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The Emergency Fund in 1939

This article was written by in Featured, Money Management. 20 comments.

In the Berkshire Hathaway 2010 Annual Report, Warren Buffett shared a letter from his grandfather to his uncle’s family in 1939, and the advice contained within the letter formed the basis of Berkshire Hathaway’s commitment to weathering any financial storm.

I can’t say if the idea of an emergency fund was novel in 1939, but the advice contained within the made enough sense to Warren Buffett that the idea stuck with him and helped to form his philosophy for operating his business. Here’s the letter, scanned and included in the annual report to shareholders.

Warren Buffett Emergency Fund $1,000 Letter

Warren Buffett’s grandfather, Ernest, owned a grocery store, and as a business discovered the importance of having cash available immediately in the event that it is needed to keep the business running. The letter also emphasizes the idea of assisting future generations, but not with so much money that those within the younger generation do not become self-sufficient. The $1,000 provided with the letter in 1939, and provided with similar letters to other family members as Buffett discovered in 1970, is equivalent to about $15,500 today due to inflation. This is a significant emergency fund and a significant gift, something that might only be possible when the giver has experienced his own financial success.

Berkshire Hathaway holds about $10 billion in cash, which helps its company survive even the toughest financial setbacks. With the company invested heavily in the insurance industry, the Katrina hurricane and flooding resulted in an unexpected $3 billion loss. The company survived thanks in part to its cash reserves.

Taking this advice to the personal level, the attitude towards cash reserves passed from one generation to the next is a great model for managing the finances of a family or individual, not just a business. Despite the opportunity cost when you figure money held in cash could be more effective invested to earn a greater return or used for paying off debt to reduce interest expenses, holding cash where it is accessible in the event it is needed on short basis can save a family’s finances from collapsing.

An emergency fund of $15,500 could mean a big difference for a family, and a patriarch provided this security in addition to the lesson about management is a great example for the financial discussions families should be having today.

Hat tip to @ramit for pointing out the letter.

Berkshire Hathaway 2010 Annual Report

Updated June 23, 2016 and originally published October 14, 2011.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 20 comments… read them below or add one }

avatar 1 Anonymous

The $10 billion, I doubt is an emergency fund. I would say he uses it for acquisitions. The meesasge from his grandfather is a good one though, whether you are in business or as individuals.

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avatar 2 Luke Landes

Yes.. it’s a combination. It’s part of a larger cash holding that in total is designed to protect from losses and be available on short notice to take advantage of investment opportunities. And the key is that once used, the reserve fund should be replaced as soon as possible so it’s available again.

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avatar 3 Apex

Berkshire is actually sitting on a hoard of cash that was $47.9 Billion as of June 30th, 2011. So much cash that Berkshire has decided to use it to start buying back its own stock as it is not finding other more attractive uses for it.

Buffet has said personally that he would never draw this cash down below $20 billion as part of the stock buy back. $20 billion seems to be his comfort level. A little higher than mine. :)

Regarding the idea that the letter implied that you should not leave an estate so large that the younger generation does not become self sufficient, I think you are reading into it something that isn’t there. His grandfather told his uncle that no Buffet had ever left a large estate but they always left something because they always saved something. He doesn’t say they had large estates but didn’t leave most of it to their kids. The whole point of the letter was to promote the idea of savings and reserve and his point was that every Buffet had always had something left as an estate to leave.

Furthermore Warren is giving most of his estate away but he is still leaving each of his children with very large inheritances. I have seen estimates that imply he is likely leaving each about $1 billion. I would say that’s a little more than they need to become self sufficient even if it’s a small fraction of his wealth.

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avatar 4 Anonymous

How amazing is it that 7 decades later the concept of even $1,000 in an emergency fund is STILL out of reach of many people?

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avatar 5 Anonymous

Even they saved $200 every year for five years. I think that’s within reach…

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avatar 6 eric

I love these Buffett-related discoveries. Good stuff from The Man!

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avatar 7 Anonymous

Wow! Thanks for sharing.

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avatar 8 Ceecee

What a sweet letter. Good common sense is in short supply these days, at times. I loved the sentiment and the logic of the letter.

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avatar 9 Anonymous

It’s still the case today, and I think that people often make a few mistakes:

1) Thinking that they really don’t need an emergency fund
2) Underestimating the amount needed for one, if they have one (example: only 1 or 2 months, instead of say 6 to 12 months)
3) Fret over the opportunity cost of these funds, thinking more could be earned by investing elsewhere

Still say it’s best to keep an emergency fund as financial buffer vs true calamaties, and sleep better knowing it’s there.

Enjoyed the post!

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avatar 10 qixx

The average annual income in 1939 was about $1200. That makes the emergency fund enough to cover one year. Inflation adjusted to $15,500 would only be about 6 months. It would be a nice gift to give a one year emergency fund to anyone.

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avatar 11 Cejay

Great advice from a family patriach. I have an emergency fund but it is not up to par. In this economy I would say a years salary would be nice.

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avatar 12 Anonymous

Thanks for sharing the letter! I wonder how many parents could give a year’s salary to their children to use as an emergency fund? If they were financially able to give it wouldn’t they worry that their adult children would just spend the money almost immediately? Our consumer culture is still pretty strong even after the Great Recession.

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avatar 13 shellye

Thanks for sharing the letter. Not only did he give his children a substantial financial gift, he also gave them the gift of wisdom in planning for the future.

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avatar 14 Anonymous

It’s a valid point that the money held in reserve is not working for you. There are investments which are very close to liquid which would probably be wiser, such as gold bullion which can easily be sold with a few hours notice.

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avatar 15 Luke Landes

There are quite a few reasons that precious metals in bullion form are not suited for emergency funds, not the least of which is the spread between the bid and the ask prices. Unless you’re a dealer, you’ll lose money in the buried cost of transactions. Dealers who sell gold will charge above spot price, and dealers who buy it back to liquidate will pay under spot price. Plus there’s the issue of securing the bullion in your possession. Stick to cash.

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avatar 16 Anonymous

And if the economy tanks and the cash is worthless? As has happened in numerous countries?

The small percentage of spread is good insurance, and failing economies mean a gain in value for the bullion, relative.

I would never have either as my sole source of reserve. Consider also a marketable skill, good professional skills, real estate (land, not luxury houses subject to market whims) and a good store of food.

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avatar 17 lynn

I agree with you here. I bet WB does too.

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avatar 18 lynn

This advice is fundamental and has been a constant since the beginning of time. Some things in life don’t change, they are just there. One of those things is, life can throw a curveball. What a great man to pass along this information to the next generation. And what smart people for taking that advice ( I am assuming) and passing it on to the next generation.

Chasing money has never worked in the long run. Being steady and conservative always ends on a positive note. Sort of a law of physics. I think Buffett is proof of this.

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avatar 19 tigernicole86

I find this type of letter to be why I like Warren Buffett more and more. There’s a great sense of passing on to the next generation, to try to preserve some of the family line in a way. Granted, Warren will have more than others to leave to somebody!

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avatar 20 lynn

I read he was leaving the bulk of his money to charity. I’m sure there will be ‘seed money’ given to family members though.

I see young people verbaly abuse Buffett because he’s old. But with age, comes wisdom. I think he has always searched out wisdom. His account could be witness to this.

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