Cash in bank to sleep well at night

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socialforums2019
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Cash in bank to sleep well at night

Post by socialforums2019 »

I've been primarily a large cash holder ($100K+) and slowly transitioning my position into the market but still trying to figure out what is the best balance where I have cash sitting in the bank to use at will v.s. sitting in the market.

For example, at the moment, my plan is to have ~$175K sitting in cash. This would be about 17 months of EF if I would ever need it, but if we consider $60K of that as "EF", there is still another $115K of cash sitting on the side in case a large purchase is required. For example, I don't anticipate needing another car in the next 5 years, but something being considered is a solar system which I'm anticipating to be $30-$40K etc.

Is $175K too much to just be sitting there losing out to inflation, but good obviously for liquidity.
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RickBoglehead
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Re: Cash in bank to sleep well at night

Post by RickBoglehead »

socialforums2019 wrote: Sat Jul 17, 2021 9:12 am I've been primarily a large cash holder ($100K+) and slowly transitioning my position into the market but still trying to figure out what is the best balance where I have cash sitting in the bank to use at will v.s. sitting in the market.

For example, at the moment, my plan is to have ~$175K sitting in cash. This would be about 17 months of EF if I would ever need it, but if we consider $60K of that as "EF", there is still another $115K of cash sitting on the side in case a large purchase is required. For example, I don't anticipate needing another car in the next 5 years, but something being considered is a solar system which I'm anticipating to be $30-$40K etc.

Is $175K too much to just be sitting there losing out to inflation, but good obviously for liquidity.
Absent other information, impossible to answer.

Even with other information, impossible to answer, because "to sleep well at night" is a personal thing.

From my perspective, it's hugely too much. 6 months EF for me is 2 months in savings account, 4 months in No Penalty CDs. Everything else gets invested.
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jello_nailer
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Re: Cash in bank to sleep well at night

Post by jello_nailer »

I don't even have 1/10th of that as cash for EF or unexpected large purchases. With 1.59% margin loan rates at IBKR and $100k of available CC line. I'm not worried about a surprise attache of bad luck.
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Re: Cash in bank to sleep well at night

Post by Breezy »

Maybe keep most of it in a retirement income fund. The balance might dip at times, but over time it should grow nicely compared to a savings account.
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Re: Cash in bank to sleep well at night

Post by Normchad »

I think it’s really an individual decision.

Based on pure math, that’s not optimal. How much would that 100K be now, had it been invested since January? Probably 110 or so. So it’s costing you money…..

But, I’m doing the exact same thing. (Also have >100K in the regular savings account). And I know that it’s costing me money as well.

I like having it there. It brings me peace of mind.

I might want to buy a new house in the next year or so. So at least I’ve got plenty there for a down payment. Honestly though, I know I’ve got way more sitting there than I’ll ever realistically use for an emergency.

So I think what you are doing is perfectly reasonable. Other reasonable people will point out it’s not optimal.
diabelli
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Re: Cash in bank to sleep well at night

Post by diabelli »

we have a similar pile of cash and I don't sleep all that well at night, since it's buying me less and less gas, groceries, used guitars.
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Re: Cash in bank to sleep well at night

Post by pasadena »

How big is your portfolio, beyond that cash?

I understand keeping 6 months of expenses in cash, mostly as income replacement (I do that :)). But potential big purchases that may or may not happen and have a flexible date? That money should be invested. Just sell some shares when you're ready to pull the trigger.

As others said, what lets you sleep at night is personal. But I think you should really think hard about whether keeping money for maybe buying solar panels one day is really helping you sleep at night.
Last edited by pasadena on Sat Jul 17, 2021 9:26 am, edited 1 time in total.
StartedAt22
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Re: Cash in bank to sleep well at night

Post by StartedAt22 »

The mathematics don't lend themselves to your strategy and you are likely leaving money "on the table" not being fully invested.

That said, investing is personal and if having a large cash position helps you, then it is not the wrong move. Certainly if you are consciously choosing to maintain the large cash fund.

That said, I would not, and do not, do so myself.
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Re: Cash in bank to sleep well at night

Post by anon_investor »

I was happy with just 6mo in cash (bank accounts and NPCDs) for EF, but my worried spouse wanted more (12mo) after the Covid crash. So as a compromise we agreed on 9mos. Last year after interest rates fell to basically nothing we found out about I Bonds and started transitioning our EF to I Bonds. After a couple of mortgage refis and some other costs going away our static EF now represents 10mo of expenses. The goal is to have 2mo of expenses in cash (bank accounts and NPCDs) and the remaining 8mo of expenses in I Bonds, so we don't lose that much to inflation.
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Re: Cash in bank to sleep well at night

Post by NabSh »

Well like anything in investing . The answer is "it depends". Having said that the short answer is probably yes, as most people should be ok with 6-12 months of EF.

Please share your age, income level, number of incomes, kids/age?
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Re: Cash in bank to sleep well at night

Post by rage_phish »

We keep way more in cash than I’d like. But it makes my wife comfortable so we do
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socialforums2019
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Re: Cash in bank to sleep well at night

Post by socialforums2019 »

pasadena wrote: Sat Jul 17, 2021 9:24 am How big is your portfolio, beyond that cash?

I understand keeping 6 months of expenses in cash, mostly as income replacement (I do that :)). But potential big purchases that may or may not happen and have a flexible date? That money should be invested. Just sell some shares when you're ready to pull the trigger.

As others said, what lets you sleep at night is personal. But I think you should really think hard about whether keeping money for maybe buying solar panels one day is really helping you sleep at night.
The rest of the portfolio is about $1.35M with 30% of that being tied up in retirement accounts (401K, roth, etc.) and the remaining 70% sits in a taxable account all in VTI. Our only debt is a $1M mortgage @ 2.375%. This is likely why I am keeping a higher cash balance than needed.
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Re: Cash in bank to sleep well at night

Post by pasadena »

socialforums2019 wrote: Sat Jul 17, 2021 9:49 am The rest of the portfolio is about $1.35M with 30% of that being tied up in retirement accounts (401K, roth, etc.) and the remaining 70% sits in a taxable account all in VTI. Our only debt is a $1M mortgage @ 2.375%. This is likely why I am keeping a higher cash balance than needed.
Assuming it's $1.35M without the house equity, it means you have $945k available to you at any time. I would definitely keep the EF in cash, and invest the rest. Money is fungible, there's no good reason not to use your portfolio for bigger expenses if and when they come up. Especially in today's environment of extremely low return on cash (you're losing money to inflation). Get that money working for you instead of leaving it chilling in a hammock on the front porch all day :)
Last edited by pasadena on Sat Jul 17, 2021 9:59 am, edited 1 time in total.
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socialforums2019
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Re: Cash in bank to sleep well at night

Post by socialforums2019 »

pasadena wrote: Sat Jul 17, 2021 9:54 am
socialforums2019 wrote: Sat Jul 17, 2021 9:49 am The rest of the portfolio is about $1.35M with 30% of that being tied up in retirement accounts (401K, roth, etc.) and the remaining 70% sits in a taxable account all in VTI. Our only debt is a $1M mortgage @ 2.375%. This is likely why I am keeping a higher cash balance than needed.
Assuming it's $1.35M without the house equity, it means you have $945k available to you at any time. I would definitely keep the EF in cash, and invest the rest. Money is fungible, there's no good reason no to use your portfolio for bigger expenses if and when they come up. Especially in today's environment of extremely low return on cash (you're losing money to inflation). Get that money working for you instead of leaving it chilling in a hammock on the front porch all day :)
Correct, we have about $600-$700K sitting in house equity not factored into that $1.35M portfolio. Perhaps $90K as a compromise? $60K for a 6 month EF and then $30K of cash to cover any kind of overage that isn't covered by cash flow for that month. Each month, assuming we stay on budget with everything, we should be contributing an additional $1K+ into taxable.
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Re: Cash in bank to sleep well at night

Post by nisiprius »

This is absolutely a personal thing. You really should be bulldog-tenacious on knowing your own risk tolerance and sticking to it, and not letting yourself fall into the behavioral error of "anchoring," letting your numerical opinions get influenced by other numbers you hear.

One thing I am always harping on. The idea that bank accounts are "just sitting there, losing to inflation" is much exaggerated, particularly by those who are trying to convince people to invest in riskier assets. You can argue details, you can argue time periods, and so forth, but unless you are so idiotic that you are keeping it in physical paper money, or in a non-interest-bearing business checking account, or something, banks pay interest.

Treasury bills, money market mutual funds, and competitive interest-bearing bank accounts have historically roughly kept up with inflation and have eked out a small real return. $1 invested in Treasury bills at the start of the SBBI data series would never have been worth more than $1.75 or less than $0.89 in year-1926-dollar purchasing power.

Image

That isn't to say there are no problems, and by using all available data I've started at a point that's favorable. A loss of -50% in purchasing power over twenty years, from 1932 to 1952, is no joke. I believe some of the fall from 1932-52 was the result of some kind of artificial limitation on T-bill rates but I can't find the reference right now, and it doesn't really matter because government regulation happens.

However, there was only about a -10% loss of purchasing power over the double-digit inflation of the 1970s and 1980s.
Not great, but nothing to panic about.

"Money in the bank" is what it is, and there will be times when it loses to inflation and also times when it gains. But do not let yourself get unreasonably panicked into thinking that a large chunk of money in the bank, in an account earning a competitive interest rate, represents a clear and present danger. If inflation picks up, bank interest rates will almost certainly rise--probably with an infuriating lag, but rise. That's what happened in the 1970s and 1980s.
Last edited by nisiprius on Sat Jul 17, 2021 10:06 am, edited 1 time in total.
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Re: Cash in bank to sleep well at night

Post by pasadena »

nisiprius wrote: Sat Jul 17, 2021 9:59 am One thing I am always harping on. The idea that bank accounts are "just sitting there, losing to inflation" is much exaggerated, particularly by those who are trying to convince people to invest in riskier assets. You can argue details, you can argue time periods, and so forth, but unless you are so idiotic that you are keeping it in physical paper money, or in a non-interest-bearing business checking account, or something, banks pay interest.
Since I'm the one who said that, I just want to say that I meant *right now* and I agree with you on the rest of your post.
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Re: Cash in bank to sleep well at night

Post by pasadena »

socialforums2019 wrote: Sat Jul 17, 2021 9:57 am Correct, we have about $600-$700K sitting in house equity not factored into that $1.35M portfolio. Perhaps $90K as a compromise? $60K for a 6 month EF and then $30K of cash to cover any kind of overage that isn't covered by cash flow for that month. Each month, assuming we stay on budget with everything, we should be contributing an additional $1K+ into taxable.
It comes down to your level of comfort. If $90k is a good compromise that does let you sleep at night, then go for it. I guess the idea is, don't let it go out of hand with the "maybes".
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Re: Cash in bank to sleep well at night

Post by nisiprius »

pasadena wrote: Sat Jul 17, 2021 10:02 am
nisiprius wrote: Sat Jul 17, 2021 9:59 am One thing I am always harping on. The idea that bank accounts are "just sitting there, losing to inflation" is much exaggerated, particularly by those who are trying to convince people to invest in riskier assets. You can argue details, you can argue time periods, and so forth, but unless you are so idiotic that you are keeping it in physical paper money, or in a non-interest-bearing business checking account, or something, banks pay interest.
Since I'm the one who said that, I just want to say that I meant *right now* and I agree with you on the rest of your post.
Yeah, and I think I said it in a reply to someone asking about the immediate future, and I probably shouldn't have said it... so... yeah. :sharebeer
Last edited by nisiprius on Sun Jul 18, 2021 7:18 am, edited 1 time in total.
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Nate79
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Re: Cash in bank to sleep well at night

Post by Nate79 »

Unless you are 100% stocks, just count it as part of your bond fund and park most of it in a short term fund and increase your stock % in other accounts. Look at your asset allocation in total across all accounts.
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Re: Cash in bank to sleep well at night

Post by Marseille07 »

socialforums2019 wrote: Sat Jul 17, 2021 9:12 am I've been primarily a large cash holder ($100K+) and slowly transitioning my position into the market but still trying to figure out what is the best balance where I have cash sitting in the bank to use at will v.s. sitting in the market.

For example, at the moment, my plan is to have ~$175K sitting in cash. This would be about 17 months of EF if I would ever need it, but if we consider $60K of that as "EF", there is still another $115K of cash sitting on the side in case a large purchase is required. For example, I don't anticipate needing another car in the next 5 years, but something being considered is a solar system which I'm anticipating to be $30-$40K etc.

Is $175K too much to just be sitting there losing out to inflation, but good obviously for liquidity.
Assuming you don't have bonds in 401K, your overall AA seems like 89/11. I would stay the course and hold 175K in cash. People often say 6 months in EF but they are assumed to carry some bonds to spend down during the downturns. You don't have bonds, or even if you do they're in 401K not in taxable.
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Re: Cash in bank to sleep well at night

Post by shell921 »

I am a 73 yo widow-I own my home free & clear. It's a 12 yr old custom home worth now close to $2 million. I have no debt and a nice car that's 7 years old. I have a teacher's pension and 50% of my late husband's Federal pension. I can pay all my expenses and save $1,000 a month most months. My emergency fund is at $150k right now but I will use some in the next 12 months to replace my kitchen countertops, buy a new computer and printer and [ hopefully ] take a trip or two. Maybe buy a new car. My health is good now but one never knows what sh*t storm is on it's way to our door!
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Re: Cash in bank to sleep well at night

Post by hudson »

socialforums2019 wrote: Sat Jul 17, 2021 9:12 am I've been primarily a large cash holder ($100K+) and slowly transitioning my position into the market but still trying to figure out what is the best balance where I have cash sitting in the bank to use at will v.s. sitting in the market.

For example, at the moment, my plan is to have ~$175K sitting in cash. This would be about 17 months of EF if I would ever need it, but if we consider $60K of that as "EF", there is still another $115K of cash sitting on the side in case a large purchase is required. For example, I don't anticipate needing another car in the next 5 years, but something being considered is a solar system which I'm anticipating to be $30-$40K etc.

Is $175K too much to just be sitting there losing out to inflation, but good obviously for liquidity.
Cash VS moving slowly to stocks? If I wanted stocks, I would move it all at once.
Car in 5 years or solar system sometime? Those wouldn't be emergencies for me; I would plan for those separately.
$175K too much? For me, yes. My situation as a 70+ retiree is different. Today, If my cash account was $175K, it would be in a high yield savings account probably paying .5%. I would immediately move $155K to an intermediate/long muni fund, an intermediate or long TIPS fund/ETF, or a 10 or 20 year treasury.

Bottom Line: A $20K problem solving fund works for me; for larger problems, I would just sell something in taxable.
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Re: Cash in bank to sleep well at night

Post by utvolfan »

So to be honest...Does anyone feel like the Cash at the bank in savings or CDs etc helps you to sleep at night because it is FDIC insured? Once in the market I have lost that feeling of security, and think that at least I have X amount that can't go right down the tubes in a crash :shock: (Not that it would be enough but at least it would be there.) I try to think of my Stable Value fund money in the 401k the same way, but in reality I know that if all hell broke loose, that really isn't completely safe.

So yes I am risk adverse, but you all have educated me enough that I have settled on a 30-40% equities AA having recently retired with DH joining me in about a year. I sincerely thank all of you for the knowledge and insight you make available to others!
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Re: Cash in bank to sleep well at night

Post by Marseille07 »

utvolfan wrote: Sat Jul 17, 2021 11:43 am So to be honest...Does anyone feel like the Cash at the bank in savings or CDs etc helps you to sleep at night because it is FDIC insured?
Yes, FDIC is why I plan to do 90/10 up to 2.5M but above that planning to keep 250K. I'm aware I can open another HYSA elsewhere for another 250K FDIC, but I also feel 250K funded in full is enough to spend down during the downturns, so I'm OK with this approach.
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Re: Cash in bank to sleep well at night

Post by whodidntante »

socialforums2019 wrote: Sat Jul 17, 2021 9:49 am
pasadena wrote: Sat Jul 17, 2021 9:24 am How big is your portfolio, beyond that cash?

I understand keeping 6 months of expenses in cash, mostly as income replacement (I do that :)). But potential big purchases that may or may not happen and have a flexible date? That money should be invested. Just sell some shares when you're ready to pull the trigger.

As others said, what lets you sleep at night is personal. But I think you should really think hard about whether keeping money for maybe buying solar panels one day is really helping you sleep at night.
The rest of the portfolio is about $1.35M with 30% of that being tied up in retirement accounts (401K, roth, etc.) and the remaining 70% sits in a taxable account all in VTI. Our only debt is a $1M mortgage @ 2.375%. This is likely why I am keeping a higher cash balance than needed.
Here's what I do. Maybe you want to do it, too. Put all your taxable funds into equity index ETFs. Put fixed income you desire to hold in your 401k. I use a stable value fund that pays 1.8% because in my opinion, bond fund holders are not compensated for term risk right now.

If I have an unexpected need for cash, I have two options:
a) Trade to raise the money. Sell in a non-IB taxable account and then trade in my 401k to restore my desired asset allocation.
b) Hold assets in an IBKR Pro account and borrow against so I don't have to sell. If opened with the right promo, you can borrow at 1.1% right now.

Which one I would pick depends on the need. If I needed to replace my roof and repair my foundation, or pay off 100k in medical bills that have nearly crossed the six-month reportable threshold, then I'm far more likely to chose option B because these are temporary cash flow deficiencies -- more of the emergency that most people think about. If I faced long-term unemployment but still expect to live a long time, I would choose option A. You can always convert option B to option A at a later point; they are not mutually exclusive so you can do a bit of each if you want.

Margin isn't the guaranteed doom that some posters here would want you to believe. It can be pretty useful and cheap as I've described. And if that part bothers you, you can just always chose option "A" above even for the first dollar raised.

I sleep just fine.
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Re: Cash in bank to sleep well at night

Post by helloeveryone »

RickBoglehead wrote: Sat Jul 17, 2021 9:17 am
socialforums2019 wrote: Sat Jul 17, 2021 9:12 am I've been primarily a large cash holder ($100K+) and slowly transitioning my position into the market but still trying to figure out what is the best balance where I have cash sitting in the bank to use at will v.s. sitting in the market.

For example, at the moment, my plan is to have ~$175K sitting in cash. This would be about 17 months of EF if I would ever need it, but if we consider $60K of that as "EF", there is still another $115K of cash sitting on the side in case a large purchase is required. For example, I don't anticipate needing another car in the next 5 years, but something being considered is a solar system which I'm anticipating to be $30-$40K etc.

Is $175K too much to just be sitting there losing out to inflation, but good obviously for liquidity.
Absent other information, impossible to answer.

Even with other information, impossible to answer, because "to sleep well at night" is a personal thing.

From my perspective, it's hugely too much. 6 months EF for me is 2 months in savings account, 4 months in No Penalty CDs. Everything else gets invested.
Yes it's very hard to answer without info.
For example - I consider my taxable vanguard account to be my "1 year emergency fund"
But it's allocated 9% cash, 33% US Total Bond, 57% S&P500

That's clearly not what most BH define as an emergency fund. and because of my allocation it actually has grown to 1.25 years of emergency fund.

But we have a very high savings rate so in the case of a true emergency I would turn off some of the extra savings and hopefully not have to dip into the stock portion of my "emergency fund" if there happened to be a market downturn or if I wanted to avoid capital gains taxes
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Re: Cash in bank to sleep well at night

Post by Watty »

If by cash you mean a
socialforums2019 wrote: Sat Jul 17, 2021 9:12 am Is $175K too much to just be sitting there losing out to inflation, but good obviously for liquidity.
Even if you have that $175K in a bond mutual fund it will still be losing out to inflation because interest rates are so low.

When looking at asset allocations people often say stocks and bonds but the bond part is really fixed income which can include a lot of other things than just bonds.

CDs can still count as part of your fixed income asset location. Most CD's can be redeemed early for a modest fee so they are more or less like "cash" too.

It is not what I would do but you could do something like keep $50K in a "high yield" savings account and then build a ladder of five year CD's where $25K matures each year. By this I would mean to start out that you buy five $25K CDs that mature in 1,2,3,4, and 5 years. When these mature and are reinvested you would then buy a new five years CD that would get the current interest rate.

You could then count that $125k as part of your overall fixed income asset allocation.
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Re: Cash in bank to sleep well at night

Post by staustin »

I share Warren's opinion on cash:

"The one thing I will tell you is the worst investment you can have is cash. Everybody is talking about cash being king and all that sort of thing. Cash is going to become worth less over time. But good businesses are going to become worth more over time. And you don’t want to pay too much for them so you have to have some discipline about what you pay. But the thing to do is find a good business and stick with it. We always keep enough cash around so I feel very comfortable and don’t worry about sleeping at night. But it’s not because I like cash as an investment. Cash is a bad investment over time. But you always want to have enough so that nobody else can determine your future essentially."

it's about liquidity ultimately.. bond funds can lack it in the worst possible times..
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Re: Cash in bank to sleep well at night

Post by delamer »

Watty wrote: Sat Jul 17, 2021 12:00 pm If by cash you mean a
socialforums2019 wrote: Sat Jul 17, 2021 9:12 am Is $175K too much to just be sitting there losing out to inflation, but good obviously for liquidity.
Even if you have that $175K in a bond mutual fund it will still be losing out to inflation because interest rates are so low.

When looking at asset allocations people often say stocks and bonds but the bond part is really fixed income which can include a lot of other things than just bonds.

CDs can still count as part of your fixed income asset location. Most CD's can be redeemed early for a modest fee so they are more or less like "cash" too.

It is not what I would do but you could do something like keep $50K in a "high yield" savings account and then build a ladder of five year CD's where $25K matures each year. By this I would mean to start out that you buy five $25K CDs that mature in 1,2,3,4, and 5 years. When these mature and are reinvested you would then buy a new five years CD that would get the current interest rate.

You could then count that $125k as part of your overall fixed income asset allocation.
Completely agree.

Cash as in $175K earning 0.3% a year is foolish.

Cash as in a CD ladder or in short-term TIPS is a whole other thing.
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Re: Cash in bank to sleep well at night

Post by HomerJ »

delamer wrote: Sat Jul 17, 2021 12:19 pm
Watty wrote: Sat Jul 17, 2021 12:00 pm If by cash you mean a
socialforums2019 wrote: Sat Jul 17, 2021 9:12 am Is $175K too much to just be sitting there losing out to inflation, but good obviously for liquidity.
Even if you have that $175K in a bond mutual fund it will still be losing out to inflation because interest rates are so low.

When looking at asset allocations people often say stocks and bonds but the bond part is really fixed income which can include a lot of other things than just bonds.

CDs can still count as part of your fixed income asset location. Most CD's can be redeemed early for a modest fee so they are more or less like "cash" too.

It is not what I would do but you could do something like keep $50K in a "high yield" savings account and then build a ladder of five year CD's where $25K matures each year. By this I would mean to start out that you buy five $25K CDs that mature in 1,2,3,4, and 5 years. When these mature and are reinvested you would then buy a new five years CD that would get the current interest rate.

You could then count that $125k as part of your overall fixed income asset allocation.
Completely agree.

Cash as in $175K earning 0.3% a year is foolish.

Cash as in a CD ladder or in short-term TIPS is a whole other thing.
Have you looked at CD or short-term TIPs rates lately?

Going from 0.3% to 0.7% or 0.85% isn't all that amazing. Yeah, one is giving up $700-$800 a year, and that's some decent spending money. But then the money is locked up in a 5-year CD ladder.
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Marseille07
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Re: Cash in bank to sleep well at night

Post by Marseille07 »

I think the takeaway for the OP is, rather than worrying about the notional value or X months in EF, simply count EF as part of their Fixed Income allocation and maintain the AA. This takes care of how much cash you need to hold at any given time.
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nisiprius
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Re: Cash in bank to sleep well at night

Post by nisiprius »

utvolfan wrote: Sat Jul 17, 2021 11:43 am So to be honest...Does anyone feel like the Cash at the bank in savings or CDs etc helps you to sleep at night because it is FDIC insured?
It's meaningful.

1) Circa 1990 I had, what was at the time, important money for me and my family in a credit union that was NCUA-insured. It failed. It was truly a nonevent for me, not even an inconvenience. The sign over the door and the logo on the statements changed, that was all. A colleague had an account in a major regional bank, FSLIC-insured, that failed at about the same time. A nonevent for him, no problems.

2) At about the same time, a credit union in Rhode Island, whose deposits were insured by a state agency named RISDIC, failed. It turned out that RISDIC was shaky, too. The depositors were frozen out of access to their money for many months, I'm not sure what the final outcome was.

3) From 1971, when the money market mutual fund was invented, through 2008, everyone always said the same thing about money market funds: "They are not FDIC-insured but they are generally regarded as very safe." In 2008, one of the oldest, largest, and most famous of all money market funds, the Reserve Primary Fund, collapsed due to holding bad paper from Lehman Brothers. Fund shareholders immediately lost access to their money for many months; they eventually got $0.99 on the dollar back but in fits and starts, as lawsuits progressed, in various chunks at various times.

Yeah. FDIC and NCUA federal deposit insurance means something.
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delamer
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Re: Cash in bank to sleep well at night

Post by delamer »

HomerJ wrote: Sat Jul 17, 2021 12:29 pm
delamer wrote: Sat Jul 17, 2021 12:19 pm
Watty wrote: Sat Jul 17, 2021 12:00 pm If by cash you mean a
socialforums2019 wrote: Sat Jul 17, 2021 9:12 am Is $175K too much to just be sitting there losing out to inflation, but good obviously for liquidity.
Even if you have that $175K in a bond mutual fund it will still be losing out to inflation because interest rates are so low.

When looking at asset allocations people often say stocks and bonds but the bond part is really fixed income which can include a lot of other things than just bonds.

CDs can still count as part of your fixed income asset location. Most CD's can be redeemed early for a modest fee so they are more or less like "cash" too.

It is not what I would do but you could do something like keep $50K in a "high yield" savings account and then build a ladder of five year CD's where $25K matures each year. By this I would mean to start out that you buy five $25K CDs that mature in 1,2,3,4, and 5 years. When these mature and are reinvested you would then buy a new five years CD that would get the current interest rate.

You could then count that $125k as part of your overall fixed income asset allocation.
Completely agree.

Cash as in $175K earning 0.3% a year is foolish.

Cash as in a CD ladder or in short-term TIPS is a whole other thing.
Have you looked at CD or short-term TIPs rates lately?

Going from 0.3% to 0.7% or 0.85% isn't all that amazing. Yeah, one is giving up $700-$800 a year, and that's some decent spending money. But then the money is locked up in a 5-year CD ladder.
For someone who isn’t sure when/if all the $175K will be spent, why not shoot for the extra $700/year?
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Marseille07
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Re: Cash in bank to sleep well at night

Post by Marseille07 »

delamer wrote: Sat Jul 17, 2021 12:46 pm For someone who isn’t sure when/if all the $175K will be spent, why not shoot for the extra $700/year?
The OP isn't asking how to optimize their Fixed Income allocation.

Did you read that they have a 1M mortgage, and $0 of bonds in taxable? The last thing they want is to cut the EF too thin, lose a job (at 1.5M AA I'm guessing they're accumulating), and have to slash equities.

You can't just look at 175K notionally and say this and that.
RoadagentMN
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Re: Cash in bank to sleep well at night

Post by RoadagentMN »

175k honestly not really a large cash holdings. Many people keep 3x to 5x times that amount. I guess it depends on your total portfolio, but 175k cash fluid is quite common.
Marseille07
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Re: Cash in bank to sleep well at night

Post by Marseille07 »

RoadagentMN wrote: Sat Jul 17, 2021 1:03 pm 175k honestly not really a large cash holdings. Many people keep 3x to 5x times that amount. I guess it depends on your total portfolio, but 175k cash fluid is quite common.
It really isn't. Those who freak out on 175K in cash should look at how much bonds they're holding.
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Re: Cash in bank to sleep well at night

Post by delamer »

Marseille07 wrote: Sat Jul 17, 2021 1:03 pm
delamer wrote: Sat Jul 17, 2021 12:46 pm For someone who isn’t sure when/if all the $175K will be spent, why not shoot for the extra $700/year?
The OP isn't asking how to optimize their Fixed Income allocation.

Did you read that they have a 1M mortgage, and $0 of bonds in taxable? The last thing they want is to cut the EF too thin, lose a job (at 1.5M AA I'm guessing they're accumulating), and have to slash equities.

You can't just look at 175K notionally and say this and that.
The OP is concerned about whether their cash position is too large. One way to reduce the adverse effects of a large cash position is to optimize how it’s invested.

How is putting money into a CD cutting their EF too thin?
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Marseille07
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Re: Cash in bank to sleep well at night

Post by Marseille07 »

delamer wrote: Sat Jul 17, 2021 1:13 pm The OP is concerned about whether their cash position is too large. One way to reduce the adverse effects of a large cash position is to optimize how it’s invested.

How is putting money into a CD cutting their EF too thin?
If by CD you're talking about No Penalty CD then that's probably fine. I'd be mindful of their mortgage obligations though.

But I guess I don't quite agree that their cash position is too large to begin with. With $0 of bonds in taxable, an AA of 89/11 doesn't seem like a lot of fixed income. In the event of a market crash / job loss etc, they need the cash ready to go.
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socialforums2019
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Re: Cash in bank to sleep well at night

Post by socialforums2019 »

For those saying to consider the cash as a "bond" allocation, this is basically what the overall portfolio looks like:

Total Portfolio - ~$1.53M
Retirement Accounts: $390K
- $280K S&P500 ETF
- $110K Total Bonds ETF
Taxable Account: $965K
- $965K VTI ETF
Cash Account: $175K
- $175K High Yield Savings

In summary:
- $1.25M Equities (82%)
- $110K Bonds (7%)
- $175K Cash (11%)

Cash includes though "savings" for EF and could draw down quickly if I do something like solar so the only concern is that it could rapidly shift from a targeted 80/20 AA to 85/15 AA as cash draws down.

Should I put some of that cash into taxable bonds? and/or potentially even towards the mortgage?
Marseille07
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Re: Cash in bank to sleep well at night

Post by Marseille07 »

socialforums2019 wrote: Sat Jul 17, 2021 1:26 pm For those saying to consider the cash as a "bond" allocation, this is basically what the overall portfolio looks like:

Total Portfolio - ~$1.53M
Retirement Accounts: $390K
- $280K S&P500 ETF
- $110K Total Bonds ETF
Taxable Account: $965K
- $965K VTI ETF
Cash Account: $175K
- $175K High Yield Savings

In summary:
- $1.25M Equities (82%)
- $110K Bonds (7%)
- $175K Cash (11%)

Cash includes though "savings" for EF and could draw down quickly if I do something like solar so the only concern is that it could rapidly shift from a targeted 80/20 AA to 85/15 AA as cash draws down.

Should I put some of that cash into taxable bonds? and/or potentially even towards the mortgage?
Cash isn't a "bond" allocation. Both cash & bonds are part of "Fixed Income" allocation. This means buying taxable bonds doesn't do anything as you still remain at 80/20.

If 80/20 is your target, I'd just stay the course. You could increase bonds in 401K and slash HYSA, but I don't think it changes the landscape too much.
delamer
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Re: Cash in bank to sleep well at night

Post by delamer »

Marseille07 wrote: Sat Jul 17, 2021 1:20 pm
delamer wrote: Sat Jul 17, 2021 1:13 pm The OP is concerned about whether their cash position is too large. One way to reduce the adverse effects of a large cash position is to optimize how it’s invested.

How is putting money into a CD cutting their EF too thin?
If by CD you're talking about No Penalty CD then that's probably fine. I'd be mindful of their mortgage obligations though.

But I guess I don't quite agree that their cash position is too large to begin with. With $0 of bonds in taxable, an AA of 89/11 doesn't seem like a lot of fixed income. In the event of a market crash / job loss etc, they need the cash ready to go.
I didn’t argue that their cash position was too large. Two couples in very similar financial circumstances will come to different decisions on that issue.

My spouse and I actually have a pretty large cash position ourselves.

Many on the forum argue that it doesn’t matter where you keep your bonds/cash. You can sell stocks in taxable and then buy them in tax-deferred to keep your allocation consistent. So even if you need to sell “low” in taxable, you can turn around and buy “low” in tax-deferred.
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mortfree
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Re: Cash in bank to sleep well at night

Post by mortfree »

Assuming you can save cash at a decent rate I would take 75k and put it in VTI. Now your taxable account is over a million.

Start saving cash again and re-evaluate.

Regarding putting the cash (75k in my example) to the mortgage, that seems like a non-event given the current balance.

Are you maxing the retirement accounts?
RoadagentMN
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Re: Cash in bank to sleep well at night

Post by RoadagentMN »

delamer wrote: Sat Jul 17, 2021 1:45 pm
Marseille07 wrote: Sat Jul 17, 2021 1:20 pm
delamer wrote: Sat Jul 17, 2021 1:13 pm The OP is concerned about whether their cash position is too large. One way to reduce the adverse effects of a large cash position is to optimize how it’s invested.

How is putting money into a CD cutting their EF too thin?
If by CD you're talking about No Penalty CD then that's probably fine. I'd be mindful of their mortgage obligations though.

But I guess I don't quite agree that their cash position is too large to begin with. With $0 of bonds in taxable, an AA of 89/11 doesn't seem like a lot of fixed income. In the event of a market crash / job loss etc, they need the cash ready to go.
I didn’t argue that their cash position was too large. Two couples in very similar financial circumstances will come to different decisions on that issue.

My spouse and I actually have a pretty large cash position ourselves.

Many on the forum argue that it doesn’t matter where you keep your bonds/cash. You can sell stocks in taxable and then buy them in tax-deferred to keep your allocation consistent. So even if you need to sell “low” in taxable, you can turn around and buy “low” in tax-deferred.
Again, 175 K isn’t that large honestly- it’s really about the total portfolio size. The world is a big place, it’s not uncommon to see cash balances running in the 300k to 500k with the 5 million + portfolios
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socialforums2019
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Re: Cash in bank to sleep well at night

Post by socialforums2019 »

mortfree wrote: Sat Jul 17, 2021 1:54 pm Assuming you can save cash at a decent rate I would take 75k and put it in VTI. Now your taxable account is over a million.

Start saving cash again and re-evaluate.

Regarding putting the cash (75k in my example) to the mortgage, that seems like a non-event given the current balance.

Are you maxing the retirement accounts?
Maxing out 401K ($19.5K), maxing $8.7K company match and started maxing backdoor Roth IRA ($6K)

End of month cash savings is around $1K/mo which we put into VTI taxable.
utvolfan
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Re: Cash in bank to sleep well at night

Post by utvolfan »

nisiprius wrote: Sat Jul 17, 2021 12:37 pm
utvolfan wrote: Sat Jul 17, 2021 11:43 am So to be honest...Does anyone feel like the Cash at the bank in savings or CDs etc helps you to sleep at night because it is FDIC insured?
It's meaningful.

1) Circa 1990 I had, what was at the time, important money for me and my family in a credit union that was NCUA-insured. It failed. It was truly a nonevent for me, not even an inconvenience. The sign over the door and the logo on the statements changed, that was all. A colleague had an account in a major regional bank, FSLIC-insured, that failed at about the same time. A nonevent for him, no problems.

2) At about the same time, a credit union in Rhode Island, whose deposits were insured by a state agency named RISDIC, failed. It turned out that RISDIC was shaky, too. The depositors were frozen out of access to their money for many months, I'm not sure what the final outcome was.

3) From 1971, when the money market mutual fund was invented, through 2008, everyone always said the same thing about money market funds: "They are not FDIC-insured but they are generally regarded as very safe." In 2008, one of the oldest, largest, and most famous of all money market funds, the Reserve Primary Fund, collapsed due to holding bad paper from Lehman Brothers. Fund shareholders immediately lost access to their money for many months; they eventually got $0.99 on the dollar back but in fits and starts, as lawsuits progressed, in various chunks at various times.

Yeah. FDIC and NCUA federal deposit insurance means something.

So you have touched on part of my reason for being risk adverse...

My grandparents grew up very poor and started their adult lives during the depression --they saved, saved, saved through-out their working lives. They were able to retire comfortably with high earning CDs and municipal and corporate bonds. She was very "safe". Had some of that Lehman Brothers, GM bonds, Ford bonds and others. She passed a few years before the collapse, but we always said she would be horrified to know what happened to some of her portfolio like what was in LB and GM (eventually a $5k bond yielded a bit less than $1k, after the bail-out and bankruptcy restructuring. Ford ended up coming out of it holding the value.) She was one of those who lived off SS and interest/dividends and would not touch the principal, and didn't need to because even in the early 2000's the bonds were paying 7% +. If she had been alive after 2008, she probably would have had difficulty paying for assisted living without touching the principal as when bonds were called the interest rates being offered were not going to pay what she was used to! And obviously they have remained quite low all these years.

So after watching her re-use bread bags (turned inside out) all my life and hearing her stories about people losing it all, that apprehension sometimes sticks with me. My Dad introduced me to the STAR fund and I can remember him talking about Vanguard when I was just starting out on my own. He'd say "if you just put $25 a week into the STAR fund..." LOL I didn't have an extra $25 a week!

So although I tell myself that I would lose approximately 20% of my portfolio if I am 40/60 in a worst case scenario, who really knows if the 60% will hold its value or how much more one would "lose"? So yeah, I probably have too much in Cash, but as I said before, all I have been able to learn from this and other forums has made me much more confident with our portfolio. I think the overall size of the portfolio matters in many ways when considering how much cash you keep--That $175k in a $2-3 million portfolio is not all that much. If the portfolio is a million or half a million, another story. But then if the portfolio isn't extremely large, maybe the person needs the security of knowing they have some money that just can't go "pouf". A bit melodramatic I know, but it is all about being able to sleep at night AND have an great retirement!

I will from time to time continue to ask "stupid" questions, but most of the time people are very kind and point you in the right direction. It is appreciated!
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Re: Cash in bank to sleep well at night

Post by KlangFool »

socialforums2019 wrote: Sat Jul 17, 2021 2:01 pm
mortfree wrote: Sat Jul 17, 2021 1:54 pm Assuming you can save cash at a decent rate I would take 75k and put it in VTI. Now your taxable account is over a million.

Start saving cash again and re-evaluate.

Regarding putting the cash (75k in my example) to the mortgage, that seems like a non-event given the current balance.

Are you maxing the retirement accounts?
Maxing out 401K ($19.5K), maxing $8.7K company match and started maxing backdoor Roth IRA ($6K)

End of month cash savings is around $1K/mo which we put into VTI taxable.
socialforums2019,

1) Your annual savings is 19.5K + 8.7K + 6K + 12K = 46.2K

2) Your portfolio is 1.53M with an AA of 82/18 (including CASH).

3) Your portfolio equal to 33 years of annual savings.

4) How old are you?

5) If the stock market drops 50%, you lose 41% of your portfolio = 13.6 years of annual savings.

6) Your AA is too aggressive. The last thing that you should do is reduce CASH and increase more STOCK.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
KlangFool
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Re: Cash in bank to sleep well at night

Post by KlangFool »

OP,

Your annual expense = 120K. Let's assume that your number is 25X 120K = 3 million. Your current portfolio size is 1.53m. Your annual savings is 46.2K

With an annual return of 5%, you would reach 3 million in 10 years.
With an annual return of 6%, you would reach 3 million in 8+ years.
With an annual return of 7%, you would reach 3 million in 7+ years.

Your AA is too aggressive. You are too close to your targeted number. You do not have the TIME to wait for recovery.

Starting Net Worth $1,530,000
Annual Savings $46,200
Years
Annual Return Rate 7 8 9 10
5.00% $2,529,024 $2,701,676 $2,882,959 $3,073,307
6.00% $2,688,350 $2,895,851 $3,115,802 $3,348,950
7.00% $2,856,661 $3,102,828 $3,366,226 $3,648,061

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
Wannaretireearly
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Re: Cash in bank to sleep well at night

Post by Wannaretireearly »

Personal opinion: if I'm getting close to retirement and not getting a paycheck I'd want 5 to 10% in easily accessible cash or taxable CA muni funds. Or perhaps it's 2 or 3X expenses in cash/taxable bonds. Assuming ER.

It is personal. I found out my comfort level in March/April 2020. I bought 30k of EM on a 'dip' using my emergency fund. Left me with just a few months of expenses in my EF. I quite quickly got spooked. What if I losd my job? How could I get thru 1 year of unemployment? I wanted to build back my EF. I sold the EM position for a small loss. Ce la vie. Lesson learned. I need 6 to 12 months of cash/CA muni funds accessible for me to feel comfortable (working on that now).

I have a largish taxable brokerage account, but that didn't matter in my above experience as those $ are earmarked for actual ER.

Money is fungible, but psychology is at work too...
Death and taxes. Only one is under your control!
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JoMoney
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Re: Cash in bank to sleep well at night

Post by JoMoney »

utvolfan wrote: Sat Jul 17, 2021 11:43 am So to be honest...Does anyone feel like the Cash at the bank in savings or CDs etc helps you to sleep at night because it is FDIC insured? Once in the market I have lost that feeling of security, and think that at least I have X amount that can't go right down the tubes in a crash :shock: (Not that it would be enough but at least it would be there.) I try to think of my Stable Value fund money in the 401k the same way, but in reality I know that if all hell broke loose, that really isn't completely safe.

So yes I am risk adverse, but you all have educated me enough that I have settled on a 30-40% equities AA having recently retired with DH joining me in about a year. I sincerely thank all of you for the knowledge and insight you make available to others!
Yes, but only a few weeks expenses worth in the bank. If I can wait a few weeks for the money to be transferred, then I feel just as safe with the money in savings bonds or safe bonds/money market account at a brokerage. I also sleep better knowing I have a small amount of cash around too, so I'm not stuck if there's some natural disaster shutting down electronic networks, or if I have to wait a day or two for card replacement.

At the currently very very low interest rates available, I feel better about keeping more at the bank and less concern about chasing the highest (safe) interest rate in money markets or elsewhere. + or - 1% on my "safe" money allocation isn't going to move the needle.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
hudson
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Re: Cash in bank to sleep well at night

Post by hudson »

socialforums2019 wrote: Sat Jul 17, 2021 1:26 pm For those saying to consider the cash as a "bond" allocation, this is basically what the overall portfolio looks like:

Total Portfolio - ~$1.53M
Retirement Accounts: $390K
- $280K S&P500 ETF
- $110K Total Bonds ETF
Taxable Account: $965K
- $965K VTI ETF
Cash Account: $175K
- $175K High Yield Savings

In summary:
- $1.25M Equities (82%)
- $110K Bonds (7%)
- $175K Cash (11%)

Cash includes though "savings" for EF and could draw down quickly if I do something like solar so the only concern is that it could rapidly shift from a targeted 80/20 AA to 85/15 AA as cash draws down.

Should I put some of that cash into taxable bonds? and/or potentially even towards the mortgage?
I like the simplicity of your holdings...S&P 500, Total Bond, Total Stock Market, cash...that's it!
It's refreshing to see a clean portfolio and not one with 20-30 questionable high expense funds.

Cash to taxable or towards the mortgage? I'd pull out the back of an envelope or two and lay it all out.
I'd sleep on it for days, weeks, or longer. Then I might decide or kick the can on down the road.
If I had $175K, I would strongly consider a high quality muni fund like BMBIX or VWIUX. VWIUX is currently paying out around 2%; the 2% is slowly declining.
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