Is it still worth it to hold emergency savings in cash?
I know that the general consensus is to have a cash emergency fund of ~6 months salary in a savings account in case of any emergency. However with recent inflation (true inflation has been ~15% YOY for past 2 years), if someone held say $100,000 in an emergency fund, that would be worth less than $76,000 today. Given that is it still worth it to hold emergency savings in cash?
Something in the back of my mind makes me think that thebrofessor just answered this ... but I can't find where. Sending up the batsignal in case he wants to participate.
It depends on your wealth level and risk level. Most people would agree that having emergency liquidity is a good thing. Some dollar amounts that you can access immediately, within a day, within a week, etc. without major consequence. Public equities are very liquid, but ... not always without consequence (i.e. needing to sell at a disadvantage).
If you are lightly leveraged anyways and have enough personal wealth, lines of credit can really help to negate some of the need for emergency liquidity. LoC / margin loan / pledged asset line are different and I am not an expert on them. But if it's set up correctly, you can draw on those emergency funds almost as quickly as if you were going to sell securities, without needing to actually sell the securities.
Doesn't work for everyone but it's become a much more popular safety valve in the last few years.
Layne makes good points here. I view emergency liquidity like this: how much money do I need to survive if the market tanks, wife and I lose our jobs and have to pay every insurance deductible simultaneously? Given our skill sets and what I'd imagine is a portable clientele for me, this is about 6mos worth of bills (not 6 months of income, maybe 2 months)
everybody has a different risk tolerance, I don't give much of a fuck about the opportunity cost of keeping cash instead of having it invested as it represents a small % of my folio and there's nothing preventing a bank from calling your credit line and all of a sudden your emergency funds just went to $0
I agree with the above, lines of credit are a good emergency liquidity source for your average finance guy. Get an extra credit card and just put it away.
I definitely wouldn't hold onto 6 months salary in cash, at least 75% of that should be in an investments account you can pull out of if you need. Yes, you could take a 30% hit on the principal, but again, this advice is nuanced towards people making 100k+ instead of those making 30k+ where the six months salary can beclose to their only savings.
Personally I hold $5-10k in a savings account that I don't touch and basically expect to take losses on, but just have as a no questions asked cash source if needed. The rest is in a Fidelity account in mostly safe investments (i.e. SPY, not BTC) that I could pull stuff out of in about 3-5 days if I really needed it. It's unlikely you'd lose your job with 0 notice so I figure better to let it gain 8-10% a year.
As an aside, it's been interesting to watch everyday investors' feelings change about the "regular" behavior of markets. It's been a long time since the S&P 500 was net negative for a calendar year, so it makes it much easier for millennials and younger to believe that "hey sure, there's volatility in the market, but it pretty much always goes up."
I remember in 2008 when the S&P was ... [checks notes] ... down 37% on the year. I even remember 2000 through '02, when the S&P was down each year for three years running. Down 9%, down 12%, down 22%.
I'm not a doomsayer, nor do I have a crystal ball. But these things happen, they have happened in recent memory, and they will happen again at some point for some reason. There's something to be said for designing your personal liquidity structure and risk insulation to at least be cognizant of the likelihood of this happening.
I don't see your point. If stocks go down for a year straight, are you going to pull out of the market? I'm not going to.
Even at two years straight, I'm still going to keep plowing my money in. I wish I had money to buy stocks in 2001 and 2002
VPs, Directors and MDs are let go all the time with zero notice (been through it myself) and it usually takes longer to land somewhere in these positions since you’re more expensive. Mix in a bear market on top of that. You will sleep a lot better at night having a bit more cash on hand, if you are further along in your career and have family obligations.
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