Let’s continue the speech made in the previous post and see how to apply improvements to our emergency fund.
During the retirement phase we should live only through the earnings that our accumulated capital should guarantee us. Whether they are coupons detached from bonds or dividends collected.
This leads us to understand that a major market crisis, however short in terms of time, can lead us to eat up our capital very quickly. This is given by the fact that in addition to the market downturn we should continue to withdraw as our capital will have lowered its dividends that it gives us.
Our goal in this phase will not be to earn as much as possible, but to limit losses as much as possible.
Consequently I would say to increase the emergency fund even to 1 year. My reasoning is based on the fact that on average a bear market lasts 14 months.
Furthermore, however much the money that will be recognized to us may decrease, it will never be zero. This should help us to overcome the crisis period.
Emergency Fund Allocation
the emergency fund should not be kept liquid in the checking account. Why?
Well because it would be a waste from a financial point of view.
While inflation continues its course, we leave the money standing.
Not very wise.
We need very liquid and very safe tools. We can do mainly in 2 ways:
- Money market accounts: We are talking about money market deposit accounts (MMDA). Some features are the payment of a higher interest rate than normal current accounts. They can also have time restrictions on withdrawing money by increasing the rate they give you (your choice).
- Money market funds: is a mutual fund that invests in highly liquid, short-term instruments. Instruments included are cash, cash equivalents and highly credit rated debt-based securities with short term maturity. Of course, there are such ETFs.
Using etfs allows us to be able to sell them when we need money and to be able to diversify between the various currencies. Giving us more security.