Over the past several years, I have consistently kept an emergency fund. I’ve been comfortable with about three to four months of expenses in the bank. My wife and I both have consistent sources of income so our strategy has been to hold smaller reserves and invest more aggressively.
When the pandemic hit though, I tweaked my strategy. I realized that I was no longer comfortable with three to four months of reserves, I wanted to have more in the neighborhood of six to nine months. Three to four months is probably fine, but I just felt like I’d sleep better at night holding more of an emergency fund.
To clarify, an emergency fund isn’t necessarily all your monthly expenses. It’s just the bare bones amount you need to financially survive for the month. Basically money for food, shelter, and transportation.
Things I never expected to happen in my lifetime happened during this pandemic. Industries that were supposed to be “recession proof”, or at least recession resistant like bars and barbershops, have been completely shut down for weeks and months at a time. Same for restaurants and nail salons.
There’s been mass unemployment, rent moratoriums, and two rounds of stimulus checks. Real estate hit the pause button for a few weeks at the start of the pandemic, and then surged. The stock market plummeted, but quickly vaulted back up. Professional sports stopped for a few months, and then came back—but without fans for the most part.
Cruise ships docked, airlines made major cuts, and the travel industry in general has been hit extremely hard. Many schools have been online only for almost a full year now. Workers who used to go to the office daily are now working exclusively from home. Strange and unpredictable times.
I have to admit, I was caught off guard by this pandemic, as I’m sure you were too. I’ve heard of pandemics happening in the past, but I guess I just assumed they were something that only occurred every few centuries and likely wouldn’t impact my generation.
Whenever a major event occurs, and this pandemic certainly qualifies as a major event, I think it’s important to re-assess our values and goals. As I began the blog with, the pandemic prompted me to increase my reserves.
I discovered that I like having more reserves on hand. Many financial experts and investors make the point that you’re losing money to inflation if you’re holding it in cash. Which taken in a vacuum is true. But life isn’t lived in a vacuum. There is real purpose to holding reserves.
Personal finance, and money in general, doesn’t have to be 100 percent optimization. There is an emotional component too. Money can give us a sense of security that we have enough in reserves if we need it. To me, that’s a valuable piece of security to have.
What good is money if we’re constantly stressing about it? Money is just one of many tools in life to help us. It helps us gain access to resources, obtain food and shelter, leisure, security, and more. It’s a tool.
Increasing my reserves hit on the security aspect for me. It’s now more valuable for me to have six to nine months of reserves than the three to four months I used to carry. I’m not suggesting to hold five years of reserves, but I think six to nine months is perfectly reasonable.
Even though that money isn’t earning much, it accomplishes the bigger goal of giving me security. I’m willing to make that trade to sleep better at night.
