Where to park liquid savings

[SavinMaven]

I have been struggling with this for some time now. I'm having a hard time figuring out what to do with my emergency fund, even after reading umpteen threads and online articles about options. We have about 8 months' expenses in a money market account earning 1.1% interest. In an actual emergency, we'd change our spending habits and it could then easily become 10 or maybe even 12 months' expenses.

On the one hand, having this amount of liquid cash gives me a sense of security, which is something I value. On the other hand, mathematically I know I'm losing to inflation. I've considered other options, like a CD ladder, but the terms would be so short to do this without losing liquidity that I wouldn't come out ahead on interest, at least as of the last time I looked, a few weeks ago.

Should I just accept the loss of buying power on this money over time as the opportunity cost of liquidity? We are fully funding two 401ks, two 529s, and a brokerage investment account separately from this cash. We have a mortgage and a ridiculously low interest student loan and are comfortable paying both of them off on schedule.

I guess it's really a two-part question: how much cash is too much, and, if you have "too much", what do you do with the "extra" that preserves capital and is liquid?

[Rob_bob]

Yes you should just accept the low rates and potential inflation risk,it is what it is.

As to how much cash is too much only you can know the answer to that.  How secure is your income, how much can you cut from your spending and how long do you think you might need to draw from the emergency fund?

If I had "too much" cash I would invest it, there is no point in having cash beyond my emergency fund in cash.  Now it might be in a bond fund, depends on what my asset allocation says.

[StashingAway]

I have been struggling with this for some time now. I'm having a hard time figuring out what to do with my emergency fund, even after reading umpteen threads and online articles about options. We have about 8 months' expenses in a money market account earning 1.1% interest. In an actual emergency, we'd change our spending habits and it could then easily become 10 or maybe even 12 months' expenses.

On the one hand, having this amount of liquid cash gives me a sense of security, which is something I value. On the other hand, mathematically I know I'm losing to inflation. I've considered other options, like a CD ladder, but the terms would be so short to do this without losing liquidity that I wouldn't come out ahead on interest, at least as of the last time I looked, a few weeks ago.

Should I just accept the loss of buying power on this money over time as the opportunity cost of liquidity? We are fully funding two 401ks, two 529s, and a brokerage investment account separately from this cash. We have a mortgage and a ridiculously low interest student loan and are comfortable paying both of them off on schedule.

I guess it's really a two-part question: how much cash is too much, and, if you have "too much", what do you do with the "extra" that preserves capital and is liquid?

You don't have to start with a full CD ladder. You can put maybe 1/4 in a yearly CD to get used to the idea. Then in 6 months put another 1/4 in another yearly CD. Now you have a "ladder" with only 1/4 of your expenses locked away for a year. After a couple years of that, you may decide that you don't like it and go back to the money market, or re-vamp your strategy for a more long term ladder.

Remember that with a CD, in an absolute emergency you can always do an early withdraw and pay the penalty.

[s0198362]

I use betterment’s safety net savings plan for my emergency fund. Basically it recommends a slightly higher emergency fund and then invests in 15:85 stocks:bonds (was a different ratio last year).  The increased amount basically accounts for their modeling of market performance etc.  I had approx $33,000 at the end of last year, and even with what COVID impacts we have had so far ad no further contributions, it is higher than that now.

The following link is worth a read:  https://www.betterment.com/resources/safety-net-advice-update-2019/

If you decide to go down that route, you can use my referral link here.
If i'm not allowed to use a referral link, let me know and i'll remove it.