that not everyone fully understands the terms of a short-term loan. This suggests that people care less about the potential impact on their finances when faced with urgent situations—and only try to focus on solving the problem at hand.
Research shows that saving on spending can take people a step closer towards financial freedom. Nonetheless, the more generalized and acceptable school of thought is the one that ties savvy investing to financial freedom. In any case, you will barely come across a public figure who amassed their wealth by being shrewd in spending.
But then, investing does not imply recklessness. The most successful investors are those that are good at identifying undervalued stocks—a principle that has earned the nickname “The Buffett Way”—due to its association with the legendary value investor Warren Buffett (Trades, Portfolio) and the book “The Warren Buffett Way”.
Therefore, it appears as though the idea of saving/cutting costs is present on both spending and investing. This means that when it comes to emergencies, people have the option to evaluate a few alternatives. At times, they will come across debt products with competing rates, which could appear very attractive, but for those with experience in investing in the stock market, they could get a better deal.
The idea is rather than keeping your money in the bank for a tepid fixed deposit interest rate, you could put a good chunk of that money in low-risk stocks that have a decent return, as well as a dividend to cap it. Nine out of ten times, your investments in stocks are likely to yield better returns on your funds than cash at the bank.
In addition, when it comes to cashing out some of your stake in a stock in order to settle an emergency, the cost is likely to be lower as compared to the potential cost of borrowing. Furthermore, unless it is absolutely necessary, you may not need to repurchase the stock after cashing out—with debt financing, you must pay that money back.
What’s the downside of using investment in stocks for emergency funds?
While investment in stocks may offer a good alternative for emergency funds, it may not be as easy to retrieve the money, as is the case of cash at a bank or a short-term loan. With short-term loans, you can apply and receive your money the same day, whereas with stocks, you would have to sell them first and wait for processing to your bank account. This could take a few days, depending on how quickly you find a buyer for your shares, plus the T+3 Rule.
In addition, when it comes to cashing in on your investments to settle an emergency, you might be forced to sell your shares at a loss, in which case the cost might end up being higher than what you could have been charged in the short-term loans market.
You could also find yourself in a dilemma on whether or not to sell a stock which seems destined for more upward movement. This could cause further delays in processing the funds to settle the emergency at hand.
Conclusion
In summary, it is important to evaluate all the available options when determining where to get finances to settle an emergency.
Not everyone has an emergency fund set somewhere for such scenarios, but when faced with the problem—the stock market could always offer an interesting alternative.
Disclosure: I have no position in any stock or commodity mentioned in this article.
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