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Cash Reserves

Started by saver73, November 03, 2018, 06:06:37 PM

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saver73

We are  wondering about cash reserves

What is an appropriate amount of money to hold in a money market account for emergencies?

What percentage of cash do you hold in your 401K so that you can invest it when the time is right?

Cheezus

I think the general rule of thumb is at least 6 months of living expenses.  Personally, I keep something much closer to 1 - 2 years.

Jon Sharpe

I take an unconventional approach. I took my emergency funds, which were about 6 months of expenses, and did two things. First I paid down my mortgage and second, I opened up a $100k HELOC. That way if I needed money in a pinch, I could access the HELOC quickly and otherwise my house will be paid off that much faster.

No cash in my 401k or other accounts. It's 100% invested in the market.

As background, I'm still working and if I get laid off, I'll get over six months of severance. So that emergency is covered.

PDXOregon

Agreed.  IF you approach a HELOC as an emergency insurance policy, it is a great way to tap equity if you absolutely need a bunch of cash for a remote, unforeseen, catastrophic event.  I think some banks will charge $50-150/year to keep a HELOC open, but if you consider that your insurance "premium" for a back up safety net, it is small cost to do so. It is probably better to open a HELOC now when times are good. If you get laid off and a recession hits, applying for a HELOC will be multiple times harder.  Make credit available to you when times are good because when things get tough, getting credit when you may need it gets even tougher.  Other members ofthe forum who are in banking and finance can better confirm or deny my limited knowledge on the topic.

Money Ronin

I think the 2 month rule or 6 month rule is too broad.  It really needs to be tailored to the certainty of your income, your available credit lines, your overall leverage, your ability to adjust expenses, your bond exposure, and of course your risk tolerance.

I like the line of credit strategy as a cash reserve.  In addition to a HELOC, I have a credit line against my Wells Fargo Brokerage account (with the Private Bank).  The rate is slightly better than my HELOC and I can borrow up to 50% of the value of the brokerage account.

My actual cash reserves varies by the certainty of my other sources of income and how high the stock market is.  My normal cash reserves have historically been quite low, maybe jut 1 or 2 months, because of my backup options.  However, at the moment, I am stocking up cash in preparation for a buying opportunity. 

MisterS

I think everyone has to really define what an "EMERGENCY" is before they decide how big their emergency fund is.  If you are a homeowner, you will have costs come up all the time.  New HVAC ($5000) or plumbing leak ($500).  Just having cash available gives you options to make fast decisions.  Losing your job is typically the most popular emergency example, hence people saying to keep 6 months living expenses.  But if you lost your job for any reason, it could also mean the market is getting bad and might be hard to get your next job.  So having 1 year of living expenses gives you more flexibility in finding a new job or new sources of income.  The worst emergency is that someone is in the hospital for long term beyond your insurance means.  Obviously, money is not the focus of your energy but it could be a stressor.   I guess I bring this up because there should not be a one size fits all approach to keeping an emergency fund.  I even read an article that said you shouldn't have an emergency fund because having a large percentage of cash on hand is bad (Low ROI) so put it all in the market, and find creative ways to get emergency cash, like Borrowing your Roth, HELOC, etc.  I think everyone needs to make that personal decision of what they would do in an emergency and sit down  and go through the scenarios.  There are rules that are good guides, but be your own boss.  I personally am ok with having too much cash in emergency fund but use that savings fund to pay for when needed (Vacation fund, home improvements, etc).  Hybrid emergency fund.  I sleep well at night, and if the market does correct itself, I do have funds able to invest a portion.  I like the flexibility. 

Cheezus

A HELOC is a way to get in a whole lot of trouble, really fast.  It's a great emergency fund if you are strong willed.  Unfortunately, many are not, too many.  It's sound advice, but keeping some cash reserves and not relying on credit is generally a better idea.  I don't like the idea of tapping your primary residence for anything.  Too many sad stories.

Orphan

I keep 10,000 ready access cash. Then put the rest in a Money Market account if I need quick access to more. But I never have.

mbb_boy

I hold 3 months in reserves, although not in a money market account (high interest savings account).

And I don't intentionally hold any cash in my investing accounts. Time in market > timing the market. I stay 100% invested

ladymaam

I'm single (one income), so I tend to fall more into the super cautious camp. As of right now, I keep about $21,000 in cash. (I live a very low COL life, so this is equivalent to about a year of living expenses for me.)

Some times I wonder if I should keep less and invest the rest, but I feel more secure with a giant cushion sitting between me and life. Hope this helps!


Sam

I think it's good to hold 6 months of living expenses in cash reserves and about 5% - 10% in low-risk/risk-free investments like cash, CDs, short-term treasuries. These have really saved me and steadied the ship through the past 20 years.

Also, given interest rates are rising, I'm allocating more to cash in 2019 and beyond. I just got an update from CIT Bank that they have raised their money market account interest rate to 2.45%. If you want to support Financial Samurai, you can sign up at https://www.financialsamurai.com/CITBankSavings

2.45% is huge b/c the 10-year bond yield is only at 2.65% or so. But you've got to hold onto the 10-year bond yield for 10 years to guarantee your annual 2.65% return.

As someone who is cashed up, looking to buy a new house, this 2.45% is the market solution given I can withdraw freely whenever I find that perfect deal.
Regards,

Sam

ladymaam

Quote from: ladymaam on January 05, 2019, 08:40:47 PM
I'm single (one income), so I tend to fall more into the super cautious camp. As of right now, I keep about $21,000 in cash. (I live a very low COL life, so this is equivalent to about a year of living expenses for me.)

Some times I wonder if I should keep less and invest the rest, but I feel more secure with a giant cushion sitting between me and life. Hope this helps!

In case it's relevant, wanted to mention that I have it in a Money Market account earning 2.65% (I got in on a good promotion!).