In Part 1, we discussed a fairly simple methodology for figuring out how much money to set aside for a financial safety net/tough times fund. We also talked about how building up such a safety net can be a difficult, long term thing, but that it is vastly important.
Remember - it's not just about the apocalypse. Losing a job or having large, unexpected expenses are far more likely events and something that we need to be prepared for, too.
This time around, we're going to talk through what form to keep that safety net in. Stocks? Bonds? Bananas? Pennies? Cash under the mattress?
Since we're talking about a fund of money for uncertain and potentially disastrous times, we want to avoid investing it--no stocks, no bonds. They can and will lose value. Just your luck that you lose your job, crash your car and your safety net stock portfolio goes belly up on the same day. And in the wake of a major event, you'll likely have a hard time moving your shares of Apple or Netflix. Not a lot of demand for those in Bartertown, raggedy man.
Nope, we want most of our safety net in cash or close-to-cash forms. And, like usual, we want some diversity. Here are to options that I consider for the ol' financial reserve:
Cold Hard Cash - Local Currency
physical currency--is king. It's accepted everywhere, anytime, with no
need for a middle man. No need for any kind of grid - a briefcase of
cash works just as well in the middle of the Mojave as it does in
Manhattan. If someone wants your cash, they're going to have to come and take it.
Physical currency has a two big downsides to be aware of.
First up, it doesn't appreciate in value and its buying power will slowly be ravaged by inflation. Put a $100 in a can, shake it up and wait 50 years and you'll still have $100, and it'll be able to buy a whole lot less.
Second up, it has no intrinsic value - it's just paper. Currencies fail regularly. The average life of a fiat currency over the past few hundred years is apparently 27 years. On a long enough timeline, the U.S. dollar (for example) will eventually fail or take a new form of some kind.
Of course, currencies don't typically fail over night - there's a window of opportunity for getting out of your failing currency and into something else, so this is not the deal breaker it's made out to be. Even in a wide scale apocalyptic event, there should be a period before everyone realizes that cash is worthless.
This is where financial adviser types typically recommend keeping your safety net.
Upsides: If you get a good money market savings type account, these days you can actually earn somewhere around 1% in interest, too...not great, but it'll do a bit to offset the damage caused by inflation. In addition, you have the other benefits of a bank account - FDIC insured, ready to transfer to another account or pay bills, and you can typically pull your money out easily, as needed.
Downside of savings account is that your moola is held by a bank. If you want physical currency, most banks only have so much on hand (less than $500k)...and if everyone else wants their money out at the same time, they can quickly run out. The bank also needs to be functional and operational for them to give your money--if they power is out, they'll all be closed.
As we've seen, a financial crisis can entirely wipe out a bank overnight or cause the government to put a freeze on cash withdrawals, which can make it difficult/impossible to pull money out of your savings account in a timely fashion.
You've still got all the currency risk of cash, too - if the USD goes the way of the drachma, it won't matter if your money is in a savings account or not.
Finally, bank accounts get screwed up all the time--whether the bank screws something up and puts a hold on your account or some hacker/scammer gets a hold of your account number and starts fraudulently withdrawing money or charging stuff. Things will eventually get sorted out but it could take days or weeks.
Holding foreign currency can do two things for you.
One, it diversifies away some of your currency risk - if the USD collapses or looses a significant amount of value, that doesn't mean the same will happen to the Swiss Franc or Canadian dollar. When the U.S. dollar is getting hammered, people with large cash holdings routinely move into more stable, so-called safe haven currencies. Same idea here.
Second, if one of your contingency plans involves fleeing to a foreign country, having a stash of their currency would help with that. Most Americans probably aren't planning on becoming refugees and heading to Canada or Mexico, but people all over the world and all through history have fled their homelands for safety elsewhere.
For many, it won't make sense to hold foreign currency in your safety net, but for some, it might. Wanted to call it out as an option.
Precious metals are often seen as the greatest safety net and hedge against economic troubles. As we've seen in recent years, their value is not especially stable - when markets are down, risk averse investors flee into gold and drive up the value. As markets creep back up, demand for gold decreases and the price goes on back down.
This year, gold has gone from $1684, down to $1201 and then back up to the $1400 range it is in this past week. Depending on when you bought in, the USD value of your metals could have gone up or down substantially.
That said, precious metals have some features that continue to make them attractive for a safe haven. I've written about them in the past - here's a good overview on my POV on the subject if you're interested.
Unlike currency, the value of precious metals is not going to erode through inflation and not going to collapse. If the USD collapses and is worth nothing, an ounce of gold will still get you a whole big stack of whatever replaces it.
Because they offset the downsides of cold hard cash, precious metals offer some good diversification for the ol' safety net, while still staying relatively liquid.
Since you're holding them long term as a hedge against an unknown event, the fluctuations in price don't so much matter.
One other thing that I like about PMs - they aren't cash, and you have to sell them to extract value, which makes it harder to dip into that value on a whim. They're still very easy to sell when needed, but you can't crack open the safe and then run to the store to spend on an impulse buy.
Cash in various forms and precious metals are very liquid and universally accepted, two keys for the safety net.
Most tangibles are typically not as liquid and universally valued.
For example, you could
buy up, say a $5,000 comic book and plan on selling that when times got
tight. But, the comic book is not very liquid or universal--it's going
to take time to sell it and the value is going to vary wildly based on
the circumstances and buyer--it'll be pretty worthless to the majority.
Same goes for lots of cool tangibles like custom knives, fancy watches and
high end guns. That Les Baer 1911 is only worth $3300 to the right buyer at
the right time. Head on down to the pawn shop or gun show and you'll likely see a heck of a lot less than that.
If you want to go down the tangibles path, go for things that are useful beforehand, in steady demand or heightened demand in an emergency, and, if needs be, can be sold for break even or better prices in a hurry. A case of PMAGs comes up as a good example. Stuff that carries a premium for collectors value is not.
Divide Up Your Loot
Based on your personal concerns and preferences, you'll need to decide how to divvy up your safety net. If you're worried about financial system collapse, you'll go heavier on currency, precious metals and tangibles and maybe have nothing in your savings. If you're concerned about theft, house fires or enjoy the convenience of a bank account, maybe more in the savings account is better for you.
I don't have a magical mirror the future or into your point of
view and concerns, nor am I a financial adviser, so you're on your own
on how exactly to allocate your safety net.
But, here's a example of what one might look like. This is for a six month, $3k per month in expenses safety net - $18k in total.
Cash: 1 month worth of cash on hand: $3000
Savings Account: 2 months worth: $6000
Precious Metals: 3 months worth: $9000
Someone else might go for more cash and less PMs, or more in the savings account.
Adding to your Safety Net Monthly:
In Part 1, we talked about setting a time frame for building your safety net. In the example above, let's say you wanted to take two years to get to your six month reserve.
When you've figured out how you want to allocate your reserve, we can figure out what we need to save on a monthly basis. Divide the target amount by your time frame for the answer.
Continuing the example above, the monthly amounts saved would be:
Cash: $3000/24 = $125
Savings Account: $6000/24 = $250
Precious Metals: $9000/24 = $375
You can set up automated transfers into a savings account easily, and some PM sellers will put you on a subscription plan where they send you a selected dollar amount of gold or silver every month. Keep the cash in a specific, dedicated place - don't mix it in with your wallet and hope it doesn't get spent.
Make a plan and stay consistent with it, as finances allow.
Got a comment? Let me know!