On the Importance of Emergency Cash

Something has been on my mind recently. I am sure this is the result of the turbulent economic and political times that we live in. I’ve been thinking about that most basic of financial building blocks: The Emergency Fund. Yes, it is so important that I capitalize it.

The Emergency Fund is a simple concept. You squirrel away enough cash to cover your basic living expenses for a period of time. If you are young and carefree, maybe you save up 3 months of living expenses. If you are a family with kids, maybe you save up 6 months of living expenses. If you have a particularly volatile or risky job, you save up 12 months. When I was a financial advisor, this was often the first goal that clients worked towards with regards to saving and investing. And most people understood the need immediately. But some percentage of people I met had an overwhelming aversion to a dedicated emergency fund. I imagine most of the people reading this understand the necessity. For those of you that need some convincing, this post is for you. Feel free to share it.

I get it. Saving up a slug of money and just letting it sit there is about as fun as spending a sunny day waiting for the cable girl to show up. But it is really important. I hope you never experience any financial or life crises. I also know that life is long, and, in the words of Ella Fitzgerald and the Inkspots, “Into each life some rain must fall”. So we might as well plan for it. I have heard many objections:

“I have a big credit card limit. I can charge anything I need”

“I have a home equity line of credit, I can use that”

“I can’t stand to see my money sitting there and losing out to inflation”

To which I say: No, No and too bad.

I’ve talked to several people who were so young and optimistic they just couldn’t imagine a future situation where would need to have a slug of cash around. Here’s a hypothetical example:

“I just can’t imagine a situation where we will need that much cash” - Optimist

“You are displaying a distinct lack of imagination. I could think of a very common situation that would require cash.” - Me (pragmatist?)

“Ok…” - Optimist

“There is a deep recession and you both lose your jobs” - Me

“We are highly trained and very employable, I can’t imagine that it would take us more than a few months to get new jobs.” - Optimist

“Then one of you gets sick.” - Me

“Wow, you are morbid.”, Optimist, “What have we got?”

“I don’t know, cancer?” - Me

“Jeez, you are sadistic and cruel” - Optimist

You get the point. It’s not called an, “I’m Slightly Uncomfortable for a Short Period of Time” Fund. It’s called and Emergency Fund for a reason. I started my career in finance in 2009. I did pro bono work on several cases where people sent their keys back to their bank because they couldn’t make their mortgage payments. I saw some pretty bad personal finance situations. Plus, other life issues tend to come up during times of stress. The last thing you want to worry about when real trouble strikes in your life is if you have enough cash to pay the rent on time. And no, credit cards, home equity lines of credit and the like aren’t good enough. Then you have to worry about staying in the good graces of lenders. And the point is you don’t need more worry. So cash it is.

I think this is particularly important for those of us who are active investors. Periods of financial stress often coincide with overall market declines. These are the periods of time when I would like to be aggressive with my investing. It’s no crime to have no investable cash at a market bottom. But I think it would be a crime if I had to sell securities at depressed prices due to financial stress.

Again, I hope nothing bad happens to you or anyone. I hope you store up some cash in a safe place and it sits there your entire life. Maybe you curse my name on your deathbed for underutilizing your emergency fund. But if you need it, you will happy to have it.

Sometimes things happen…