Many people who save regularly are facing a similar dilemma in the wake of the 2008 market chaos as they look ahead to setting 2009 goals. Should I boost my cash reserves or should I buy stocks?
Cash is probably the right choice if you:
- Need the money to spend in less than 7 years,
- Aren’t sure about the stability of your company and/or job,
- Have an income largely dependent on rental income, retail sales, or your own business, or
- Don’t have any emergency fund or short term savings whatever.
Of course, there is never a BAD time to be boosting reserves; it’s hard to argue against such conservativism even in the best financial times. We all need to have money set aside in case we are temporarily disabled, lose our jobs, have a medical emergency, etc etc. Then there is that new car/TV/appliance/engagement ring we plan to buy in the next 5 years for which it is best to have cash to pay.
But it is also tempting to buy stocks in what appears to be a fantastic opportunity of a generation, especially if you:
I for one am torn.
The markets are down around 40% for the year. Buy Buy Buy! screams the greedy voice in my head. I realize that I’ve been known to try to “catch a falling knife” before by making a bad stock pick and buying more and more shares as it tanked to near-worthless territory. But this is different; this is the whole diversified market. What could be more advisable than boosting my 401k contribution and taking advantage of a market dip early in my formative saving years?
So I did that; I suspended all other savings and boosted my 401k contribution to 20%. It has been exciting to see my contributions and balance rise a bit over the last couple of months. But at the same it has been disheartening to notice that my emergency fund has frozen. It just sits there, not getting any bigger like it used to every month – and it’s not that big to begin with. It would really only get me through 1.5 months of expenses if I got laid off.
On the other hand I have credit and taxable investments and wealthy relatives who could help in a real emergency. And in a temporary pinch (like a tenant vacancy), I can always suspend my 401k contributions…
But will I ever really know or notice the difference if I cut my 401k contributions back down to something reasonable and stock up on reserves this year instead? So I’ll end up with $568K instead of $600K in retirement funds one day down the line because of this choice. Does it really matter? Isn’t it more important to protect myself in the short term and make sure I have a comfortable cushion in case I can’t – or don’t want to – work in the foreseeable future (as opposed to my wholly unforeseeable retirement)? I mean it’s not like I’m not saving for retirement; I just really don’t have to go all in.
I am one of those odd people who is half crazy conservative (i.e. I want to buy physical gold to barter with in case of financial Armageddon and I want to own raw land outright which I can farm in case of the Great Depression II, and I want all my other investments in inflation protected government insured securities) and half crazy aggressive (i.e. I want to load up on 100% stocks – especially international ones which have really tanked, and I want some commoddities exposure and to bet on oil, and I want to leverage up my balance sheet to buy lots of real estate that will boost my income down the road, and who really has a year’s worth of expenses sitting in cash??).
I know that the reasonable thing to do is limit my 401k contributions to 10% and put the other 10% in cash. That’s probably the reasonable thing to do. But I think I am going to see how far the 20% in my 401k can take me before I start to feel any sort of crunch. How are you prioritizing your financial goals in the coming year?
More from Meg at The World of Wealth