During the years of a booming economy, an urge for prudence doesn’t resonate. Life seems secure when business is thriving, generous commissions are flowing, and unemployment is virtually nonexistent. Meanwhile, holding cash reserves seems unnecessary, even wasteful, when real estate and stock values only rise.
But now that the economy has turned sharply and unemployment has skyrocketed, the argument against saving has flipped to “How can you talk about building up reserves when just getting by is a challenge?”. Many people who now have lowered income and no savings are determined to build up an emergency fund to avoid ever revisiting the desperate place they’re in.
How much do I need to save? Where should I stash the money?
The Wheel Turns
Yosef Hatzaddik was the first to highlight the phenomenon that during times of plenty, it can be challenging to consider a future with hunger, and vice versa. Some mefarshim explain that Pharaoh’s admiration for Yosef was because he was a rare “ro’eh es hanolad”— one who counters the human tendency to live only in the present. As per Yosef’s advice, during times of rain, we must prepare for drought. There’s a never-ending cycle: jobs come and go, businesses rise and fall, people fall ill to hopefully recover, investments boom then falter. Coping with the bad financial times is much easier when cushioned with savings from the good times.
How Much is Enough?
The standard advice is to stash three to six months of family expenses as emergency savings, but your needs may be above or below that range. Those with steady professional jobs often need much less of an income cushion than the real estate agent, salesman, or business owner with a highly cyclical income. Consider also two yungeleit living in the same house, one living in the basement apartment with HUD rental assistance while his upstairs landlord counts on this rent to cover the mortgage. The renter has lower risk and requires fewer savings than the landlord, who has to prepare for the occasional large repair bill and apartment vacancy.
Who’s Your Backup?
Another variable is how much assistance may be available in times of crisis. How secure are insurance coverages and government safety nets? Are there family or friends who are able and willing to lend a financial hand should there be an unexpected need? Everyone’s circumstances and perspectives are different. Some have parents or siblings who would happily carry them during a downturn. Others aren’t able to or don’t want to count on others for help when bumps in the road can be readily planned for. This attitude brings to mind the Brisker saying that often the most costly way of securing something is getting it “free.”
In Case of Financial Fire
Like a fire alarm, emergency funds need to be both completely secure and accessible. Stocks, real estate, and iska loans can’t be reliably liquidated at full value and are not the right parking spots for a real emergency stash. Even bonds (without Federal guarantees) can be unreliable during an economic crash. Although these investments offer higher return rates, the job of emergency funds is to provide protection, not growth or income. Another no-no is counting on lines of credit as a primary source of emergency funding because they can be shut down by lenders at the first signs of stress.
Count On Solid Reliability
For the most part, emergency funds belong in federally guaranteed savings accounts, CDs, secure bonds, or money market accounts. This is not to say that other investments can’t help in a pinch. Someone with significant assets needs a smaller emergency reserve than another person who lacks accumulated wealth. But even the wealthy need (and often maintain significant) cash reserves. A crucial part of preserving wealth is always avoiding the forced sale of assets. The stability provided by a solid financial base enables wise investors to take advantage of opportunities with significant risk with the rest of their funds. Everyone needs some level of liquid cash.
Breaking the Fire Glass
On the other hand, keeping reserves in the family’s general checking accounts often means they’ll get used up on day-to-day expenses. Therefore, it’s sensible to stash emergency reserves in a separate savings account. For an added deterrent, favor CDs that have small penalties for early removal. This tiny pinch acts as does the little glass blocking the trigger for a public fire alarm. It reminds you, “Break the glass—but only if the fire is real.” IRAs also offer a “glass effect” (via the early-withdrawal tax penalty) as does a correctly structured whole life insurance policy (which provides access to cash value via loans but penalizes excessive withdrawals).
A Frustrating Necessity
As noted, it’s very frustrating to keep money in cash during good times, especially considering today’s 0% rates. And building proper cash reserves takes a lot of time and discipline. But giving up on the security of cash reserves is like saving money by skimping on necessary fire protection. You save a few dollars up-front, and a fire may never show up, but it’s not the smart way to make money.
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