I’ve never been a fan of the idea of keeping a lot of cash set aside.
Be it for emergencies or anything else, sitting on a significant amount of cash is usually just a bad idea. Anyone who has learned about the power of compounding, the time value of money, and the potential for long-term investing in quality assets quickly realizes this. Cash is nothing more than pieces of paper.
Many people think of cash as king.
No. Cash is trash.
Regularly putting my cash to work in high-quality investments helped me build the FIRE Fund. That’s my real-money early retirement stock portfolio. And it generates the five-figure passive dividend income I live off of.
I went from below broke at 27 years old to financially independent and retired at 33. Retiring early is something that I think almost anyone out there can do, as I lay out in The Dividend Mantra Way and 5 Steps To Retire In 5 Years.
If I would sat on a lot of cash all along, I wouldn’t be where I’m now at.
Now, I do think typical people should keep an “emergency fund”.
Keeping 4-6 months’ worth of expenses in liquid cash makes sense for most people. This cash is there as a nice backstop, just in case one were to lose their job or some kind of expensive problem were to suddenly befall them.
This advice is for typical people. And that advice comes from your mainstream financial advisors. Of course, typical people aren’t reading this blog. And I’m not a mainstream guy.
Typical people have jobs. They have homes, cars, and fairly expensive consumer-based lifestyles. They’re living from paycheck to paycheck. Financial independence is not exactly in their everyday vocabulary. Retiring at 30 or 40 years old is not even on their radar.
In that kind of scenario, I think an emergency fund is a good idea.
However, I don’t think an emergency fund is a good idea at all for people who are aiming to achieve financial independence and retire early.
Nor do I think it’s necessary.
If you’re going to achieve FIRE, you’re going to have hundreds of thousands (or potentially millions) of dollars in high-quality, income-producing assets. That’s a given.
Thus, your “emergency fund” is right in front of you. It’s that, umm, gigantic pile of money you’re sitting on.
Moreover, anyone who’s going to achieve FIRE is going to be very fluent with money. They will have greatly reduced their recurring expenses, making the idea (or, at least, size) of an emergency fund far less applicable. Simultaneously, an emergency fund, in this case, might end up simply being the cash they sit on as a buffer for normal day-to-day life.
The average American consumer unit spends more than $5,000 per month. Six months’ worth of expenses would be over $30,000, in that example. That’s a lot of money.
But someone aiming to achieve FIRE is probably spending a fraction of that. My monthly expenses, all-in, average somewhere between $1,400 and $1,500 per month these days. I mean, I can keep a few grand in walking-around money and have two months’ of expenses saved up completely by accident.
Plus, there’s the fact that these low expenses usually contrast against a much higher income. This is because it’s necessary to save a high percentage (50%+) of one’s net income in order to have the regular capital necessary to invest and achieve FIRE. If you’re saving and investing $3,000+ per month, you have a regular stream of substantial cash flow that you could quickly and easily divert toward a different cause.
In addition, it’s often a resourceful and enterprising person that is going after FIRE. They think outside the box. They’re scrappy. And they’re creative. Coming up with a grand or two in short notice should not be a problem.
Plus, there’s always the access to credit. Keeping a few quality credit cards around (with those valuable points) means you probably have mid-four-figure credit available to you, which could be tapped in an emergency.
With all of that working to your advantage, you’d be crazy to sit on cash instead of having it go to work and compound on your behalf.
I’m lazy enough. I don’t need my money to be lazy, too. I’d rather have it out there working hard for me.
Money works 24/7. Money never gets sick, tired, or cold. It’s a machine. And this machine is too powerful to have it collecting dust.
So those are my thoughts on the matter.
But what does Warren Buffett, arguably the greatest investor to ever live, think about this?
We don’t have to wonder. It just so happens that he was recently asked about this.
The question wasn’t laid out in a way that explicitly ties it to early retirement, but Buffett did weigh in on whether or not people who are independently wealthy and retired should keep aside a pile of cash for emergencies.
Talking to Andy Serwer, as part of Serwer’s Influencers series, Buffett was asked how much cash an ordinary investor should have set aside on a percentage basis.
Buffett’s initial response:
It depends on their personal situation. If you’re working in something where you’re living off your paycheck, from week to week, you want to have a little cash around. And you certainly don’t want to have a credit card maxed out.
This is speaking to the typical person here. As I noted above, an emergency fund is a good idea if you’re the average American who’s living from paycheck to paycheck.
Buffett continues, now speaking to someone who’s a level up from your average American:
But if your house is paid off, you don’t have big living expenses, and you’ve got a portfolio of decent, diversified businesses, you don’t really need any cash.
I’d agree with this. If you’re in a good financial position, and you’re not living from paycheck to paycheck, it’s doubtful that you’d find yourself in a position where coming up with $10,000 suddenly would be difficult, even absent a lot of liquidity.
So we’re moving up from one level to another. Buffett then adds to this, finally speaking to those who are financially independent and retired. This is where the Buffett starts to speak to us:
If I were retired – I had, say, a million-dollar portfolio of stocks that was paying me $30,000 a year in dividends or something of the sort, my children had been grown, and the house was paid off, I wouldn’t worry too much about having a lot of cash around.
There you go. That’s your answer on the idea of having an emergency fund within the framework of financial independence and early retirement.
What Buffett is saying here is pretty clear.
An emergency fund is not necessary, or even a particularly good idea, for those aiming to become financially independent and retire early.
Buffett is explicitly telling you that you do not need an emergency fund.
With that said, I do think Buffett’s final answer is targeted toward a person who’s retired in the more traditional sense. You know, in their 60s or 70s.
However, Buffett’s rationale is actually magnified for those who are retired early. That’s due to the time value of money. A million dollars at age 40 is worth a hell of a lot more than a million dollars at age 70. Truth be told, I’d much rather have $500,000 at 40 than $1 million at 70. It’s not even close.
In addition, someone who’s retired early, sitting on a life-changing pile of money that’s paying out a hefty amount of passive income, is almost surely in the kind of physical and mental condition that predisposes them to continue making an active income of some sort – an active income that can serve as its own form of an “emergency fund”.
In fact, I’ve argued before that the early retirement math is moot. Anyone driven and intelligent enough to achieve FIRE is going to be driven and intelligent enough to continue doing cool things and making money. They won’t be content to sit around and just collect money. One could even question how necessary full financial independence is in the first place.
I’ve been saying for years that an emergency fund is a foolish idea for anyone aiming to achieve FIRE. I would have held myself back had I allowed myself to put aside cash to collect dust. I’m very glad I didn’t do that.
But I thought it was very interesting to hear Buffett weigh in on this. And it was nice to hear the man himself agree with what I’ve been saying all along.
If you want to keep an emergency fund, even knowing that it’s to your detriment, because it helps you sleep at night, that’s okay. Some people buy expensive mattresses. Others have emergency funds. Whatever gets you through the night.
But I’m glad to know that Buffett and I are on the same page in this regard.
What do you think? Is an emergency fund necessary within the context of FIRE? Agree with Buffett?
Thanks for reading.
Image courtesy of: DonkeyHotey via Flickr.
P.S. If you’d like to achieve financial independence, which would negate the need for an emergency fund, check out some fantastic resources I personally used on my way to becoming financially free at 33!
On the other hand, in his 2014 shareholder letter, Buffett said that he recommended that the trustee for his wife’s inheritance keep 10% of her assets in short-term treasuries, with the rest in Vanguard funds. The idea was that she wouldn’t have to sell stock investments during a downturn.
JP,
Yeah, that’s part of an asset allocation and broader withdrawal strategy, which would have nothing to do with an emergency fund.
Cheers.
Great article. I’ve always argued that the emergency fund obsession has done a huge disservice to people trying to achieve their financial goals. So called experts advise 6 months living expenses in cash as first step. Really? Someone is going to save $25 or $30k in cash? How long is that going to take & how discouraging is that going to be? How many people are going to give up after a month? Diversification, for the average person means that SOMEWHERE in your portfolio, you have an emergency fund. Secondly, what is an emergency & how often do people experience it ? An emergency is not replacing your car, replacing your furnace or roof, your kid going to college, a last minute vacation trip. An EMERGENCY is very rare and for most people, will never happen. A job loss is about all I can think of., & depending on severance, or pension contribution cash out, that often actually is your emergency fund.
Steve,
Right. Typical people do typical things and require typical advice. In a very typical type of financial situation, having some cash as a backstop probably isn’t a bad idea.
But I’m not typical. My situation isn’t typical. People reading this blog usually aren’t typical. This information isn’t typical. And that final response from Buffett is speaking to more atypical people, as not too many people are walking around with a million bucks in investments.
Best wishes.
Hi Jason,
I agree with you. Having a few credit cards gives you the option for a 28 day float should something come up and cash flow from dividends or recurring income should take care of the rest.
If you have been a good enough planner to get to early retirement then you will be able to use those skills to manage your cash flow on a monthly basis for sure.
-Mike
Mike,
Absolutely. If you’re financially literate enough to get to FIRE in the first place, you’re financially literate enough to manage an emergency. There’s credit, ongoing passive income, inevitable active income, and a massive pile of money/assets that you’re sitting on. Plenty of options. The only bad option is letting cash collect dust.
Best regards!
Great article My wife and I are guilty of having a ridiculously large emergency fund (over 100k). I think this is due to our very humble beginnings (not as humble as yours Jason, but we did have to donate plasma to eat) as well as seeing and surviving wave after wave of corporate layoffs over the past 2 decades. We have been maxing our 401k, IRA and HSA contributions for a while and we contribute monthly to our taxable account. When there are market declines, we have been slowly moving over chunks. Even though this is suboptimal, it allows us both to sleep better at night and we are FI Light at this point. We would be completely FI if we downsized our housing and got down to one vehicle which will be happening in the next few years when my son will be going to college.
joe,
Hey, sleeping well at night is a very nice thing. And if it’s expensive, so be it. I noted that toward the end of the article. If the peace of mind that having liquid cash is what gets you through the night, it is what it is. My brain kind of automatically tries to optimize things. And sitting on a lot of cash like that is definitely suboptimal. But of all of possible the problems to have in life, carrying around too much cash is certainly one of the better ones. 🙂
Best regards.
You’re not typical. The only emergency you can have is some kind of health issue.
Most people have a lot more things that can break. I don’t think you need a huge amount of cash, but most people probably need about $5,000 in their saving account.
We live a modest lifestyle, but we had issues too.
Just this year.
– A bike ran into the back of my car. The repair cost $5,000. I didn’t fix it and pocketed the money so I didn’t really need cash for that.
– Our rental was vacant for 6 months. $1,200/m.
– Our balcony door rotted out – $1,300. Replace rotted window $400.
– My dad had to stay in a hospital for a week. That cost just $1,000, but it was in Thailand. Would have been a lot more expensive in the US.
– An older relative passed away and we contributed $500 to the funeral.
Most people need some padding.
Joe,
Well, I wouldn’t really count a rental property in there. That’s something you should have some reserves for, which is totally separate from an emergency fund that’s designed for your personal life.
As for the rest, there’s nothing in there that you couldn’t handle with your blogging money or access to credit. Cash is unnecessary. Buffett was noting this for a more typical retiree. But I think the rationale is actually magnified for someone in your case, which is also very atypical, since you have so much ongoing active online income (and passive income and the wife’s income…). It’s just nonsensical to have cash collect dust. Very easy to temporarily divert active cash flow away from new investments and over to some of those minor expenses you just listed. Then it’s back to business as usual.
Thanks for stopping in!
Best wishes.
I keep about a thousand for unexpected repairs, but I don’t worry about having money in case I lose my job. My company pays out severance packages to people they lay off, plus they also pay off all unused vacation and sick hours. I have purposely always kept my unused hours very high, as my own form of “emergency fund”. There is also unemployment insurance in America if you get laid off. I used that once in 2001 after I was laid off, and it helped a lot. If worst came to worst I could always sell some of my stocks, but I’d hate to do that.
Tim
Tim,
Thanks for mentioning that. Yeah, I was more than happy to collect unemployment insurance back in 2009, after I was let go from my car dealership job. That saved my life.
That’s another option I didn’t note above. There really are so many options at your disposal. Although, I’d still recommend an emergency fund of some sort for a more typical person living a more typical life. For anyone aiming for FIRE, or already FIRE, cash is trash. Besides, I have yet to meet anyone who’s FIRE and NOT making some kind of active income. The sheer number of blogs and vlogs should tell you that much. Passive income is basically just the foundation. Everyone I’ve ever come into contact with in this space is making much more than just that. Thus, much of the consternation over emergency funds, withdrawal rates, and money in general is totally moot.
Best regards.
Hi Jason,
I’ve been early retired for 12 years and have yet to make a dime in active income. Passive all the way. I did try to start a business, but it’s gone nowhere yet. I know others who also only live off of passive income, so we are out there.
I think I would willingly trade some time to make $1,000 a month. I’d only be willing to put in 5-10 hours a month to do that though. Haven’t found any gig yet with those characteristics.
Joe,
Wow. That’s interesting. I think this is the first time I’ve come across someone in your situation. You’re a rare breed, but I suppose there are exceptions to every rule. As long as you enjoy your life, that’s all that matters. 🙂
I guess I’d say 99% of people who go on to achieve FIRE will make some kind of active income. That’s my perception after all of the comments, emails, in-person meetups, blogs, vlogs, and coaching clients I’ve encountered over almost 10 years now. There are probably a few people at the margin who just collect passive income, but I weigh that against the thousands who aren’t. Thus, I put forth content, ideas, and experiences that will apply to the vast majority of the readership.
Cheers!
I have an “Armageddon” fund of stacks of 5’s and 10’s. Being that I live in the Puget Sound area and we are due for the 300 year quake (9 or above), I don’t want to have it hit and not be able to access any funds with no power and be unable to use a debit or credit card. I’d rather be prepared to have to survive a couple weeks. Peace of mind.
Chickenwizard,
Boy, if the “big one” that I’ve read about actually hits your area, I think cash on hand might be the least of your worries. I certainly hope it doesn’t shake out (pun not intended) like that.
I think there’s value to be had in walking-around money. But as I noted, those who are FIRE (or on their way there) have so many options at their disposal, keeping a big pile of liquid cash around is nonsensical. I’m with Buffett on this one. 🙂
Cheers!
I never needed an emergency fund and probably never will. I have manage things well so I don’t need one. If something were to happen then I will stop investing regularly and between the dividends and rental income take care of the problem. Other than that my money keeps working for me monthly. Good article!
Nandy,
Right. Exactly. Anyone aiming for FIRE should have a very robust cash flow situation. It’s easy to divert cash flow away from investments temporarily, until you take care of the problem and get back to business as usual. Plus, there’s walking-around money, credit, the gigantic pile of assets you’re sitting on, etc. An emergency fund strikes me (and Buffett, obviously) as silly.
Thanks for adding that!
Best regards.
Glad I’m not alone. I don’t keep an emergency fund. I do have a large LOC that I can tap into at any moment though.
Redwan,
You’re definitely not alone. In fact, you’ve got Buffett in your camp. I’d say that’s pretty good company. 🙂
Best wishes!
I still like having an emergency fund, I have done since I first started working for myself 20 years ago. I used to keep 1-2 years aside for worse case scenario sakes and my business slowed or stopped.
A nice way to have an emergency fund whilst not sitting on cash is to use Fixed Deposits (FD). In Malaysia you can get rates of 3.75-4% on FD for 6-12 months but its completely liquid too, just means if you cash in early you don’t get the interest. This is much better than having cash sitting there doing nothing but is available if you really need it. Of course wouldn’t feel comfortable moving a lot of cash to put into a FD.
Adam,
Yeah, that’s a great point there. If you are going to keep a lot of cash around, make sure you’re receiving a competitive yield on that money. If you’re determined to let cash sit around and collect dust, at least put that cash in a situation where it’s collecting less dust than it otherwise would. 🙂
Cheers!
I keep an emergency fund even though I’m aiming for FIRE. Mainly because I ain’t there yet. And having gone into Anti-Money Laundering, I know work in a field that’s dominated by temporary contract positions. I work off 6 month contracts right now. It took me 16 months to get my current job, and a new girl in my office who has experience in financial crime detection told me she’d been searching for 10 months before landing a gig. So I need to keep an emergency fund unless I want to be forced to crawl back to retail banking if my contract expires.
Fortunately, I only keep 6 month worth of NECESSARY expenditures on hand. And fortunately, my expenditures are pretty low considering I live in a HCOL city. If I get laid off and feel that I’m going to be facing lengthy unemployment, I’ll be cutting spending to the bone. And thankfully I’ll be able to apply for unemployment.
Sincerely,
ARB–Angry Retail Banker
ARB,
It took you 16 months to get your current job? That sounds pretty extreme to me, especially in a tight labor market that favors workers. I was only out of work for four months back in 2009, after I lost my car dealership job, and that was in a terrible industry during the Great Recession. Tough to think of a more difficult job market than that. Plus, there was unemployment insurance for me. I didn’t starve or anything. That was probably the only time in my life in which I really could have used an emergency fund, yet I got by without one. Now that I have hundreds of thousands of dollars in assets, a healthy amount of passive income, skills that earn a significant amount of active income from anywhere, access to substantial credit, adaptability, and even some walking-around money, an emergency fund is quite obviously beyond unnecessary.
All that said, sleeping well at night is priceless. If it runs you that big opportunity cost, so be it. I’ve long slept like a baby, but it’s nice to know that Buffett heartily approves. 🙂
Thanks for sharing!
Cheers.
Hi Jason,
No emergency fund for us. Money must be always working either on net positive or net negative basis. My family has lived through currency conversions and hyper inflation. Thus, paper money became very quickly worthless but assets became valuable and some very valuable in the same time period.
If one invests even somewhat wisely, they will be net positive and ultimately very successful almost by default. It is not that complicated.
BTW my portfolio is up to $50k now. Pretty much thanks to your example. I hold about 130 different stocks. Many are not the same as yours, which is okay. The dividend machine is working very well after almost 3 years systematically investing $20 to $200 at a time. Also, the gain on the portfolio is comparable to other funds that don’t actually pay dividend. Very weird. I like the daily dividend part a lot.
Very good article.
Karol,
Thanks for stopping by and adding your thoughts!
We’re totally in agreement. Paper will naturally decrease in real value over the long term. Quality assets will naturally increase in real value over the long term. Not difficult to understand. And not difficult to prosper from this dynamic.
If someone sleeps better at night with a large pile of money sitting beside them, that’s okay. But I think you just need to be cognizant of the cost of that sound sleep and accept it.
I’m with Buffett on this one. 🙂
Best regards.
Don’t follow what Buffet say, follow what he does, As of August 2019 Berkshire Hathaway has about 122 Billions in cash, that almost like 20-30% of the value of the market Cap of the company, Yes it is not emergency fund but it is a cash ready for deployment on the next recession AKA the market on discount cash will become very valuable to acquire assets on discount.
I do hold 10-15% of Cash just to be able to buy Stock when opportunity arise, yes I am losing on return while the market on bull but it will compensate for lower volatility and higher return during the bear markets.
ATM,
He addresses that in the video, in case you didn’t watch. I wouldn’t compare what an individual needs to what a $500 billion company (with significant insurance exposure) needs. Apples and oranges.
Yeah, you can definitely hold a good chunk of cash for opportunities in your portfolio. But that’s not an emergency fund. You’re conflating the two ideas. I could have held a lot of cash like that in the portfolio (and/or a sizable emergency fund) over the last decade, but I wouldn’t be where I’m now at. I accumulated while the accumulating was good. Now I’m able to enjoy my life. Either way, I’m with Buffett on the emergency fund concept.
Cheers!
Thanks Jason for the kind reply, After watching the video he put things into better prospect. I agree with Buffett for the individual with good money management and having fully diversified portfolio like your case Emergency fund is not necessary.
Hi Jason. I never really had an emergency fund. Back in my 20s ( over 30 years ago ) I thought what could possibly happen that I would need money today ? Hmm food, gas for my car to get to work that’s about it. Everyone has their own vision of what an emergency is and some people worry about things that may never happen. If you truly need momey assets ( stocks ) can be sold and in 3 days be in your acct for use. I would say most people can get by for 3 days with little or no money. Thats normal for us I dont need money every day.
If you go to a hospital ( emergency ) they bill you. If your car breaks down it never gets fixed the same day. I do my own home repairs but I know it takes weeks to get a handyman in to do anything.
So my question always is what really is a true emergency ?
In all I generally keep about $100 cash in my wallet plenty for food and gas for a few days if needed.
Bob
Bob,
Totally agree. Someone else earlier up in the comment thread noted something similar. I actually wanted to discuss this in the article, but I felt like it was going to stray too much from the central theme.
The odds of needing something like, say, $10,000 by the end of the day – it’s almost unimaginable. And even if it were required, those who are fairly well off with money (i.e., those not living paycheck to paycheck) are gonna be able to get that rounded up, even absent a lot of liquidity. I just don’t get the purpose of an emergency fund. I think it’s silly.
Those who I’ve run into who are most worried about something like this, tend to be more worried in general. They’re the people who suffer from “One More Year Syndrome” and stockpile money for a day they’re never gonna see. I think it might have something to do with being an optimist that I never saw much use for an emergency fund, and it might be why Buffett was so dismissive of the concept. If you’re more of a pessimist, an emergency fund might make more sense. Maybe it depends on your worldview?
The only time in my life that I ever could have actually used an emergency fund, back in 2009, I found myself getting by just fine without one. And now that I’m far wealthier and more adaptable, I see even less use for it.
If you’re living paycheck to paycheck, I get why you might want to have some money set aside. For everyone else, it’s nonsensical. And if you are living paycheck to paycheck, you need to figure out how to change that situation and eliminate the need for an emergency fund.
Best regards.
Hi Jason,
I think you wrote everything important in your article. When I was reading it I thought to myself how important I find and found an emergency fund. A lot of people worldwide think about it.
Today I only have some small money on my accounts. One account for the normal living including the VAT I have to pay Germany for my active income. A second account on a different bank, where also is my first brokerage account. On this account I have 3 – 5.000 EUROs, but the main reason is to pay quarterly pre-taxes and everything around the taxes. So the states set me in the situation, that I have some money on the account.
So what can happen? I´m FI, so if I don´t find a project nothing happens. But I can´t remember the last two years after getting FI, when this happens. A broken washing-machine? I don´t know what else? I don´t own a house, have no car and travelling is nothing essential. I simple don´t know why I should have additional money I don´t invest in assets.
Warren Buffet stated correct, if you don´t have any assets and you count 100% on your active money you need some extra money. Yes, I see it and I would have may be 5.000 EUROs in cash. But not 6 months of cost of living. This is ridiculous and too much thinking to be safe.
I simple don´t know a situation where I have to pay exactly now anything, what needs a high amount of money. You always have time to react. In the meantime you earn some money, you can reorganise your existing money, you have passive income you simple don´t reinvest and spend instead for the negative issue.
If you have a big house, liabilities and may be one or more big expensive cars you have to spend a lot every month, an emergency fund might be useful. But these are things I always avoided. And if you have income far over your expenses an emergency fund is not a question.
If I get more passive in the future and doe not have that much active income I have nowadays I also can decrease the small amounts on my accounts and have only 2.000 EUROs overall there because I don´t have to pay so many taxes. If you are FI an emergency fund isn´t a question of priority, maximum of luxury if you need that for your well being.
Best regards
Oliver
Oliver,
“I simple don´t know a situation where I have to pay exactly now anything, what needs a high amount of money. You always have time to react. In the meantime you earn some money, you can reorganise your existing money, you have passive income you simple don´t reinvest and spend instead for the negative issue.”
Absolutely. That’s really the crux of the matter right there. It’s very easy to temporarily divert excess cash flow over to a problem. Anyone in this community (the “You” in the title of the article) has regular excess free cash flow. A lot of it, usually. We’re not living paycheck to paycheck here. Besides the excess free cash flow, you have the assets, access to credit, a flexible/creative mindset, whatever cash you might have as walking-around money, etc.
If you feel the need to roll around a lot of cash in a wheelbarrow behind you for some kind of mysterious boogeyman that might sneak up on you on one day, go for it. But it’s not a very good idea.
Thanks for adding that!
Best regards.
When most people think of emergency funds, they think of cash. But it’s better if you maintain emergency assets instead, which are assets that can easily be converted to cash it you need it. You can put these assets to work making money, while still having access to it in an emergency.
Scott,
Definitely. I noted that in the article:
“Thus, your “emergency fund” is right in front of you. It’s that, umm, gigantic pile of money you’re sitting on.”
My FIRE Fund could work as an emergency fund just fine.
But that would actually be a last resort for me. Credit, for instance, is practically free right now. I see cards offering no interest for almost two years. After factoring in the opportunity cost, it’s a no-brainer to choose that over dipping into assets.
Cheers!
Great article Jason, I am seeing the wisdom of his / your words. I am slowly adjusting to this way of thinking now that I am not a small business owner that deals with physical product / invoices. In the old days, I would have up to 8 years worth of expenses sitting in cash, but I also would have huge invoices come due that would need to get paid. At one point I thought to myself… ‘this is crazy to have so much cash sitting in my checking account’, so I started investing some of it while waiting to pay off my credit cards / invoices. I founds some bond proxies and other vehicles for the immediate needs, and put the rest into a diverse group of income generating or growth stocks. Talk about throwing some rocket fuel on my accounts. Time and compounding interest are truly the 8th / 9th wonders of the (investing) universe, so I hope more people heed the call to reduce cash holdings (within reason) and make their money work for them 24/7/365. I did a fun exercise this morning and calculated how much I actually earn every day of the year between all revenue sources (a bunch of which are locked up for 7.5 years) and I got $511.64. I am now keeping $10k in my cash fund at all times and deploying the rest of what I used to hold on to to pay down my mortgage as fast as possible, especially since the interest is front loaded. Compounding works for (divis / interest) or against (interest in debt) us, so I am heeding your call to cash out of my cash, and get compounding!
Andrew,
Thanks a lot!
If you have some kind of business with physical inventory, that might be a different story. Buffett was obviously speaking about someone’s personal financial situation, which I was mirroring with my own thoughts on the matter. But eight years of expenses in cash, even in that situation, is pretty hefty. Glad you were able to get some of that working for you.
Compounding is something we definitely want working for us as much and as often as possible. 🙂
Best wishes!
In the early stages I was right there with you, only have a 1 to 2 month “emergency” fund, which was really just our working budget of covering next months expenses with that months income. I wanted each available dollar to invest working as hard and as soon as possible. Now in the middle stages, with a decent net worth but still several years out from our FI goals, I keep a chunk of cash in a money market account yielding ~2%. This doubles as an emergency fund as well as an attractive-investment-opportunity fund. We’re still investing regularly each month but now have cash to be aggressive if/when a downturn occurs. This took a few years to build out though which is one of the reasons I agree it doesn’t make sense for people just starting out.
Michael,
Thanks for sharing!
It really depends on one’s individual comfort level with cash. As Buffett states (which I agree with), it’s totally unnecessary to have an amergency fund for someone in your situation. But if you need that money for peace of mind and a good night’s sleep, so be it. But the 2% is obviously expensive on the opportunity cost side compared to what that historically can do over the long term.
Best regards.
Great article!
I use to be in the camp that would set aside 3-6 months for an emergency fund. The “problem” I found I had was as I was setting aside money, I would always “dip” into it to invest in my dividend portfolio haha. Also, there has been not one emergency in my life that $500-$1000 couldn’t handle.
To help me sleep at night, 2 months in a interest bearing account is good enough for me. I am traveling to Europe next yr in which I see as an investment so I have an account for travel. I sit aside a portion of my rental property income in case of an rental emergency. Then I have another savings just for if I’m short on money for the month (< $500). I use the Acorns app to invest my loose change. Everything else gets invested into my DG portfolio!
I agree that if an emergency did occur just temporarily hold off on investing and use that capital for said emergency. Credit cards are there if needed and you can sell shares of stock (last resort). Some downsizing would get me to FI much faster, but I'm for sure on the right track. After reading this post I feel way better about my emergency fund or lack there of.
Cedric,
That’s good stuff. Thanks for sharing!
Sounds like you found the right fit for your situation. And you’re absolutely right. There are a number of options available to you in case you really did need to come up with a grand or two on the spot (which is actually quite unlikely anyway). Redirecting free cash flow, credit, asset sales, etc. Having the two months’ worth of expenses set aside helps, too. I’ve been at this for 10 years now. Have yet to come across any kind of situation that suddenly required me to come up with a substantial amount of money out of the blue.
Cheers!
Jason, truly great article, it’s opened my mind to my use of an emergency fund.
I’d love to hear more (maybe an article 😁) from you on how health insurance is handled living internationally. To me, that seems like the biggest expense that one would need an emergency fund for.
Secondly, while this is not an “emergency “, I am stock piling cash in anticipation of a recession in the next 18 months. I know the common advice is to not time the market. But I’m having a hard time putting much money into this market. Sure, there are value equities out there as you write about every Sunday. I’m thinking though having the cash earn 2% in liquid savings while waiting for it’s “forever home” (i.e., in cheaply bought dividend growth and dividend paying stocks) is best. Sure I’m putting some cash flow in frequently but the big money is on the side lines and is essentially an emergency fund in the sense of a cash pile but will be used for an emergency marker drop condition lol. Your thoughts?
JPK,
I’ve actually already covered what I do for health insurance while living in Thailand:
https://www.mrfreeat33.com/three-reasons-why-i-dont-have-or-want-health-insurance/
For perspective, here’s my personal experience (including costs) with a local private hospital:
https://www.mrfreeat33.com/my-recent-experience-with-visiting-a-hospital-in-chiang-mai-thailand/
Healthcare runs between 50% and 90% less here (depending on what it is you’re looking at) than in the States. That’s just a taste of the power of geographic arbitrage for you.
As for keeping cash on the side and timing the market, it would have nothing to do with an emergency fund. In that regard, I’ve always been an advocate of time in the market over timing the market:
https://www.dividendmantra.com/2015/08/time-in-the-market-trumps-timing-the-market-for-the-long-term-investor/
I’ve been hearing this same kind of story (market’s too high, keep a lot of dry powder, etc.) from some readers for more than five years now. Even a broken clock is correct twice a day, though.
Cheers!