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.
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.
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.
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.
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.
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.
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.
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.
Based on my experience, you should have:
[ol]
[li]Two to three months living expenses in checking and savings accounts.[/li][li]Three or four months in a money market account.[/li][li]Another six months in an account which could be made liquid in six months. This would includes stocks and bonds.[/li][/ol]
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.
? 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).
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.
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.
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.
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.
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
I 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.
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).
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.
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.