Millionaire Librarian

One area of my finances I have been poor at managing personally are known as cash reserves and an emergency fund. This money is set aside for unexpected life occurrences. Car repairs, vet bills, and hospital bills all can dig into our cash funds and if there isn’t enough there then you may have to go into debt to float those bills. Therefore, every money guru I know recommends a cash set account aside usually designated in months of expenses. 3 months may be enough if you have steady job, no loans or other financial liabilities, and are single. However, the more financially complex your life is then you will usually want to increase this amount from three months up to a couple of years.

Personally, I keep 6 months of expenses in cash and 18 months in a bond index fund. The bond index fund is more volatile than cash but it also will make some money over the long term. The rest of my money is in stocks which are very volatile but will make the most money over the long term.

You may be asking how I know whether to draw down bonds or stocks in case I need the money? Its mostly common sense. Since I am living entirely off of my investments I spend cash and replace it with stocks if the market is at all time highs or less than 5% percent down. If the market is more than 5% down then I pull from bonds to replace spent cash. Once the market recovers I replace the bonds with stocks and we start again from new.

By holding 2 years of conservative assets in bonds and cash then I should have 2 years for the market to recover. If you have a bleaker outlook on the future then you may wish to have 4 years in conservative assets.

Either way is fine but I feel that for me 2 years of conservative assets protects me enough without giving up too much long term growth (stocks).

If you are unsure what end of spectrum you may be at then try to picture yourself in a falling market due to a radical political environment, a global financial crisis, or a pandemic and keep in mind noone knows when it will change or end. How do you feel? Whatever the negative feeling in your gut you feel then magnify it a few times and that will probably be the reality for you.

There’s no one clear answer for anyone and you will need to meditate on these thought exercises. Personal finance is personal.