Reasons to Keep More Than a Six Month Emergency Fund in Cash

“Banks introduced the installment plan. The disappearance of cash and the coming of the credit card changed the shape of life in the United States.”
–Jerzy Kosinski

As Black Monday erupted and people were jumping out of windows, a phrase was born. “Cash is king” posited Per G. Gyllenhammar, the CEO of Volvo. Thus a phrase entered into our lexicon. You can utter that phrase to nearly anyone and get at least some din of recognition.

The typical financial advice that you’ll find is that you should have six months of expenses in cash or liquid assets such as CDs or money market funds. Are there reasons why you might want to keep more than a six-month emergency fund in cash or liquid assets?

Here are reasons you might want to keep an emergency fund with more than six months of expenses.

You’re in a job that requires very specialized skills. If something happens at your current job and you lose it, you might need a while to find a replacement job. In an industry where jobs that use your skills come up infrequently, the average time of unemployment may be higher than usual, so you need to make sure that you have enough cushion to account for that extra time.
You’re anticipating a big purchase in the near future. You should be saving up money each month to fund a car replacement fund. When the time comes, you want to make sure that you can pay cash for a different car, even if you’re not going to tell the salesman that you’re paying cash until after you’ve agreed to the price.

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You can get cash discounts on large purchases. While this maxim doesn’t apply as much for car purchases, since the salesperson has an incentive to get you to sign up for dealer financing, it does apply in other areas. If you’re going to have to have major medical or dental work, you can negotiate the price upfront if you can pay cash. Obviously, this doesn’t work if you’re in the emergency room (although you can probably negotiate a discount off the bill later by paying cash), it does if you’re going to have to have elective work. Another area where this will work is if you’re going to be buying furniture. The showroom salesperson is going to have a hard time walking away from a bunch of Benjamin Franklin portraits sitting in front of him.
You’re value cost averaging. If you receive money in a large payment and want to invest it, you’ll want to dollar value average, which may mean that you keep a larger than usual amount of your money in cash while you work your way into your investments.

While you don’t want to keep all of your assets in cash, unless you have a relatively low amount of assets, it might be worth strategically keeping more than six months of assets in cash if you can leverage that cash into more value than you can invest that cash.

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John Davis

John Davis is a nationally recognized expert on credit reporting, credit scoring, and identity theft. He has written four books about his expertise in the field and has been featured extensively in numerous media outlets such as The Wall Street Journal, The Washington Post, CNN, CBS News, CNBC, Fox Business, and many more. With over 20 years of experience helping consumers understand their credit and identity protection rights, John is passionate about empowering people to take control of their finances. He works with financial institutions to develop consumer-friendly policies that promote financial literacy and responsible borrowing habits.