Warren Buffett on having cash on hand (Emergency Fund)

[muadib]

This is from his 2010 Letter to Shareholders.

 

 

"Over a period of a good many years I have known a great many people who at some time or another have suffered in various ways simply because they did not have ready cash. I have known people who have had to sacrifice some of their holdings in order to have money that was necessary to have at that time.

 

For a good many years your grandfather kept a certain amount of money where he could put his hands on it in very short notice.

 

For a number of years I have made it a point to keep a reserve, should some occasion come where I would need money quickly, without disturbing the money that I have in my business. There have been a couple of occasions when I found it very convenient to go to this fund.

 

Thus, I feel that everyone should have a reserve. I hope it never happens to you, but the chances are that some day you will need money, and need it badly, and with this thought in view, I started a fund by placing $200 in an envelope, with your name on it, when you were married. Each year I added something to it, until there is now $1000 in the fund.

 

Ten years have elapsed since you were married, and this fund is now completed.

 

It is my wish that you place this envelope in your safety deposit box, and keep it for the purpose that it was created for. Should the time come when you need part, I would suggest you use that you use as little as possible, and replace it as soon as possible.

 

You might feel that this should be invested and bring you an income. Forget it – the mental satisfaction of having $1000 laid away where you can put your hands on it it, is worth more than what interest it might bring, especially if you have the investment in something that you could not realize on quickly."

 

[Taryn Ann]

Agree completely on the Emergency Fund, but mostly commented to tell you your name is awesome! Just finished reading the first three!

[Jean]

I'm having some trouble with the emergency fund concept: it's there to give you peace of mind but it is still a thing of balance. It's easy to fall on either of the two extremes: use it too liberally and have it be depleted and hard to fill back or use it too sparingly and not have it come in handful in the very situations when it should. In both those situations, you end up worrying too much where this fund was meant to give you peace of mind.

 

What the fund should be used for comes down to personal decisions and, as I am living it, it varies in regards to your personal present exposure to risk (your current wealth, debt level and the political and economical stability of your neighborhood).

 

I find that most often, in situations where I would have used the fund, I can find a way to make do without really having that money on hand and that the situations where I really wish I had cash on hand are more of the missed opportunities kind (like it would be a good time for this or this investment but I haven't the means for it right now), so more of the nicety than real necessity situations. It may be due to the fact that I try to allow room for emergency expenses in my usual cash-flow (house repairs, medical bill and such things) but, even though I'm holding a safety fund, I'm still not entirely sold on the concept.

 

Which brings the questions: what form does your safety fund take (checking account, cash in an enveloppe, other), what are situations where you'd consider using it and how tied up are your other assets?

 

[Sciread77]

On 3/9/2019 at 5:44 AM, Jean said:

I'm having some trouble with the emergency fund concept: it's there to give you peace of mind but it is still a thing of balance. It's easy to fall on either of the two extremes: use it too liberally and have it be depleted and hard to fill back or use it too sparingly and not have it come in handful in the very situations when it should. In both those situations, you end up worrying too much where this fund was meant to give you peace of mind.

 

What the fund should be used for comes down to personal decisions and, as I am living it, it varies in regards to your personal present exposure to risk (your current wealth, debt level and the political and economical stability of your neighborhood).

 

I find that most often, in situations where I would have used the fund, I can find a way to make do without really having that money on hand and that the situations where I really wish I had cash on hand are more of the missed opportunities kind (like it would be a good time for this or this investment but I haven't the means for it right now), so more of the nicety than real necessity situations. It may be due to the fact that I try to allow room for emergency expenses in my usual cash-flow (house repairs, medical bill and such things) but, even though I'm holding a safety fund, I'm still not entirely sold on the concept.

 

Which brings the questions: what form does your safety fund take (checking account, cash in an enveloppe, other), what are situations where you'd consider using it and how tied up are your other assets?

 

 

I tend to use cash in an envelope for part, but not all, of my emergency fund. I also have a separate account. 

 

I usually hold off and use it for more physical emergencies. In 2k8, for example, the credit freeze really screwed up the commercial paper market and I had to go without some paychecks, and even the money I had in my accounts was problematic as expenses led my local gas stations to resort to cash-only transactions for a while. More recently, while emptying the rest of our storage facility after moving we hit a piece of debris and it killed th tires on the family vehicle. Gotta keep that going or we can’t get to work/school and the money valve shuts off entirely. 

 

Most anything that can be negotiated or budgeted to avoid that stash, we do. That said, sometimes terrible things happen and it takes all you have to keep food in mouths. I’m lucky that the last time I had a situation like that, I didn’t have kids to feed. 

 

In short, it’s there for roughly the bottom 1.5 levels of Maslow’s hierarchy. 

[NymianH]

It's good to have a cash reserve.

It's also good to not have debt so you can build the reserve AND invest. I've definitely been working at that.

BUT.

Without the reserve we had in place here and the severance offered by my previous employer, I'd not have left my job--even though the stress of said job was causing deteriorating health in myself and my family.

 

We do have a minimum limit that we prefer to keep physically on-hand, as far as keeping funds in reserve. But things can also happen to banks and credit unions, such as hackers taking things down so no one can pull their money if they need to use it. This is why the cash + account thing is not a bad plan, in my book.