Taxable EF and cash

[LivingAlmostLarge]

I know we say 6 months cash. That's a lot for us in cash because of our lifestyle. I was wondering does anyone else just keep say 3 months of cash and then invest the rest? Do you ever think what would happen if you did tap the taxable accounts? I'm really struggling what to do. I think because we need so much monthly right now that I feel nervous keeping so much cash on hand. But at the same time I'm struggling because I hate the idea of cashing in our taxable accounts if we need it.

[disneysteve]

I don't think it necessarily needs to be in cash accounts as long as it is in something easily liquidated and of fairly stable value. What you don't want is to find yourself in a situation where the economy crashes, you lose your job, and your "emergency fund" has lost 40% of its value because the stock market crashed.

We have about 25K in Series I bonds. I can cash them in at any time if we really needed the money. I consider them to be part of our EF.

Many people take a tiered approach with perhaps 3 months in cash and the rest invested. Personally, I think the larger your portfolio becomes, the less critical that 6 months of cash becomes. We've got over $1 million in various places. Keeping 45K in a savings account isn't as critical as it used to be.

[corn18]

I was just running the numbers for my EF just now. If I lost my job tomorrow, I could survive for a year without cutting expenses. If we trimmed expenses jus a bit (10%), we could go 18 months. Then I have the new car fund and we don't need a new car anytime soon. And the college fund, which is fat. And the balance in the checking account is usually 2 months of expenses. And I'm adding $3k to the excess every month. That EF really isn't needed and should be invested.

Then I sit back and think about what would my wife need the most if I died tomorrow. She would need enough in checking/savings to not worry about money for at least 6 months. Trying to figure out how to sell stuff in a brokerage account while getting me buried is not something I want to put her through. So I leave it all in cash (but it is earning 1.65% these days).

[cypher1]

I know we say 6 months cash. That's a lot for us in cash because of our lifestyle. I was wondering does anyone else just keep say 3 months of cash and then invest the rest? Do you ever think what would happen if you did tap the taxable accounts? I'm really struggling what to do. I think because we need so much monthly right now that I feel nervous keeping so much cash on hand. But at the same time I'm struggling because I hate the idea of cashing in our taxable accounts if we need it.

Great questions. I'm kind of in the same boat with 6mo EF for cash reserves. I just recently moved a large sum of EF to taxable accounts. However, I'm more nervous of the idea of job loss/surprises with the majority of money in tied up. I think for me its more of an adjustment and re-assessing my risk tolerance with investing.

[Jluke]

I know we say 6 months cash. That's a lot for us in cash because of our lifestyle.

In that case you need to know what your core expenses are, that is assuming your lifestyle would change if there were a job loss.

For instance maybe someone’’s lifestyle with a job is 10k per month in expenses but the real core expenses are 6k per month. So 6 month EF would be 36k. (Totally made up numbers).

[snafu]

I imagined the scenario of job loss, lump sums coming in from employer, $ 500. kept in the house, emergency cash hidden in the car, access to soft sums from non retirement accounts [dividends, interest], car fund, 1% house emergency repair fund, savings slush fund, [insufficient for planned ETF purchase], $ 1 K to keep chequing fee free and laddered CD whose funds free up every 3 months. The other half of the same scenario are expenses that could be reduced significantly and even scorched earth using library internet services, eating pantry & freezer foods, making bread etc, keeping only one vehicle operational, cancelling insurance/maintenance etc. We really have too high a percentage of discretionary spending.
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[scfr]

I think the "3-6 months rule" is fine for many people, but not for everyone. Lots of us on this site like to think about and discuss our finances, so many of us are able to come up with a more personalized number. Corn18's example is a great one of a very individualized approach. How much is right for you depends on a lot of factors. Some questions you may want to ask yourself include:
- What do you expect your EF to cover? Is it only going to be used if your world seriously goes to hell? Or is it to be used to cover more "life happens" type expenses such as: car or homeowner's insurance deductible, vet expenses beyond routine preventative care, appliance replacement, etc.?
- Who could you rely on for help? If a massive earthquake or hurricane or wildfire hit and you lost your house and your job simultaneously, are there people in your support network, who live in a different geographic area (since near-by friends and family would probably be struggling too) who would take your entire family in (including pets) for an extended period of time? Or would you need to find a new place to live?
- If not in cash, how would you be investing your EF? There's a big difference between putting it in I-bonds vs. junk bonds or stock options.
- What do you need to sleep at night? What does your spouse think?

Your answer doesn't have to be 3 months or 6 months or one year. It might be 5 months or 9 months or two years or any number that works for you.

[MooseBucks]

In that case you need to know what your core expenses are, that is assuming your lifestyle would change if there were a job loss.

For instance maybe someone’’s lifestyle with a job is 10k per month in expenses but the real core expenses are 6k per month. So 6 month EF would be 36k. (Totally made up numbers).

Exactly. We figured out our discretionary vs non-discretionary spending and did our emergency fund off of that. I think you’re good to keep some in stocks/mutual funds etc but you need to monitor the value and make sure you’re still funded.

[LivingAlmostLarge]

I guess it sort of depends. If the market is going to hell and it looks like we won't have a job for a long time.

[corn18]

I completed my analysis and decided to drop my EF from $50k to $30k. The extra $20k will go into the house fund, so it really is just a shell game. My plan right now is to save like crazy over the next three years so I can pay cash for a house in 2021 when I should be financially independent (FI). So, if I needed it, all that money would be available. Not much risk in that.

[LivingAlmostLarge]

that is a sound idea. I am thinking of lowering my cash on hand to $30k. But that would mean investing a lot right now. I'm a little hesitant.

[kork13]

But that would mean investing a lot right now. I'm a little hesitant.

I'm sort of feeling that way as well... Things are seeming pretty hot & high flying right now, which makes me a bit hesitant to throw massive amounts of cash into the stock/bond markets. I've pulled out ~$30k from non-taxable bonds into cash that we've been building up for some home improvements (rising interest rates were dragging on it), which are planned for this winter/next spring. I am still continuing to add a few hundred dollars to my taxable stock investments & DKs' 529s each month, and still doing ~15% of gross income into retirement accounts.... But beyond that, I'm kind of holding us back from the markets at the moment. Instead, I'm focusing on eliminating the mortgages on our current & rental homes. The interest rates are quite low, (2.385% & 2.75%), but I'd be thrilled to get them paid off quickly then be done with debts entirely. At that point, I can look more seriously into acquiring additional rental properties. The rental will be paid off next summer, then DW is likely going back to school for a degree in physical therapy or occupational therapy within the next year after she is (most likely) medically retired from the military.

Beyond that, there are a variety of ways to still make good use of your money without running headlong into the stock market. Obviously, diversification is the simplest answer. Some of this, some of that, and the high-flyers make up for the laggards, and everything comes out ahead in the end. Debt reduction is another great option. Real estate or small business investments can also be good options. Similarly, you can turn some money inward & make some overdue home improvements to improve energy efficiency, home value, and appearance. Or even invest in yourself -- going back to school for new degrees or certifications can be a great way to put your money to work, plus it gives you the opportunity to potentially earn more income or step into a new field in the future. These are all some of what we're going to be doing over the next couple years, while we let the markets figure themselves out. I'm not exiting the markets at all (except as noted for the home improvements), just leaving what's there in place.... But I'm not eager to funnel thousands of new dollars monthly into over-heating stock/bond markets going forward for the near-term future. So I'm redirecting that cash to other avenues.

[creditcardfree]

that is a sound idea. I am thinking of lowering my cash on hand to $30k. But that would mean investing a lot right now. I'm a little hesitant.

Could you start dollar cost averaging the investments, rather than in one lump sum? For example, start with a $1000 a month and keep adding that amount monthly until it's all invested. If the market drops significantly, you can always do a lump sum then.

[LivingAlmostLarge]

Could you start dollar cost averaging the investments, rather than in one lump sum? For example, start with a $1000 a month and keep adding that amount monthly until it's all invested. If the market drops significantly, you can always do a lump sum then.

It's a thought but it would take even at 5k/month about a couple of years to invest. I have to admit to being also lazy that I hate watching it. I like once a year. But maybe dollar cost is the way to go and put a little in here and there.