# Keep emergency fund in equities, or always cash account?



## sceach (10 May 2017)

Hello,
Is it a bad idea to keep emergency funds in equities? Should it always be kept in a cash account?
After using all my savings on our new home which we built recently I have again six months living expenses saved as an emergency fund but unfortunately I have it sitting in an unused current account and I am thinking it might be good to hold as equities (I am a complete novice investor).
Thanks,
John


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## aristotle (10 May 2017)

Its not necessarily a bad idea but you have potential issues like the markets crashing 10-20% just at the time you need to cash out. So if you need cash tomorrow then you have to sell today and probably get your money transferred out of your custody account and into a bank account to get it? So that takes a few days.

You say you are a novice investor, I'd stay away from equities until you educate yourself a lot more.


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## so-crates (10 May 2017)

I would vote for bad idea.

Emergency fund should be stable in value and accessible in an emergency.

You put it into equities, the value you take it out at is unknown and unknowable and it may take a few days to access.

If you want to play at equities, set up a fund to do that separate to your emergency fund.


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## Sarenco (10 May 2017)

It's a bad idea.

Your emergency fund should always be held in an interest-bearing, instantly accessible, deposit account.


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## aristotle (10 May 2017)

If you have a credit card then you also have emergency cash cover with that as well. Just don't forget to pay it off quickly.

Very few scenarios where you need cash "instantly".


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## sceach (10 May 2017)

OK thanks. On a related note, when I calculated six months living expenses I excluded rental income which I currently receive as wanted to assume worst case scenario. This make sense or is it too conservative?


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## so-crates (10 May 2017)

Rental income wouldn't be an expense.


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## sceach (10 May 2017)

I know, but what I mean is should i include it as an income...
For clarity my emergency scenario I am looking at is loss of employment.


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## so-crates (10 May 2017)

Are you saying that you based your calculation on a loss of both your primary income and your rental income? If you are then yes, that is sensible. I would actually go further and aim for 6 months net income rather than six months expenses.


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## sceach (10 May 2017)

Yes I calculated it based on loss of employment income of myself and my wife and loss of rental income.
Thanks


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## Brendan Burgess (10 May 2017)

The first issue is accessibility.  As Aristotle has pointed out, there are very few occasions where you need it instantly. If you hold blue chip shares, you can convert them into cash over a few days.  So they are perfectly accessible. 

You seem to have three sources of income - your salary, your wife's and your rental income.  It's very unlikely that all three will stop suddenly at the same time and without notice. If you one of you loses your job, you will probably get a redundancy payment. 

Your income is well in excess of your expenditure as you have managed to save 6 months' expenditure in a very short time. 

You probably have a credit card and while things are good, you should probably ask your lender for an overdraft facility. 

You can comfortably handle the risk of a fall in the value of shares. So, you should probably keep around €3k in cash, and put the rest in an equity based fund. 

You will probably never need it. 

If you are self-employed and your income is volatile, then it would be a different matter, but that does not appear to be the case here. 

Brendan


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## sceach (10 May 2017)

Thanks Brendan, that makes sense.


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## Sarenco (10 May 2017)

Imagine a scenario where we have a particularly acute global recession.  The value of major stock indices plummet by over 50% in less than 6 months and spreads on individual stocks blow out dramatically.  Major banks go bust and credit is strictly rationed.  Unfortunately, yourself, your spouse and your tenant all lose your jobs at the same time.

Only somebody with a very short memory would think that scenario is improbable.

My strong advice is to keep your emergency fund in cash.


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## Brendan Burgess (10 May 2017)

Sarenco said:


> Major banks go bust





Sarenco said:


> My strong advice is to keep your emergency fund in cash.



In such a scenario, you would be better off having a diverse portfolio of equities. They may well fall by 50% but if a bank goes bust, you could well lose 100% of your cash. 

Unless you, your wife and your tenant all work together, it's highly unlikely that you will all lose your jobs at the same time without notice and without a redundancy payment. 

My strong advice is to keep your emergency fund in equities. As you are net savers, you will be building up cash reserves anyway.  

Brendan


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## Sarenco (10 May 2017)

Brendan Burgess said:


> In such a scenario, you would be better off having a diverse portfolio of equities. They may well fall by 50% but if a bank goes bust, you could well lose 100% of your cash.



I couldn't disagree more.

Deposits are guaranteed by the State, up to limit of €100k per depositor, per institution.  The State can issue bonds to fulfil its obligations and can tax its citizens to meet interest and principal payments on those bonds.  Also, the State can access stability funds from the IMF in times of financial distress.

Pretty much all of our banks went bust in the most recent recession.  Bank shareholders were wiped out, depositors were protected.

The risk of the State defaulting on its guarantee obligations to retail depositors is extremely remote.  The risk of stock values plunging by 50% or more within a short period of time, on the other hand, is very real.

The idea that a portfolio of equities, however diversified, is somehow less risky than a State guaranteed bank deposit is, frankly, misplaced.



Brendan Burgess said:


> Unless you, your wife and your tenant all work together, it's highly unlikely that you will all lose your jobs at the same time without notice and without a redundancy payment.



The whole point of an emergency fund is to address low probability, high impact events.

In an acute recession, it is far from improbable that three individuals working for different employers, or even in different industry sectors, could not all lose their jobs at the same time.


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## Brendan Burgess (10 May 2017)

Sarenco said:


> The risk of the State defaulting on its guarantee obligations to retail depositors is extremely remote.





Sarenco said:


> The whole point of an emergency fund is to address low probability, high impact events.



I am not sure that it is as remote as you think.  If the situation you envisage of a severe recession where everyone loses their jobs suddenly and without any redundancy, anything could happen.  It's certainly low probability but it's very high impact. 





Sarenco said:


> In an acute recession, it is far from improbable that three individuals working for different employers, or even in different industry sectors, could not all lose their jobs at the same time.



The husband and wife would have to lose their jobs and neither would get redundancy. And they would have to not get jobs again in the short term. In that situation, then there will be much greater things to worry about. They will be able to stop paying their mortgage(s) and will get by fine. 

Brendan


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## Sarenco (10 May 2017)

Brendan Burgess said:


> If the situation you envisage of a severe recession where everyone loses their jobs suddenly and without any redundancy, anything could happen.



Eh, I didn't say that "everyone" loses their jobs in my scenario.  But, yes, mass unemployment is not at all uncommon during severe recessions.



Brendan Burgess said:


> They will be able to stop paying their mortgage(s) and will get by fine.



Well, you can't eat a house! 

Doctors, lawyers and the taxman also expect to be paid in cash.


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## Brendan Burgess (10 May 2017)

If they have no income,they won't have a tax liability. 

It's unlikely that they would be using lawyers. 


The overall point is that there is an old wives' tale that you must have 6 months' cash in case the world falls apart.  For people in steady employment who have rental property and who are saving, this is excessively conservative and they would be losing out on the potential gains from investing in equities as a result. 

Brendan


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## Sarenco (10 May 2017)

Brendan Burgess said:


> If they have no income,they won't have a tax liability.


Well that's very obviously untrue.

Outstanding taxes was _the_ major cause of bankruptcies during the Great Depression.


Brendan Burgess said:


> It's unlikely that they would be using lawyers.


Unlikely, certainly, but far from impossible.  Bad things happen to good people...

What about doctors' fees?  Medical problems (particularly mental health problems) tend to increase during severe recessions.


Brendan Burgess said:


> For people in steady employment who have rental property and who are saving, this is excessively conservative and they would be losing out on the potential gains from investing in equities as a result.


Strongly disagree.

A reasonable, but not excessive, emergency fund is a pragmatic and rational way of addressing many of life's uncertainties.

The opportunity cost of not investing such a fund in risk assets is modest.  However, the real life cost of not maintaining such a reserve in cash can be dramatic.

The fact that maintaining a reasonable emergency reserve is orthodox financial advice doesn't make it an old wives' tale. 

Far from it.


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## Brendan Burgess (10 May 2017)

Sarenco said:


> Well that's very obviously untrue.
> 
> Outstanding taxes was _the_ major cause of bankruptcies during the Great Depression.



They are both in employment.  They are subject to PAYE. Maybe they are building up a big tax liability by not paying the tax on their rental income.  

Which Great Depression? The recent financial crisis in Ireland? 

I wouldn't have thought that outstanding taxes were the major cause. I would have thought it was property related borrowings, but I have no figures to back it up. 

Brendan


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## DeeKie (10 May 2017)

What about keeping the emergency cash in prize bonds? That's what I was thinking of doing, instead of current account


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## Sarenco (10 May 2017)

Brendan Burgess said:


> They are both in employment.  They are subject to PAYE. Maybe they are building up a big tax liability by not paying the tax on their rental income.


I've no idea about their employment status.

You said "if they have no income, they won't have a tax lability".  That's obviously not necessarily so.


Brendan Burgess said:


> Which Great Depression?


Was there more than one? 

I'm not trying to be smart but if somebody referred to the Great War would you ask which one? 

I would suggest that both phrases have a commonly understood meaning.


Brendan Burgess said:


> I wouldn't have thought that outstanding taxes were the major cause


It's not a controversial statement - it's a well documented historical fact.

As an aside, I would strongly recommend that anybody that is interested in finance (personal or otherwise) devotes some time to read up on the reality of what happened during the Great Depression.  It certainly changed my view of the world and the reality of deep, left tail risks.


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## Sarenco (10 May 2017)

DeeKie said:


> What about keeping the emergency cash in prize bonds? That's what I was thinking of doing, instead of current account



Certainly a better idea than keeping the funds in a current account but I would still recommend keeping those funds in an instantly accessible, interest bearing, deposit account.


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## ixus (11 May 2017)

I'm a Trader by profession. Keeping emergency funds in equities is a terrible idea imho. I would have to aggressively dismiss it and am pretty shocked it is being supported in any form.

The order of safety would go along the lines of:
Short term US debt, up to 2/5/10yr Treasury
German 2/5/10 yr debt.
USD denominated bank account with a top rated bank.
Smaller funds should look at the "safe" banks and spread the funds in short term demand accounts. E.g. BOI over AIB as they have cleared up their book much more strongly.

Equities would be way down the list. Way down.

Edit: A GFC is not needed for a blue chip stock to collapse 50% in value. Check out the movement in the following shares over the last two years. Each would have been viewed as blue chip but have been damaged due to one scandal or another:

VW
Tesco
Deutsche Bank
BHP Billiton
Toshiba


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