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Making over my cash reserves plan
Old 05-31-2013, 04:32 PM   #1
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Making over my cash reserves plan

Making Over My Cash & Emergency Reserves Plan


Two years of living expenses in a savings account: that’s what my cash reserves plan amounted to as recently as 2 weeks ago. Then I started planning to write a blog post on the how and why of that plan. And in so doing, completely changed my thinking.

I’ve gone from a cash reserves plan to an emergency reserves plan -- and that has made a huge difference. Before, my cash reserves consisted of sums in checking, savings and CD accounts amounting to (as I said) 2 years of living expenses. Now, my emergency reserves consist of a 6-month food supply, $2000 cash on hand, gold and silver coins on hand, half-a-year’s worth of living expenses in cash deposit accounts, and $270,000 in personal credit lines from 13 different financial institutions. This madeover emergency reserves plan is much much broader in scope than my old cash reserves plan -- yet only ties up half the money. And the freed half of the money can now be invested for extra income.

This emergency reserves plan works for me thanks to my own individual income and insurance framework. The plan’s specifics are not going to be applicable to someone else’s financial situation. But the thinking behind the plan may very well open some mental doors worth the opening. You decide.


What are my reserves supposed to do?
My reserves are there to give me liquidity and solvency. I don’t want to be forced to sell a chunk of my investments (at the wrong time!) because I need the ready cash (liquidity). I don’t want to have to do without something I need (such as a car repair or a medical prescription) because I just don’t have the money (solvency). I don’t want my credit score to plunge because I don’t have enough money in my checking accounts to pay my bills when they come due (liquidity and solvency). And I don’t want to miss out on an investment/savings/great deal opportunity because I don’t have the necessary funds when the opportunity presents itself.

BUT! In the first place, I don’t need money in a checking or savings account to deal with some of those situations. And in the second place, there are plenty of situations where money in a checking or savings account (or available balance on a credit card) would not do me one bit of good.

To give myself true (or truer) liquidity and solvency, I’ve had to revise the elements of my reserve so that I will be covered in a much wider range of possible emergency situations.


What I learned about ready cash from Hurricane Andrew
There are a lot of things I’m never going to forget about the aftermath of Hurricane Andrew in Miami. And one of those things is the little convenience store that reopened up for business a few blocks from me just 2 days after the hurricane hit. There was no electrical power in that entire section of the city, so: no electronic cash registers, no credit card terminals, and no ATMs. Cash was King and prices were inflated. Almost 2 weeks passed before that little store had its electrical power restored. Same thing for the home improvement store half-a-mile in the other direction. If you were out of cash, you were out of luck. And that in a situation where you even had to buy your water because there was nothing coming out of the faucets!

So, Reserves Lesson #1 for Alex: have a ready cash reserve at home.

But for some people in the areas south of Miami, it was actually worse than that. There were no stores in good enough shape to open and NOTHING to buy. We all saw similar images repeat themselves a few years later in New Orleans. People standing in line for food-and-water handouts from the back of trucks. People completely at the mercy of… whatever.

Something like that can happen anywhere, anytime. Hurricane… earthquake… forest fire… tornado… snow storm… civil disturbance… security lockdown (think Boston)… you name it. The day could come when you have no open stores to go to. For days. If it’s really, really bad maybe for weeks. All you’ll have is what’s in your pantry. (Best to go right through the stuff in your refrigerator the first day, before it all spoils.)

So, Reserves Lesson #2 for Alex: have a food reserve at home.


What I hope I never learn first hand about the fragility of fiat money
Emergency is the key operating premise in my approach to reserves. And what could be more of a financial emergency than your money becoming worthless, or just disappearing overnight from your accounts?

Just a few months ago, Cyprus tried to simply confiscate bank deposits above a certain amount. My Cuban friend lived through a day when – overnight – the paper currency was changed and no one was allowed to exchange more than a certain limited amount of the old no-longer-legal-tender money (or bank deposits) for the new paper. That scenario has been played many times in many different countries. And the taking doesn’t even have to be so much in-your-face.

We all know about hyperinflation in Germany’s Weimar Republic and the clichéd photo of the guy with the wheelbarrow full of paper bills on his way to do his grocery shopping. Too far out to take seriously? Then how about the United States in the 1970’s with wealth destroying inflation and mortgage rates above 15%? Devaluation of the currency is the natural (inevitable?) consequence of governments living beyond their means and reaching the point when taxing and borrowing stop being viable options. (Greece, anyone?). What happens if we reach that point here in the U.S? The only option left then is to simply print the money (or create it as ledger entries like the Federal Reserve has been doing for years now).

I hope it does not happen. More than that, I think things will get worked out so it doesn’t happen. But even though I don’t expect my house to burn down, I have homeowner’s insurance in case the unthinkable happens. Even though I don’t expect my vehicle to get totaled on the highway by some tipsy driver, I have automobile insurance in case the unthinkable happens. And, even though I don’t expect some currency-collapsing crisis to happen here, I think I better have at least a little insurance in case the unthinkable happens.

So, Reserves Lesson #3 for Alex: have a modest stash of gold and silver coins at home. (And if nothing happens, it will just have been another investment.)


The rest is just a matter of hedging my cash flow
As I mentioned earlier, this emergency reserves plan works for me thanks to my own individual income and insurance framework. And that framework makes it very unlikely that I could get caught in a longterm cash flow crunch.

My Social Security income covers 130% of my basic living expenses. Dividends and interest income from my investment portfolio covers 200% of my basic living expenses. That means that my retirement income could collapse by 70% and I still would not have to fight Sassy, Scampy and Bear for their canned cat food. I cannot see a solvency issue in my horizon; just the possibility of a liquidity one.

And that is where my credit lines come in as a component of my emergency reserves plan. Except for taxes, electricity, and insurance, all my expenses can be paid by credit card if necessary. Having credit lines from 13 different banks gives me a way to bridge any short term lack of liquidity for more than half of my living expenses without having to be dependent on just one or two lenders. I can always pay off any borrowed sums with future cash flow from my Social Security and/or my investment income.

The other “cash only” half of my basic living expenses needs to be covered by, well, cash. So I have hedged that with one year's worth of those expenses in a checking and a savings account.

So, Reserves Lessons #4 and #5 for Alex: keep a diversified mix of credit lines open, and keep enough money in bank deposits to cover your non-chargeable expenses for a reasonably long while.

The only possible fly that could still be left in the ointment here would be unexpected medical expense. But I think I have covered that too, as I detailed in http://www.early-retirement.org/forums/f38/taming-my-healthcare-cost-monster-66527.html I've focused on overall worst case medical expense risk to come up with a maximum possible expense number ($5000 a year) that I could most certainly handle under my emergency reserves plan.


So, more emergency coverage and more money in my pocket
With this emergency reserves plan in place, I have reduced my need for cash reserves by half. As a result of investing the freed half, I have boosted my annual passive income by a goodly amount. And I have hedged against just about every kind of emergency I can think of.

What about you?


Alex in Virginia
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Old 05-31-2013, 04:59 PM   #2
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virtually no cash. I sell off stuff at the beginning of the month to fund the next month. But I keep my bond duration pretty low so there isn't a huge risk there.
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Old 05-31-2013, 05:32 PM   #3
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Good post - especially the thinking behind each decision.

We never have much cash on hand & I think I should remedy that situation. Given the checking account interest rates, it isn't as if I will suffer an opportunity cost.
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Old 05-31-2013, 05:52 PM   #4
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Thanks OP for the interesting idea. But keep in mind that credit is really not cash in hand, as they can be cancelled by the creditor at any time.

For me, I have 3 years' full expense in CD, earning 1.5%.
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Old 05-31-2013, 06:40 PM   #5
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Thank you for the post! It certainly gives me lots to think about....
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Old 05-31-2013, 10:51 PM   #6
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Some interesting points to think about.
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Old 06-01-2013, 05:30 AM   #7
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The issues with disasters are the ones I am least prepared for. Extra cash on hand and food/water are probably a good idea. As for gold, or extensive survival supplies, I am skeptical. If things broke down to the point that only gold (or other commodities) could sustain you, you would need more than a few Krugerands to survive for long. Ditto a post apocalyptic world with more than a few weeks of no food and good water. I do own one of those micro-pore water filter deals that could supply me with potable water from drainage ditches but even that won't do against nuclear fallout.

Oh, and guns. I'm in DC so those are hard to get (legally) even with the Supreme Court's blessings.
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Old 06-01-2013, 05:41 PM   #8
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I don't have that much cash in the house but you're right Alex, I need to do something about that. I do have a decide food pantry including canned tuna, canned chicken and canned soup that could last a month or so.

I do have 2 years of expenses in cash deposits, and another 2 years in short term bonds, but I don't consider either of those decisions particularly wise. Turns out they helped me a bit, but that was by luck, not design.
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Old 06-02-2013, 05:08 PM   #9
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virtually no cash. I sell off stuff at the beginning of the month to fund the next month. But I keep my bond duration pretty low so there isn't a huge risk there.

Jebmke, thank you for replying to my post.

So... what is your "plan B" if you suddenly lose access to your "stuff" because some event has caused either an extended loss of electrical power and/or an extended closing of financial institutions? And what if that same event causes you not to have the use of electronic credit (credit cards, etc)?

What do you do? How would you function with "virtually no cash" in such an eventuality?

Alex in Virginia
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Old 06-02-2013, 05:27 PM   #10
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We keep a couple thousand in cash around the house for disaster scenarios. We also have about 60 gallons of water, some MREs, bulk storage of rice, beans, etc., a portable generator and 10 gallons of gas, and a bunch of firearms and ammo. We also keep the travel trailer in the driveway and it is stocked at all times with a certain amount of food, fuel and clothes to serve as a self contained living space and escape pod. We camp and hike, and I hunt and fish, so I am not real worried.

As far as liquidity goes, I keep a mix of savings account, CDs, I bonds and portfolio cash around. Before I bail on the job next year I will be setting up a HELOC as the house has appreciated enough in the last two years to make it worth while.
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Old 06-02-2013, 07:45 PM   #11
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What about you?



There are few things better than a well-thought-out-plan, which is what you have Alex. As you state, it is your plan, not anyone elses.

Getting it down to the cat food and gold/silver coins is damned impressive. Your detail is not so much for me, but I really can appreciate all of the thought and foresight that you have applied here.

Maybe I rely too much on my .357 Magnum to equalize my situation. Gold coins? Silver? Cash stash? Maybe so in the future.
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Old 06-02-2013, 08:26 PM   #12
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If the power is out, how am I going to look up how much my pre-1964 dime is worth? :-)
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Old 06-03-2013, 08:00 AM   #13
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Jebmke, thank you for replying to my post.

So... what is your "plan B" if you suddenly lose access to your "stuff" because some event has caused either an extended loss of electrical power and/or an extended closing of financial institutions? And what if that same event causes you not to have the use of electronic credit (credit cards, etc)?

What do you do? How would you function with "virtually no cash" in such an eventuality?

Alex in Virginia
If the financial institutions were closed more that a couple days or so, we have bigger problems. I have 250 bottles of wine, pantry with pasta, peanut butter and a handful of canned products. Swimming pool has 18,000 gallons of water (since our well won't work without power).

I suppose if I got desperate I could club a goose to death with my 3-iron -- it certainly isn't that useful for anything else based on my latest round.
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Old 06-03-2013, 09:19 AM   #14
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I suppose if I got desperate I could club a goose to death with my 3-iron -- it certainly isn't that useful for anything else based on my latest round.
So what kind of wine goes with a clubbed goose?
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Old 06-03-2013, 10:34 PM   #15
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Thanks OP for the interesting idea. But keep in mind that credit is really not cash in hand, as they can be cancelled by the creditor at any time.

For me, I have 3 years' full expense in CD, earning 1.5%.


Hey, HillCountry, thanks for replying to my post.

No, credit lines are not cash; but they are another useful tool in my emergency reserves arsenal. And that tool definitely gives me a lot of liquidity elbow room should the need ever arise.

As long as there is a functioning economy, I'm not worried about having my credit lines cancelled (and certainly not by 13 different banks.) Nothing like that happened to me in 2000, and it didn't happen in 2008 either. If the time comes that credit just collapses completely for everyone, then that's when my other emergency reserve tools will come into play.

In the meantime, what my credit lines do give me is free access to financial liquidity. It costs me nothing to keep my credit lines available to me -- but holding excessive amounts of cash in low-interest deposit accounts would cost me a considerable amount of missed stock dividend and bond interest income.

By keeping my deposit account reserves at just one year's worth of non-chargeable living expenses, I am able to keep a lot more of my capital generating income to fund those living expenses.

Have you calculated what holding 3 years of living expenses in CDs is costing you annually -- even with that 1.5% you are getting for the time being?

Just a thought!


Alex in Virginia
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Old 06-03-2013, 11:05 PM   #16
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Maybe I'm putting my head in the sand, but in my entire life I've never needed to have the kinds pf preparedness that many are talking about. So I don't really put much effort into it. I'd feel different if I lived in an area that could expect evacuations (hurricanes, wild-fires).

Worst I recall was when I was a kid. Ice storm left us (in a rural area) w/o power for ten days. Fireplace got us enough heat to get by, and somehow we manged.

I'm on a well now (as we were then), so an extended power outage means I'm out of water. No big concern, we are just outside of town and their municipal supply, we would fill up containers at friends houses. I've got an inverter and battery for our sump pump, and I can connect that to the car to get some power to select things.

We don't keep much cash, but again, I don't think there would be an extended time where we couldn't use credit. As others have said, if that hits, there are bigger problems. Taking my chances.

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Old 06-04-2013, 07:11 AM   #17
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Hurricanes are my main concern around here but we usually have 2-3 days to prepare. So I don't keep a stock pile of stuff normally. I realize tornados can pop up and other disasters can happen, but I take my chances. I do have some cash pigeonholed around the house.
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Old 06-04-2013, 10:32 AM   #18
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Maybe I'm putting my head in the sand, but in my entire life I've never needed to have the kinds pf preparedness that many are talking about. So I don't really put much effort into it. I'd feel different if I lived in an area that could expect evacuations (hurricanes, wild-fires).

-ERD50
Call it an insurance policy. I lived through several near misses from hurricanes, got hit with winter storms that resulted in extended power outages, etc. Last year I didged (by moving) a direct hit by Sandy. In my old neighborhood there was no water or power for something like 10 days, raw sewage spilled into the street for a couple of days, roads and bridges were flooded, looters were active nearby, and there was not much done by the local authorities for several days as they were overwhelmed. I am not at all interested in going through that sort of thing unprepared.
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Old 06-04-2013, 11:41 AM   #19
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If the financial institutions were closed more that a couple days or so, we have bigger problems. I have 250 bottles of wine, pantry with pasta, peanut butter and a handful of canned products. Swimming pool has 18,000 gallons of water (since our well won't work without power).

I suppose if I got desperate I could club a goose to death with my 3-iron -- it certainly isn't that useful for anything else based on my latest round.
I think you just solved my back up plan. I always have a weeks supply of water as I by it in bulk, and have always a week or 2 food supply of nasty canned food products I think I will eat but never do. But we do have a couple tame Canadian geese at our nearby golf course. I'm pretty sure I could whack one with a three iron pretty easy. Though the other might get smart before I can get him.
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Old 06-04-2013, 05:00 PM   #20
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I think you just solved my back up plan. I always have a weeks supply of water as I by it in bulk, and have always a week or 2 food supply of nasty canned food products I think I will eat but never do. But we do have a couple tame Canadian geese at our nearby golf course. I'm pretty sure I could whack one with a three iron pretty easy. Though the other might get smart before I can get him.
We have a lot of golf geese. We have a lot of geese period since we live near the Chesapeake. The golf geese are year rounders. I've actually hit them with a golf ball.
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