No announcement yet.

Working Capital and Emergency Fund

  • Filter
  • Time
  • Show
Clear All
new posts

  • Working Capital and Emergency Fund

    I have an emergency fund (EF) of 4-5 months of expenses that just sits in a separate account. My checking account serves as my working capital (WC) account - a conduit essentially for other transactions (deposits from work, outflows to pay mortgage or credit card, and monthly deposits to investment accounts). Some of these are fixed amounts that are predictable and some are not - the latter of which generates the need for a buffer to prevent cash shortfalls. I'm curious what kind of liquidity buffer other people use in this WC account so they never run out of cash. Or do you adopt another method? Also, do you add any part of this buffer (which will vary but have a more stable long-term average) to your EF account to bring you to a total EF number?

    My personal take is that the WC amount should be at least 2x monthly expenses in order to account for deposit timing and variable expenses. Also, if an actual emergency occurred, where inflows stopped or a large expenditure became necessary, I think it's reasonable to subtract out the optional expenses (investment outflows) and do a net WC for the next month's expected obligations and add that to the EF total. I know this is nit picky, but curious what you all do or if you have any special "hacks" for these accounts. Thanks!

  • #2
    I don't get into that much detail honestly. My working capital and EF are the same, and at the moment it is also the " same" as the wedding funds and other money I hope to give the kids when they buy a house. Since these are funded by passive income, which has been reliable for years, and those two items are years away, I am comfortable with my silly method.

    I used to stress on it, but now I am trying to embrace the concept of fungibility and not be afraid to move money from one self imposed "bucket" to another. Of course never touching long term retirement funds in doing so.




    • #3
      I have 2 months of income in a cash management account for my private practice income. This used to be 4 months in the past but I found over years that I didn't need this. What sort of buffer you keep for working capital for your business practice depends on your expenses, how long receivables are, how lumpy this is and whether you need the capital for somthing else.

      In terms of an actual emergency buffer, I would suppose that like most people I have offset amounts in a mortgage on my PPOR and investment properties that can be redrawn.