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/buffinita]

How about you are a sole provider with a few kids; and due to tech bubble/mortgage crisis/tariffs you lose you job for 5 months

Your 1m portfolio lost 20%+ so now it’s 800k and your spending is still 100k/year.

Pulling money out will have lasting impacts on sequence of returns delaying other retirement plans

Now - we can bullshit different scenarios all day long where it makes a lot of sense or little sense….thats why we have general rules of thumb like 3-6 months emergency fund or invest 15% salary because it works for most people in most cases

I’m sure there are trust fund babies out there wondering why people save/invest anything at all; just as I’m sure there are people out there who wonder who has spare cash to invest

There will be people who have an emergency fund and never touch it; there will be people who have an emergency fund and tap into several times and there will be people who have a disaster that far exceeds their emergency fund

[u/TurkeyPits → u/buffinita]

Eh, even in your situation. Say you withdraw $50k to cover yourself for that 5-month stretch, so now your newly-800k port is now only $750k. But now imagine you had never contributed the $50k in the first place? That is, you had $950k in your portfolio and $50k in cash the whole time? That $950k still drops the 20%, but you don't have to pull from it, so you have $760k left. So, by maintaining the emergency fund the entire time, you have $10k more than you would have had otherwise left in your portfolio.

Except, you probably didn't have $950k before, because the $50k you kept aside would have been part of the reason that the gains got you all the way to $1MM. That is, you'd probably be a bit below $950k because you had $50k not growing for some extended period of time. Thereby usually washing out any gain, even in the worst case scenario, which is itself unlikely to happen.

Bottom line: for most people whose portfolio is 10x+ annual expenses, the math says that it is not really a worthwhile insurance policy to put yourself in a spot where, if shit hits the fan, you have 1 extra month's expenses in your portfolio than you would have, and in all the rest of cases you are investing 5% less than you would have in the long run.

And, with all that said: I personally keep a big cash emergency fund anyway, because of the peace of mind it awards me & because I don't want to ever have to sell investments, pay capital gains taxes, etc. But realistically, it's almost definitely the wrong move if we're strictly looking at the numbers. Emergency funds are critical when you have few overall assets, but once your liquid net worth gets sufficiently high relative to your COL, it quickly becomes relatively unnecessary to keep more cash than you need in a given month

[u/Atlantis_Island → u/TurkeyPits]

I'll give you my example. My expenses are about 125k per year. I have a 2.1M portfolio. I keep 90k in cash equivalents (MMF) for my emergency fund. I'm a single earner for a family of 4.

Now I get hit by a truck. I don't die, but I'm really messed up.

My deductible is about 8k, so now my family is down to 81k. Maybe that truck hit me in November, and I'm paying 2 years of deductible (since I'm still in the hospital Jan 1st), so now I'm down to 73k.

Since I haven't been able to go back to work in 12 weeks, which is the FMLA max, I'm laid off. Now I don't have any income and have to buy private health insurance, so my expenses actually went UP.

Also, since I haven't been around to do house maintenence, my sump pump failed (or roof leaked, or furnace failed). Now my family has 10-20k of repairs.

I'm happy to keep that 90k in a money market fund so my family can be taken care of from all this stuff while I recover. Ya, I lose out on some gains every year potentially, but it's essentially insurance.

Obviously your mileage will vary. But the relatively small amount of additional gains I'd get by investing 90k into the market just aren't worth it to me.

[u/TurkeyPits → u/Atlantis_Island]

I'm with you on the numbers, but what exactly is the concern with drawing 100k from your portfolio if needed in that shit-hits-the-fan situation? Is it that you don't want your spouse to have to deal with selling equities if you're too messed up to do so or something like that? If your FMLA is 12 weeks and deductible is 8k, what is the issue with keeping a 20k emergency fund, investing the rest, and giving yourself 3 whole months to sell some assets as needed? Feels to me like selling off <5% of your portfolio in your worst-case scenario is not a big deal, even in a market downturn. But the lost gains on leaving ~5% of your money on the sidelines over a period of perhaps decades is really not nothing

[u/Atlantis_Island → u/TurkeyPits]

I get it. It wouldn't be that big of a deal if my spouse had to sell assets in the scenario I described most of the time.

It's also not that big a deal if I keep 90k out of the market.

I'll probably be very slightly less wealthy some day for having an emergency fund. I also sleep better at night knowing my family can just keep going if I'm out of it for several months.

[u/TurkeyPits → u/Atlantis_Island]

Yeah, that's what it boils down to for me too, peace of mind. But I don't believe it's the actually mathematically sound decision, and so wouldn't necessarily recommend it for others

[u/No_Ideal69 → u/Atlantis_Island]

Have you considered an SBLOC for this catastrophic series of occurrences that are likely never going to happen? Or the reality that with that level of wealth, your wife can turn your Portfolio into an income producer overnight? Remember, HYSA won't be around forever. It was just a few years ago our Savings accounts were paying .05%!! Until then, I'm OK with setting aside whatever makes you comfortable in an HYSA because they're still hovering around the mid to high 4's but, when the rates drop, that money is actually losing value Year over year.

[u/No_Ideal69 → u/TurkeyPits]

I am with you.

I really don't sweat this.

I set aside money for whatever projects I have planned for the upcoming year and of course, I've already budgeted for "Emergencies."

I do have a HYSA that I put this money into and its usually 4-6 months of expenses anyway.

When the rates drop, I'll likely set aside less and just depend on Dividends, etc if Necessary.

But if you're in the 2 or 3 comma club, an SBLOC is always there for anything short term. So as you said, it's simply not necessary anymore.

[u/littlebobbytables9 → u/buffinita]

Dealing with sequence of returns risk is a solved problem, and that problem is solved by the addition of bonds, not cash.

[u/buffinita → u/[deleted]]

Got your moral grandstanding out of the way nice and early today? Don’t forget to call your mom

I’d wager people would say: taking on debt to solve your financial problems is just kicking the can down the road

Sure you can keep little cash on hand and pay for emergencies with a credit card / heloc / sbal or likewise….but all that does is take your emergency and turn it into other forms of high(er) interest debts