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Comment by ryandrake | Hacker News Reader

Curious, not criticizing: What is your plan if you get sick or laid off, or for some other reason need a large amount of cash immediately? I always thought it was common advice to keep ~6mo living expenses in cash savings for emergencies.

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I don't know about the poster but my investment account gives me access to it as "cash" if I chose to exercise that option, the brokerage essentially loans me the money and briefly and then sells some of the stocks in a pre-arranged priority to cover that cost. The "real" life implementation of this is that my kid's college tuition is auto-deducted from that account, so if the cash on hand balance got to 0 it would liquidate money markets, and then long term stock holdings, to cover the draft.

That said, I personally have tried to balance dividend (income) paying stocks and short term bonds (6months to 1 year) which feeds into the cash balance, so that covers some of it.

If you have a 401k you could potentially borrow against it if absolutely necessary. My plan allows 4% loans in which I pay myself the interest and a very small fee goes to the plan holder. I'm assuming the 6 months of living expenses is an extreme situation.

Well in 2009, during the real estate crash and subsequent Great Recession, people were out of work for a lot longer than 6 months. Of course financial planners don't really talk about those sorts of seismic events. That historically hasn't been an issue for engineers, but there are groups that are disproportionately affected (like older engineers).

Because I'm built the way I am I've always saved in the context of how long I could live on my savings with the goal of increasing that number until it reached infinity. That first level I call 'Raman level retirement' where you could live forever[1] off your savings if you ate only Ramen, up to the the point where you can live off your savings and keep your current lifestyle (which actually takes less income than most people thing), to actually living a more lavish lifestyle without day to day employment.

[1] Of course you intercept the life expectancy line at some point, and you have to build into your model ever increasing health care costs or a one time lump sum to emigrate somewhere that has a national health plan.

Most of my savings is invested in index funds. Pretty much all of them allow you to withdraw the full amount in 3 days or so.

Granted, do you have any idea what such a scenario might look like? Odds are, it can wait. Even large medical operations if you don't have medical insurance (where I live), simply require a modest deposit before they start the operation or expensive procedure. Though I do think they ask for some sort of proof that you have the money on hand.

But, again, most people here have enough money to pay for private healthcare insurance, or they rely on the free state hospitals.

Car, insured. Medical, insured. Bond payments, predictable.

So, I'm trying to figure out a valid plausible scenario where a large amount of "cash" is required in a very short amount of time. Any ideas?

There is a difference between liquid and volatile. Index funds are definitely a liquid instrument, but they are very volatile.

For funds that you know you will need in the next six months to three years, it is recommended to keep the funds in a liquid and very stable investment.

Personally, I use a California (I live in CA) tax free short term bond fund.

What type of expenses do I keep in this kind of fund? Tax payments I know I already owe (capital gains from an IPO for example), child's college tuition payments, planned major house repairs / remodels, pending car purchases, and as others have mentioned six months of living expenses in case of layoff or other emergencies.

Mostly medical costs or getting laid off are the scenarios I'd be worried about. Even if you're insured, medical bills add up and you tend to be billed very soon after care is provided.

In a scenario where you are found at fault in an accident (eventually / as the outcome), both legal fees and the judgment of having to pay out could put immense strain on your fiscal outlook in both the short and long term. Note I picked the word "accident" because it's something that is theoretically insured against but may not be sufficiently mitigated as a personal risk. E.g. umbrella is too small.

Sure, you could liquidate your investments if need be, but you'll get hit with high short-term capital gains taxes if you sell equities you've held for a year or less. If held longer than a year, you'll pay long-term capital gains taxes, which are substantially lower.

Stocks are a pretty liquid asset in those cases. And for things where the need for money is sooner than a sale would go through it could be put on a Amex/credit card and paid at the end of the month. Totally guessing but they've also probably got a fair amount of money in a checking account as their 'cash on hand'.

But stocks are risky. Murphy's Law strikes and your stocks are all down 10% when you need the money the most. That doesn't sound like the way to go for an emergency fund.

You don't put that money in a stock market. And than it goes up by 10%. What's worse?

Either way you've lost money you could have had. Humans tend to be loss averse though.

In both situations you probably have liquid equivalents at hand

Losing 10% is clearly worse than losing 0% while watching someone else (irrelevantly) gain 10%.

It's opportunity cost. If it goes up 10% without putting money. That's 10% you could have had if you made the right decision.

The stock market going down 10%. That's 10% you could have had, if you made the right decision.

Logically its the same. However humans loss averse, which makes one seem worse.

Stocks and bonds of all kinds are available as ETFs that can be sold anytime. And you almost certainly don't need to sell the whole thing at once, so running low on principal value isn't that much of a problem. (Instead it's a tax break.)

https://www.betterment.com/resources/personal-finance/safety...

Even in that unlikely scenario they'd still have access to most of their money, it'd feel pretty bad to have to sell into a 10% loss but it's not the end of the world if it's a true emergency scenario. That's also a manageable risk that you can avoid with well diversified investments.

6 months is usually far too long to keep in direct cash / savings.

I think 2-3 months direct cash/savings/checking is fine, then move excess cash to CDs or something semi-liquid. You totally CAN get money out of CDs, just sometimes lose your interest. If you have some kind of CD ladder or such going on - you can have a new CD coming out every 1-3 months anyway, which will give you the cushion you need after savings run out.

I disagree with this. If you are semi-retired like me, you need to have enough cash on hand to weather a market downturn of 1-3 years. That way you are not selling stocks at fire sale prices to keep a roof over your head and food on the table.

Who said anything about the stock market? Short term CDs usually have a fixed rate, you don't ever sell them at a firesale price.

CD's are terrible investments at the moment. A 1 year CD doesn't offer a much better rate than a FDIC money market account, and I certainly would not invest in a longer term CD at the moment.

When interest rates tanked, I moved all of my CD's to money market accounts when the term was up.

What is key is to only open a money market account at an institution with a long term track record of staying above average on rates compared to thier competition. You want to avoid the institutions which constantly raise and (and then lower) thier rates. Bankrate.com is a good way to research these.

A 1 year CD is a terrible investment, but a lot of 5 year CDs have very generous early withdrawal penalties. Unless you are making over 2% in your FDIC-insured money market account, a 5 year CD is probably a better investment.

The withdrawal penalties can be anywhere from 6 to 30 months interest for a 5 year CD. 6 months seems pretty rare with only a few institutions offering it.

Although pretty much all essentially risk-free investments these days have interest rates so low, you're getting into fine-tuned optimization territory for most people. It's fair that if you have a big wad of cash that you really want to protect from capital losses, it's probably worth putting it in something other than cash. But the gains are minimal.

Get a $30K line of credit with your bank. Don't touch it unless there is an emergency.

Borrow when you need it, then you have some time to figure out what assets to sell to pay it back.

You sell the stocks and bonds and have cash the same or next day. You can also take a home equity loan.

If the market declines significantly, and you're still a long-term bull (inherent to the buy and hold strategy), you probably don't want to sell until the asset recovers.

But is it worth missing out on the potential gains of 6 months' income doing nothing, just so that if you hit an emergency (by definition a rare thing) you don't sell during a down period?

I mean, keeping the money in savings virtually guarantees 'losses' in real terms.

shrug maybe, maybe not. I sometimes have rather low cash reserves; credit cards and a checking account that lets me overdraft for free (via margin borrowing) can give me a bit of liquidity. But credit cards come due every month, and margin borrowing can always result in a margin call, so it certainly does feel like a risk. Having a bit of cash around gives you some peace of mind, but what's that worth depends quite a lot on the individual.

I believe there's a significant risk of deflationary times ahead - the prime rate over the last five years really makes much of that argument for me. It is not a given that keeping the money in a savings account guarantees real losses.

The typical advice is ~6mo in liquid assets. Not cash.

Stock is considered a liquid asset.

If you meet the income requirements (>$116k if single, >$183k if filing jointly), you can contribute up to $5,500 per year into a Roth IRA which can also double as an emergency fund if need-be. You can withdraw all your contributions with zero penalty anytime for any reason. You just can't withdraw your earnings on those contributions without a penalty.

I can put $10K on my CC and not have to pay for 30 days which is plenty of time to cash out investments. I'd rather take the hit on selling low in an emergency then proactively give up gains by having cash sit idle for years.

You sell bonds or near cash equivalents like t bills, gilts , consols etc

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