How much cash on hand during accumulation phase?

[FrugalFan]

I know people often discuss the pros/cons of emergency funds, and I read another good thread about that yesterday with some great links a multi-part series on earlyretirementnow advocating no emergency funds in most situations.

Our emergency fund is not big, about 11k. Which is less than two months of current expenses, though many things could be easily cut out during a true emergency such that this amount would be sufficient for at least 2 months. But we have way more cash than that. Money to meet minimum checking account balances to waive fees, our own play money accounts that have been accumulating, savings for future vacations, savings for future major house maintenance, savings for car repairs/future car, savings for future vacations, etc.

Do people who advocate having a minimal/no emergency fund (using springy debt) still save up for cars/major house repairs, etc? People often say those are not emergencies because you can plan for them, but on the other hand they could turn into emergencies if you didn't plan for them.

As I see it, the pros of saving for these things include:
-Not stressing about big expenses that might crop up
-These are things we expect to have to spend on eventually, and saving for them incrementally helps us understand our overall budget/expenses better

The cons:
-Opportunity cost/inflation erosion
-Sometimes, I think this justifies bigger purchases than necessary. Before MMM, we bought our second car for 19k, and that happened to be the amount in the car account. Or we bought a nice sectional for our downstairs family room because we had plenty in our furniture account. Or we choose where to go on vacation based on how much is in that account. I'm more conscious of this now, but it's harder to convince DH. He'll often ask how much is in such and such account when we discuss big expenses.

I'd love to hear how others approach this.

[BigHaus89]

We only keep a $2k cash buffer in the checking account. The rest is invested or paying off debt. This makes sense for us because we have a lot of resources we could draw from in the case of a true emergency. Resources like HELOC, credit cards, Roth IRA's, 401k loans, sale of stocks, and family member loans if need be.

[ysette9]

We tend to have 1-2 months' cash that I could cobble together if needed. It used to be a bit more, but over time we would have an unexpectedly high month (vacation, major appliance) and then need to pull from the slush fund to cover the credit card that month. I have it set up so the credit card is automatically paid off in full each month, so if we have extra spending one month, we need a buffer. Over the last year or two that situation has happened a few times and we haven't poured money back into the slush fund. I should probably do that, come to think. Otherwise things are run pretty tightly, with the auto investments to Vanguard pulling money out of checking each week. If we had a true emergency, we'd 1) use up all available cash, 2) start using the credit card and kill the feature to automatically pay it off in full each month, 3) stop the Vanguard weekly investments.

This presumes that the emergency doesn't leave both of us without jobs at the same time. If that is the case, then we start tapping into investments as step 4.

[FrugalFan]

Thanks for your input. I get what you both are saying about unexpected emergencies. But what about big planned (but unknown timing) expenses like a new roof or a new car? Things that would cost multiple months' worth of expenses? Save for them separately or just have a bigger "emergency" slush fund?

[ketchup]

We previously had a very minimal (2kish) buffer/emergency cash but are in the process of expanding it.  It really varies on your situation.

For us, the "oh crap" liquidity crunch moment was back in September when my (self-employed) GF had a client get shitty about paying her ($3k), AND she had to bankroll an upcoming work trip ($3500), AND our car died in there too (because why not).  So we had to swallow basically seven grand without much of an e-fund.  And then buy a car.  We made it happen, but it wasn't fun.

We'll probably end up with around a 10k e-fund once the dust has settled.

[englishteacheralex]

Out of a net worth of about $160k, we have around 30k in cash. This probably would strike many MMMers as absurdly high, but we like liquidity and most of that cash is earmarked for sinking funds such as travel (we spend higher than average on travel because we live on Hawaii and have to go to the mainland anytime we see family), car replacement, car repairs, home maintenance, and then, yes, the 15k emergency fund.

We are conservative with money and value liquidity over returns. I see merit in MMM's advice about "springy debt" but it would cost me too much sleep.

[ysette9]

But what about big planned (but unknown timing) expenses like a new roof or a new car

That's a good question. In our situation, we rent so we don't have large house-related expenses (woo-hoo!). I do plan on replacing my car since it is a VW TDI and I will have to go through the buy-back at some point. I don't plan on spending any more for a replacement car than what I get for the buy-back though, so it will be a wash. My husband replaced his car a while back, but he bought a used car that was pretty much the same price that he got for the car he sold. I realize it doesn't always work out that way, but it does explain why we haven't had a car fund yet.

Due to poor tax planning on our part we owed a crap-ton last year. Fortuitously, that is the same time that we each got RSU/stock/incentive-grant type thingies that vested so we used that cash flow to cover our stupidity. I'm struggling to think of other situations where we would need a large influx of cash that we wouldn't see several months off. Ideas?

[trollwithamustache]

I'm a huge fan of this question and my thinking has changed over the years with my circumstances. Immediately post college I built up a decent emergency fund, the full 6 month of necessary expenses. (hey my dad told me to max out my 401k and do the 6 months fund so I did)  After a few years  I realized by showing up on time, doing decent work and basically having less BS than my coworkers, I was never going to get fired/laid off.

At that point I kept a month or so in the checking account and invested everything else.This was in my 20s when I was not only a low cost operation, but very low responsibilities.

Somewhere in this time, I got an engineering license and was pretty confident that if I got laid off, there were a bunch of firms that would pick me up really quickly if that's what I wanted. Maybe not my ideal pay rate or job, but I could be cash flow positive and  the resume would still show my chosen profession. If your local labor situation isn't as friendly then this maybe doesn't apply.  This has also made me relatively risk tolerant as I got older and took jobs with start ups ect where I did get laid off/ they went belly up.

We also avoid debt and therefore pre-save for big expenses. So that means we've had money for travel and hobby stuff accumulating in a savings account as well as major expenses. I historically did NOT  count this towards an emergency fund as employment breaks for me are travel time so that money was going to get used.

But now that I'm older, the savings for car expenses, this and that house project or furniture, the kids summer camp ect has gotten quite a bit more extensive. If I'm unemployed this summer, I'm selling the kids tablets and dragging the kids off into the forest for a long national forrest camping trip. Then we can spend the summer program money covering our living expenses. We have so many more categories of savings now that it seems silly not to view this money as useable.

I also became an independent contractor in the last few years and want to stay that way.  Because of that I keep a much larger, ~4 mo reserve on hand for layoff time. So far I've been able to keep myself booked up with work but contracts fall through and get delayed all the time.   I could still go back to being an employee if the layoff time lasted too long, but I want to make this independent thing work so that requires more $$ on hand to ride out lean times.

Its also psychological. The HELOC thing got mentioned and I'm totally OK with it. Part of the MMM style path is you have a lot of freedom to experiment with what is optimal and if you are wrong, its not a big deal, you pay to much in interest for a bit and try to do it better next time. I suspect everyone on this board is doing more than enough things right to cover the odd mistake. However, the Missus Troll abhors debt more than I do and wouldn't be happy if we drew on the HELOC instead of selling investments. She wouldn't be happy about selling investments either , so we keep more cash on hand.   

Housing Costs got mentioned, and this is a topic we haven't sorted out yet. I would be ok using the HELOC or refinancing for something like a new roof. Borrowing for a capital improvement to a capital asset is something I am ok with.

[Lanthiriel]

For those of you who don't keep a lot of cash on hand, do you invest it in a taxable account so that you can withdraw it without a penalty? All of the rest of my money is locked up in pre-tax 401ks and Rollover IRAs. 

[Telecaster]

For those of you who don't keep a lot of cash on hand, do you invest it in a taxable account so that you can withdraw it without a penalty? All of the rest of my money is locked up in pre-tax 401ks and Rollover IRAs.

I do.  And having taxable accounts isn't a terrible idea anyway because the withdrawals from IRAs and 401(ks) are taxed as ordinary income which is typically taxed at a higher rate than capital gains.   Basically, it gives you some tax flexibility when it comes time for withdrawals. 

[trollwithamustache]

For those of you who don't keep a lot of cash on hand, do you invest it in a taxable account so that you can withdraw it without a penalty? All of the rest of my money is locked up in pre-tax 401ks and Rollover IRAs.

Yes. This was a problem for me in my 20s when I basically had all my assets in the 401k and IRA and very little useable money. For a few years I didn't contribute as much to the 401k to save more in the taxed accounts. But I always was betting I could stay employed no problem.

[Rubic]

For those of you who don't keep a lot of cash on hand, do you invest it in a taxable account so that you can withdraw it without a penalty? All of the rest of my money is locked up in pre-tax 401ks and Rollover IRAs.

I only put money into taxable accounts that I assume won't be withdrawn for
the next 5 years.  Obviously if a crisis occurs, I'd withdraw it, but I don't want
to be forced to cash out at inopportune times -- so it would truly need to be
an emergency situation.

For what it's worth, my taxable accounts are at an approximately 1:2 ratio of my
current investments.  Not due to any grand strategic design, it just worked
out that way after topping off my tax deferred contributions over the years.

[ysette9]

We are fortunate enough to have plenty of investing space after maxing our retirement accounts, so we have plenty in taxable accounts. Conveniently, this also sidesteps the issue of how to access those retirement funds early; I think we will be able to just let them sit and do their compounding magic until long in the future.

[wenchsenior]

For those of you who don't keep a lot of cash on hand, do you invest it in a taxable account so that you can withdraw it without a penalty? All of the rest of my money is locked up in pre-tax 401ks and Rollover IRAs.

I do.  And having taxable accounts isn't a terrible idea anyway because the withdrawals from IRAs and 401(ks) are taxed as ordinary income which is typically taxed at a higher rate than capital gains.   Basically, it gives you some tax flexibility when it comes time for withdrawals.

We do also. We have a net worth of ~600K right now, about 500K of that being invested assets rather than home equity.  We keep ~1 month worth of expenses (5K or so) in cash among 4 different checking/savings accounts. This covers all monthly bills, serves as a sinking fund for property tax payments, and covers typical smallish unexpected costs such as (this month) a water heater repair and the need to get our fascia replaced (~2K). We also use our savings accounts to save for short-term planned expenses...e.g., DH is thinking about a possible trip to Europe next year, so we're stashing an extra 500/month in one of the savings accounts right now.

In addition to this slush fund, we have an actual 'emergency fund', 15K minimum, invested in the Vanguard Income fund.  We don't touch that...it is for really bad situations like a job loss. 

On top of that we have our longer term slush fund, also taxable, which is invested with VG for moderate growth. This fund is for long term expenses, such as down payments on houses were we to need to move; down payments on new cars; etc., that only come up every 5-10 years. I'm not sure how big I plan to grow this. Right now 75K seems reasonable, but I might change my mind in a couple years.  Once our "moderate risk" account goes over 50K (soon), I'll probably just consolidate the emergency fund cash into it (on the assumption that we are unlikely to lose more than 15K emergency equivalent in a big market drop).

[2Birds1Stone]

I keep 1-2 years of living expenses in a high interest bank account, as well as use it to churn bank account bonuses.

So that money earns a pretty much guaranteed 3-5% APY.