Investing too much?

[Nederstash]

Hi all,

I've been Mustachian for around 10 months now. I discovered the site in August and made my first investment in October. A whopping 100 euro that month (#yolo) but then increased it to 300 a month. My investments took a bit of a downturn (as most of you know) between December and March. Knowing I should buy low, I've increased the monthly contribution and I put in larger amounts (2 bonuses and part of my savings). Man, I really got a taste of market fluctuations! But it's a thrilling ride.

Maybe too thrilling. I now have whopping (to me) 12k of my 20k in investments. Looking back, it seems an enormous amount! Am I being to laid-back, too optimistic? Sure, it's going well while it's going well, but should I have a bigger savings account?

Some numbers:

Savings: 8k
Investments: 12k
Income: 40k take-home pay per year including bonuses (12 times 3k and 2 times 2x bonuses)
Expenses: 25k a year including everything (mortgage/taxes/holidays/groceries etc.) (2k/month + 1k taxes once a year). Bare bones would be 1500 a month + 1k taxes (19k/year, so 6k less).
Debt: none except mortgage

Thanks to the Dutch welfare state, I get 70% of my income for a year should I get laid off (not expecting this, just a safety net) and longer should I fall ill. 70% should still cover my normal expenses quite well. But what if my car breaks down or something in the house breaks or some other strange life event occurs that makes me delve into my savings?

Do I have enough? Having only 8k of my 20k readily available seems so irresponsible!

PS yes I should have more savings by now. But I spent most of my 20s traveling the world, going to a different continent twice a year :) I may have discovered MMM a bit too late. I'm working on my hedonic adaptation.

[slappy]

8k appears to equal about 4 months of expenses, so that sounds about right.

[CmFtns]

You should not have a percentage invested you should have it all invested minus reasonable safe liquid funds for an emergency. There's no reason to not have all your money working for you.

[Nederstash]

Thanks! I guess I just worry: what if the car goes and something happens to the roof, 8k won't cut it. Maybe I'm just too paranoid.

[WildJager]

Investment into a market is not necessarily iliquid.  You can always sell a portion when required (a traditional tax deferred retirement account will incur penalties, so I would not sell from those).  Real estate and the like is more of a challenge, because you can't quickly sell on a rainy day.

However, you're right, living within your means and considering investments untouchable is the best way to go.  Keep an emergency fund you're comfortable with, and go from there.  Don't based that value on feelings and what ifs, instead track your expenditures so you realistically know how much you might need for any given emergency.

[csprof]

Investment into a market is not necessarily iliquid.  You can always sell a portion when required (a traditional tax deferred retirement account will incur penalties, so I would not sell from those).  Real estate and the like is more of a challenge, because you can't quickly sell on a rainy day.

However, you're right, living within your means and considering investments untouchable is the best way to go.  Keep an emergency fund you're comfortable with, and go from there.  Don't based that value on feelings and what ifs, instead track your expenditures so you realistically know how much you might need for any given emergency.

And remember that there's not one "investment" - there are many.

Example:  We spent the last year and a half budgeting for some home remodeling.

I normally keep my investments in a fairly standard mostly-equities mix (vanguard target 2045 retirement, VTSAX, the usual).

Once we started specifically allocating almost all of our spare cash towards the remodeling plans, I left it:

  ~10% that was already sitting in BRK.B  (VTSAX-equivalent volatility)
  ~10% that was already sitting in SPY (s&p 500 -- roughly the same volatility)
  ~5% that I put into VTSAX in January, because I couldn't resist when the market was so far down.
  ~5% in VFICX (low volatility bond fund)
  ~40% in VTINX (lower-volatility income-producing)
  ~30% in my savings account @ 1% (no volatility)

At the worst part of the most recent market volatility, my VTINX was down about 2%, which was annoying but didn't put us out of the running.  I left the BRK and SPY alone because it'd been parked there for 9 years and had a lot of long-term capital gains tied up in it that I didn't want to pay last year.  The savings account held enough of a buffer to pay big chunks of the construction bills.

The VTINX was my main target for saving-with-some-appreciation.  It experiences about 1/3rd the volatility of the broader market and has comparatively lower gains, which was about right for my time horizon.

You can do similar things with your portfolio -- some in savings to buffer monthly issues, some in a lower-volatility fund to handle actual emergencies, and the rest in a high-volatility VTSAX-like fund.

I don't necessarily recommend VTINX, btw:  for US taxpayers, it has too much short-term capital gains and interest income if you're holding it for a longer period of time.

[CmFtns]

Thanks! I guess I just worry: what if the car goes and something happens to the roof, 8k won't cut it. Maybe I'm just too paranoid.

I think the benefit of having most of your money invested outweighs the cost of whatever you need to do to get through these rare situations. There are also things you can do to be prepared for these situations and also keep most your money invested.

-One thing you can do is Once per year open a credit card with zero percent interest
Usually there are always credit cards offering 12-15 month interest free and if your credit is good you should be able to get a 10k+ credit limit. You could just put this card away and never use it unless something happens then pay it off before the interest starts.

-If you own a home you could open line of credit on your home equity which you would only draw upon during an emergency. This is a low interest rate option that would have minimal costs if paid back over only a few months.

-Both the car and roof companies probably offer financing which in a bind you could take advantage of then pay off very quickly in order to not have much interest...

-Also you should keep a small buffer of money but what i'm saying is that 8k is more than enough

[aspiringnomad]

My cash on hand fluctuates between 1k and 7k at any given time (it actually will drop a bit below 1k this month) and I have over 350k invested in the market. I initially understood that I would use credit cards and possibly sell some stocks in an emergency, but now I have a 50k home equity line of credit that gives me all the peace of mind I need. Based on your roof comment, it sounds like you own your home - if so, you should look into whether a HELOC is a viable option for you.

[Slee_stack]

Good advice (as usual here). 

Personally I carry on average about 1% of my savings in an 'emergency fund'.  Its really just a checking account which obviously you want to keep minimal stocked.

I do keep an amount over a 'minimal' level to protect against bank 'errors'...double billing, early ACH pulls, late DDs etc.  Unfortunately this type of crap happens on occasion and I don't want to waste time getting fees reversed or payments returned/reissued or whatever.

My 'emergency fund' is really just a half dozen credit cards.  Within 25/30 days I would pull from my after tax (non IRA) mutual funds to bay off any balances incurred.