Warren Buffett’s 2010 advice on cash reserves is more relevant than ever
Many Americans who have stuck to their jobs and cut spending over the past year are cashless.
The personal savings rate is at its highest level in decades, but when the economy reopens and vaccinations rise, many people might be tempted to do things they've avoided for 12 months: travel, food, concerts, and exercise.
The Oracle of Omaha may advise you to save some of that money when speaking to longtime business partner Charlie Munger at the Berkshire Hathaway shareholders meeting, which will be broadcast live exclusively on Yahoo Finance on Saturday May 1st. which he gave over a decade ago during the financial crisis.
"We pay a heavy price to maintain our world-class financial strength," Warren Buffett wrote in his 2010 letter to Berkshire Hathaway investors after the Great Recession. "The more than $ 20 billion in cash equivalents we normally hold is now making a penny. But we sleep well."
American investor Warren Buffett listens to a question during a press conference in Madrid on May 21, 2008. Buffett, the richest man in the world, said Wednesday that he had seen the impact of the current financial crisis on the US economy longer than many people. (REUTERS / Andrea Comas)
The message ages well and, according to many financial planners, applies to your personal finances. For those in need of the post-pandemic, it can be helpful to make sure you have an adequate emergency cushion for the unexpected to ease fears in an uncertain future.
Of course, you don't need as much as Berkshire Hathaway.
"For Warren Buffett and his company, his nightly sleep amount appears to have been $ 20 billion in 2008. I suspect we all have a similar need to calculate an amount, even though the amount has far fewer zeros next to our number" said James Guarino, executive director of tax practice at Baker Newman Noyes in Woburn, Massachusetts.
Read More: Ask The Expert: How To Build An Emergency Fund After The Pandemic
This cash pillow should be kept in an accessible account - such as a savings account, money market account, or deposit slip - even if it earns one "pittance" per buffet. This is true today - or even more so - as it was in 2008, when the Fed kept interest rates close to zero.
(Credit: Federal Reserve of St. Louis)
But that "high price", as Buffett put it, enables you to be nimble in rough waters.
"When you have cash or cash equivalents in your portfolio, you can have peace of mind and capitalize on everyone else going crazy during a market correction," said Henry Hoang, certified financial planner with Bright Wealth Advisors in Irvine, California.
Read more: Emergency Fund: What You Need To Know To Build One
The quick and dirty rule of thumb is that you need three to six months of basic living expenses in your emergency fund. But that has a nuance, especially after a pandemic that weighed on some people's sources of income for more than a year.
2021 Berkshire Hathaway Annual General Meeting
There is no one size fits all that can be tracked with emergency savings. "It depends on so many variables," said Marianela Collado, CEO and co-owner of Tobias Financial Advisors in Plantation, Florida.
Factors to consider include sources of income, employees versus self-employed, your occupation, the likelihood of firing - which is "really hard to assess," said Collado - lifestyle, total wealth, and "simple old comfort levels," she said.
Or, as Buffett would put it, whatever allows you to "sleep well".
Janna is an editor for Yahoo Money and Cashay. Follow her on Twitter @JannaHerron.
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