American International Group, known as AIG, became a household word after the federal government bailed out the insurance giant with billions of taxpayer dollars. The crisis panel cited two main factors for its collapse: AIG agreed to insure massive amounts of questionable mortgage-backed securities through credit default swaps, and it lacked enough cash on hand to cover its expenses if the deals went sour.
But Wall Street giants aren't the only ones who sometimes suffer from inadequate cash reserves. Individual investors can also be hurt if they don't have cash on hand when the markets go south, Grealish says.
"When you do need money, you could be forced to liquidate assets in a really unfavorable market environment," he says.
Montgomery and Kennedy agree the average American family needs at least six months' of cash reserves to cover financial emergencies as major as a member of the family losing his or her job or as mundane as a malfunctioning refrigerator or a broken-down car.
"After what I've seen in the last few years, I don't think you can have too much cash," says Montgomery. "Unfortunately, you can't earn a lot on it in this day and age."