My wife grew up very close to the poverty line, with her parents always just about to lose the house. And she has this anxiety. (Edit: to be clear, she's a successful civil engineer, considered one of the best in her field locally and makes great money- she has nothing to worry about.)
In order to help with it, we have a bank account that our bills come out of that has a little more than 6 months worth of all our bills (mortgage payment included) just sitting there, collecting zero interest. Every time a bill is paid, we top it up to the target amount. If we stop making money today, we don't have to do anything differently for 6 months.
It's not logical or financially wise, but it means that she doesn't worry about money as much. I consider the opportunity cost on the interest we might collect on that money as a bill that I'm happy to pay.
People vastly underestimate the "peace of mind" costs - once those are taken into effect it can suddenly make sense to do things that many consider "financially unwise", such as having a large emergency fund, paying off a mortgage, etc.
And once you do that you can find yourself suddenly feeling much more free - knowing that even if everything goes south room and board is taken care of can give you the courage to take risks you'd not otherwise take, such as starting a business, a family, even moving.
The main thing about "living paycheck to paycheck" that scares me is that feeling of being trapped.
> It's not logical or financially wise
I'm taken aback by this statement. I am in an incredibly similar situation to your wife in terms of growing up and being successful today, and I do this. Granted, I think I'm at 3.5 months, but the point stands.
Sure, the money isn't generating more wealth, but that amount is finite. It's a cushion that should effectively indefinitely and every dollar beyond is vigorously invested. And, should something happen to employment, you use it as a buffer (assuming no severance) and replenish as soon as you're employed again.
I have a friend who helped me get where I am. He makes even more than I do, but financially, I'm more well off than he is because he thinks that every single dollar needs invested -- to the point that despite making the top 2-3% of income for our entire region, he regularly is paying off revolving credit card interest because he isn't equipped to pay a $500 unexpected expense.
Sure, if you invest every single dollar, it's always earning 7-10% on average. But if you have to then pay 20%+ APR on credit cards because you can't handle unexpected expenses, it begs the question whether you're really getting ahead.
Stocks are liquid enough that you can sell enough to pay your credit card off before getting hit with interest. There's no reason to have 6 months worth of expenses in cash just sitting around unless you strongly suspect a crash.
Broad munis and intermediate treasuries are both down 10% YTD, and so are TIPS (though at least those have had inflation adjustments). You might want to check your "emergency fund investment account" lol...
Gains from the past isn't so much the point, but rather when you may need to liquidate. An emergency fund is typically needed at the worst possible time, when the economy isn't good and investments are deflated. That's the liquidity risk you take with anything but cash.
With our system, our bills get paid with the money we have, and then when we make more money, it just goes back to the buffer account. Overflow goes into investing.
Stocks are the definition of not liquid, in that their implied duration is 10+ years at least. How many fools are using stocks as an emergency fund during a tightening cycle that's removing liquidity at the fastest pace since the 1980's?
Having a solid emergency fund is actually pretty wise. Maybe split some of that into something low risk like I-bonds. My wife has similar anxiety, and it took years of financial education to get her comfortable with the idea that we only need a month of backup, and can float the rest on CC until we liquidate other assets.
As someone who went through two recessions, survived multiple layoffs, and had a few medical things, this seems like crazy talk. The general rule of thumb is 6 months of savings. I've known many that didn't follow this rule, and ended up in very bad debt.
Do you need it all sitting in a savings account, though? Inflation ate almost 9% of its value this past year. Granted stocks are down 20% this year, but assuming you don't have to touch it for a while, they should more than recover in a few years (well, assuming no massive global disaster, which seem more and more common lately).
We have a decent amount sitting in our savings account, but not six months worth. But I can liquidate assets to get us the rest of that six months if necessary, and it would take about a week to get that into our bank account.
If you need six months of expenses, you likely got laid off, which means your stocks are likely tanking as well, and it takes longer to get a new job. A cash or bonds emergency fund is perfectly logical. Six months isn't even that much money; in a normal 2% inflation year, that means you're losing less than 0.01% of the amount each month to inflation. The peace of mind is worth that, isn't it?
Personally I have 2 years in cash because I like to take 6+ month sabbaticals between jobs, but even that is a negligible amount due to my expense/income ratio.
This year. Meanwhile it would have missed out on 27% in gains the previous year (and its associated dividends), if I kept it in a bank account.
Also that 20% loss will most likely recover in time. Inflation almost never reverses itself, it only slows down.
There's a reason rich people park most of their money in assets, and not in savings accounts. If they got more returns by keeping it in savings accounts, they would do that.
6 months of basic living expenses isn't "most of their money" for rich people. Ideally it wouldn't be for the rest of us either.
You seem to be thinking I'm against investing altogether - I'm not, but there is a significant risk avoidance in having an emergency fund that is 100% liquid and not tied to market risks.
But you will be liquidating your assets at the worst possible time (assuming the cause for needing to dip into your emergency fund is more systematic than being individually fired and not being able to find another job).
A cautionary tale for you - I burned through 8 months of savings in the 2008 crisis. While the I-Bond isn't subject to market fluctuations, I am glad that my emergency fund was in cash/CDs and not invested. Because it would have lost 40% of it's value just when I needed it the most.
Several months is excessive. Even if you think you might going to spend six months with no income, you don't need six months' expenses in cash - one month's worth in instant access savings (or, sure, half in savings and half in cash under the matress, just in case), two months' in one months' notice savings, and three months' worth in three months' notice savings works just as well and will get you a better return.
What if your car suddenly breaks down and you have to replace it? Is the extra income of investing, let's say, 3 months of expenses really worth it?
Let's say you get 3% in an instant savings account, and 3.5% in a three months' notice savings account. If you never touch that money until your retirement in 30 years, that would give you 0.5 months worth of expenses extra interest.
Compare that to the hassle, extra work to keep track of several savings account, and the added risk in the unlikely event that you do need the money quicker (eg. A broken car, an unexpected medical emergency, whatever). Surely the trade-off must than tip in favor of simply having a bit bigger emergency fund?
You could use that logic to say keep all your savings in cash all the time. What if your roof gets blown off and you suddenly need to replace it? What if your house burns down and you need to buy a new one? The relevant question to ask is when having an extra couple of months' expenses in instant access is going to make the marginal difference. IMO the window between "one months' expenses" and "six months' expenses" is pretty narrow, so it makes more sense to keep one month or so in cash or current account and then invest the rest at the best rates you can.
(e.g. I would say for most people a car probably costs more than three months' expenses, so having that much extra in instant access probably doesn't shift you from "can't buy a new car in cash" to "can buy a new car in cash". Realistically you're (hopefully) insured and you're quite likely to finance your replacement car.)
I've had an "instant access" savings account take 2 months to pay out my money - some kind of AML issue, supposedly. Conversely, a lot of "three months' notice" accounts aren't "you physically can't take money out with less than three months' notice" but rather "if you withdraw with less than three months' notice you sacrifice one year's interest" or similar. I don't find the "hassle of an extra account" to be significant when it's two accounts at the same bank under the same login, but if you do then I would seriously consider having only a notice-requiring savings account.
It's absolutely both of those things. It's financially unwise to take any risks at all with your emergency funds and operating expenses, so having 3-6 months worth locked up is absolutely the best thing you can do.
with the market being as it is, actually very wise to have a lot of cash on hand :) we also operate this way. i could become unemployed today and we buffer enough so that it's not an emergency at all.
I prefer a layered approach - some investments take longer than others to cash out. And some are in between but still provide some return. A ton of cash on hand is probably a bad idea
Should be noted that a significant portion of Berkshire Hathaway's usual cash pile is not for deal making, but as a backstop for their large insurance portfolio.
I have a high yield savings account and interest is 0.75%, 6 withdrawals per month and the transfer completes same day if I need it in an emergency, plus it’s FDIC insured. Same peace of mind plus interest.
In order to help with it, we have a bank account that our bills come out of that has a little more than 6 months worth of all our bills (mortgage payment included) just sitting there, collecting zero interest. Every time a bill is paid, we top it up to the target amount. If we stop making money today, we don't have to do anything differently for 6 months.
It's not logical or financially wise, but it means that she doesn't worry about money as much. I consider the opportunity cost on the interest we might collect on that money as a bill that I'm happy to pay.