Author Topic: Any good formulas for how much (liquid) cash to stash?  (Read 986 times)

panda

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Any good formulas for how much (liquid) cash to stash?
« on: August 29, 2019, 09:40:30 AM »
Tired searching the forum for this but didn't really turn anything up and generally it seems like the general advice is to just have ~$1,000 to three months living expenses worth of liquid cash on hand.

So to expand things a bit, any good formulas out there  for how much cash to keep in the bank? I'm really curious about situations where total cash also includes allocated funds, such as a "new to me" car fund.

secondcor521

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Re: Any good formulas for how much (liquid) cash to stash?
« Reply #1 on: August 29, 2019, 09:49:10 AM »
No formulas, but there are some rules of thumb / factors to consider:

1.  The less stable / more intermittent your income, the more cash you are recommended to have.

2.  The less access to credit (credit cards, lines of credit, HELOCs) you have, the more cash you are recommended to have.

3.  The less wealth you have ... more cash.

4.  The more high interest debt you have, the less cash you are recommended to have (pay off the high interest debt instead).

5.  The more conservative you are financially, the more cash you should have.

6.  If you're married and your partner works ... less cash.

7.  Economic uncertainty.  Currently nobody suggests more than six months of expenses.  When the next recession comes, some gurus will change their recommendation to up to 9 to 12 months of expenses and hope you don't notice that they change their recommendations based on how the economy is doing.

I'm FIREd, have six figures of credit lines available to me, have zero high interest debt, am moderately aggressive, I'm single, and I think the economy is doing well for now.  I tend to keep between 1 and 3 months cash in total, with about $1,000 of that in checking and the rest in an online bank high yield savings account.

Malkynn

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Re: Any good formulas for how much (liquid) cash to stash?
« Reply #2 on: August 29, 2019, 09:55:00 AM »
No formulas.

The fewer formulas you use, the more appropriate your financial decision making will be for your particular circumstances.

Look at your specific needs/risks and decide how much cash to keep.

RyanAtTanagra

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Re: Any good formulas for how much (liquid) cash to stash?
« Reply #3 on: August 29, 2019, 10:09:53 AM »
Also whatever helps you sleep at night, which might be more than is ideal mathematically, but that amount will change as you learn more and get more comfortable with how everything works.

You don't need enough to cover all your emergency scenarios.  Your roof probably won't cave in the same time you have to take a 3 month leave of absence from work just as your car shits the bed and needs replaced.  Covering for the most expensive of those 3 also covers the other 2.

But for a bad example, I keep $1k buffer in my checking account and a year's expenses in savings, which is probably too much for my current stash size.  But like I said, it helps me sleep at night and reduces stress knowing I could quit or lose my job tomorrow and not have to make any moves or even think about moving money out of investments for a year.  Knowing a year's expenses is too much also drives me to lower my expenses, so I can reduce the amount of cash sitting around.

panda

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Re: Any good formulas for how much (liquid) cash to stash?
« Reply #4 on: August 29, 2019, 10:16:53 AM »
But for a bad example, I keep $1k buffer in my checking account and a year's expenses in savings, which is probably too much for my current stash size.  But like I said, it helps me sleep at night and reduces stress knowing I could quit or lose my job tomorrow and not have to make any moves or even think about moving money out of investments for a year.  Knowing a year's expenses is too much also drives me to lower my expenses, so I can reduce the amount of cash sitting around.
I'm in a similar position and didn't even really recognize it until I started doing the budget. I know there are some optimizations I can do (i.e., keep most in the "high yield" savings account vs. bank), but it really seems like I'm in a position to start shifting some funds over to the market as opposed to sitting as liquid cash.

I suppose the tricky bit is if I should count things like the car savings (i.e., large but shorter term) as part of the total number, or separate?

secondcor521

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Re: Any good formulas for how much (liquid) cash to stash?
« Reply #5 on: August 29, 2019, 10:20:06 AM »
But for a bad example, I keep $1k buffer in my checking account and a year's expenses in savings, which is probably too much for my current stash size.  But like I said, it helps me sleep at night and reduces stress knowing I could quit or lose my job tomorrow and not have to make any moves or even think about moving money out of investments for a year.  Knowing a year's expenses is too much also drives me to lower my expenses, so I can reduce the amount of cash sitting around.
I'm in a similar position and didn't even really recognize it until I started doing the budget. I know there are some optimizations I can do (i.e., keep most in the "high yield" savings account vs. bank), but it really seems like I'm in a position to start shifting some funds over to the market as opposed to sitting as liquid cash.

I suppose the tricky bit is if I should count things like the car savings (i.e., large but shorter term) as part of the total number, or separate?

It depends on whether you are willing to "raid" the car savings to cover an emergency or not.  Obviously if you raid the car savings for an emergency, that might set back when you can buy the car.  Some people would be OK with that trade-off, some wouldn't.

OzzieandHarriet

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Re: Any good formulas for how much (liquid) cash to stash?
« Reply #6 on: August 29, 2019, 12:08:35 PM »
Our case, which probably won't apply to people still working full time (DH and I are both retired, ages 60 and 62): We decided to keep about 18 months' of expenses in an online money market paying about 2%. We use this as a combination emergency/life happens/monthly expenses fund. I've set it up to transfer living expenses to our checking account every month. Earlier this year we started pulling money from some of our retirement accounts and putting it into the MM; planning to do this quarterly and pull out about a quarter of our anticipated yearly expenses. We're hoping in this way to cushion any effects of a big downturn, and also to draw down some of the 401k money so when we have to start doing RMDs they won't be so huge.

We end up having north of $10k in the checking account most of the time, which is probably too much, but it staves off any worrying about being short of funds when things come due.

Steeze

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Re: Any good formulas for how much (liquid) cash to stash?
« Reply #7 on: August 29, 2019, 01:13:47 PM »
I have 1.5 months recurring expenses in checking and about 2.5 months in savings. 10% of my total savings each month is transferred to my savings account automatically. Looking at the spread sheet cash has ranged from 1% to 20% of my net worth over the last 24 months, and is about 6% right now. The high and low being just before and just after paying off my mortgage.

Cash, Roth principal, taxable accounts, and credit are about 4 years expenses, and we are a DINK couple that can cash flow expenses off 1/2 of 1 income. Cash for me isn’t really a safety net as much as it is an opportunity fund. Plus more cash in the savings account makes my wife feel more stable I think. She seems to think invested money “isn’t ours” or “isn’t real” because it seems locked away for the future. I will keep growing the cash stash until something interesting comes along like a rental or home business.

Rosy

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Re: Any good formulas for how much (liquid) cash to stash?
« Reply #8 on: August 29, 2019, 02:14:52 PM »
It depends entirely on your situation and whatever lets you sleep at night.

Mr. R. is only about 3 years away from retirement so we have set aside $50K in a 3.25% CD - it's a cash cushion. It represents one year plus ... in expenses.
These are funds that I hope to never have to touch at all for anything - only dire emergencies that can't be handled any other way.

Besides that we have $4K in a liquid 2.5% savings account for anything we decide to use it for.

When I had a car fund my car was soo old that I knew a car problem would mean replace right now. So I wanted that money liquid and I wasn't going to use it elsewhere.  YMMV

Rdy2Fire

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Re: Any good formulas for how much (liquid) cash to stash?
« Reply #9 on: September 02, 2019, 07:52:49 AM »
I don't know a formula nor would I attempt to use one, I think as others indicated it's a comfort thing.. Personally I have a few months of actual cash which comes in handy if I want/need to hire someone for something (they typically prefer cash and work a better deal) and I usually keep that around the same level. Additionally, in a savings account (should move it to a money market probably for the extra interest) I have another 6 months totally liquid

Blackadder

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Re: Any good formulas for how much (liquid) cash to stash?
« Reply #10 on: September 02, 2019, 09:24:50 AM »
I would not use a formula, but look at my expenses. I feel that maybe 2 months of our recurring expenses plus enough to pay for a small emergency repair at the house or a funeral (so maybe + 3.000) would be enough. Does not need to be all cash as long as you can turn it into cash without substantial losses within a working day or two.
« Last Edit: September 02, 2019, 09:33:57 AM by Blackadder »

FatFI2025

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Re: Any good formulas for how much (liquid) cash to stash?
« Reply #11 on: September 02, 2019, 11:17:22 AM »
I think you could express these concepts formulaically like:

6E + .8O + .5T + .3H + .1R = C

Where E is monthly expenses, O is special expenses in 1-2 years, T is special expenses in 2-3 years, H is special expenses in 3-4 years, R is special expenses in 4-5 years, and C is value of portfolio held in cash.

Then you can argue over the coefficients.

Malkynn

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Re: Any good formulas for how much (liquid) cash to stash?
« Reply #12 on: September 02, 2019, 01:15:24 PM »
I think you could express these concepts formulaically like:

6E + .8O + .5T + .3H + .1R = C

Where E is monthly expenses, O is special expenses in 1-2 years, T is special expenses in 2-3 years, H is special expenses in 3-4 years, R is special expenses in 4-5 years, and C is value of portfolio held in cash.

Then you can argue over the coefficients.

Sure...it's a formula...
but what is it based on other than completely arbitrary values that have absolutely nothing to do with any give person's reason to have stores of cash???

FTR, I keep almost no cash. That works for me because of the circumstances of my life, not because of any metric or formula. I wouldn't recommend it for anyone else except my own spouse.

Each person needs to determine their own needs.

35andFI

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Re: Any good formulas for how much (liquid) cash to stash?
« Reply #13 on: September 05, 2019, 12:10:20 PM »
I'll tell you what I do.

First off, I am 28, single, and rent a small room in a shared house within bike distance to work so there aren't a lot of "emergencies" that I need to account for.

I keep:
$1,000 (1 months worth of expenses) in a checking account
$2,000 in a high yield savings account (I use Wealthfront's Cash Account)
Plenty in a taxable investment account.

I do all of my spending on credit cards and have cashflow from a stable job to pay them off.

DeniseNJ

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Re: Any good formulas for how much (liquid) cash to stash?
« Reply #14 on: September 05, 2019, 12:38:34 PM »
We are a married couple with a 17 yr old HS student and a 19 yr old college kid.  We also have a house with mortgage and a dog.  We spend about 8K per month--not every month but on average, which doesn't include the about 5K we save.  I just can't see having 3 months worth of expenses in cash, even in a CD.  24K is a lot of money to have sitting around.  But then again, my husband and I have incredibly stable jobs.  We keep very little cash on hand, not more than 3 or 4 grand.  We practically live pay check to pay check--savings first then bills then spend the rest.  No cc usage

Radagast

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Re: Any good formulas for how much (liquid) cash to stash?
« Reply #15 on: September 05, 2019, 09:03:59 PM »
If there is a formula I'd lean more towards something based on variability in expenses and income. Maybe

2nd standard deviation of monthly expenses + 2nd standard deviation of monthly income range

2 standard deviations means 95% of the time you will not go over that. Which means if you are targeting 2nd stddev monthly expenses, about once every 20 months you will have an expense that cannot be covered by cash and you need to tap investments. More often than that is too stressful, less often is leaving money on the table. Maybe it will sometimes be twice in three months, or maybe just once in five years.

Add in a variable income factor. If your income is chained to cost of living and is extremely stable and essentially guaranteed, you might have a 0 for this item. If your income ranges from 0 to $24,000 per month, you might have $20,000 for this value.

I don't follow a formula, but in practice what we do is pretty similar to above.