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EARLIER THIS YEAR, HumbleDollar unveiled its Two-Minute Checkup. All you need to do is input up to nine pieces of information and it spits out advice covering 10 areas of your financial life. When I tried it, I thought it was great—except for one thing. The amount it suggested my wife and I have in emergency cash was $13,000 higher than what we currently had.
I felt comfortable with the amount of cash we were holding, partly because the interest earned on our emergency fund was so low and I preferred to invest the money instead. But little did I know, the Two-Minute Checkup was more correct than I was.
When stocks went down over the summer, I told myself this was a good opportunity to throw some extra money into the market. It felt to me like stocks were selling at a discount, and I was intent on investing for the long term. I invested the $6,000 limit in my Roth IRA for the current year.
That drove down our cash reserves, but I knew we could replenish our emergency fund over the next few months. We still had enough for four months of living expenses. I felt like I was being an intelligent, rational investor. I was buying when stocks were on sale.
But then we had to pay for a series of costly items. Some were planned, some weren’t. Some we had to pay on short notice. Among other things, we paid for a trip to Orlando, Florida, for a wedding, paid a contractor to install ceiling fans in our house, paid for tickets to Denver to visit the in-laws because we promised we’d go, and paid for a 50-person birthday pool party for the kids.
Suddenly, within the span of a month, we were covering $5,000 of expected and unexpected expenses. We had to dip into our emergency cash to cover much of the cost. A combination of poor planning, coupled with carrying the minimum amount of cash for emergencies, led us to use up a large chunk of our cash savings.
Of course, money isn’t everything, and sometimes we just need to pay up and enjoy ourselves. As the research tells us, treating ourselves to experiences is one of the best investments we can make.
Still, I can’t shake this uneasy feeling. Seeing our cash balance so low has stressed me out. I hate seeing our balance below the cash level I’d set for our family. I feel like our emergency fund is a warm blanket of protection against risk, and every dollar missing is one step closer to the unknown. There’s nothing better than cash for the freedom and safety it provides.
I always planned on having enough cash to cover one or two big unexpected expenses, and I’ve banked on our ability to quickly replenish our cash reserve if we needed to dip into our emergency fund. But the past few months have changed my thinking. Cash isn’t just there for emergencies. It’s also the best asset for spontaneous and fun experiences.
From now on, we’ll be carrying more cash, even if it does just sit there, losing ground to inflation. I’ll get on the same page with my spouse, and get more involved in planning our trips and preparing for large expenses. And, of course, I’ll think twice before using our cash to make a large one-time investment.
Charlie Schafer is an aerospace engineer with an interest in personal finance and investing. His other hobbies include reading widely and homebrewing beer. Charlie lives with his wife and two children in South Philadelphia. His previous articles were Harsh Reminder and A+ for Effort.
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I used to be stressed out about “emergency cash” and my “account balance” when I was locking up all of my money in retirement accounts “for the tax savings.” When I had to do hardship withdrawals for major life events twice in 3 years — with the 10% penalty — then I decided I would just invest in a taxable account next time. Now I have tons of liquidity and no need to carry emergency cash, because my investments could cover years of expenses.
I’m confused about your definition of an emergency expense. I would consider a car repair necessary so you can get to work, or a roof leak that if not fixed would damage your house. What you spent your emergency funds on appear to be “wants”, I would define emergencies as needs.
Maybe I didn’t explain it well.
You are correct, the things I had to pay for were NOT emergency expenses, which was exactly the problem.
The problem was I ONLY had cash for emergency expenses (about 6 months to cover expenses if we all lost our our jobs), and NO other cash available for non-emergencies. I was trying to be “a good investor” and invest heavily for the future.
I now realize that I was too heavily invested and didn’t plan on having enough cash to actually enjoy life.
It was the combination of poor year-long planning my part plus the extremely slim margin for error I made for myself that led to me having to dip more into my emergency savings than I would have liked.
Does that make sense?
A car repair isn’t necessary to get to work if you get a work from home job, and roof leaks are my landlord’s business.
Charlie, thanks for your honesty about your experience. Here’s hoping all remains financially calm at home while you replenish your cash reserves.
Hear, hear!! I’m in the same church, in a different pew, but singing the same hymn. Earlier this year I too went through a stress period of “hey we’re reasonably well off but we have no cash – not good!”. That realization, prompted by the market sell-off, has led to several adjustments. One can indeed be too fully invested.
I still think cash is a terrible investment — I’d rather have to sell stocks at a loss to come up with funds to cover an expense than hold a depreciating asset (cash) for any extended period of time. Plus anyone with halfway decent credit can get $40,000 in a fixed loan within a week, not to mention margin loans at Interactive Brokers at a low rate against stock holdings.