# How Much Cash Savings is Appropriate? **URL:** \ **Category:** In My Humble Opinion\ **Created:** [June 28, 2011, 1:47am UTC](https://boards.straightdope.com/t/how-much-cash-savings-is-appropriate/587089 "2011-06-28T01:47:09Z")\ **Posts on this page:** 17\ **Page:** 4
**Author:** ![emacknight](https://avatars.discourse-cdn.com/v4/letter/e/3ec8ea/32.png) [@emacknight](https://boards.straightdope.com/u/emacknight)\ **Post date:** [June 28, 2011, 10:42pm UTC](https://boards.straightdope.com/t/how-much-cash-savings-is-appropriate/587089/61 "2011-06-28T22:42:25Z")
> [@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. 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??? ---
**Author:** ![Yllaria](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/yllaria/32/3452_2.png) [@Yllaria](https://boards.straightdope.com/u/Yllaria)\ **Post date:** [June 29, 2011, 12:51am UTC](https://boards.straightdope.com/t/how-much-cash-savings-is-appropriate/587089/62 "2011-06-29T00:51:51Z")
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. ---
**Author:** ![Chefguy](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/chefguy/32/138_2.png) [@Chefguy](https://boards.straightdope.com/u/Chefguy)\ **Post date:** [June 29, 2011, 12:52am UTC](https://boards.straightdope.com/t/how-much-cash-savings-is-appropriate/587089/63 "2011-06-29T00:52:27Z")
> [@emacknight](#): > > 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. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [June 29, 2011, 4:41pm UTC](https://boards.straightdope.com/t/how-much-cash-savings-is-appropriate/587089/64 "2011-06-29T16:41:15Z")
> [@msmith537](#): > > 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. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [June 29, 2011, 4:46pm UTC](https://boards.straightdope.com/t/how-much-cash-savings-is-appropriate/587089/65 "2011-06-29T16:46:33Z")
> [@emacknight](#): > > 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. ---
**Author:** ![Chefguy](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/chefguy/32/138_2.png) [@Chefguy](https://boards.straightdope.com/u/Chefguy)\ **Post date:** [June 29, 2011, 10:00pm UTC](https://boards.straightdope.com/t/how-much-cash-savings-is-appropriate/587089/66 "2011-06-29T22:00:55Z")
> [@Voyager](#): > > 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. ---
**Author:** ![j666](https://avatars.discourse-cdn.com/v4/letter/j/9de0a6/32.png) [@j666](https://boards.straightdope.com/u/j666)\ **Post date:** [June 29, 2011, 10:03pm UTC](https://boards.straightdope.com/t/how-much-cash-savings-is-appropriate/587089/67 "2011-06-29T22:03:54Z")
> [@emacknight](#): > > 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? ---
**Author:** ![emacknight](https://avatars.discourse-cdn.com/v4/letter/e/3ec8ea/32.png) [@emacknight](https://boards.straightdope.com/u/emacknight)\ **Post date:** [June 29, 2011, 11:38pm UTC](https://boards.straightdope.com/t/how-much-cash-savings-is-appropriate/587089/68 "2011-06-29T23:38:55Z")
> [@Voyager](#): > > 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. ---
**Author:** ![emacknight](https://avatars.discourse-cdn.com/v4/letter/e/3ec8ea/32.png) [@emacknight](https://boards.straightdope.com/u/emacknight)\ **Post date:** [June 29, 2011, 11:50pm UTC](https://boards.straightdope.com/t/how-much-cash-savings-is-appropriate/587089/69 "2011-06-29T23:50:12Z")
> [@Chefguy](#): > > 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. > [@j66](#): > > 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. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [June 30, 2011, 12:28am UTC](https://boards.straightdope.com/t/how-much-cash-savings-is-appropriate/587089/70 "2011-06-30T00:28:38Z")
> [@emacknight](#): > > 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. ---
**Author:** ![emacknight](https://avatars.discourse-cdn.com/v4/letter/e/3ec8ea/32.png) [@emacknight](https://boards.straightdope.com/u/emacknight)\ **Post date:** [June 30, 2011, 2:01am UTC](https://boards.straightdope.com/t/how-much-cash-savings-is-appropriate/587089/71 "2011-06-30T02:01:32Z")
> [@Voyager](#): > > 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. ---
**Author:** ![Dewey\_Finn](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/dewey_finn/32/4222_2.png) [@Dewey\_Finn](https://boards.straightdope.com/u/Dewey_Finn)\ **Post date:** [July 1, 2011, 2:38am UTC](https://boards.straightdope.com/t/how-much-cash-savings-is-appropriate/587089/72 "2011-07-01T02:38:04Z")
> [@Trom](#): > > 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. ---
**Author:** ![TimeWinder](https://avatars.discourse-cdn.com/v4/letter/t/bcef8e/32.png) [@TimeWinder](https://boards.straightdope.com/u/TimeWinder)\ **Post date:** [July 1, 2011, 2:43am UTC](https://boards.straightdope.com/t/how-much-cash-savings-is-appropriate/587089/73 "2011-07-01T02:43:54Z")
> [@Voyager](#): > > 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). ---
**Author:** ![emacknight](https://avatars.discourse-cdn.com/v4/letter/e/3ec8ea/32.png) [@emacknight](https://boards.straightdope.com/u/emacknight)\ **Post date:** [July 1, 2011, 1:32pm UTC](https://boards.straightdope.com/t/how-much-cash-savings-is-appropriate/587089/74 "2011-07-01T13:32:42Z")
> [@TimeWinder](#): > > 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. ---
**Author:** ![AntiCoyote](https://avatars.discourse-cdn.com/v4/letter/a/a587f6/32.png) [@AntiCoyote](https://boards.straightdope.com/u/AntiCoyote)\ **Post date:** [July 1, 2011, 9:25pm UTC](https://boards.straightdope.com/t/how-much-cash-savings-is-appropriate/587089/75 "2011-07-01T21:25:44Z")
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. ---
**Author:** ![Shagnasty](https://avatars.discourse-cdn.com/v4/letter/s/9dc877/32.png) [@Shagnasty](https://boards.straightdope.com/u/Shagnasty)\ **Post date:** [July 1, 2011, 10:46pm UTC](https://boards.straightdope.com/t/how-much-cash-savings-is-appropriate/587089/76 "2011-07-01T22:46:13Z")
> [@AntiCoyote](#): > > 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. ---
**Author:** ![msmith537](https://avatars.discourse-cdn.com/v4/letter/m/d9b06d/32.png) [@msmith537](https://boards.straightdope.com/u/msmith537)\ **Post date:** [July 2, 2011, 12:55pm UTC](https://boards.straightdope.com/t/how-much-cash-savings-is-appropriate/587089/77 "2011-07-02T12:55:11Z")
> [@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. 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. [Previous page](https://boards.straightdope.com/t/how-much-cash-savings-is-appropriate/587089.md?page=3)