A financial expert says there's an obvious sign you shouldn't be investing more money right now
- If you don't have a one-year emergency fund, you shouldn't be investing more money in the market right now, says financial expert Ramit Sethi.
- With all the economic uncertainty looming due to the COVID-19 pandemic, having enough cash on hand to weather potential job loss is crucial.
- If you don't have enough cash savings to cover 12 months worth of basic expenses, Sethi recommends pausing investment contributions to focus on your emergency fund.
- See Business Insider's picks for the best high-yield savings accounts »
A market downturn like we're experiencing now shouldn't be a signal to quit investing - unless you're short on cash.
Stocks may be "on sale," allowing you to buy more shares at a cheaper price, but if you don't have enough liquid cash to get you through a potential job loss, it's time to shift your focus to emergency savings, says financial expert Ramit Sethi.
During a recent Instagram Live posted to YouTube, Sethi stressed the importance of building and maintaining a one-year emergency fund.
"Usually you hear about emergency funds and people pooh-pooh it [and say] three months, six months. No. One year. We are getting more conservative and more aggressive [about saving] based on what has been going on in the news," Sethi says in the video, which is part of a series of "fireside chats" he's hosting to help people navigate their finances during the economic fallout caused by the coronavirus pandemic.
"If you normally contribute to your 401(k) or Roth IRA or SEP, or anything like that, and you don't have a full one-year emergency fund, hold off on those investments and fill up your emergency fund," he says.
A crisis like this means it's OK to pause investing
Sethi is typically a staunch advocate for investing. In his bestselling book "I Will Teach You To Be Rich," he encourages people to start investing as early as possible, and suggests contributing to a retirement account before putting extra dollars toward high-interest debt if it means scoring a company match.
But as Sethi notes in his fireside chat, the current climate - which experts say is leading us right into a recession - calls for desperate measures.
"You have never heard me say this before, but now more than ever I believe that having that one-year security is really important," Sethi says. "Even at the risk of losing out on some potential returns down the road, money to you and to me and to everybody is more important right now than money six months to 12 months from now."
To get your emergency fund goal, he suggests calculating your bare minimum expenses for any given month, eliminating any non-essential recurring costs, and multiplying that by 12. "We're cutting it down to the minimum. I hope you don't have to cut all the way, but you need to be prepared to do it," Sethi says.
It may seem daunting at first, especially if you're not working currently or fear you may be out of a job soon. But that's a clear sign to keep saving whatever cash you have coming in that's not being spent on immediate needs. You can only control your own money, not how the stock market or how the economy performs, and the balance in your bank account is one way to do that.
As for those who already have enough cash to cover their most basic, essential expenses for a year? Stick to your long-term investment plan, Sethi says.
"If you have your one-year emergency fund and if you still have money, you should keep investing. We don't know whether the market is going to go up or down, we do not know. But we know that if you miss the best few days in a decade of investing, your returns are cut dramatically," he says.
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