This coronavirus situation and the subsequent society-wide shutdown we are all experiencing right now has rewritten both the personal finance and investing playbooks somewhat.
Suddenly, income is not nearly as certain as it was only two months ago for many individuals and families.
And whilst the S&P/ASX 200 Index (ASX: XJO) and broader Aussie share markets have crashed severely over the past five weeks, many investors would be feeling extremely nervous about deploying precious cash into such a volatile and unpredictable market right now.
So, let’s take a look at how much cash you should have before investing in the ASX markets could be considered a good idea at this point.
How much cash is enough?
There are a lot of variables that go into such a simple question. Do you and your partner (if you have one) both work? Are you still working? Are you comfortable with your current job security? All worthwhile questions to be answered to be sure.
I always think the golden rule for how much cash one should hold is based on how much it costs for you and your family to live each month. There’s food, rent, utilities to be paid for, as well as non-discretionary items and services to buy – such as school uniforms or medicines. All of these (plus even a few creature comforts) need to be accounted for.
I always live by a rule that you should have at least three (preferably six) months’ worth of living expenses saved up in liquid cash. That way if you or your significant other lose your jobs or encounter some other kind of emergency, it won’t create immediate financial stress in your family and give you plenty of time to find another occupation.
But once you have achieved this level of financial comfort, I think any extra cash would be well spent in ASX shares right now. Shares are (as Warren Buffett would put it) ‘on sale’ right now – having lost around 30% of their collective value since mid-February.
That means it’s a great time to buy almost anything on the markets right now. Even an index fund like the Vanguard Australian Shares Index ETF (ASX: VAS) would be a great (and easy) choice.
Interest rates are now virtually at zero, so you’re not going to get a decent, inflation-beating return if you don’t invest your spare cash in assets like shares.
When thinking about how much cash you should have before you invest, I think the best principle to follow is financial security first, investing second. Investing is easier, more rewarding and less stressful if you’re using money that you can afford to lose!
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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.