I keep $20k liquid cash as an emergency fund, which is close to a year's expenses.
- single income family
- responsible for wife and child if a job loss occurs
- don't agree with leveraging debt as a financial plan, especially in an emergency
The opportunity cost of not having it elswhere doesn't bridge the gap of risk for me. Life's not a spreadsheet, and this is an area where the math doesn't fit into my plan.
Just my 2 cents.
Drew, are you saying that you keep that money to self-insure against a job loss/income loss that may last 12 months? If this is the case, let's make the math easy and say you have yourself about $2,000 per month in the event that you lose your income. Why not consider that as a 10-month income stream in which you actually only need $2,000 per month for 10 months? That allows you to invest, at least come, of that money in something with a slightly higher return than a savings account. You could ladder CD's, invest half in a low-volatility/low-return ETF, or some other version?
I guess as a percentage of your total net worth that $20,000 might be small enough that you don't mind it losing value to inflation, but in my case that is a lot of potential earnings being left on the table. I agree that life is not a spread sheet, life is a measured risk. I am not advocating that you, or the OP, spend that emergency fund down, but rather to consider if you need the entirety of that sum always available in cash?
FWIW, we keep a small portion of our emergency fund in an online savings account earning 0.75% at the moment, with the balance in a CD earning a promotional rate of 5%. If we have an emergency we will first use our surplus income that would normally go into savings, then if needed we will draw on the few thousand in cash in the online savings account, and if that doesn't take care of it we will cash out our CD paying a penalty equal to 2 months interest, and if that still isn't enough.....well then we start liquidating the investments whether we want to or not.