Comments on: You Don’t Need Cash

Comment on You Don’t Need Cash by: Brian

Wed, 07 Sep 2005 13:55:57 +0000

My point is not that I will be better off in all circumstances — but that, chances are, I will be better off. I think it’s reasonable to expect an average return of 8%. Of course, this 8% is “lumpy” — I could have to cash out at the bottom in a worst case scenario. But, the probability of that happening is very small — especially if you own a well-diversified portfolio and, over time, you become overcapitalized through your higher returns.

Of course, if you are in a very cyclical industry, fear that you may be fired soon, and won’t be able to find another job soon you should keep more cash on hand.

There is no certainty in the strategies I recommend — there is risk. However, the upside is much bigger than the downside and has greater probability of occuring. I think that makes the strategy a good one.

On a side note: I couldn’t agree more that people need to understand themselves and their individual circumstances before they undertake any strategy. Thanks for your comments.

Comment on You Don’t Need Cash by: baselle

Wed, 07 Sep 2005 04:31:13 +0000

Aren’t you forgetting human nature? Your plan is fine for you, because apparently you aren’t jumpy about your investments (you’re planning on an 8% average rate of return - my rates of return tend to be lumpy), your sense of timing is superb (your emergency doesn’t correlate with a sharp investment down turn), you have the discipline, and your line of work is a hot one, with little outsourcing and loads of choices.

All of those ingredients are woefully lacking in 90% of American households.

That being said, once you decide on the size of an emergency fund and fund it fully, its time to invest. I think one can have too big an emergency fund if one is the sort to believe that a six month emergency fund gives one six months of stalling.

Comment on You Don’t Need Cash by: » Carnival of Personal Finance #12 by Blueprint for Financial Prosperity

Tue, 06 Sep 2005 18:30:18 +0000

[…] Want a reason not to save six month in your emergency fund? Financial Reference gives some good reasons why that is too much. He argues that having that amount in lines of credit is sufficient in most cases if you have the discipline… read on to hear the argument. […]

Comment on You Don’t Need Cash by: Apprentice

Tue, 06 Sep 2005 14:11:16 +0000

I also disagree with the standard convention that 6 months of expenses need to be kept in a liquid account. An emergency fund, to me, should be reserved for dire straits. I have a goal of setting aside 3 months of expenses in a separate brokerage account as monies I can access in 3 - 5 days. I am keeping a slush fund of $1,000 for smaller emergencies in a savings account, and feel that this should be enough to sustain us in the 3 - 5 day interim.

I’ve also recently been unemployed for two long stretches (nine and seven months) in a 24 month period. In each case I did not have to dig into savings.

So, I would recommend a staged approach for emergencies. A small line of credit as overdraft protection, a slush fund for day-to-day “emergencies”, and a true emergency fund that can be liquidated and accessed in 3 - 5 business days.

Note: I disagree that emergencies should be funded with a line of credit.

Apprentice
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