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.
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.
Betterment recommends 30% margin: https://www.betterment.com/resources/funding-a-safety-net-ca...
Neither of those are stocks.
Bonds are (usually) less volatile than stocks, but yeah, be careful about using them for short-term emergency funds.
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.
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.
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.
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.
yeah, so you're still ahead of the game if you had it saved.
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.
It is common advice to have an emergency fund equal to several months of expenses in cash.
What is the alternative ? Having no emergency fund?
In the USA unexpected expenses (beyond monthly savings) can completely wipe a three month savings in a heartbeat.
Add to that getting laid off during a recession and you’re in for real pain.
I guess it’s just been 12 years since people ever had to deal with a bad economy.
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?
(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.
Your strategy means that the best time to buy assets correlates with when your net worth dips then lowest.
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.
Even Warren Buffet always keeps at least something like a fifth of his investments in cash. Otherwise how the hell are you going to buy low?
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.