If You Were Furloughed, Do You Have Cash?

The current government shutdown is no secret, nor is the difficulties those furloughed are going through financially.  This should be a lesson to the rest of us, though.  Ask yourself this:  What would happen to me if I lost my job and didn't have an income for a period of time?  This, of course, is where an emergency fund comes in and is extremely important.  This piece provides some good, basic advice on an emergency fund, but I'd like to add my own twist.

For one, the basic and classic amounts of 3-6 months or up to a year of living expenses is a good starting place.  But I also think individual comfort and mindset should have a place in determining that amount as well.  For instance, if you have an uneven income, you may feel more comfortable having a larger emergency fund.  The opposite could be true if you have a relatively safe job with a history of not being laid off or slow periods.

Second, I've read online advice that says to put your emergency fund into a low cost index fund so that it grows and keeps up with inflation over time.  I can't stress how terrible I think this idea is.  For one, no one knows what the market will do at any particular time, we just know that it goes through booms and busts and tends to rise over long periods of time.  Why would you want your emergency fund in a vehicle that could drop drastically in value right when you possibly need it?  It's a terrible idea.  Two, although cash currently pays next to nothing, in a pinch, cash is king.  Invested, you need to sell, wait for settlement of the sale, then wait for the funds to hit your bank bank account after transfer.  If the cash is already in a savings account, a simply transfer normally suffices.  It's really as simple as that.

I think a better solution is to adjust your emergency fund over time as your situation changes.  And guess what?  A great time to do this is when your evaluating your plan and making any necessary changes.  It's funny how things can fit together, right?