Our thinking is that, if there's a long term market crash (e.g. Great Depression) and the value of our index fund plummets,
People were having these exact same thoughts 10-11 years ago after the market fell due to the bursted real estate bubble.
and we happen to have no job income for years, we'll need money to tide us over.
Only making yourselves more employable will truly solve that problem.
Will having savings in cash make our financial situation more secure, or is this thinking wrong-headed?
(Where did you put that cash? Checking or savings account paying 0% interest, a "high"-yield savings account or set of CDs paying -- currently -- 0.65% interest? Bonds? What kind of bonds?)
Enough cash to pay for an emergency or keep you afloat until you get a new job is always right-headed.
A mix of cash in a high yield savings account (I like Ally Bank), staggered CDs (Ally is my go-to for them, too) and bonds (TIPS, T-bills, munis, and possibly corporate) is the standard mix.
The basic problem with keeping a lot of cash in the bank is that it slowly disappears with inflation.
(I'm not even mentioning "cash in the mattress" because that is wrong-headed.)
The wisest things to do, whether or not there's another great depression, are:
- Get out of all debt (except for a modest mortgage), and
- Live modestly.