Many Americans who held onto their jobs and pared back spending over the last year are flush with cash.
The personal saving rate has been at its highest level in decades, but as the economy reopens and vaccinations ramp up, many people may be tempted to splurge on things they avoided for 12 months: travel, dining, concerts, and sports.
The Oracle of Omaha may advise you to hold onto some of that cash when he speaks with longtime business partner, Charlie Munger, at the Berkshire Hathaway Shareholders Meeting, which will stream live exclusively on Yahoo Finance on Saturday, May 1. It would be similar to the advice he dispensed over a decade ago during the financial crisis.
"We pay a steep price to maintain our premier financial strength," Warren Buffett wrote in his 2010 letter to Berkshire Hathaway's investors after the Great Recession. "The $20 billion-plus of cash equivalent assets that we customarily hold is earning a pittance at present. But we sleep well."
The message ages well and applies to your own personal finances, according to many financial planners. For those with the wherewithal following the pandemic, making sure you have an adequate emergency cushion for the unexpected can help ease anxieties over an uncertain future.
To be sure, you don't need as much as Berkshire Hathaway.
"For Warren Buffett and his business, his sleep at night amount appears to have been $20 billion back in 2008. I suspect all of us have a similar need to compute an amount, albeit, the amount has a whole lot less zeroes next to our number," said James Guarino, managing director in the tax practice at Baker Newman Noyes in Woburn, Massachusetts.
This cash cushion should be stashed in an accessible account — such as a savings account, money market account, or certificate of deposit — even if it earns a "pittance," per Buffett. That's just as true today — or even more so — than in 2008, with the Fed holding interest rates near zero.
But that "steep price" as Buffett characterized it allows you to be nimble in rough waters.
"Having cash or cash equivalents in your portfolio gives you peace of mind and the opportunity to capitalize when everyone else is losing their minds during a market correction," said Henry Hoang, a certified financial planner with Bright Wealth Advisors in Irvine, California.
The quick and dirty rule of thumb is you need three to six months of basic living expenses in your emergency fund. But there is nuance to that, especially after a pandemic that walloped some people's income sources for more than a year.
There is no one-size-fits all that can be followed with emergency savings. "It depends on so many variables," said Marianela Collado, CEO and co-owner Tobias Financial Advisors in Plantation, Florida.
Factors to consider are sources of income, employed versus self-employed, your job industry, likelihood of layoff — which is "really hard to gauge," Collado said — lifestyle, overall wealth, and "plain old comfort level," she said.
Or, as Buffett would put it, whatever allows you to "sleep well."