Also, the article title is very different than the actual survey question:
> How much money do you have saved your savings account?
That's a very specific question. A person with $5k in their checking account or a person with $100k in a retirement account might still answer that they have no savings.
My net worth is probably top 5% or so and I haven't even had an open savings account in 10 years. Cash on hand or it's invested in stocks, bonds and my home.
I don't really follow how having money in stocks, bonds and a house is somehow capable of being wiped away by the market when a savings account in a bank wouldn't be in dire straits with such an economic upheaval to render those 3 investments useless
I'm sorry you don't follow, but it should be fairly obvious that stocks can crash, bond markets can collapse, and home prices can plummet, whereas money in FDIC insured savings accounts would only be lost in the event of a catastrophic, country-jeopardizing event, in which case we'll all have bigger problems.
I'm not meaning to attack anyone personally, I just think this survey is trying to suss out what percentage of Americans are in a position such that an economic downturn would hurt them severely.
I also don't know much at all about finances, so take what I'm saying with a jar of salt.
Not even the worst stock crash in history was a 99% drop.
Also, you are almost 100% wrong about the intention of the article. It's not that they're trying to make some point about people's poor asset allocation, it's just sloppy reporting.
If their actual point was that people had too much money invested, wouldn't the most obvious and actionable advice for the "What to Do If Your Savings Fall Short" section be to sell some shares and transfer the cash into a savings account?
It's on you to prove why your financially unwise viewpoint is correct.
I think you're the one who might need an attitude adjustment. Instead of providing reasoning for why cash is necessary, you continue to belittle people who invest their assets.
What? Let's assume he's intelligent and has good diversification (eg. he mentioned bonds, stocks, home, and cash -- probably in a investment account). If all his financial positions got "wiped out" in a broad-sweeping financial collapse, then "cash in savings" would be equally worthless.
In the meantime, he has a home to live in. Plus, most investment accounts give you easy access for withdrawals (eg. debit cards) or the ability to borrow while transfers or sales settle. I fail to see how it's precarious.
You're the second person to say this, but how would "cash in savings" be equally worthless? Maybe I'm not understanding, but it's pretty difficult to actually lose money in a savings account, that's the whole point.
> in a broad-sweeping financial collapse, then "cash in savings" would be equally worthless.
> how would "cash in savings" be equally worthless? Maybe I'm not understanding, but it's pretty difficult to actually lose money in a savings account, that's the whole point.
The cash wouldn't be lost, but it would have reduced purchasing power in a recession. And if inflation is steep, you're actively "losing" money.
It would be "worthless" in the context of long-term investing, because nothing would have long-term worth.
Why would the cash have reduced purchasing power in a recession? Sure, that would be the case if there was high inflation, but that certainly wasn't the case with the 2008 crisis.
You have that backwards, during a recession Cash is King. $10,000 in summer 2009 bought you a hell of a lot more of practically anything than the same amount a year previously.
People with cash on hand in 2009 made out like bandits. Cheap stocks, cheap houses, cheap cars. Everything was cheap, cheap, cheap.
He mentioned having some of the funds as "cash on hand." Let's assume it's some sort of investment (eg. sweep) account, like at Charles Schwab [1]. The funds are FDIC-insured, just like a savings account; they are also just as accessible as a savings account. But they are actually an investment account, from which you can trade stocks, bonds, etc.
Of the (mostly affluent) people I know... none of them possess a traditional savings account. Most use a checking accounts for direct deposit and a brokerage account. There's no reason to have a traditional savings account.
Because the set of events that could "wipe away" your (reasonably-intelligently diversified) assets has a large intersection with the set of events that could "wipe away" your saving account in a bank. Things like nuclear war, global pandemic, etc.
Yes, the FDIC does insure savings accounts, but that's only useful so long as the FDIC exists.
I don't agree! I think much worse things would have to happen to dissolve the FDIC than would have to happen to lose a significant portion of your investments in the bond/stock/real estate markets.
Because in diversified portfolio, to loose it all the following must happen. All listed companies must have completely collapsed. Goverment must have basically collpased to loose all value on the bonds.
If that happens its probably the financial amagedden anyway.
If the stock market falls by 50% i still have 70% of my portfolio. I'm OK with that.
Right but these days there's a lot of correlation between assets and all the big moves happen in response to monetary policy. In an environment where everything doesn't hinge on extremely low interest rates I'm in total agreement, but you're really exposed to policy risk in the market right now.
I agree that many assets are now correlated stocks and bonds for example.
But for a bond to go to absoulte 0, would take a lot.
Also I'm not sure that small increases in the interest rates would that much of a disaster. We've been in situations with low interest rates before, and increments in the interest rate didn't harm stocks in the long term.
In many ways it's a positive indicator, that goverments see a positive future.
When the fed announced that the interest rates were on hold. Stocks went down.
There is a lot of lose money in the system though from low interest rates.
I think you're implicitly doing an asset allocation for the poster.
> Cash on hand or it's invested in stocks, bonds and my home.
That could be $100k on hand in checking, $600k in stocks/bonds, and $200k in home equity, with $0 in a savings account. Asset allocations that don't use savings accounts are not necessarily 'precarious'.
Also, it's worth noting that most financial advisors do not recommend that you keep a significant portion of your assets in savings accounts. Primary reason is that by not being in assets that deliver returns, you are losing money to inflation, even at these low levels of inflation. (Also, you have to save a ton more if you don't let your money multiply.)
You are, as far as I know, entirely correct. I still think the survey was designed specifically to find these people who exist in this manner, and I think your criticisms are valid when placed against the thrust of the survey.
everytime someone says that, I always think of a great quote by Nouriel Roubini:
"asked whether he invests in stocks, he replied, "Not as much these days. I used to have a lot in equities—about 75%—but over the past three years, I’ve had about 95% in cash and 5% in equities. You’re not getting much from savings these days but earning 0% is better than losing 50%."
Since June 2009, when that interview was conducted, the S&P500 has more than doubled, not including dividends, so I hope he switched back or he did, in a sense, "lose" 50%.
Numerous financial experts assert the current valuations within the stock market do not reflect the underlying fundamentals; or, in other words, ZIRP allows for cheap debt in the bond markets which many firms are using to aggressively buy back stock, thereby artificially inflating the market value. Thus, "a correction" is due and his statement is still valid from a conservative investing standpoint.
This is hindsight bias. The markets could have easily went the other way. Market timing is notoriously futile. If you want to play "what if?" and pick arbitrary dates then he could have as easily put his cash position into equities lets say beginning of October 2008? Then his advice would seem very wise indeed.
I agree, market timing is futile. Roubini is unwise not because he lost money, but because he believed he could time the market. Mountains of evidence suggest that the RoR on stocks is positive and higher than that of lower-risk assets, Roubini claimed that the opposite was temporarily true. This is a good example of an attempt at market timing that failed.
Picking arbitrary dates to buy a lot of equities and then not selling them isn't market timing; trying to trade repeatedly on the right dates is. That's how you lose all your money.
that is very true, but a lot of people that couldnt afford to lose money lost that and more (percentage wise) in between march - sept. 2008. Your best bet is to put money in vanguard index funds targeted for your ideal retirement year and check it once a year - but for people that are trading single stocks/options/.etc, i think Roubini is right - he is also 55 so he is and should be a lot more conservative than someone that is in their early 20s/30s
When the market goes down, you can still hold.
Or you can sell before the bottom. I was playing in the market in 2008, I got out after the down lost about 2000. Paid off all my debt, got back in at lower prices! Worked great.
Other commenters weigh in with excellent counters. However, the OP (and I) didn't split between equities and cash.
It would have been very rare for one to have -- while trying to be prudent -- constructed a portfolio of assets across checking accounts, equities, bonds, and primary residence that saw anything like a 50% loss from peak to 2008-crisis trough.
Note that the checking account loss was 0%; bonds did not perform as badly as equities; and in the vast majority of the US, residential RE did not fall 50%. Also note that if one did not choose the absolute generational bottom to liquidate the entire portfolio, the actual losses would have been lesser still. In other words, allocating across a diverse set of assets would have protected from the worst of the downside (while letting you participate in the historic run in equities since).
Irrational fear of volatility is going to have a lot of people retiring much later than they would like, with less money than they would like.
I have less than "recommended" (depending on who you ask) in an emergency fund (but I do still have one). Why? I have a spouse with a large income and it is doubtful crisis will hit us both at once. I also can reduce my spending without a problem in the short term - most of my spending isn't fixed expenses it is experiences that can be curtailed very easily. Someone with a large mortgage may want to keep more in their emergency account - that's all I'm saying. Age has a lot to do with it also - if you are young you can ride out large dips in the market.
If the stock market falls by even just 80%, which is probably the minimum I'd call "wiped out" then things are bad enough that your savings account can't be trusted either.
Market fall of 80% in a portfolio that has been diversified isn't that bad. Say you 50% in shares. It has lost 80% of that 50%. That's not so bad. You still have a chunk of savings.
If goverment bonds loose all their value, it means goverments are close to failing.
If real estate is loosing all its value. It means people have no money to buy houses
If all 3 is going on the same time, some serious stuff is going and I'm not sure your goverment backed account is really that secure.
I think you're confusing loss of value with loss of savings. So if your stocks lose half their value, then you now have "less cash equivalent savings" but you still have savings. Even in the dot com crash (where I was not diversified and had a lot of tech stocks) the reduction in value across the board was, in aggregate, about 70% even though some stocks it was 99.9%. But all of that was "ok" because I didn't need that money to live on, it was "savings".
Similarly with house values, if you own your home outright it doesn't matter if the real estate market crashes, you can still live there. But it might make moving less desirable (or not if you can find a good deal somewhere else).
The article is talking about people who find themselves unable to pay for repairing a vehicle after an accident without going into credit card debt. That can start a spiral into insolvency.
A market crash severe enough to whipe out stocks, bonds, and real estate, is also going to effect fiat currency. In order for the FDIC to actually cover the saving accounts for the defaulted banks, we would have to create many many new dollars.
I really don't see a significant advantage to using a savings account with a bank. Keeping 50k in a checking account vs savings account costs you less than 5$ a month before taxes which is just not worth the effort of opening a second account for someone that's keeping 50k cash on hand.
> You're exactly the kind of person this article is pointing out, because your ability to be wiped away by the market is a precarious position to be in.
Any scenario where the stock market declines by 99% ($100k to $1k) would basically mean the collapse of the entire financial system. I doubt your bank savings account would be very useful in that scenario.
Moreover, I don't think this article is actually talking about people who do save but just choose to save into high-return assets. I save 80-90% of my income, but it all goes into index funds. Does that mean I am not "a saver?"
> Moreover, I don't think this article is actually talking about people who do save but just choose to save into high-return assets. I save 80-90% of my income, but it all goes into index funds. Does that mean I am not "a saver?"
Not at all. This article is about people who aren't saving because they don't think its necessary or because they can't afford to.
An emergency fund IS NOT an investment. It is insurance; treat it as such.
Why should one have an "emergency fund?" I would genuinely love to hear a good argument for why keeping any cash assets when one has significant liquid investments, as I've never encountered one.
Insurance companies invest their premiums. Why shouldn't I?
Insurance companies and banks are required to maintain a minimum amount of safe/liquid (read: cash) reserves.
> I would genuinely love to hear a good argument for why keeping any cash assets when one has significant liquid investments,
Can you describe an asset (besides US treasuries) that you can be assured of its value in a volatile market? Even money market funds have broken the buck before (~2008).
> Can you describe an asset (besides US treasuries) that you can be assured of its value in a volatile market?
My point is emphatically not that your stocks will maintain their full value. But even at their lowest, their value will be more than enough to cover any emergency fund. A 50% drop on $100k will still leave you with $50k.
Which would ruin your investment outcome for years (if not decades, depending on the value of your portfolio at the event in question). If stocks take a loss that bad, you need the ability to not sell off to get liquid cash. That is what an emergency fund is for.
>>Any scenario where the stock market declines by 99% ($100k to $1k) would basically mean the collapse of the entire financial system.
Yet if you owned real estate[Land, Houses], they stand exactly as they are. While the numbers in the bank database turn to 0 after the collapse and companies go bankrupt and never recover. If you owned real estate, your money will recover in the very next turn.
Real estate is yet another asset class which should be included in a diversified investment strategy, but my point was that there's no evidence that money should be kept in a bank savings account.
Given the interest rate so low, saving is definitely a "smart" answer. Keep cash and keep invest seems to be a "wise" choice in our current market. So, it might be the market (or policy maker) to blame...
Curious, not criticizing: What is your plan if you get sick or laid off, or for some other reason need a large amount of cash immediately? I always thought it was common advice to keep ~6mo living expenses in cash savings for emergencies.
If the market declines significantly, and you're still a long-term bull (inherent to the buy and hold strategy), you probably don't want to sell until the asset recovers.
But is it worth missing out on the potential gains of 6 months' income doing nothing, just so that if you hit an emergency (by definition a rare thing) you don't sell during a down period?
I mean, keeping the money in savings virtually guarantees 'losses' in real terms.
shrug maybe, maybe not. I sometimes have rather low cash reserves; credit cards and a checking account that lets me overdraft for free (via margin borrowing) can give me a bit of liquidity. But credit cards come due every month, and margin borrowing can always result in a margin call, so it certainly does feel like a risk. Having a bit of cash around gives you some peace of mind, but what's that worth depends quite a lot on the individual.
I believe there's a significant risk of deflationary times ahead - the prime rate over the last five years really makes much of that argument for me. It is not a given that keeping the money in a savings account guarantees real losses.
6 months is usually far too long to keep in direct cash / savings.
I think 2-3 months direct cash/savings/checking is fine, then move excess cash to CDs or something semi-liquid. You totally CAN get money out of CDs, just sometimes lose your interest. If you have some kind of CD ladder or such going on - you can have a new CD coming out every 1-3 months anyway, which will give you the cushion you need after savings run out.
Although pretty much all essentially risk-free investments these days have interest rates so low, you're getting into fine-tuned optimization territory for most people. It's fair that if you have a big wad of cash that you really want to protect from capital losses, it's probably worth putting it in something other than cash. But the gains are minimal.
I disagree with this. If you are semi-retired like me, you need to have enough cash on hand to weather a market downturn of 1-3 years. That way you are not selling stocks at fire sale prices to keep a roof over your head and food on the table.
CD's are terrible investments at the moment. A 1 year CD doesn't offer a much better rate than a FDIC money market account, and I certainly would not invest in a longer term CD at the moment.
When interest rates tanked, I moved all of my CD's to money market accounts when the term was up.
What is key is to only open a money market account at an institution with a long term track record of staying above average on rates compared to thier competition. You want to avoid the institutions which constantly raise and (and then lower) thier rates. Bankrate.com is a good way to research these.
A 1 year CD is a terrible investment, but a lot of 5 year CDs have very generous early withdrawal penalties. Unless you are making over 2% in your FDIC-insured money market account, a 5 year CD is probably a better investment.
The withdrawal penalties can be anywhere from 6 to 30 months interest for a 5 year CD. 6 months seems pretty rare with only a few institutions offering it.
Stocks are a pretty liquid asset in those cases. And for things where the need for money is sooner than a sale would go through it could be put on a Amex/credit card and paid at the end of the month. Totally guessing but they've also probably got a fair amount of money in a checking account as their 'cash on hand'.
But stocks are risky. Murphy's Law strikes and your stocks are all down 10% when you need the money the most. That doesn't sound like the way to go for an emergency fund.
Even in that unlikely scenario they'd still have access to most of their money, it'd feel pretty bad to have to sell into a 10% loss but it's not the end of the world if it's a true emergency scenario. That's also a manageable risk that you can avoid with well diversified investments.
Stocks and bonds of all kinds are available as ETFs that can be sold anytime. And you almost certainly don't need to sell the whole thing at once, so running low on principal value isn't that much of a problem. (Instead it's a tax break.)
I don't know about the poster but my investment account gives me access to it as "cash" if I chose to exercise that option, the brokerage essentially loans me the money and briefly and then sells some of the stocks in a pre-arranged priority to cover that cost. The "real" life implementation of this is that my kid's college tuition is auto-deducted from that account, so if the cash on hand balance got to 0 it would liquidate money markets, and then long term stock holdings, to cover the draft.
That said, I personally have tried to balance dividend (income) paying stocks and short term bonds (6months to 1 year) which feeds into the cash balance, so that covers some of it.
If you have a 401k you could potentially borrow against it if absolutely necessary. My plan allows 4% loans in which I pay myself the interest and a very small fee goes to the plan holder. I'm assuming the 6 months of living expenses is an extreme situation.
Well in 2009, during the real estate crash and subsequent Great Recession, people were out of work for a lot longer than 6 months. Of course financial planners don't really talk about those sorts of seismic events. That historically hasn't been an issue for engineers, but there are groups that are disproportionately affected (like older engineers).
Because I'm built the way I am I've always saved in the context of how long I could live on my savings with the goal of increasing that number until it reached infinity. That first level I call 'Raman level retirement' where you could live forever[1] off your savings if you ate only Ramen, up to the the point where you can live off your savings and keep your current lifestyle (which actually takes less income than most people thing), to actually living a more lavish lifestyle without day to day employment.
[1] Of course you intercept the life expectancy line at some point, and you have to build into your model ever increasing health care costs or a one time lump sum to emigrate somewhere that has a national health plan.
Most of my savings is invested in index funds. Pretty much all of them allow you to withdraw the full amount in 3 days or so.
Granted, do you have any idea what such a scenario might look like? Odds are, it can wait. Even large medical operations if you don't have medical insurance (where I live), simply require a modest deposit before they start the operation or expensive procedure. Though I do think they ask for some sort of proof that you have the money on hand.
But, again, most people here have enough money to pay for private healthcare insurance, or they rely on the free state hospitals.
Car, insured. Medical, insured. Bond payments, predictable.
So, I'm trying to figure out a valid plausible scenario where a large amount of "cash" is required in a very short amount of time. Any ideas?
Mostly medical costs or getting laid off are the scenarios I'd be worried about. Even if you're insured, medical bills add up and you tend to be billed very soon after care is provided.
In a scenario where you are found at fault in an accident (eventually / as the outcome), both legal fees and the judgment of having to pay out could put immense strain on your fiscal outlook in both the short and long term. Note I picked the word "accident" because it's something that is theoretically insured against but may not be sufficiently mitigated as a personal risk. E.g. umbrella is too small.
There is a difference between liquid and volatile. Index funds are definitely a liquid instrument, but they are very volatile.
For funds that you know you will need in the next six months to three years, it is recommended to keep the funds in a liquid and very stable investment.
Personally, I use a California (I live in CA) tax free short term bond fund.
What type of expenses do I keep in this kind of fund? Tax payments I know I already owe (capital gains from an IPO for example), child's college tuition payments, planned major house repairs / remodels, pending car purchases, and as others have mentioned six months of living expenses in case of layoff or other emergencies.
Sure, you could liquidate your investments if need be, but you'll get hit with high short-term capital gains taxes if you sell equities you've held for a year or less. If held longer than a year, you'll pay long-term capital gains taxes, which are substantially lower.
I can put $10K on my CC and not have to pay for 30 days which is plenty of time to cash out investments. I'd rather take the hit on selling low in an emergency then proactively give up gains by having cash sit idle for years.
If you meet the income requirements (>$116k if single, >$183k if filing jointly), you can contribute up to $5,500 per year into a Roth IRA which can also double as an emergency fund if need-be. You can withdraw all your contributions with zero penalty anytime for any reason. You just can't withdraw your earnings on those contributions without a penalty.
The thing that I don't understand about this logic is that in the event of an economic downturn or disaster, if you lost your job the market would also be on the decline - the worst time to sell. Isn't it better to keep a couple month's expenses in savings, even if only for the peace of mind?
Sure, consider that $10k or whatever that you need for a couple months after you lose your job. In an economic downturn, if your stocks/bonds lose half their value, it costs you $20k of pre downturn, investment dollars rather than the $10k of pre-down turn dollars if the money was in a savings account.
Everything has a cost - however much you're holding in cash you're effectively burning ~3% of that each year. How quickly do bills come due? If I lost my job tomorrow I could take a payment holiday on my mortgage (since I've made overpayments) and pay for food and the like with my credit card (and in my specific case as a contractor I'd have what I'd earned last month, but I appreciate that doesn't apply to everyone); I'd certainly have a few months' leeway to sell some stocks/bonds/whatever, and what you lose in a slump is less than what you gain during the boom period.
ITT the top 20% pat themselves on the back and imagine their life-bubbles are somehow similar to that of the poor. "It's the data that's obviously flawed."
That was what I was wondering as well, since savings accounts are such poor vehicles for saving these days in terms of a return I'm sure a lot of people just leave the money in their checking account.
That said, its really really important that if you can't save some money every month, and don't accumulate savings year over year (those are importantly different things!) That is a signal that you are living beyond your means, budget down and find ways to reduce your burn rate.
In fact they are probably better off in checking because a lot of banks offer ridiculous benefits like high interest on checking in exchange for swiping your debit card 5-12 times a month.
Agreed, I'd answer $0 because I don't have a savings account. Even if they asked in all bank accounts, it would be about $1500 or less depending on the day of the week. Yet I own a home with 50% equity, a car and have a 6 figure retirement account and separate 6 figure taxable account. What they really should ask is what is your net worth or at least what is your liquid net worth, but I suppose that would be confusing to a lot of Americans.
I just encouraged my SO to move what she'd held in savings to start off her retirement. Now her savings account is just a small emergency buffer with automated minimum monthly transfers to prevent maintenance fees.
The only reason I still have a savings account is because I expect interest rates to go up again at some point in my lifetime, and, as petty as it is, I didn't want my credit score to take that temporary dip for closing the account.
> How much money do you have saved your savings account?
That's a very specific question. A person with $5k in their checking account or a person with $100k in a retirement account might still answer that they have no savings.
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