Like most people in the investing field, I have been glued to the media feeds over the past few weeks keeping abreast of the continuing Greece development to ensure there is no fall out from from this to the investments that I care for.
As I read through 4 newspaper publications each day (the Wall Street Journal, Australian Financial Review, Bloomberg, and a local news papers) all before my work day starts at 8am, I found myself being drawn to the humanitarian side of the story.
What if I was transported today to Greece and right now I could only draw out 60 Euros each day to cover my living. How would I handle this situation, and would I have been ready for the event?
I have never been to Greece but one day would love to go! Having spoken to people who have travelled there, they assured me this is no third world country with stunning landscape and architecture, incredibly wonderful and smart people- and food to die for!
Greece is not a small island or in an emerging market were cash is the only form of transaction. So the living mindset which normally goes with this equation and set up also does not apply.
So what does this all have to do with Warren Buffet?
Well it comes back to this idea of an emergency cash account. In the Berkshire Hathaway annual report dated 2010, Warren Buffet quote the following letter which was written in 1939 by Ernest to his youngest son (Warren’s Uncle) Fred…I quote from the annual report 2010…
Dear Fred & Catherine:
Over a period of many years I have known a great many people who at some time or another have suffered in various ways simply because they did not have ready cash. I have known people who had to sacrifice some of their holdings in order to have money that was necessary at that time.
For a good many years your grandfather kept a certain amount of money where he could put his hands on it in very short notice.
For a number of years I have made a point to keep a reserve, should some occasion come up where I would need money quickly, without disturbing the money that I have in my business. There have been a couple of occasions when I found it very convenient to go to this fund.
Thus I feel everyone should have a reserve. I hope it never happens to you, but the chance are that some day you will need money, and need it badly, and with this thought in view, I have started a fund placing $200.00 in an envelope, with your name on it, when you were married. Each year I added something to it, until there is now $1,000.00 in the fund.
Ten years have elapsed since you were married, and this fund is now complete.
It is my wish that you place this envelope in your safety deposit box, and keep it for the purposes that it was created for. Should the time come when you need part, I would suggest that you use as little as possible, and replace it as soon as possible.
You might feel that this should be invested and bring you an income. Forget it the mental satisfaction of having $1,000.00 laid away where you can put your hands on it, is worth more than what interest it might bring, especially if you have the investment in something that you could not realise quickly.
If in after years you feel this has been a good idea, you might repeat it with your own children….
Interestingly the purchasing power of the $1,000 back then would today equate to around $14,000 today give or take a bit.
Today’s global economy is generally a pretty financially stable place and, like most things in life, you would not normally expect your bank to close, particularly in Australia. Our banks are amongst some of the soundest in the global banking system and then overlaid with a government guarantee on cash accounts. However with the Greece situation, it is not having cash in the bank which is the problem, it is having cash in your hand which is the problem. People simply can’t get their cash.
I am sure however if you were sitting in Greece right now and you had followed the advice of Warren Buffet in his annual report back in 2010, then you would be pretty happy to know that you can access that envelope of cash.
Who is to say what is around the corner and what might come, but I think the wisdom in this notion of “having some cash tucked away in case the unexpected occurs”, might not be such a silly idea. Yes you might forego some interest not having it in a bank account but this is not the purpose of the funds. Your main investment portfolio is positioned to handle the market opportunity which is separate from this cash.
Interestingly, my grandfather (who we fondly referred to as AJ) as a kid used to provide the same sage advice to us too. It might be that they have seen things in their life that we have not yet seen or may never, but I think it is worth giving some consideration too.
Like all great financial planning ideas it is important that you seek professional guidance before you implementing any of the information and we would recommend that you speak with our friendly team at AJ Financial Planning.