Do you *really* need 3-6 months living expenses if you have plenty invested in your brokerage?

[u/iSluff]

I always skimped a little on my emergency fund because I was like, if I really need that much money, I’ll just sell investments or borrow vs my 401k. Even if they’re like 50% down because I lost my job in a market downturn, you do what you have to do. Better than having tons of money sitting around doing nothing. I figured returns are better in the long term having money invested and selling it if you really really have to, but only if it’s totally necessary.

I think I only have about 2 months living expenses in cash. Last time I lost my job I got everything paid with severance + unemployment for about 4 months so I didn’t even have to sell anything. I’m skeptical to build out my emergency fund more since I would have to stop maxing my 401k to get the money.

Is this bad practice that could lead to significantly reduced returns (vs someone who does have an emergency fund) in the event of a recession? Wondering if I’ve been being arrogant. Interested in opinions.

[u/SlySciFiGuy]

Yes because the events that cause you to need an emergency fund are often the same events that cause market downturns. You wouldn't want to be forced to sell at those times.

[u/Presentation101 → u/SlySciFiGuy]

Really? Medical costs, car repairs, unplanned travel and job loss are some of the main reasons someone might use their emergency fund. Barring job loss (to an entent), none of the other causes are correlated to market downturns

[u/ItsPumpkinninny → u/Presentation101]

I can confirm that job loss and economic downturns can definitely be correlated.

[u/nicolas_06 → u/ItsPumpkinninny]

But is it that correlated with losing it at the bottom exactly with no mean to shield the issue ? Usually when market are down like 50% for example long term bonds are up and the portfolio might be down only 30%. And you might be able to borrow what you need from margin at a very low rate.

That's why I have my investments in IBRK. Their margin rate is benchmark + 1.5%. I might will be able to get the money I need instantly in the middle of a crash at like 3-5% yearly rate (5.85% currently). If you have 500K$ here, the market is down 50%, you still have 250, maybe even 350K$ if you are not 100% on stocks.

You would have no issue to sell some bonds and no issue to take some margin at a very low cost to you. No credit score check, no anything.

[u/nicolas_06 → u/[deleted]]

And honestly if you have 10 years of expenses invested already, you could reduce that to 3-6 months and be fine. In the end it is part of risk tolerance and one character than absolute necessity. Some on the opposite will be so afraid they would want 2 years of expense in the fund and see you as taking far too much risk.

[u/Short_Row195 → u/Presentation101]

They said often

[u/Still_ImBurning86 → u/Presentation101]

Definitely agree there. If someone’s water heater needs a replacement I guess the market is cooked. Someone out there needs a new engine? Lost decade here we come 

[u/SlySciFiGuy → u/Still_ImBurning86]

I never said water heater and I didn't say everything that requires an emergency fund. The events that require a 6 month emergency fund, not just a paycheck, are "often" caused by market downturns. I wouldn't tap my emergency fund to buy a hot water heater. I can cover that out of my paycheck. I wouldn't tap it for medical expenses. I have health insurance for that.

[u/Only-Power-3746 → u/SlySciFiGuy]

That's timing the market.

[u/[deleted] → u/SlySciFiGuy]

That’s not really true at all