Stability fund is essentially an alternative term for “emergency fund”, and it is phrased as such to shift the mindset away from thinking that emergency funds are for emergencies only, and that everything else should either be invested or used in some way to grow wealth. While this approach seems to make sense from a glance, it isn’t the most optimal way to think of what an emergency fund can actually do for you.
It is time to stop thinking of an “emergency fund” as money reserved for emergencies only, but for stability as well.
1. Stability Fund & Investment
The stock market can be volatile at times. You should never invest the money you need in the short term because you never know when the market will go down and when it will rebound back up.
- If the market goes down, the money that you have invested will decrease in value, but you will only realize a loss if you were to sell your investment.
- If you are able to ride out the downturn of the market until your investment rebounds higher than the time you purchased it, this is when growth happens.
So the key here is being able to ride out the downturn of the stock market, and this is more easily doable if you have a sufficient stability fund.
A downturn of the stock market will not bother you as much if you have a sufficient stability fund, since you are still able to meet your day-to-day needs in the short to the medium term. Because of this, you will be less prone to panic buying or panic selling an investment in the stock market, and this ability is crucial to growing your wealth for the long term.
By having a sufficient stability fund, you would be growing your wealth from a position of stability rather than fear.
Here are some posts that further discuss how having a stability fund can benefit you in terms of investing:
2. Stability Fund & Financial Liquidity
Financial liquidity is the amount of money you can access at any given time. This usually comes in the form of the cash you have at hand or the money in your chequing/savings account. Stock market investments, fixed-term deposits, and money tied up in investments typically do not demonstrate your current financial liquidity.
So what is the purpose of demonstrating financial liquidity?
There are times when you would need to provide a proof of financial liquidity to a lender, a financial institution, a visa office, or any other organization, such as in the case of:
- Car loan financing
- House mortgages
- Rent application
- Visa application
The most common document that can be used as proof of financial liquidity is a bank statement spanning over the past few months. Having recent bank statements that show a moderate sum of funds, say, an average of $20,000 would be helpful to these economic and lifestyle pursuits. This would demonstrate to lenders, financial institutions, and visa offices that you possess the funds and financial liquidity to support your desired lifestyle, whether it’s to pay off a car loan, a house mortgage, or to show that you have the capacity to embark in genuine travels in foreign countries where you need a visa.
This is another example of how the term “emergency fund” isn’t the most accurate representation of what it can actually do for you, because these funds isn’t necessarily used to deal with any emergencies, but rather to demonstrate stability where needed.
How Much of a Stability Fund Is Good?
As previously mentioned, a “stability fund” is an essentially a spin-off of the term “emergency fund” to rethink how an emergency fund isn’t only used for emergencies, but also for stability reasons.
If you already have an emergency fund, then you can certainly think of it as your stability fund as well. The general recommendation for an emergency fund is to have around six-months’ worth of salary, but it all comes down to your personal preferences. How much money in your bank account would make you feel good and confident before dipping your toes in any investment activities that carries risks?
Where Should You Keep a Stability Fund?
It’s preferable that a stability fund is kept in an account that is easily accessible at any given time. This could be a chequing or savings account, possibly high-interest ones.
In the U.S. and Canada, a high-interest savings account would typically only yield you at most 2% interests per year, however, it is usually the best option to obtain all of the following three benefits we would like from a stability fund:
- Maximize interest income
- High financial liquidity
- Easily accessible funds at all times