It's been a topic on a couple of threads, and MMM himself recently released a video.
I think emergency savings should be broken up into two categories:
- Unanticipated expenses
- Job loss
Unanticipated ExpensesTo me, credit card all the way. That gives plenty of time to liquidate assets or redirect cash flow as needed. Keep the $ invested!
Job lossThis one is trickier. I think with a high correlation between unemployment rate and prior 12 month stock returns, it is wise to keep in mind that if you need to liquidate stocks to cover a job loss, you are selling low. On the other hand, the chances of losing a job, even during a bad recession, aren't that high.
I met with a financial adviser a month ago. They suggested the typical strategy of higher exposure to stocks while accumulating, and reducing that as you get to distribution and moving wealth into safer investments.
I personally think this is backwards. Until recently I kept 1 year of emergency savings in a combination of cash and treasuries. As I've gotten closer and closer to FI, I've gotten more exposure to stocks. My reasoning? The closer to FI, the impact of job loss and stock market correction is less. Once I am FI, I could lose my job and sail right through a 50% correction, drinking my fine teas and going on long Monday morning walks.
How do you guys like to think about it?