4 ms·

How is this not logical or financially wise ? It is common advice to have an emergency fund equal to several months of expenses in cash. What is the alternati

How is this not logical or financially wise ? 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?

aoeusnth1 4y ago
Minimum buffer / maximizing investments in ETFs has higher EV and depending on your time horizon and model, may even be lower risk.
- throwawayarnty 4y ago
  This strategy essentially ensures that you will never have much capital ready for when stocks and other assets suddenly get cheap. Your strategy means that the best time to buy assets correlates with when your net worth dips then lowest.
  - aoeusnth1 4y ago
    Do you try to time the market? Holding cash waiting for stocks to "get cheap" is a losing strategy unless you have some serious edge.
lmm 4y ago
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.
- throwawayarnty 4y ago
  To think one would ever have three months savings in cash sounds insane to me. 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.
- evandijk70 4y ago
  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?
  - lmm 4y ago
    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.

How is this not logical or financially wise ? 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?

aoeusnth1 4y ago

Minimum buffer / maximizing investments in ETFs has higher EV and depending on your time horizon and model, may even be lower risk.

throwawayarnty 4y ago
This strategy essentially ensures that you will never have much capital ready for when stocks and other assets suddenly get cheap. Your strategy means that the best time to buy assets correlates with when your net worth dips then lowest.
- aoeusnth1 4y ago
  Do you try to time the market? Holding cash waiting for stocks to "get cheap" is a losing strategy unless you have some serious edge.

lmm 4y ago

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.

throwawayarnty 4y ago
To think one would ever have three months savings in cash sounds insane to me. 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.
evandijk70 4y ago
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?
- lmm 4y ago
  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.