The best gift that you can give to yourself is also an important investment asset: an appropriately funded emergency reserve. Since The Great Depression, the US economy has had 14 recessions. A recession is characterized by lower economic output and higher unemployment. Capitalistic systems depend on periods of economic growth, during which economic output is unusually high, and unemployment is low. These periods are sometimes referred to as economic booms. During these times, the psychology of many economic participants has been referred to as “irrational exuberance.” Economic booms always have an end which is marked by the start of an economic pullback or recession. Trees don’t grow to the moon and economic booms always come to an end. Currently, we are in the largest economic boom in American history. Since the great Recession in 2008-2009, we have had consistent and high economic growth and low unemployment. While this growth might continue for 5-10 years, it’s always prudent to prepare for an employment or other emergency which could be created as a part of an economic pullback. This involves putting aside 9 months to 1 year of personal expenses in a short-term liquid investment asset.
Establishing an emergency fund is so important for so many practical reasons, but the biggest benefit is psychological. The emergency fund gives you peace of mind as you pursue your career and live your life. How stressful is it to live paycheck to paycheck while trying to pay your mortgage, taxes, and life expenses without any savings in the event something happens that prevents you from working? Can you really be your best at work when the stress of losing a job will create financial ruin? No way. The confidence that an emergency fund will give you to be your best, authentic, and creative self at work is critical for a successful, productive career and life. FREE YOURSELF and build an emergency fund!
An emergency fund should be large enough to fund your family expenses for a minimum of 9 months and ideally as much as a year and should be invested in liquid assets. A liquid asset is one that can be accessed immediately without any chance of principal loss. These are cash equivalent assets like a money market funds or a 3-month Treasury Bill. While these assets are earning record low interest, there is almost no risk of any of the principal being lost. Cash as an asset class has an important role as a part of any balance sheet. Warren Buffett’s company, Berkshire Hathaway, currently has 16% of its total assets, $149 billion, in cash equivalents/3-month Treasury Bills. In the event of a large stock market pullback, Mr. Buffett wants quick access to cash to buy positions in companies that will be on sale. For your emergency fund, you would be wise to put 25% in a money market and 75% in a 3-month Treasury Bill which get automatically rolled over on maturity You can buy US Treasury Bills and Notes at auctions without being charged a fee any discount broker.
The best gift you can give yourself, your family and employer is an emergency fund. Your life’s stress will be much lower which will greatly increase your peace of mind, life productivity, creativity, and enjoyment. Free your mind!!