The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: israele on January 10, 2014, 01:18:46 PM
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A financial adviser recommended 6 months expenses worth of cash reserves, which I current have in place. However, I'd love to put some of that to work in the market. I have a stable job, and don't feel like I'd be taking a major risk if I kept, say, 3 months of cash on hand instead. Is there any conventional wisdom on the best course of action regarding this topic? Thank you.
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I think 3-6 months is the general recommendation you will get although there are a lot of Mustachians who don't keep any relying on Roth accounts, taxable investments, credit cards, etc. instead.
I keep 6 months worth of expenses in liquid CDs - my job is stable but if I lost it for some reason, it would probably take me 6 months to a year to find something comparable and I would probably have to relocate. Also, I view the cash holdings as a diversification mechanism for my overall portfolio.
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It depends on your own risk appetite and situation.
I have the best health insurance plan that my employer provides, so it'd be unlikely for me to have that as a major expense. On top of that, I have a credit cart, and a taxable investment account margin approved. So what would my "emergency" be? If it's employment related, I'd reorient my financial situation, and 6 months of cash wouldn't change what I'd have to go through.
So I keep ~1-2 months(~1500-3k) worth of expenses in actual cash in my Checking account. Anything beyond that I'm not worried about, whether I pay it from credit cards, liquidating investments(even at a bad time), going on the margin, wherever.
See also
https://forum.mrmoneymustache.com/investor-alley/investing-your-emergency-fund/msg162639/
https://forum.mrmoneymustache.com/investor-alley/do-you-always-need-an-emergency-fund/msg181757/
https://forum.mrmoneymustache.com/ask-a-mustachian/should-invested-money-count-as-'emergency-fund'/msg156215/
https://forum.mrmoneymustache.com/ask-a-mustachian/do-i-already-have-an-emergency-fund/msg185917/
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It depends on your own risk appetite and situation.
I'm of the view that holding 6 months of cash is the biggest risk - due to lost returns that could have been received if it was invested.
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5k. It has worked for me for 10 years, undergrad, grad school, two kids and a self employed husband.
Seems perfect to me.
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I consider myself extremely risk adverse, but 1.5k is my "bottom line". All else gets swept into investment accounts. I've been through several major financial emergencies and have used credit cards, sold investments and have always come out ahead. I do have low spending and some rental income, and could totally live on unemployment.
This is clearly not a one size fits all answer, the best answer is what will let you sleep at night.
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I am currently working up to 6 months in an emergency fund, however, I just started to put a chunk of my paycheck towards a company stock purchase plan. I was just trying to max out my 401k and then save as much cash as possible, but now I am taking a portion of that cash savings and treating as a 6 month CD investment in the stock purchase plan.
If your employer offers anything like this, it is worth thinking about. I get a 15% discount on market price when the stock in purchased, and I can cash them out immediately. So I sign up for a percentage of my paycheck, and the funds are invested every 6 months. I plan on cashing them out immediately once purchased every month, which will give me an automatic 15% return. I will have to pay taxes on that return, but I think it's worth it.
This is certainly unconventional, but I can't find any other guaranteed rate that will rival this deal for a 15% return every 6 months. We will see how it goes over the next year, but I plan on adding that to my emergency fund, and using it to contribute to IRA accounts.
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I used to keep a fair amount - $5-10K - in checking & savings, but these days I only keep a couple of months basic bill payments. (I'm self-employed, so income tends to arrive in largish but irregular chunks, or I'd go month-to-month.) Emergency fund is a combination of 0% interest for a year or so credit cards, and a moderate-risk mutual fund. (T. Rowe Price Spectrum Income - RPSIX). People offer me free money, and let me earn dividends on my own? Sure, I'll take it.
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Personally I keep just over 2 months of income in a savings account, just in case. I also have a credit card that I can use short-term: the interest is so low that it wouldn't matter much to me, if it came down to it. I think it's also important to make sure you have income protection, both redundancy and sickness. I have it on a 30 day stand-down period too so that I won't have to use my funds waiting for it to kick in. Some people have a long stand-down, but my investments are working too hard for me to justify pulling them out, when the income protection is so affordable!
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You should have ready access to 3-6 months of expenses; however, that doesn't mean you need to keep that money as cash. If you have a source of semi-liquid savings, such as stock you can sell with no penalties, that can cover the vast majority of those expenses. You can defer expenses at no cost for a few weeks on average by charging them to a credit card, and that's more than enough time to convert stock or similar assets to cash. Thus, in terms of cash on hand, you probably only need 1-2 months of expenses in completely liquid form (e.g. a savings account).