Author Topic: Holding on to cash  (Read 2668 times)

FiguringItOut

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Holding on to cash
« on: March 02, 2017, 07:32:12 AM »
Does anyone else having problems giving up cash reserves and investing?

I can't seem to do it.  I have enough cash in the bank right now to cover 7 month of living expenses at my current spending level.  If I add monthly child support payments to that, it will go for 12 months.  And after I receive tax refund plus another sum that is is due to me in the next 4-6 weeks, the total cash plus child support will stretch to 16 months.  Plus I can access about 2 more month of living expenses from my HSA and Roth without penalties.  Also, monthly spending could be reduced some if absolutely needed, but not by a lot.  We are not living bare-bones, but there is very little frivolous spending.  About 80% of it is pretty much set expenditures between rent, utilities, food, transportation, and basic needs.

I have no debt except $11K of student loan at 3% with $130 payment.  I will not be paying it off and plan to just ride it out.  I costs me only about $350 in annual interest and declining, and would take over 7 years to replenish that $11K if I save the payment.  Not worth it.

So that's a lot of cash just sitting in the bank.  And for the life of me I can't dump it into after tax brokerage account. A few months back I even went as far as opening an account with Vanguard.  I put $5 in it just to keep it open.  And that was it.

I know this is all psychological.  I still remember when there was over $50K debt on credit cards and how much effort it took to pay it off.  I remember when there was only $60 in the bank and paycheck wasn't coming for another week.  I am a divorced mother of two.  I understand the psychology behind it.  But I can't seem to come to terms that I should it either invest the money or just decide to be ok with it sitting in the bank doing nothing.

Plus, I believe that this market run up we are in right now will deflate sooner rather than later.  And I am entertaining a possibility of purchasing a rental property, though that is a pipe dream right now due to logistics.

And a side question:  Can anyone recommend a good android app for listening to podcasts.  I'd like to be able to mark podcasts that I've listened to and mark favorites if possible.









marielle

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Re: Holding on to cash
« Reply #1 on: March 02, 2017, 07:41:36 AM »
I have the opposite problem--I feel like money sitting in my bank is useless because it's not earning interest or paying debt (even if the interest rates are low). I also get more tempted to spend it.

Don't try to time the market. It could continue to go up for another year, or two, or five. It could go down tomorrow. Time in the market is always better than timing the market. Always. Either way, you're in this for the long term (decades hopefully) so you shouldn't worry about investing today and the market dropping 10% next week. It will eventually trend up.

Also: I recommend Podcast Addict. It automatically marks "read" podcasts and you can pre-download on Wifi and follow/favorite certain channels.

stevef941

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Re: Holding on to cash
« Reply #2 on: March 02, 2017, 07:56:14 AM »
Hi, I'll weigh in on this and hope it is helpful. It sounds like you are unsure of what to invest in more then anything. if you cannot handle the fluctuations in stock prices it is probably best not to invest your money there.  All investments have risk though. Rental real estate has price/value risk (which is your biggest concern with the stock market based on your post), lease default risk, vacancy risk, catastrophic risk, etc..

I personally started investing in publicly traded businesses and ownership in rental real estate.  The later proved time consuming, I was location bound and the risk/return was not as good as my public equity investments. So, I have since focused on the later.

The most important aspect of an investment in my opinion is that you have two things; a sound economic model and conviction in that model.  This tackles the economics and the behavioral aspect of investing.

For example; if your cost of debt is 4% (your weighted average cost of capital would theoretically be higher then 4% then) and the un-levered cap rate on a prospective real estate investment is 3% it is not an economical. 

If however the cap rate is 5% and you believe in real estate and can suffer through the hardships you will most likely face because of that belief then its a good investment.

plainjane

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Re: Holding on to cash
« Reply #3 on: March 02, 2017, 07:58:21 AM »
This problem is really common.  You had tunnel vision on building your cash reserves.  And before that on getting out of debt.  You've hit your target on the cash reserves.  Now you can check that off your list. 

Your reserves are the perfect size right now.  So this tax refund and the other sum, they're for you to start of on the next goal.  Don't worry about your existing reserve being too big or moving that.  Just think about the next money coming in, you need to find a spot for it now that your cash reserve bucket is full.  Your next bucket only has $5 in it.  That $5 is lonely, and your tax refund is just the thing to keep it company.

ETA: later on you might decide that the cash reserve bucket is too big.  Don't worry about that right now.  Only worry about what you're doing with the new money.
« Last Edit: March 02, 2017, 08:04:31 AM by plainjane »

mbl

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Re: Holding on to cash
« Reply #4 on: March 02, 2017, 08:00:36 AM »
What percentage of your total assets is your cash position?

Are you a single parent/single income household?

Might it be a good thing to have that much cash if you, for some reason were unable to work for an extended time?


FiguringItOut

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Re: Holding on to cash
« Reply #5 on: March 02, 2017, 08:05:13 AM »
This problem is really common.  You had tunnel vision on building your cash reserves.  And before that on getting out of debt.  You're hit your target on the cash reserves.  Now you can check that off your list. 

Your reserves are the perfect size right now.  So this tax refund and the other sum, they're for you to start of on the next goal.  Don't worry about your existing reserve being too big or moving that.  Just think about the next money coming in, you need to find a spot for it now that your cash reserve bucket is full.  Your next bucket only has $5 in it.  That $5 is lonely, and your tax refund is just the thing to keep it company.

ETA: later on you might decide that the cash reserve bucket is too big.  Don't worry about that right now.  Only worry about what you're doing with the new money.

Haha!  I just pictured a lonely $5 bill fluttering in the wind. 

I was thinking of dumping that tax refund into tIRA account instead of saving up for it monthly over the year.  Not really sure what's best. 
May be I can talk myself into putting the other sum that is coming into after tax account (to keep my $5 company). 






marielle

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Re: Holding on to cash
« Reply #6 on: March 02, 2017, 08:08:06 AM »
I forgot to mention. How many expenses are work-related? If you were unemployed, you would theoretically not be commuting as much, not paying for daycare, or any other expenses you only pay when you're working full time. So theoretically you may have even more saved than you need, possibly several months extra.

FiguringItOut

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Re: Holding on to cash
« Reply #7 on: March 02, 2017, 08:11:50 AM »
What percentage of your total assets is your cash position?

Are you a single parent/single income household?

Might it be a good thing to have that much cash if you, for some reason were unable to work for an extended time?

About 23% of my NW is in cash right now.  The rest is in pre-tax account (401k, HSA, tIRA, and very small RothIRA)

Divorced mother of two, receiving child support payments from my ex.  Child support covers about 40% of my monthly expenses.  I can usually save most of it and live on my salary, but it's very close call.  When I increase my 401K to annual max (had to reduce it in Jan due to temporary circumstances), I'll have to use CS to cover the gap. 


FiguringItOut

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Re: Holding on to cash
« Reply #8 on: March 02, 2017, 08:14:29 AM »
I forgot to mention. How many expenses are work-related? If you were unemployed, you would theoretically not be commuting as much, not paying for daycare, or any other expenses you only pay when you're working full time. So theoretically you may have even more saved than you need, possibly several months extra.


Work related expenses are mostly transportation, about $130/month, plus I need to pick up new clothes.  But I sort of need new clothes right now regardless of work.  Haven't bought anything new in couple years and a lot of it definitely needs replacing now.

No daycare, etc.  Kids are in junior and high schools.


Fishindude

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Re: Holding on to cash
« Reply #9 on: March 02, 2017, 08:16:12 AM »
I'm in the same boat.  Recently invested some into a cash real estate purchase, but currently have a sh!tload of cash just sitting in bank accounts.    I've been stashing $$ away in a 401K for many years and feel like that is just about enough money in the stock market.  Kind of just sitting idle to see where my taxes settle up for the year, then will make some decisions to put some of it to work.

It's not all bad having significant liquid cash laying around.  Gives you lots of options to take advantage of opportunities when they arise.


Cycling Stache

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Re: Holding on to cash
« Reply #10 on: March 02, 2017, 08:27:10 AM »
Does anyone else having problems giving up cash reserves and investing?

I know this is all psychological.

Correct.  This is just a market timing problem.  Once you accept that you're not smarter than the market and cannot successfully market time, you can move on, invest in the market, and let the money work for you.

Here's the point that might help.  You're just starting off market accumulation.  You want the market to crash.  You want it to plummet.  You want it to go as low as possible, as long as possible, until the last second when you need it.

Your best case scenario is the market dropping 50% tomorrow.  Your $11k goes to $5.5k, but you're not cashing out.  You're buying the next $100k or $200k worth of shares at half price.  That's a win.

So what you're really worried about is feeling foolish that the $11k goes to $5.5k.  Why?  It's a paper loss, and you're not going to sell.  It will be back to $11k (and probably way more) before you ever need it, assuming this is all long-term money.  And the rest of your investments--investments that should ultimately dwarf the $11k you currently have--would be at a lower price.

And assuming the market goes down, you're also not going to guess the bottom correctly either.  How long has your money been sitting there?  Did you jump in when the market dropped 10% right before the election?  Did you go all in last January when the market dropped and Mr. P was predicting the coming of Red Dow(n)?  Did you know that the market is up over 20% in the last year, and now 300% since February 2009. 

Maybe you're trying to be the guy who avoided investing in October 2007, right before the market lost 56% (the second largest drop in history)?  That would be great, right?  Except do you know what the S&P 500 was in October 2007?  1562.  The market is up 53% today from that peak, not including the additional 12% or so increase from dividends.

Also worth noting.  The market goes up on average, which means that every day the market is statistically more likely to be up than down.  So betting against it is a losing proposition.

That's a long way of saying you need to get over the fear of investing.  Every time you wish the market would go up while you're still in the accumulation phase, you've made a psychological error.  You're not a unique butterfly.  You cannot time the market.  But you can make a lot of money over the long-term by investing now, investing regularly, and avoiding selling (or withholding investments) whenever you see a news article suggesting the next big crash is right around the corner.

Good luck!

Cali Nonya

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Re: Holding on to cash
« Reply #11 on: March 02, 2017, 09:54:33 AM »
When I started investing over just saving I originally bought a few (three) dividend paying stocks of fairly conservative companies (about 2k per stock).  I purchased equities through a self directed account with minimal costs, but as the dividends started trickling in, it was easy to use the dividends to motivate me to match that from income and keep at investing. 

If it's a bit of a mental block, you might want to look at an investments that have a dividend or royalty where the payment can be a motivation.

Just a thought.
Good luck.

catccc

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Re: Holding on to cash
« Reply #12 on: March 02, 2017, 11:30:25 AM »
I would invest now if I were you. 

Since you are talking about taxable investments:  If the market goes down, I think you could exchange your holdings, harvest some tax losses, and be better off than if you just waited and bought at the exchange price once it goes down.  I did tax loss harvesting for the first time in August 2015 and it was a nice tax break.  ($3K loss resulted in $450 tax savings, investment holdings pretty much remained the same.  The investments have recovered, but if I sell today, I'm still in the 15% tax bracket with means zero capital gains tax.  It might not work out for others just like this, but it is worth looking into, I think.)

Aggie1999

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Re: Holding on to cash
« Reply #13 on: March 02, 2017, 11:48:34 AM »
What clued me in is doing some analysis of $15k I had let set in a non-interest bearing account for about the last4 years. At the time I said it's only $15k so no big deal on what little interest I had lost. Then started reading MMM over the holidays. Realized in those 4 years I lost ~$5k gain that money from not having it invested in index funds. That was it. Now I carry hardly any cash reserves. Only $1k or so in my checking account. Note that I am single with no kids so it is a little easier to go down that low on cash reserves. I figure if something happened I can ride on credit for a month while stopping all 401k contributions. If it got really bad I could always withdraw from my Roth 401k, post tax 401k and Roth IRA's.

Basically don't let your money sit in a bank account or CD. Not only are you loosing out on market growth but your actual cash is loosing around 2% per year from inflation (3% inflation minus 1% interest). Put your money in Vanguard Total Stock Market Index Fund and some in the International version if you are so inclined.

neil

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Re: Holding on to cash
« Reply #14 on: March 02, 2017, 12:04:10 PM »
Losses from cash drag also compounds to the point where it's non-recoverable.  I though I might buy a house in 2011-ish so I was planning for that, but then it put me into a bit of a limbo for years.  Oddly enough, the banking crisis did not bother me but what to do with my personal circumstances paralyzed me a bit.  I have a spreadsheet where I track opportunity cost and the opportunity cost begins to compound on itself, creating an especially nasty effect.  After a few good years you end up hitting a point of no return where it might take a fantastic crash to be able to invest the idle cash and recover the opportunity cost.  While it is not my favorite spreadsheet for obvious reasons, I maintain it as a reminder.

Investing at highs never really bothered me because I mainly look at the dividend as an anchor.  I don't plan on aiming for 2% SWR but the yield is somewhat a representation of the growth of your earning power of the investments.  The CAGR of dividend growth is a lot more fun to watch than net worth (though that's hard to really say honestly after an 8+ year bull run) since it is more closely related to your savings rate and less so the growth of the market.

NorthernBlitz

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Re: Holding on to cash
« Reply #15 on: March 02, 2017, 03:02:38 PM »
If you decide to keep holding that much cash, you could try to get some sign up bonuses from banks for opening savings accounts. I think that there are several deals where you can get $150-200 for putting in $10-15k for 90 days or so.

If you're OK moving money around and opening and closing bank accounts, it's a much better return than the 1% you'll get at online banks.

FiguringItOut

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Re: Holding on to cash
« Reply #16 on: April 13, 2017, 10:33:54 AM »
So I bit the bullet this week and send contributions to HSA and tIRA to cover January through April 2017.  I plan to send monthly contributions through the end of the year.  I also send $4K to a taxable brokerage account. 

I am still somewhat uncertain about taxable account as I am looking at having to fill out FAFSA soon for my older kid.  It seems that for 2020-2021 college freshman year I will need 2018 tax returns or may be even 2017 if we fill out FAFSA early.  And taxable accounts count towards savings available for college tuition. 

Side question:  I don't have 529 account for my kids (long story).  They each have a small 529 set up by their grand parents, but they are really small.  Around $15K each.

When time comes for me to pay a portion of their college tuition, can I set up a 529 account for them, make tax free contribution to the account and then turn around and withdraw those funds to pay the tuition?  This seems like a good way to lower taxes on the payments I'll have to make anyway, but it also seem to easy/obvious.



frugaliknowit

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Re: Holding on to cash
« Reply #17 on: April 13, 2017, 11:19:51 AM »
My $.02:  I would hammer out the SLs.

I know theoretically the "expected value" of (100%) equity investment is higher than 3%, but this has not been the case over all 10 year time spans (example:  2000-2009).  Also, it would be bad for my spirit to have the SLs hanging over my head while trying to make progress on my wealth.

protostache

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Re: Holding on to cash
« Reply #18 on: April 13, 2017, 12:19:13 PM »
529 doesn't work that way.  It works like a roth (You put in after tax dollars and pay no tax on the withdrawals if used for education).  The benefit of the 529 is the tax free growth over time.

Depends on your state. Many states let you deduct 529 contributions from your state taxes. None of them will have a clawback if the student is enrolled in classes at the time of the withdrawal. Depending on how much you're funneling through and how big of a deduction your state lets you take, this could be a significant sum even if you contribute on Dec 30th and withdraw on Jan 4th of the next year.

BlueHouse

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Re: Holding on to cash
« Reply #19 on: April 13, 2017, 12:23:07 PM »
Yep, I routinely have the same problem but I try to keep it in check.

Try making a pie chart (or a simple table) of every investment that you have across all accounts.  I categorize mine as:

US Stocks
US Bonds
Intl Stocks
Real Estate (equity only)
Cash

Identify what percentage you WANT in each category (which then becomes your Investment Policy), and compare it to what you actually have.
When I see it in a pie chart, it helps to move me back to my goals.

FiguringItOut

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Re: Holding on to cash
« Reply #20 on: April 13, 2017, 12:40:00 PM »
529 doesn't work that way.  It works like a roth (You put in after tax dollars and pay no tax on the withdrawals if used for education).  The benefit of the 529 is the tax free growth over time.

Depends on your state. Many states let you deduct 529 contributions from your state taxes. None of them will have a clawback if the student is enrolled in classes at the time of the withdrawal. Depending on how much you're funneling through and how big of a deduction your state lets you take, this could be a significant sum even if you contribute on Dec 30th and withdraw on Jan 4th of the next year.

Thank you!

I just checked and my state allows up to $5K deduction on state returns.  This is awesome for me considering my state's very high tax rate.

FiguringItOut

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Re: Holding on to cash
« Reply #21 on: April 13, 2017, 12:44:34 PM »
My $.02:  I would hammer out the SLs.

I know theoretically the "expected value" of (100%) equity investment is higher than 3%, but this has not been the case over all 10 year time spans (example:  2000-2009).  Also, it would be bad for my spirit to have the SLs hanging over my head while trying to make progress on my wealth.

I've come to terms on keeping my student loan till it's paid off on it's own.  The math tells me that if I pay it off and then save monthly payments, it will take me only 4 months less to replace the cash than it I just keep paying the loan.  So not worth it to me.

The_Pretender

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Re: Holding on to cash
« Reply #22 on: April 13, 2017, 12:57:59 PM »
I do not know much about 529's really.  But if they are treated like Roth IRAs, could the OP fund a couple 529's currently and if something were to happen where they need the money they could pull the principal out of the 529?  This is assuming the Roth IRA has been fully funded.