Author Topic: Cash management question  (Read 3605 times)

Travis

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Cash management question
« on: September 08, 2015, 03:33:34 PM »
I started using YNAB a few years ago to get my budget under control which led me here.  I've improved my budgetary and financial education immensely since then and I've been thinking about taking the next step - reducing my cash reserves.  Through YNAB I've always made sure I had enough in checking to cover immediate and planned expenses (I even wrote a check for a $9000 car last month that I saved all year for).  Now that I'm comfortable doing that, I also understand I'm losing out on gains from investing that money rather than just holding onto it.  I think I've read about a few people here who rely almost entirely on their credit cards during the month and simply pull out enough from their investments to pay it off when it comes due.  How well does this work?  I would earn more money investing everything I could, but there also seems to be some risks/costs with pulling that money out to pay the bills.  I'm also concerned with how well I've done budgeting that if I no longer was as concerned with saving up for something in cash I might overspend.  Thoughts?

choppingwood

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Re: Cash management question
« Reply #1 on: September 08, 2015, 05:03:24 PM »
Search:

Ask a Mustachian: How do you manage cash flow if you don't use a budget?

Many mustachians explained in reply to me the different ways they use credit cards to handle expenses.

KMMK

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Re: Cash management question
« Reply #2 on: September 08, 2015, 05:25:12 PM »
How much cash are we talking about? I like to have an easily accessible buffer of 1-3 months worth of expenses in chequing/savings accounts, and the rest invested. But people are comfortable with different levels of cash available.

If you're talking about a couple thousand I wouldn't worry about it. But if you're sitting on $20,000 - I'd invest most of that.

BarkyardBQ

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Re: Cash management question
« Reply #3 on: September 08, 2015, 05:33:20 PM »
I started using YNAB a few years ago to get my budget under control which led me here.  I've improved my budgetary and financial education immensely since then and I've been thinking about taking the next step - reducing my cash reserves.  Through YNAB I've always made sure I had enough in checking to cover immediate and planned expenses (I even wrote a check for a $9000 car last month that I saved all year for).  Now that I'm comfortable doing that, I also understand I'm losing out on gains from investing that money rather than just holding onto it.  I think I've read about a few people here who rely almost entirely on their credit cards during the month and simply pull out enough from their investments to pay it off when it comes due.  How well does this work?  I would earn more money investing everything I could, but there also seems to be some risks/costs with pulling that money out to pay the bills.  I'm also concerned with how well I've done budgeting that if I no longer was as concerned with saving up for something in cash I might overspend.  Thoughts?

No!

You shouldn't store short term cash in stocks and then sell to pay off your monthly expenses.

You hold a cash reserve or emergency fund for your level of risk and you pay off your cards with current months income.

The purpose is to keep your cash low, and invest anything extra you have at the end of the month instead of storing cash.

Travis

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Re: Cash management question
« Reply #4 on: September 08, 2015, 06:21:29 PM »
How much cash are we talking about? I like to have an easily accessible buffer of 1-3 months worth of expenses in chequing/savings accounts, and the rest invested. But people are comfortable with different levels of cash available.

If you're talking about a couple thousand I wouldn't worry about it. But if you're sitting on $20,000 - I'd invest most of that.

It's a one month expense buffer plus things I'm saving up for (gifts, vehicle expenses, travel expenses) which ends up equally about 2 months of expenses.

Choppingwood, I'll check it out. Thanks.

Retired To Win

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Re: Cash management question
« Reply #5 on: September 08, 2015, 07:01:52 PM »
... I think I've read about a few people here who rely almost entirely on their credit cards during the month and simply pull out enough from their investments to pay it off when it comes due.  How well does this work?...

It wouldn't work very well at all if you had boxed yourself into having to sell your investments AT A LOSS just to pay your credit card bills.  This is too much like playing Russian Roulette.  I would never do it.

I think some people get a bit too obsessed about the opportunity cost of holding some cash.  I mean, how much are we really talking about?  If you held just $5000 in cash as a small buffer, your annual opportunity cost (at a reasonable 5% yield) would be $250.  And for that money you would be eliminating all risk of having to sell your investments at a loss just to pay your bills.

Anyway, that's one man's opinion.

johnny847

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Re: Cash management question
« Reply #6 on: September 08, 2015, 07:11:58 PM »
... I think I've read about a few people here who rely almost entirely on their credit cards during the month and simply pull out enough from their investments to pay it off when it comes due.  How well does this work?...

It wouldn't work very well at all if you had boxed yourself into having to sell your investments AT A LOSS just to pay your credit card bills.  This is too much like playing Russian Roulette.  I would never do it.

I think some people get a bit too obsessed about the opportunity cost of holding some cash.  I mean, how much are we really talking about? If you held just $5000 in cash as a small buffer, your annual opportunity cost (at a reasonable 5% yield) would be $250.  And for that money you would be eliminating all risk of having to sell your investments at a loss just to pay your bills.

Anyway, that's one man's opinion.

But as you say, that's only one year's return.
If we ignored the principle of compounding returns, then our stock market investments would not get us anywhere close to the amounts necessary for FIRE.

Note: I'm not saying it is or it isn't worth $250, or any other dollar amount, for the peace of mind of having a cash buffer. But take that $5000 and stick it in some investment that earns 5% (I don't know if you meant this as nominal or real, but w/e) and in a decade, you've earned $3144.47 on it. Not $250*10 = $2500. Take that out to two decades and now your opportunity cost is $8266.49.

Travis

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Re: Cash management question
« Reply #7 on: September 08, 2015, 08:28:50 PM »
... I think I've read about a few people here who rely almost entirely on their credit cards during the month and simply pull out enough from their investments to pay it off when it comes due.  How well does this work?...

It wouldn't work very well at all if you had boxed yourself into having to sell your investments AT A LOSS just to pay your credit card bills.  This is too much like playing Russian Roulette.  I would never do it.

I think some people get a bit too obsessed about the opportunity cost of holding some cash.  I mean, how much are we really talking about?  If you held just $5000 in cash as a small buffer, your annual opportunity cost (at a reasonable 5% yield) would be $250.  And for that money you would be eliminating all risk of having to sell your investments at a loss just to pay your bills.

Anyway, that's one man's opinion.

To be more specific to my situation, no matter what I plan on keeping at least one month's expenses in my checking.  My curiosity goes more towards non-immediate expenses such as vehicle maintenance, vacation funds, gifts, and longer-term expenses of that nature.  I am guaranteed to spend about $3k a month on recurring living expenses. I currently have $10k in checking which includes accumulated budget lines for airline tickets, vehicle maintenance, Christmas, various annual registrations and fees, and clothes.  I put a predetermined amount in checking each month to grow these categories.  I'm trying to determine if these items should stay in cash continuing to accumulate or if I would be better off putting them in my investment account until I need them.  I invest 50% of my income so if an emergency expense comes up I'll have the money one way or another.

Jags4186

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Re: Cash management question
« Reply #8 on: September 09, 2015, 07:05:34 AM »
The opportunity cost of keeping $5000 or $20000 in cash should really not be part of your thought process behind keeping liquid funds.

If you are just starting out, you're going to make the biggest gains by saving money, not by investing money.
If you are a ways into your journey to FIRE, $20000 is not going to make or break you.

Let's look at the numbers:

$20000 invested at 8% over 15 years gets you to $63000.  $20000 in a 1% savings account over the same 15 years is $23219.  So you lose $39718 by keeping the cash.  This also presupposes that interest rates never rise and you don't do various things with your cash that can push your returns up to 4% or 5% at the present (savings/checking bonuses, mango, etc.)  So the difference could be much smaller.

But lets use the number $40000.  $40000 with a SWR of 4% gives you $1600/yr, or $133/mo--15 years from now.  You should not be FIREing based on whether or not you have an extra $133/mo to spend in 2030.

Think of it as insurance you're paying so you never have to sell at a loss.


« Last Edit: September 09, 2015, 07:09:24 AM by Jags4186 »

NotJen

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Re: Cash management question
« Reply #9 on: September 09, 2015, 10:03:16 AM »
My curiosity goes more towards non-immediate expenses such as vehicle maintenance, vacation funds, gifts, and longer-term expenses of that nature.  I am guaranteed to spend about $3k a month on recurring living expenses. I currently have $10k in checking which includes accumulated budget lines for airline tickets, vehicle maintenance, Christmas, various annual registrations and fees, and clothes.  I put a predetermined amount in checking each month to grow these categories.  I'm trying to determine if these items should stay in cash continuing to accumulate or if I would be better off putting them in my investment account until I need them.
My personal way of dealing with these things is to not really worry about them, and just cash-flow the expenses monthly.

Here's specifically what I do:
- I keep a buffer of $1,000 in my checking account.
- I keep an emergency fund in a "high yield" (laughable these days) savings account.
- I pay most of my expenses on my credit cards, with the exception of utilities, home property tax, and vehicle property tax/tag.
- On payday, I pay my credit cards down to zero, pay utilities or taxes as they come up.
- I subtract $1k from my checking balance, and move what's left over to my current savings goal (which is either EF, Roth, or Taxable investment account).
- Repeat every 2 weeks on payday.

My income is large enough and savings rate high enough that I can cover larger expenses easily with cash flow (including vacations, especially as those expenses can sometimes be prepaid).  I've never had to, but could dip into my EF if I had something like an expensive car repair pop up.  This means that my savings rate isn't consistent month-to-month, but the annual total is always good (months can vary from 25% to 75%, but average out to 60% or so), and I am able to meet the savings goals I set each year.

I only move to investments what I'm sure I will not need in the short term.  I don't want to be selling investments until I need to live off of them.

Lis

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Re: Cash management question
« Reply #10 on: September 09, 2015, 12:35:12 PM »
I keep a laughable amount in my checking account. Seriously, the only time it's over $75 is when my landlord takes too long cashing my rent check. Other than that, it hovers between $50-$75 for the month.

Paycheck comes in, all money in the checking minus $75 gets put in my savings account. PNC Virtual Wallet allows you to set up categories for your money, so I have my every day spending budget (usually groceries) and my gas budget, but also categories for my credit cards, rent, utilities bills, etc. When my paycheck comes in, I set aside money for the stuff that is static (rent & internet are the same every month, I do my best guess for electricity). I fill up my budget categories, and transfer everything else to another savings account where I'm saving for a downpayment. As I use my credit card, I move the saved money from the budget categories to my credit card categories. The first of the month, all credit cards get paid.

I keep $500 in my PNC savings account (immediately accessible). I keep the rest of my efund in another savings account (would take 2-3 days to transfer). Unless shit completely hit the fan and I wasn't able to cover everything with my efund (very, very unlikely), I wouldn't dream about touching my investments.

Travis

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Re: Cash management question
« Reply #11 on: September 09, 2015, 07:17:03 PM »
I working my way towards a solution somewhere in the middle.  Through YNAB I know what my recurring living expenses are more or less to the dollar.  While I use my credit card to pay for most of them, I'm keeping enough cash in checking to cover them.  I'm also keeping $2k as a buffer for unforeseen expenses like a car repair or plane tickets where I used to keep individual budget lines for those things in addition to an emergency fund.  I have individual budget lines for car registration, Sam's Club membership, clothes which I'm going to eliminate.  I know I'll always have the money for these things and I'll just account for them in my general shopping or E-fund budget line when the time comes.  If I'm comfortable with this I'll probably drop a couple other "saving for later" categories.

As it stands now at the beginning of each month I have my TSP, Roths, and about half my taxable account contributions automatically taken out of my paycheck or checking.  Towards the end of the month after I know what I have left after every bill is paid or category funded I usually take the remainder and add it to my taxable account.  With this new system if I need to buy tickets or fix the car I know I can put it on the credit card and I'll more than likely have enough cash in the E-fund to immediately cover it.  If my unplanned expenses break what the $2k E-fund would cover, I can wait until the next paycheck and hold off on putting as much into the taxable investment account to top it off again.  Keep in mind at the beginning of every month I'll always have enough cash to pay the bills regardless.  Does this make sense?