How Much Cash Savings is Appropriate?

[emacknight]

This will probably seem like a bit of a strange question, but I can't figure out how much of my savings I should keep in cash as opposed to stocks or investments. And by cash I mean in a checking/savings account where it is fully liquid.

What seems like an appropriate system, 3 months living expenses?

I usually try to keep enough to cover the deductible for car and house insurance, you know, in case my car crashes into my house. As well as my max out of pocket for medical, again in case I'm in the car when it crashes into the house.

It bothers me that it's just sitting there doing nothing, but I seems irresponsible to lock it into something.

Thoughts? Opinions?

[Shagnasty]

It depends on your lifestyle and the types of adjustments you can make rapidly. Three months is the base rule but most people don't even close to that. A large percentage of people claimed in recent polls that they couldn't even come up with $2000 on a month's notice even with help. That is scary. Depending on your profession and obligations, closer to 6 months is safer but that does start to look like real money as in tens of thousands of dollars in your savings account just sitting there. Six months of savings does not equal six months of self-funded full pay however. It should be cheaper in some ways to be unemployed. You should get some unemployment and you don't have to fund investments and retirements during that time. OTOH, medical insurance usually goes up sharply. Three months of fully funded self-pay should cover you for about 4 - 6 months without a major lifestyle adjustment but you would have to sit around the house looking for a new job most of the time and not go on vacation.

[Rand Rover]

Single, huh? :)

My wife makes me keep way more in cash than I want to. Personally I'd keep 20 bucks in cash if she'd let me (well, actually, I'm self-employed for tax purposes so I have to keep lots of cash to pay my taxes every quarter). I've got a high credit limit on several cards, I can liquidate investments in a taxable account with a mouse click during business hours (then transfer to checking immediately), and I'm insured every which way (I'm pretty sure you'd have a few days at least to come up with the deductible).

Like lots of advice dealing with money, I think the "have some savings" advice is for those who would otherwise spend it all and doesn't really mean you need to keep some actual cash around if you have investments and credit.

[j666]

Very strong opinions.

Money has two uses:
1. Paying for things you need
2. Creating additional wealth

One trumps two.

If you are young and single, keep 3 months of basic operating expenses in liquid assests. If you have a family (or other assest you would be loath to lose, up it to 6 months.

You will not earn money on liquid assets, but you need to maintain them. Bad things can happen.

Low debt makes it easier to keep adequate reserve assets.

[j666]

Single, huh? :)

My wife makes me keep way more in cash than I want to. ...

Like lots of advice dealing with money, I think the "have some savings" advice is for those who would otherwise spend it all and doesn't really mean you need to keep some actual cash around if you have investments and credit.
You are very fortunate in your wife.

[Rand Rover]

You are very fortunate in your wife.

So tell me why cash is better than (i) not-that-volatile assets in a taxable account that I can liquidate immediately and (ii) credit limits on several cards.

[Onomatopoeia]

If you're like me, no amount is enough. I think about and worry about money every single day, and I'm financially comfortable. The older I become, the more I obsess and save and obsess some more.

BOA has an online retirement calculator that I really, really need to stay away from. It's making me sick(er). According to them, I need millions of dollars in cash just to be able to retire with the shirt on my back...and the really sick thing is I've bought into it.

My wife thinks I'm nuts, but I'm not.

[Shagnasty]

If you're like me, no amount is enough. I think about and worry about money every single day, and I'm financially comfortable. The older I become, the more I obsess and save and obsess some more.

BOA has an online retirement calculator that I really, really need to stay away from. It's making me sick(er). According to them, I need millions of dollars in cash just to be able to retire with the shirt on my back...and the really sick thing is I've bought into it.

My wife thinks I'm nuts, but I'm not.

Sadly, you are closer to mark than most people are. I hear people calling in on financial advice shows wanting to know if they can retire with half a million dollars. Maybe, but it won't be fun depending on how long you plan to live. If you are 50 years old, the chances are good that you will live into your 80's or beyond. Half a million dollars doesn't seem so go when you spread it out over 30 or 40 years even with investment gains.

[kunilou]

Three to six months is the usual guideline, but there are several ways to do it. One way is to put a month's savings at a time into a 90-day or 6-month CD. Then you get a CD rolling over every month. You can either pull out the money when you need it, or let it continue to roll. Interest rates are very low, but they're still (marginally) better than what you'd have in a savings or money market account.

[Bag of Mostly Water]

Based on my experience, you should have:

Two to three months living expenses in checking and savings accounts.
Three or four months in a money market account.
Another six months in an account which could be made liquid in six months. This would includes stocks and bonds.

[TimeWinder]

So tell me why cash is better than (i) not-that-volatile assets in a taxable account that I can liquidate immediately

In the first and probably only time I will ever agree with Rand Rover on anything...I agree. Why would you keep a cash/savings account at all beyond the necessary routine flow of money and bills? Assuming you don't do something stupid like buy CDs with your investment dollars, you should be able to make your basic stock management account liquid within 5 days at the outside (less if it's not a weekend), and it'll earn more than a savings account--with whatever risk profile you want.

I needed money for a down payment a while back and TD Ameritrade moved money from fully invested in some stable, dividend-bearing stocks to cash in my checking account in about 48 hours.

[Rand Rover]

Another six months in an account which could be made liquid in six months. This would includes stocks and bonds.
[/LIST]
? Are you implying that it takes six months to make stocks and bonds liquid? Maybe for ones that aren't publicly traded, but very few people own those. Also, six months is a long-ass time--basically everything that the average person owns is liquid if six months is your time horizon.

More generally, it would be nice if people advocating keeping lots of cash on hand would explain their reasoning. We aren't talking about having the cash versus not having the cash, we are talking about having the cash versus investing it in something (and a CD or money market account isn't really an investment since these days you wouldn't beat inflation by a far sight).

I hope it doesn't look like I'm picking fights with people--I'd really like to hear some opinions on this (so far most people are just stating their recommendation without any reasoning for it).

[Implicit]

This will probably seem like a bit of a strange question, but I can't figure out how much of my savings I should keep in cash as opposed to stocks or investments. And by cash I mean in a checking/savings account where it is fully liquid.

What seems like an appropriate system, 3 months living expenses?

I usually try to keep enough to cover the deductible for car and house insurance, you know, in case my car crashes into my house. As well as my max out of pocket for medical, again in case I'm in the car when it crashes into the house.

It bothers me that it's just sitting there doing nothing, but I seems irresponsible to lock it into something.

Thoughts? Opinions?
First, it is doing something, it's giving you protection. If you get lose your job or get hurt/sick or have an actual emergency that emergency fund is your lifeline.

If you are drunk when you crash your car into your house it's not just the deductible you'll need since you probably invalidated your insurance. So basing your needs on deductibles is a backwards way of calculating what you need for an emergency fund.

The fund should be based on your monthly fixed living expenses (rent/mortgage, car payment, utilities, food, insurance expenses, etc.) and most financial advisors recommend an emergency fund that covers you for 6 months. If you have other easy to access funds invested then you can probably get away with a lower emergency fund.

[Rand Rover]

In the first and probably only time I will ever agree with Rand Rover on anything...I agree. It only hurts the first time. :) Welcome to my fan club, your t-shirt is in the mail.
I needed money for a down payment a while back and TD Ameritrade moved money from fully invested in some stable, dividend-bearing stocks to cash in my checking account in about 48 hours.
Nowadays, using the power of the internet, we can do that in 48 seconds.

[Implicit]

? Are you implying that it takes six months to make stocks and bonds liquid? Maybe for ones that aren't publicly traded, but very few people own those. Also, six months is a long-ass time--basically everything that the average person owns is liquid if six months is your time horizon.

More generally, it would be nice if people advocating keeping lots of cash on hand would explain their reasoning. We aren't talking about having the cash versus not having the cash, we are talking about having the cash versus investing it in something (and a CD or money market account isn't really an investment since these days you wouldn't beat inflation by a far sight).

I hope it doesn't look like I'm picking fights with people--I'd really like to hear some opinions on this (so far most people are just stating their recommendation without any reasoning for it).

I don't know why others are advocating it, but I would advocate the same for two reasons. First, your hands are tied when you need to liquidate in an emergency. Having some flexibility on the timing when you are liquidating stocks and bonds can save you some losses or allow you to minimize the tax impact. Second, most people aren't investing for a rainy day, those funds are for their retirement and they should think extra long and hard before taking that money out to buy a new car because they've totaled theirs. Dipping into those funds can quickly become a habit, so keeping different kinds of savings separate (emergency fund, travel fund, retirement fund) is a very good idea.

[Rand Rover]

I don't know why others are advocating it, but I would advocate the same for two reasons. First, your hands are tied when you need to liquidate in an emergency. Having some flexibility on the timing when you are liquidating stocks and bonds can save you some losses or allow you to minimize the tax impact. The tax impact makes sense--an added cost to liquidating investments is you may liquidate one at a gain, thereby incurring a tax liability you wouldn't have if you just had cash. It's extremely difficult to estimate the negative of the tax impact and the positive of having the investment in the first place, but I think that having the investment has got to come out ahead--the unlikelihood of having to liquidate seems to reduce the tax impact to a number that's easily outpaced by the return. Also you didn't take into account that many of my cash needs could be put on a credit card, thus avoiding this negative.


Second, most people aren't investing for a rainy day, those funds are for their retirement and they should think extra long and hard before taking that money out to buy a new car because they've totaled theirs. Dipping into those funds can quickly become a habit, so keeping different kinds of savings separate (emergency fund, travel fund, retirement fund) is a very good idea.

Well, most people will have insurance and will finance a car, so having to liquidate investments to buy a car isn't that realistic a scenario. Also, with the last part, you are again talking to people other than the OP.

[China Guy]

It depends. For me the peace of mind of having cash or more or less cash assets is HUGE. I also lived in a cash society for 25 years (Asia), witnessed the '87 crash, first hand the '97 crash and of course the '08 crash and have seen people wiped out. I worked investment banking for 7 years and was a bit player in the '97 crash and got laid off for my sins 6 months later.

1 year worth of cash or near cash assets for my family is a no brainer. It's totally worth it, for me, versus the lost potential gains of investing that money.

I moved back to the US after 25 years one year ago. I didn't have established US credit. Car dealers, the very few that would extend credit, had rates that would make a loan shark look like a piker. Fuck it, I bought my mini-van with cash. Again, for me, it's worth great peace of mind to be able to drop 30 grand and still have everything covered for my family for at least a year if things go south.

I grew up poor and did a lot of stupid things and made stupid choices for a decade until I started making some ok money and went debt free. YMMV

[Onomatopoeia]

I grew up poor and did a lot of stupid things and made stupid choices for a decade until I started making some ok money and went debt free. YMMVI can't say that I grew up poor, but my family was probably solidly lower middle class. When I graduated high school, I had absolutely no concept of the value of money, nor appreciation for it. My college years gave me a rude awakening as more and more of the responsibility for managing my life shifted from my parents to me. It was tough.

My dad told me that once I hit 20 his contribution toward my tuition would cease. Contribution? He was paying the whole freaking thing! I went into a panic and, by the time I was 20, I had a full-time job at American Savings Bank's mortgage division. My job was to clear remittances by mortgage companies with a process called single-debit accounting. It was a terrible job. All the while I had a full plate of courses at NYU, all of which I was responsible for paying. I was poor then, and miserable, and believed I would always be poor.

The good thing is something clicked in me in those days, and I've been saving like a mad man ever since, accepting a lifestyle of personal sacrifice and limited enjoyment. The bad thing is something clicked in me in those days, and I've been saving like a mad man ever since, accepting a lifestyle of personal sacrifice and limited enjoyment. ;) I missed out on a lot in my 20s and 30s. When people I know reminisce about those days, they say they're amazed at how disciplined I was with my finances. What they don't realize is it was really just a perpetual, 15-year long panic attack, and not any wisdom on my part, that propelled my hoarding of cash, constant research for the best savings and CD rates, and moving money around like my life depended on it.

20 years, and a couple of degrees later, and I'm in a good place financially, with all my student loans paid off, and no debt other than my house. I have way more cash in savings than is necessary, or smart to be frank, but I have to sleep at night.

[Dangerosa]

I keep about three months - my husband and I both work so the chances of both of us losing jobs are pretty slim.

Why not in something better than a money market account? Because we are both most likely to lose jobs in the aftermath of a stock market crash. Because selling stock has bigger tax implications than pulling cash out of a savings account. Because some of my money is to save and some of it is to spend - money that goes into the market I don't spend lightly - where when my cash savings gets higher, I will spend that (or move it to stocks).

[Machine Elf]

The tax impact makes sense--an added cost to liquidating investments is you may liquidate one at a gain, thereby incurring a tax liability you wouldn't have if you just had cash.

But only the ROI is taxed, right? Not the principle? So assuming the market has been headed upward (I'll grant this is not a sure thing these days), wouldn't investing in (and then liquidating) a mutual fund always put you ahead of just keeping cash in a savings account for the same time period?

I'm with the "invest it" crowd. One should know how long it takes to liquidate one's investments, and just have enough cash on hand to last that long (plus a margin of safety). This way you're putting as much of your wealth to work for you as possible.

[Folacin]

For the 'fully invested' crowd: if you are growing your investments, 3-6-12 months of expenses (whatever your comfort zone) becomes less and less of your net worth, so it affects your ROI less each period. Of course, on the flip side, having to liquidate part of the trust fund becomes less of a hit also, even if the market has dropped 75%.

But it's the "market has dropped 75%" scenario that keeps some amount (probably too much, but my wife is risk-averse) of the hoard in cash. I'm trading some unknown gain for insurance against selling at a loss.

[Dangerosa]

But it's the "market has dropped 75%" scenario that keeps some amount (probably too much, but my wife is risk-averse) of the hoard in cash. I'm trading some unknown gain for insurance against selling at a loss.

Yep.

I also like to have cash in hand for those market drops. Then I buy dividend stock. So the dividend portion of my portfolio has 8-9% dividend yields on its original purchase price, plus gain. If I sold, I'd buy back fewer shares and take a dividend hit.

Now, if I have all my cash in the market, I can't take advantage of fire sale prices on dividend stock - and I have to sell my dividend stock, cutting into my dividend income.

[Rand Rover]

Machine elf--yep, totally agree, and in fact I had that realization myself in the shower this morning.

Also, a couple of people have said that I may be forced to "take a loss" when I don't want to. That's a bad way to think about investing. If you buy something for $100 and it's now worth $75, you've already lost $25 whether you sell it now or keep holding it.

Also, I understand those of you in volatile employment fields--I can see how having csh makes sense there.

[Dangerosa]

Machine elf--yep, totally agree, and in fact I had that realization myself in the shower this morning.

Also, a couple of people have said that I may be forced to "take a loss" when I don't want to. That's a bad way to think about investing. If you buy something for $100 and it's now worth $75, you've already lost $25 whether you sell it now or keep holding it.

Also, I understand those of you in volatile employment fields--I can see how having csh makes sense there.

Paper losses are different than actual losses. I'll take losses when I want to (and I often do if stock isn't performing or if I start to get to emotionally invested in the loss - that isn't good investing), but I don't like taking losses cause I NEED to. I want the market to work for me - it isn't doing that when circumstances are forcing my hand on when to sell.

[Rand Rover]

How exactly are paper losses different?

[bump]

How exactly are paper losses different?

I think what they're saying is that it's all theoretical until you actually sell the instruments in question.

For example, if you had a share of stock X at $20.00 in 2007, it dropped to $5 in 2008, and by 2011 it's back to $20.00, you neither lost nor gained over your four year period on that particular stock.

You'd have lost if you sold it before it was back at $20.00 though, but since you didn't, that $15 loss in 2008 was a paper loss.

So what she's trying to say is that by not putting the savings money into stocks, the only value loss you have to deal with is inflation, rather than potentially having to incur losses if you convert your stocks to cash when they're down.

[Rand Rover]

Right, but you're just illustrating my point that "paper losses" and "real losses" are the exact same thing. Really the decision to not sell something is a decision to buy it. The past has already happened and can't be changed.

[LonghornDave]

How exactly are paper losses different?

Paper losses are different in the obvious way that they have not been realized. I do not know if you are a fundamentalist or a technicalist (or combination), but clearly if you believe in fundamental analysis then you can believe that the intrinsic value of a security exists despite some market pyschology change.

[Rand Rover]

Well, they haven't been realized in the tax sense, but they have in the economic sense.

If you have $10k and lose $2k at a casino, then you now have $8k. Also, if you buy $10k worth of stock and it goes down in value to $8k, you also have something worth $8k, exactly as in the first scenario. The first scenario becomes the second if you use the $8k to buy that stock.

[Implicit]

Well, they haven't been realized in the tax sense, but they have in the economic sense.

If you have $10k and lose $2k at a casino, then you now have $8k. Also, if you buy $10k worth of stock and it goes down in value to $8k, you also have something worth $8k, exactly as in the first scenario. The first scenario becomes the second if you use the $8k to buy that stock.
In both those cases you are willing to take some risk on your bankroll because you believe that the trend will be up even if there are fluctuations down. If that's your emergency fund and you have to take out $4k right now, you will be left trying to ride out that fluctuation where you lost $2k with only a $4k bankroll. That 20% downturn in the market needed a 25% rise to get you whole if you still had the whole bankroll, but now you need a 50% rise to get back that $2k. You were banking on the market trending upwards eventually, but by cashing out part of your bankroll you are going to have a hard time recovering from that loss. Obviously if you luck out and are forced to cash in during a peak instead you'll be locking in profits instead of losses, but if you are investing you should be the one dictating the timing, not an emergency.

[Rand Rover]

I think some people are losing sight of the discussion here. The issue we are discussing is whether to make the investment or hold onto the cash. If you choose to make the investment, then of course you only make an investment you think will go up, and of course it may go down, and of course you may be forced to liquidate when you don't want to. But, you wouldn't want to spend the cash either if you just kept it in cash--that's just the nature of having to spend money in an emergency.

Making the investment gives you the opportunity for gain, whereas cah doesn't. Of course, the investment also carries the risk of loss, whereas cash doesn't. But you choose the investment by balancing the two and picking one you think will go up. If it goes down and you have to sell, then that's just a risk you take.

I guess another thing that should be mentioned here is that you really shouldn't count 100% of the investment as an emergency fund because it could go down in value. So, if you want a $10k emergency fund, you should have something like $12k or whatever invested.

[LonghornDave]

More generally, it would be nice if people advocating keeping lots of cash on hand would explain their reasoning.

There are numerous reasons why cash or cash type instruments have value.

1) Cash is better than unused borrowing capability because that unused availability can be taken away. It may be unlikely to occur, but it can happen.

2) Cash allows you to take advantage of buying opportunities that come up unexpectedly.

3) Cash can help with unexpected catastrophic expenses. You may simply not want to liquidate other investments (for a multitude of reasons).

4) Cash serves as an unencumbered cushion in the event that you lose your revenue stream. Regardless of how secure you think your income stream is, you can lose it.

The very simple fact is that lightning can strike. Something unexpected always has the chance of occurring.

Take a look at some company balance sheets. Most retain cash despite also having some unused borrowing capacity.

[Dangerosa]

I think some people are losing sight of the discussion here. The issue we are discussing is whether to make the investment or hold onto the cash. If you choose to make the investment, then of course you only make an investment you think will go up, and of course it may go down, and of course you may be forced to liquidate when you don't want to. But, you wouldn't want to spend the cash either if you just kept it in cash--that's just the nature of having to spend money in an emergency.

Making the investment gives you the opportunity for gain, whereas cah doesn't. Of course, the investment also carries the risk of loss, whereas cash doesn't. But you choose the investment by balancing the two and picking one you think will go up. If it goes down and you have to sell, then that's just a risk you take.

I guess another thing that should be mentioned here is that you really shouldn't count 100% of the investment as an emergency fund because it could go down in value. So, if you want a $10k emergency fund, you should have something like $12k or whatever invested.

It probably makes a big difference what your overall net worth is.

If you have a net worth of $3M invested in the market (and fairly affordable day to day needs), than who cares if $1M of it disappears overnight. You can still manage to have plenty of cash in your hands to meet your needs for some amount of time if you loose your job- even with $50 in your checking account and nothing in savings. (I'd still keep more cash liquid myself, but that is me)

But if you have $3000 in the market and $50 in the checking account and nothing in savings, and suddenly $1000 disappears overnight, that's going to hurt if you have any significant financial emergency and need that money.

[msmith537]

Well, they haven't been realized in the tax sense, but they have in the economic sense.

If you have $10k and lose $2k at a casino, then you now have $8k. Also, if you buy $10k worth of stock and it goes down in value to $8k, you also have something worth $8k, exactly as in the first scenario. The first scenario becomes the second if you use the $8k to buy that stock.

I'm surprised you haven't mentioned this (since you are a tax attorney), but if you are forced to liquidate stock you purchased at $10k at a $2k loss, you can write off some off that loss on your taxes. If you pay $2k in cash, you don't get to write that off (unless of course whatever you are forced to pay for qualifies as a deduction, in which case it is a wash in both scenarios).

There are also tax implications if you plan to invest that money. Say you are saving up for downpayment on a house you want to buy in a year. You need to take into account any capital gains you may incur when you sell those stocks. It might work out that it would have been better just to keep it in savings.

[LonghornDave]

If you have $10k and lose $2k at a casino, then you now have $8k. Also, if you buy $10k worth of stock and it goes down in value to $8k, you also have something worth $8k, exactly as in the first scenario. The first scenario becomes the second if you use the $8k to buy that stock.

It's not the exact same. It may be the same from a current liquidation value perspective, but that stock may have intrinsic value above that which hasn't been captured by the market value yet.

Do you believe in a perfectly efficient market? When you buy a stock, do you buy it because you believe it is undervalued? Do you ever sell a stock because you think it is overvalued?

[Rand Rover]

It's not the exact same. It may be the same from a current liquidation value perspective, but that stock may have intrinsic value above that which hasn't been captured by the market value yet.

Do you believe in a perfectly efficient market? When you buy a stock, do you buy it because you believe it is undervalued? Do you ever sell a stock because you think it is overvalued?
The value of a stock right now is the amount you can sell it for right now. The "undervalued"concept is just one way to say "I think the price will go up in the future." The stock is not uin some present state of "being undervalued." There's no "real value" that's different than the current market value.

[iamthewalrus(:3=]

But only the ROI is taxed, right? Not the principle? So assuming the market has been headed upward (I'll grant this is not a sure thing these days), wouldn't investing in (and then liquidating) a mutual fund always put you ahead of just keeping cash in a savings account for the same time period?Sure, assuming the market will be up. Once you assume that, obviously the best move is to invest every last dime in it. Once you remove that assumption (and it's not a good assumption to make in this case), then the right move is not so obvious.

Something to consider: On average, you are statistically more likely to need your emergency fund in a down market. You can wreck your car or have a medical emergency at any time, but losing your job and being unable to get another one (or being unable to get as good of one) is more likely to happen when the economy is faltering and the stock market is down.

[Manda JO]

But if you have $3000 in the market and $50 in the checking account and nothing in savings, and suddenly $1000 disappears overnight, that's going to hurt if you have any significant financial emergency and need that money.

Transaction costs also play a more significant role when you are dealing with fairly small amounts of money. This is especially true when we are talking about "rainy day" savings, not retirement-or-huge-emergency savings.

I move money in and out of my savings account a lot: I move money in a couple times a month, and I pull money out of it several times a year. We "save" every penny above basic operational costs, but I am not shy about dipping into those savings if we need to buy a new appliance or take a planned vacation or deal with other non-reoccurring expenses. It would be a real pain in the ass to have to liquidate something because the dishwasher broke. It's just not worth it to me to have to worry about that: I'd rather have the cash on hand to handle those sorts of expenses.

There are also times when you can't project future expenses very well. We have a Big Pile of Money in savings right now because we are having a baby in October. It's just really hard to project what that is going to cost, beyond "way more than we think". So for now, we will just keep adding to the Big Pile, and six months after the baby is born we will look at what is left, what our new level of "normal" expenditures looks like, and reassess. But even then, I want to be able to handle unexpected mid-level expenses without a lot of bother.

[LonghornDave]

The value of a stock right now is the amount you can sell it for right now. The "undervalued"concept is just one way to say "I think the price will go up in the future." The stock is not uin some present state of "being undervalued." There's no "real value" that's different than the current market value.

Yes, there is. Apparently you think you know more than people like Adam Smith, John Maynard Keynes, and Warren Buffett though. Maybe, instead, you could read a beginner's book on Fundamental Analysis and educate yourself on the topic instead of spouting off obviously incorrect platitudes. I guarantee you that there is not a single company you invest in that believes what you just stated.

[Trom]

Yes, there is. Apparently you think you know more than people like Adam Smith, John Maynard Keynes, and Warren Buffett though. Maybe, instead, you could read a beginner's book on Fundamental Analysis and educate yourself on the topic instead of spouting off obviously incorrect platitudes. I guarantee you that there is not a single company you invest in that believes what you just stated.

I think it's reasonable to argue that the market was significantly less efficient when Keynes was a hedge fund manager. And Buffett recommends index investing.

I think the point is, unless you're a big bank and can suspend mark-to-market accounting of your positions, you are SOL. It doesn't matter what you think your portfolio is worth. It's is worth exactly what the current market price is. Even if there is a very solid rational reason you believe your securities are mispriced, you can do nothing to realize that value until the market agrees (if ever).

Also, there is no 100% agreed upon model that can be used to determine a stock's true value. For every fundamental argument explaining why a stock is over valued, you could find another fundamental analyst arguing the opposite.

[Rand Rover]

Yes, there is. Apparently you think you know more than people like Adam Smith, John Maynard Keynes, and Warren Buffett though. Maybe, instead, you could read a beginner's book on Fundamental Analysis and educate yourself on the topic instead of spouting off obviously incorrect platitudes. I guarantee you that there is not a single company you invest in that believes what you just stated.
Calm down, tough guy. Not only have I read plenty on FA (stuff way beyond beginner's books), I actually understood what I read. Perhaps you could try to do the same.

[Mama Zappa]

Columnist Michelle Singletary recommends:
1-2 thousand for "life happens" (unexpected repair bills and the like)
3-6 months living expenses (maybe more with the economy the way it is).

Note that it doesn't all have to be in a regular (.001% interest) savings account, I suspect you'd be fine with putting it in shortish term CDs. You can always break the CD if necessary, with relatively small penalty.

Off to read the rest of the thread to see how duplicative this advice is :).

[Mama Zappa]

...

More generally, it would be nice if people advocating keeping lots of cash on hand would explain their reasoning. We aren't talking about having the cash versus not having the cash, we are talking about having the cash versus investing it in something (and a CD or money market account isn't really an investment since these days you wouldn't beat inflation by a far sight).
...
Suppose you had your 6 months' savings on hand - invested in stocks - in October 2007 (http://www.the-privateer.com/chart/dow-long.html).

Then you lost your job in February 2009 (http://www.the-privateer.com/chart/dow-long.html).

All of a sudden, you've got a LOT less cash for that emergency.

Note: I do believe that we should have a major portion of our investments in instruments that have greater earnings potential. The vast majority of our retirement money, for example (probably more than is recommended given our ages). But having a certain cushion in cash - which won't earn much but won't LOSE much either - is a very good idea.

[LonghornDave]

Calm down, tough guy. Not only have I read plenty on FA (stuff way beyond beginner's books), I actually understood what I read. Perhaps you could try to do the same.

Exactly how am I acting "tough"?

Also, why don't you expand on your statement. You say you have read and understood Fundamental Analysis books. Do you simply disagree? Why don't you attempt to demonstrate your understanding?

You say, essentially, that a stock can not be undervalued and there is no real value other than market value. What happens, in your mind, when a company either offers or consummates a transaction where they have purchased a company's stock for more then the prior stock price? Have they simply overpaid?

[Dangerosa]

I think it's reasonable to argue that the market was significantly less efficient when Keynes was a hedge fund manager. And Buffett recommends index investing.

I think the point is, unless you're a big bank and can suspend mark-to-market accounting of your positions, you are SOL. It doesn't matter what you think your portfolio is worth. It's is worth exactly what the current market price is. Even if there is a very solid rational reason you believe your securities are mispriced, you can do nothing to realize that value until the market agrees (if ever).

Also, there is no 100% agreed upon model that can be used to determine a stock's true value. For every fundamental argument explaining why a stock is over valued, you could find another fundamental analyst arguing the opposite.

But unless you are going to sell today (or need to value your net worth to get a loan or something), what its worth on paper is moot for an individual - as individuals we don't do mark to market. Its fun to look at when the market is going up - and depressing to look at when the market has gone down.

I have a piece of art in my house that I'd guess is worth somewhere around $5k, just off comparative pieces on the internet. But that is moot, I'm not going to sell it. So it really doesn't make any difference if I can get $25 for it at a garage sale, or $500 that I bought it for, or I auction it off and get $10k for it at this moment in time. When I do sell it - it may be worth much more - or it might be worth $25.

[Voyager]

Calm down, tough guy. Not only have I read plenty on FA (stuff way beyond beginner's books), I actually understood what I read. Perhaps you could try to do the same.

Wow, we're seeing some textbook examples of loss aversion, aren't we? To those who haven't studied this, psychologically losses of X hurt more than gains of X feel good. Thus, people ride stocks and other investments down because they think they don't need to feel the pain until they actually sell. Which often means they take bigger losses than people getting out early.

Rand I seem to recall that companies value their assets on a regular basis, based on the market, and not on what they hope they are worth. Am I right? it was an issue during the crash because banks valuing their holdings correctly would have had to get more capital to meet their capital requirements.

[Voyager]

Based on my experience, you should have:

Two to three months living expenses in checking and savings accounts.
Three or four months in a money market account.
Another six months in an account which could be made liquid in six months. This would includes stocks and bonds.


Why so much in checking, which pays little or no interest? Our money market account has check writing privileges, and we commonly move excess money into it, and use if for major purchases. It is linked to our investment accounts, so is a convenient place to put interest and dividends which are not rolled over.

And while it takes a day or so to sell stocks and bonds, I agree that it will never take much more than that. There is clearly no ceiling on non-cash investments, while having too much in cash doesn't make a lot of sense.

[Rand Rover]

Suppose you had your 6 months' savings on hand - invested in stocks - in October 2007 (http://www.the-privateer.com/chart/dow-long.html).

Then you lost your job in February 2009 (http://www.the-privateer.com/chart/dow-long.html).

All of a sudden, you've got a LOT less cash for that emergency.

Note: I do believe that we should have a major portion of our investments in instruments that have greater earnings potential. The vast majority of our retirement money, for example (probably more than is recommended given our ages). But having a certain cushion in cash - which won't earn much but won't LOSE much either - is a very good idea.
If that happened to me I'd be perfectly fine, wouldn't bat ab eyelid.

1. I would in all likelihood find a new job before being let go from my old job (that's just how my profession works).

2. I wouldn't have counted on 100% of the cash I invested being there later.

3. I could use credit cards to pa mor things so I wouldn't have to use cash at all.

[Rand Rover]

Exactly how am I acting "tough"?

Also, why don't you expand on your statement. You say you have read and understood Fundamental Analysis books. Do you simply disagree? Why don't you attempt to demonstrate your understanding?

You say, essentially, that a stock can not be undervalued and there is no real value other than market value. What happens, in your mind, when a company either offers or consummates a transaction where they have purchased a company's stock for more then the prior stock price? Have they simply overpaid?
Go look up "control premium" and "minority discount."

[msmith537]

Exactly how am I acting "tough"?


By having the audacity to dare to dispute Rand Rover on an anonymous message board.

I think what he is trying to say is that the current market price of a stock currently reflects all known information about that stock, including what people will expect the future price to be. You can't predict what a stock price will do by researching the hell out of it's prior performance.

Of course from an investing standpoint, he is wrong. Sort of. Stocks do have an inherent value because they represent shares of ownership of a real company. And that company has real assets, real debt and a real cash flow that can be measured (iow "valuation"). And irrational exuberance can drive the price of a stock much higher (or lower) than the price of the underlying assets would seem to justify.


Rand I seem to recall that companies value their assets on a regular basis, based on the market, and not on what they hope they are worth. Am I right? it was an issue during the crash because banks valuing their holdings correctly would have had to get more capital to meet their capital requirements.


Sort of. One common valuation method is to calculate the expected discounted cash flows into perpetuity. Basically trying to predict how much money you think the compay will make over it's lifetime. It's a lot of guesswork, but you can reasonably infer that if a company would require growing 1000 times the GDP over the next century in order to meet earnings, it's probably overvalued.

The 2008 crash happened because banks failed to properly value the CDOs they were buying. They bought billions of dollars worth of mortgages bundled together with the expectation that real estate never goes down in value. Unfortuantely it did.

[LonghornDave]

I think it's reasonable to argue that the market was significantly less efficient when Keynes was a hedge fund manager.

It might be reasonable to argue, but it is a complicated argument. There are many additional markets that exist now that are clearly not very efficient. When the MBS market kicked off in the 1980's it clearly wasn't very efficient. How efficient are CDS securites? Sure, I'll agree that if we are talking about blue chip stocks, the market is probably more efficient now than it was back Keynes's day. What about all the other options that are available to investors now though? Also, more efficient certainly doesn't mean that it is highly efficient.

And Buffett recommends index investing.

Does he personally practice index investing? No, he recommends it to your average middle class person who doesn't have the time to spend analyzing stocks nor the ability to make change-of-control type investments like him. The guy is clearly a value investor though.

I think the point is, unless you're a big bank and can suspend mark-to-market accounting of your positions, you are SOL.

Magically, I not only get to suspend mark-to-market account, I can also never adopt it in the first place. Of course, this just happens to put me in the exact same category as every other American.


It doesn't matter what you think your portfolio is worth. It's is worth exactly what the current market price is. Even if there is a very solid rational reason you believe your securities are mispriced, you can do nothing to realize that value until the market agrees (if ever).

Since we have been talking about Keynes, a worthwhile quote to bring up is "markets can remain irrational far longer than you or I can remain solvent." I happen to agree with this. I certainly don't think that some valuation that I personally come up with for a company is the true correct value. I don't believe that a value determined by the best analyst is necessarily the correct value. It is also very possible that the market value may never approach what the underlying fundamentals tell us a company is worth. Nevertheless, stating that the only correct value is the current market value is insane.

Furthermore, getting back to how this all started, I would never want to put myself in the position that meant that I had to rely on the current market value of stocks for my source of emergency liquidity.

[emacknight]

Crap, I think I was a little too vague in my OP, so there appears to be two overlapping questions. The first is the "how much savings should I have" which tends to be answered as "3-6 months living expenses."

But the real question I meant to ask was how much of that should be in liquidable cash? Obviously it shouldn't all be tied up in a 10 year CD or chunk of land in Florida. We already have a retirement savings plan going, and we have a long term savings plan that's mostly company stock. After that we have a brokerage account, and the rest is cash in our checking/savings accounts.

What I've found is that cash builds up in my checking account, and I haven't figure out a system to put it to better use.

At the heart of the issue is that if things go bad it's likely that the stock market and company stock will fall as well. And as immigrants I kind of have an irrational fear that the government will cease my assets.

I was also under the impression that after selling stock it could take up to 3 days before the cash is available. My first brokerage was terrible and took up to a week to transfer funds, ING was like that as well.

Now I need to go back and read through, thanks for the replies, lots of good stuff.

[emacknight]

But only the ROI is taxed, right? Not the principle? So assuming the market has been headed upward (I'll grant this is not a sure thing these days), wouldn't investing in (and then liquidating) a mutual fund always put you ahead of just keeping cash in a savings account for the same time period?

I'm with the "invest it" crowd. One should know how long it takes to liquidate one's investments, and just have enough cash on hand to last that long (plus a margin of safety). This way you're putting as much of your wealth to work for you as possible.

The real problem with the "invest it" concept is that I consider anything I invest (in stocks) as having the potential to vanish. But then because my brokerage account does so well I see no point in bothering with a CD that is only paying 1%.

As I said, I need some sort of a system to get cash out of my checking account and into something more useful.

[LonghornDave]

Go look up "control premium" and "minority discount."

That's it. That's really your argument? Obviously control premiums / minority discounts exist; also, obviously they are not the sole (or even primary, in most cases) reasons for paying a premium for a stock. Do you realize that argument falls on it's face when you are talking about the controlling shareholder taking a company private, for instance?

[LonghornDave]

Rand I seem to recall that companies value their assets on a regular basis, based on the market, and not on what they hope they are worth. Am I right? it was an issue during the crash because banks valuing their holdings correctly would have had to get more capital to meet their capital requirements.

It depends on what type of asset (or liability for that matter) it is. Most types of assets that a company owns are booked on a cost basis. This sometimes has to be tested periodically to determine if it needs to be impaired. Therefore, an asset might be reduced on the books if the cost basis valuation is below whatever impairment test valuation (which might be a fair market value approach) is used. The converse is not usually true (although sometimes it is). You do not write up the value above cost simply because the fair market value is higher.

Securities act a little different although of course most companies aren't in the securities owning business. Here it depends on how they are classified. You value a security differently if it is classified as "available-for-sale" versus "hold-to-maturity" for example. Just because the fair market value has declined doesn't necessarily mean you need to reduce your book value. For example, if a company buys a 5 year bond and interest rates rise, that bond has a lower vlaue. If I am planning to hold it to maturity though it doesn't matter that I can't currently sell it for par value.

Also, the issue with bank valuations wasn't simply that they did not want to value a security at market value. The problem was also how do you value something at market value when there is no market. It is incredibly stupid to value it at zero (or some ridiculous fire sale price) if any reasonable cash flow forecast states you would receive much more by simply holding on to it. Of course, you need to be able to demonstrate that you have the capability to hold on to it.

[Rand Rover]

That's it. That's really your argument? Obviously control premiums / minority discounts exist; also, obviously they are not the sole (or even primary, in most cases) reasons for paying a premium for a stock. Do you realize that argument falls on it's face when you are talking about the controlling shareholder taking a company private, for instance?
I wasn't making an argument. I was only providing one answer to the specific question I responded to. Of course there can be other reasons why an acquirer would pay more than the current market price (eg, the company is worth more dead than alive, it's juice for the SH vote), but I don't have time to personally correct all the deficiencies in your thinking on this subject.

[Rand Rover]

The real problem with the "invest it" concept is that I consider anything I invest (in stocks) as having the potential to vanish. But then because my brokerage account does so well I see no point in bothering with a CD that is only paying 1%.

As I said, I need some sort of a system to get cash out of my checking account and into something more useful.just throw the excess in ther brokerage account, easy-peasy. That's what I do every month as soon after payday as possible.

[LonghornDave]

I wasn't making an argument. I was only providing one answer to the specific question I responded to. Of course there can be other reasons why an acquirer would pay more than the current market price (eg, the company is worth more dead than alive, it's juice for the SH vote), but I don't have time to personally correct all the deficiencies in your thinking on this subject.

What a joke. You say there is no "real value" other than current market value, and I'm the one with deficiencies in my thinking? Yea, right. You won't try because you know you have an elementary understanding of valuation.

[Chefguy]

In today's world of easy access to accounts and investments, the question should really be: how much cash should I keep ready access to and incur the least amount of tax penalty? With a volatile job market, it would probably be a good idea to be able to get your hands on a year's salary on fairly short notice (spread out over whatever period is necessary). Use cash first, liquidate low interest paying instruments second (CDs, savings bonds), longer-term held investments third, short-term last. This helps defer some tax hits, particularly for short-term capital gains. I encourage my kids to have a year's worth of income invested somewhere - anywhere - in case the worst scenario occurs.

[emacknight]

just throw the excess in ther brokerage account, easy-peasy. That's what I do every month as soon after payday as possible.

It's the "excess" part I can't quite figure out.

So to clarify a bit further: My wife moved to the US first, needed a bank account asap and signed up at the first one she encountered so that she could get direct deposit from her employer. I moved down after and had a chance to shop around for a better bank, which is what I use for my direct deposit.

It's this second account that became our default. It has the mortgage, ebills, credit card, and links up with the brokerage and money market accounts. We essentially live of my salary from this account. This is where the first problem is: for some reason I feel I need a huge cash reserve to cover up coming expenses. I think it's the result of when rent was the largest expense, and I was always terrified of bouncing a check. So I tend to just let it build and have a hard time moving money of out it.

Meanwhile, all her salary goes into that other account, which is the second problem. I tend to use it for big purchases, but that's really just travel, so in between it keeps building. Admittedly there is no reason to have more than a few thousand in it at any given time, but it's a pain in the ass to move money in and out of.

I need a better system.

[emacknight]

In today's world of easy access to accounts and investments, the question should really be: how much cash should I keep ready access to and incur the least amount of tax penalty? With a volatile job market, it would probably be a good idea to be able to get your hands on a year's salary on fairly short notice (spread out over whatever period is necessary). Use cash first, liquidate low interest paying instruments second (CDs, savings bonds), longer-term held investments third, short-term last. This helps defer some tax hits, particularly for short-term capital gains. I encourage my kids to have a year's worth of income invested somewhere - anywhere - in case the worst scenario occurs.

This was said earlier and I think it's ultimately the best possible answer. Recognize that some investments take time to liquidate, line them up, and then have cash reserves to cover that time frame.

So how much should I have in cash reserves???

[Yllaria]

Six months living expenses in savings is what we were told in engineering school. The reason given was always, "so you can tell your boss to go to hell if he asks you to do something unethical or against your professional judgement." So I'd interpret that to mean that you should have enough cash sitting in savings to leave you feeling free to tell your boss to go to hell. Free to the point that endangering your next paycheck will not enter into your decision-making process. How much that is may vary.

[Chefguy]

This was said earlier and I think it's ultimately the best possible answer. Recognize that some investments take time to liquidate, line them up, and then have cash reserves to cover that time frame.

So how much should I have in cash reserves???

Sorry if I was repeating another response. I sort of skimmed the thread to avoid having to read all the wrangling with Rand Rover.

I hate to say "that depends", but it's really a comfort level for you. Can you make your next mortgage/car/credit card payments out of what is now in your checking account, should you lose your job tomorrow? For me, a month's worth of bill payments in my checking account would be my comfort level for cash (if I had those sorts of bills, that is). Liquidating other assets takes very little time, but I try to plan for worst-case. In my case, I keep enough in checking to more than cover expenses and my credit card balance. Emergencies can happen, so there's also enough cash to cover pet care, airfare, car rental, hotel, etc. Most of that would go on a credit card, but it still has to be paid off at the end of the month.

[Voyager]

B

Sort of. One common valuation method is to calculate the expected discounted cash flows into perpetuity. Basically trying to predict how much money you think the compay will make over it's lifetime. It's a lot of guesswork, but you can reasonably infer that if a company would require growing 1000 times the GDP over the next century in order to meet earnings, it's probably overvalued.

The 2008 crash happened because banks failed to properly value the CDOs they were buying. They bought billions of dollars worth of mortgages bundled together with the expectation that real estate never goes down in value. Unfortuantely it did.

But that's how the risk department screwed up, isn't it? I was talking about the current value of assets on their books, which I hope has nothing to do with target prices. We all know how accurate target prices are, right?
One pretty famous econ prof my daughter knows has made a bundle betting against the market's reaction to an analyst's change in target prices.

[Voyager]

we have a long term savings plan that's mostly company stock.

Bad, bad move. The poor Enron people lost their retirement savings because their plan was in company stock. I had a friend who got laid off from IBM when its stock was in the toilet, and he was facing a hard time because that was when he needed it. My old company and my new company do not allow people to purchase company stock for 401K plans, though you can for ESOPs. Given the performance of the old company's stock, that was a good thing.

When I left AT&T I had half my 401K in AT&T stock and half in a general fund, and the AT&T stock actually out-performed the fund. But I was very lucky, and I'm not going to do that again.

I think the general idea is that the stock will track your personal employment prospects, and that isn't good.

[Chefguy]

Bad, bad move. The poor Enron people lost their retirement savings because their plan was in company stock. I had a friend who got laid off from IBM when its stock was in the toilet, and he was facing a hard time because that was when he needed it. My old company and my new company do not allow people to purchase company stock for 401K plans, though you can for ESOPs. Given the performance of the old company's stock, that was a good thing.

When I left AT&T I had half my 401K in AT&T stock and half in a general fund, and the AT&T stock actually out-performed the fund. But I was very lucky, and I'm not going to do that again.

I think the general idea is that the stock will track your personal employment prospects, and that isn't good.

My cousin was one of those people. Enron bought up Portland power, then intimidated and browbeat employees into converting their retirement money to Enron stock. At age 65, he had to go back to work after being wiped out by those bastards.

[j666]

It's this second account that became our default. It has the mortgage, ebills, credit card, and links up with the brokerage and money market accounts. We essentially live of my salary from this account.

Meanwhile, all her salary goes into that other account, which is the second problem. I tend to use it for big purchases, but that's really just travel, so in between it keeps building.
What a lovely problem you have.

If I understand you correctly, you and your wife live on one salary? We did that for several years; it's a wonderful feeling.

However, you want to know how to efficiently move the savings out of your wife's checking account, probably into savings with a probably better rate of return?

Open a IRA account and sign up for regular contributions to be sent automatically from Mrs. Knight's account.

I would recommend a Roth and a traditional IRA. I would recommend three funds in each (the same three in both, if you like). If you aren't an active investor, select index funds with the lowest fees.

I use Charles Schwab and I find the customer service excellent, but that's the topic for another thread.

Just how financially savvy are you?

[emacknight]

Bad, bad move. The poor Enron people lost their retirement savings because their plan was in company stock. I had a friend who got laid off from IBM when its stock was in the toilet, and he was facing a hard time because that was when he needed it. My old company and my new company do not allow people to purchase company stock for 401K plans, though you can for ESOPs. Given the performance of the old company's stock, that was a good thing.

When I left AT&T I had half my 401K in AT&T stock and half in a general fund, and the AT&T stock actually out-performed the fund. But I was very lucky, and I'm not going to do that again.

I think the general idea is that the stock will track your personal employment prospects, and that isn't good.

Just to clarify, we don't have ANY company stock in our retirement savings. We bought a bunch of her company's stock as part of an ESOP that let you buy it at a 15% discount. I called it "long term savings" because I have no desire to touch it any time soon, and it pays a reasonable dividend.

[emacknight]

My cousin was one of those people. Enron bought up Portland power, then intimidated and browbeat employees into converting their retirement money to Enron stock. At age 65, he had to go back to work after being wiped out by those bastards.

Yup, that happened to a lot of my wife's co-workers that had the bulk of their savings in the employee stock purchase plan. We continued contributing to it for a few quarters after the crash and then concluded we had enough.

Having our savings tied up in company stock is part of what caused me to have the mentality I do now. There were a few times we needed that money and it wasn't available.

What a lovely problem you have.

If I understand you correctly, you and your wife live on one salary? We did that for several years; it's a wonderful feeling.

However, you want to know how to efficiently move the savings out of your wife's checking account, probably into savings with a probably better rate of return?

Open a IRA account and sign up for regular contributions to be sent automatically from Mrs. Knight's account.

I would recommend a Roth and a traditional IRA. I would recommend three funds in each (the same three in both, if you like). If you aren't an active investor, select index funds with the lowest fees.

I use Charles Schwab and I find the customer service excellent, but that's the topic for another thread.

Just how financially savvy are you?

Right now I feel like we're putting enough into retirement savings, so I'm not thrilled with the idea of having it locked into IRAs.

But I am now tempted to set up some more automated plans to move the money for me. What holds me back is that our spending is really erratic, since our only real expenses are on travel but when we travel we go far. So and some what random intervals we'll suddenly up and go to Tanzania for 3 weeks.

I'm going to take your advice and get stuff moving automatically into our brokerage, and then make some fix value purchases in an index fund.

[Voyager]

Just to clarify, we don't have ANY company stock in our retirement savings. We bought a bunch of her company's stock as part of an ESOP that let you buy it at a 15% discount. I called it "long term savings" because I have no desire to touch it any time soon, and it pays a reasonable dividend.

Good. That's different. My current company only offers a 5% discount which isn't good enough to give up the diversification I can get from putting the money into other investments. 15% is worth it.

[emacknight]

Good. That's different. My current company only offers a 5% discount which isn't good enough to give up the diversification I can get from putting the money into other investments. 15% is worth it.

It wasn't :(

The forced dollar cost averaging made up for it though.

[Dewey Finn]

I think it's reasonable to argue that the market was significantly less efficient when Keynes was a hedge fund manager. And Buffett recommends index investing.
I seem to remember an interview with Warren Buffett in which he said that the sort of value investing he did isn't possible any more. I think the idea is that the easy availability of information today means that corporate valuations are more realistic.

BTW, here's a blog posting (http://dealbreaker.com/2011/06/blind-item-which-east-hampton-resident-likes-to-keep-100-million-or-so-in-his-checking-account/) about an ATM receipt that was found in East Hampton showing a withdrawal of $400 and a remaining balance of just under $100 million. So some people are more cautious than others.

[TimeWinder]

Good. That's different. My current company only offers a 5% discount which isn't good enough to give up the diversification I can get from putting the money into other investments.

Usually you don't have to hold those employee purchase plan stocks, which means that effectively they're selling you dollars for $0.95 each, even at 5%. Take as much as you can get unless there's another "gotcha," and sell immediately if you don't want to hold your own company's stock (also wise).

[emacknight]

Usually you don't have to hold those employee purchase plan stocks, which means that effectively they're selling you dollars for $0.95 each, even at 5%. Take as much as you can get unless there's another "gotcha," and sell immediately if you don't want to hold your own company's stock (also wise).

At least in our case we were required to hold the stock for 1 year before we could sell, and we had to hold if for 3 years before we could move the shares to a different brokerage.

[AntiCoyote]

I would say at least six months.

In general, they say for people making $40,000 or more you will probably need four months to find a new job and get references and background checked and get a first pay check.

And for every $10,000 you make you need to add a month

So if you were making $50,000 you'll need 5 months to find a similar job. For $60,000 you'll need six months to find a job.

I never understood why we don't teach people to live BELOW their means. I have lived in some pretty awful places, but I saved a lot of money and now I'm comfortably retired. I think you need to live at least 25% below what you paycheck brings in.

[Shagnasty]

I never understood why we don't teach people to live BELOW their means. I have lived in some pretty awful places, but I saved a lot of money and now I'm comfortably retired. I think you need to live at least 25% below what you paycheck brings in.

Like most everything that is wrong with the world, you can blame the baby boomers for that. People often did live below their means in previous generations and the advice was always out there for those disciplined enough to take it. Most people were just led to believe until recently that you could always find a way to get more money through a better job if you had to and banks would always give you more credit unless you were a true screwup. Buying any house you could conceivably afford was a good idea, the bigger the better in fact, because it would appreciate as an investment of its own and you get to live in it. Now that those things aren't true anymore, I have great hope for Gen X and below as long as they listen to their grandparents and not their parents. My financial prospects are bright but I just bought a condo priced at 1.25x my salary with no other debts just because I value security and savings very much. Some people still have mortgages at 4 - 6 times their salary plus other debts and those ideas have to go.

[msmith537]

Crap, I think I was a little too vague in my OP, so there appears to be two overlapping questions. The first is the "how much savings should I have" which tends to be answered as "3-6 months living expenses."

But the real question I meant to ask was how much of that should be in liquidable cash? Obviously it shouldn't all be tied up in a 10 year CD or chunk of land in Florida. We already have a retirement savings plan going, and we have a long term savings plan that's mostly company stock. After that we have a brokerage account, and the rest is cash in our checking/savings accounts.

What I've found is that cash builds up in my checking account, and I haven't figure out a system to put it to better use.

At the heart of the issue is that if things go bad it's likely that the stock market and company stock will fall as well. And as immigrants I kind of have an irrational fear that the government will cease my assets.

I was also under the impression that after selling stock it could take up to 3 days before the cash is available. My first brokerage was terrible and took up to a week to transfer funds, ING was like that as well.

Now I need to go back and read through, thanks for the replies, lots of good stuff.

The question isn't so much a matter of liquidity as it is a matter of risk. Stocks, mutual funds, bonds and so on have a greater return but they also incur a greater degree of risk than simply keping your money in a savings account. Even if you could get the cash immediately, you don't want is to have your 3-6 month emergency fund suddenly become worthless because the market tanked at the same time you lost your job.

A good rule of thumb for most people is not to invest money you can't afford to lose.