Do I need so much cash?
Do I need so much cash?
Hello all, I currently have about 40k in cash stuffed in an online account for a rainy day, this would equal about 9 months of worse case expenses (girlfriend moves out and stops contributing to house, no unemployment, ect). This also does not count some cash I have in a local savings and checking account (typically around 5-6k). I am in sales executive without a college degree and average around 110k ish a year, about 7 years of experience in my current field (technology), all have been with the same company. My fear is that if I were to lose my job, finding another 100k + job might be a bit tough. However my company is large and doing pretty well.
That being said, I purchased a house 10 months ago (so no longer need to save for the DP) and am maxing a roth and contributing to my 401k. So I now am putting money into taxable accounts. Is there a certain point where I can put a portion of my emergency fund into the market? Obviously I dont want to 'have to' access it after the markets drop 20 points, but it might make sense long term. I currently have about 20k in taxable accounts and will continue to contribute. I'm considering moving 10-20k into it after I get a few more $s into it. Thoughts?
Thanks in advance!
That being said, I purchased a house 10 months ago (so no longer need to save for the DP) and am maxing a roth and contributing to my 401k. So I now am putting money into taxable accounts. Is there a certain point where I can put a portion of my emergency fund into the market? Obviously I dont want to 'have to' access it after the markets drop 20 points, but it might make sense long term. I currently have about 20k in taxable accounts and will continue to contribute. I'm considering moving 10-20k into it after I get a few more $s into it. Thoughts?
Thanks in advance!
Re: Do I need so much cash?
You might consider reducing your cash such that your taxable accounts + cash are equal to X months expenses in the case of a Y% decline in the market, where X is 9 months in your case and Y is a worst case scenario. Say, 50%. Eventually you can get to the point where you keep about a month's expenses liquid and have enough invested such that you can withstand that drop and then some.
Many do not do this, since there could be a 90% or worse drop. Think of it as insurance, as in how much do you want to buy? The more you buy, the more expensive.
Many do not do this, since there could be a 90% or worse drop. Think of it as insurance, as in how much do you want to buy? The more you buy, the more expensive.
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Re: Do I need so much cash?
If you have a bond allocation, and keep it in bond mutual funds with Vanguard (and presumably other similar firms' bond MF offerings), you can write checks on the money while it earns 2-3%. Yes the bond funds are not federally guaranteed like bank accounts, but this has been an acceptable risk for me.
Re: Do I need so much cash?
As a homeowner, I like having some cash around. I don't have to sell stock or bond mutual fund shares to buy a new roof or furnace. Figure out a worst case scenario for such things -- whatever makes you comfortable. The one thing you don't want is to lie awake at night wondering if you should have $x or $y in cash. The cash is there to give you a good night's sleep.
Yields are lousy on bonds anyway, so why not have a little FDIC insured cash as part of your fixed? No market risk, no muss no fuss with tax reporting like when you sell stocks or bonds. There's a lot to be said for cash right now. Use a nice online bank for a little extra interest.
I try not to over-think the emergency fund. This is not a place to maximize anything but peace of mind.
Yields are lousy on bonds anyway, so why not have a little FDIC insured cash as part of your fixed? No market risk, no muss no fuss with tax reporting like when you sell stocks or bonds. There's a lot to be said for cash right now. Use a nice online bank for a little extra interest.
I try not to over-think the emergency fund. This is not a place to maximize anything but peace of mind.
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Re: Do I need so much cash?
Thanks for the words yall. Not so many years ago I did not have enough loot to have much of an emergency fund, so I understand the peace of mind that comes with cash. That being said I also did not have much $ in taxables either. I am in my late 20s and most of my investments are stocks, but my plan would be to put it into a low fee stock/bond fund.
At the minimum I would keep 20k in cash as I do see the value. However on the other side, if I were to lose/quit my job (knock on wood) I would love to take a few months off and do some traveling ( I have been working fulltime with no gaps or long vacations for the past 10+ years, thankfully), so I get to thinking that maybe I should put another $10k into savings because of this. Guess I have some decisions to make
At the minimum I would keep 20k in cash as I do see the value. However on the other side, if I were to lose/quit my job (knock on wood) I would love to take a few months off and do some traveling ( I have been working fulltime with no gaps or long vacations for the past 10+ years, thankfully), so I get to thinking that maybe I should put another $10k into savings because of this. Guess I have some decisions to make
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Re: Do I need so much cash?
Take some of the cash and buy I bonds with it. There is a minimum 1 year lock-up, but after that it's super safe, tax-deferred and super liquid, if you needed to access it.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Re: Do I need so much cash?
Better to lean on the side of more cash than less, especially with the rates as had been said.
I bonds are a great idea.
I didn't get the feeling you are maxing your 401k, so you might consider getting on that if your EF is sufficient. In the case that you lost your job, you would roll the company 401k into an individual 401k account, then take a portion that you needed and roll into a roth, then the roth into cash. You would pay taxes on the gains from the individual -> roth, but not pay a penalty. If you needed the cash, it would be because you have no income, so the tax rate would be lower than you pay right now. It is not the most convenient or easy thing to get to, but it reduces your taxes now and acts as an EF backup.
I bonds are a great idea.
I didn't get the feeling you are maxing your 401k, so you might consider getting on that if your EF is sufficient. In the case that you lost your job, you would roll the company 401k into an individual 401k account, then take a portion that you needed and roll into a roth, then the roth into cash. You would pay taxes on the gains from the individual -> roth, but not pay a penalty. If you needed the cash, it would be because you have no income, so the tax rate would be lower than you pay right now. It is not the most convenient or easy thing to get to, but it reduces your taxes now and acts as an EF backup.
Re: Do I need so much cash?
Have you read the wiki articles about Principles of Tax-Efficient Fund Placement and Placing Cash Needs in a Tax-Advantaged Account?poker27 wrote:Thanks for the words yall. Not so many years ago I did not have enough loot to have much of an emergency fund, so I understand the peace of mind that comes with cash. That being said I also did not have much $ in taxables either. I am in my late 20s and most of my investments are stocks, but my plan would be to put it into a low fee stock/bond fund.
At the minimum I would keep 20k in cash as I do see the value. However on the other side, if I were to lose/quit my job (knock on wood) I would love to take a few months off and do some traveling ( I have been working fulltime with no gaps or long vacations for the past 10+ years, thankfully), so I get to thinking that maybe I should put another $10k into savings because of this. Guess I have some decisions to make
Have you considered investing in a Traditional IRA rather than a Roth IRA?
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Re: Do I need so much cash?
Typically you wind up with bonds in your retirement accounts and therefore not available without penalty and the taxable accounts have the stocks, which you may not want to be forced into a sale. That is why you need an emergency fund (available with out touching retirement or stocks). You size the fund based on how long you want to go without touching the other accounts.
Re: Do I need so much cash?
I would second (third) a look at ibonds.
Re: Do I need so much cash?
I keep 1 year in a bank account, 1 year in ibonds and 1 year in intermediate muni bonds in taxable. That is my order of operations in the event of an emergency. Most would call this very conservative, but I work in an industry with limited compensation and limited job security. Running about 80/20 including the muni bonds excluding the ibonds, so I like lots of cash but fairly aggressive investing. Unemployment or worse, the pernicious underemployment, has been lasting quite a bit longer these days. Frequently people are out of work for 16 months, sometimes even 24 months.
70% Global Stocks / 30% Bonds
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Re: Do I need so much cash?
You might reevaluate your expenses to see how low they can really go in an emergency situation. If it's truly an emergency some austerity measures might be in order. If you do that (and commit to adopting that lifestyle in the event of an emergency) you might see the $40k could last for more than you currently estimate (which could be justification for downsizing the emergency fund and contributing it to your taxable accounts). I used to size my fund based on what I actually spent every month, but decided that planning on blithely ignoring something important like the fact I no longer had an income was pretty "expensive".poker27 wrote:Hello all, I currently have about 40k in cash stuffed in an online account for a rainy day, this would equal about 9 months of worse case expenses (girlfriend moves out and stops contributing to house, no unemployment, ect). This also does not count some cash I have in a local savings and checking account (typically around 5-6k). I am in sales executive without a college degree and average around 110k ish a year, about 7 years of experience in my current field (technology), all have been with the same company. My fear is that if I were to lose my job, finding another 100k + job might be a bit tough. However my company is large and doing pretty well.
That being said, I purchased a house 10 months ago (so no longer need to save for the DP) and am maxing a roth and contributing to my 401k. So I now am putting money into taxable accounts. Is there a certain point where I can put a portion of my emergency fund into the market? Obviously I dont want to 'have to' access it after the markets drop 20 points, but it might make sense long term. I currently have about 20k in taxable accounts and will continue to contribute. I'm considering moving 10-20k into it after I get a few more $s into it. Thoughts?
Thanks in advance!
In the end, don't take it down farther than you're comfortable with just because there's a mathematical advantage. Using short-term bond mutual funds for part of it is a way to at least sink less slowly relative to inflation without much risk of capital loss. I have a 1-year fund, two-thirds of which is in sort-term bonds. I've not looked into I Bonds but that might be an even better option for your situation.
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Re: Do I need so much cash?
I'm in the wrong field (college graduate).poker27 wrote:I am in sales executive without a college degree and average around 110k ish a year, about 7 years of experience in my current field (technology)
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Re: Do I need so much cash?
There will always be someone who makes or has more than you. It's also likely there are many who have far less than you do.chocolate123 wrote:I'm in the wrong field (college graduate).poker27 wrote:I am in sales executive without a college degree and average around 110k ish a year, about 7 years of experience in my current field (technology)
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Re: Do I need so much cash?
You'd have to pay me a lot more than that to do a job described as "sales executive".chocolate123 wrote:I'm in the wrong field (college graduate).poker27 wrote:I am in sales executive without a college degree and average around 110k ish a year, about 7 years of experience in my current field (technology)
Brian
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Re: Do I need so much cash?
Default User BR wrote:You'd have to pay me a lot more than that to do a job described as "sales executive".chocolate123 wrote:I'm in the wrong field (college graduate).poker27 wrote:I am in sales executive without a college degree and average around 110k ish a year, about 7 years of experience in my current field (technology)
Brian
+1
Re: Do I need so much cash?
Well said.Grt2bOutdoors wrote:There will always be someone who makes or has more than you. It's also likely there are many who have far less than you do.chocolate123 wrote:I'm in the wrong field (college graduate).poker27 wrote:I am in sales executive without a college degree and average around 110k ish a year, about 7 years of experience in my current field (technology)
Chase the good life my whole life long, look back on my life and my life gone...where did I go wrong?
Re: Do I need so much cash?
^ +1fulltilt wrote: Have you read the wiki articles about Principles of Tax-Efficient Fund Placement and Placing Cash Needs in a Tax-Advantaged Account?
No you don't need to hold 'cash' as part of your AA plan in your 20s/30s.
It is perfectly legit to have more of an emergency plan than an emergency fund.
My "emergency fund" is TSM in a taxable account with at least the same amount in bonds in my IRA. My taxable stock fund it's twice the size I need it to be (sound like you may be close to that level, too). If I ever need it, I would sell it and re-allocate the bonds to stocks in my tax advantaged account to keep my desired AA. If I never need it, then it's money for the kids' college tuitions, our own retirement or a drawer full of $5000 watches.
The 2% dividend yield is higher than the income from a savings account.
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