Author Topic: Right amount of cash?  (Read 779 times)

joe travers

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Right amount of cash?
« on: April 21, 2021, 11:19:22 PM »
Hi all,

I'm curious to get a sense of what folks' cash allocations are. When Covid hit last year, my wife and I had some uncertainty with our jobs. I did take a pay cut for several months but thankfully we didn't lose them and things are pretty stable now. So we just built up our cash position just in case and we sorta kept at it (while still contributing to our retirement accounts, maxing 401ks and IRAs). Our savings rate has been about 50%. Right now, this is how we're allocated:

Cash - 10.6% (approx. $91k)
Investments - 68.9% (approx. $604k)
Home Equity - 20.5% (approx. $179k)

Definitions:
> Cash = checking and savings accounts
> Investments = multiple retirement accounts, two brokerages, and two 529s
> Home Equity = last appraisal value when we refi'd minus mortgage balance (we bought our home 3 years ago so the mortgage is still big)

I know there's a lot out there about the right amount of emergency funds, i.e. 6 months spend. I also know what we have a large amount of cash, probably way too much in the Mustachian world, but it does give us peace of mind. It also gives us options:

1) I think we'll probably take some chunks to pay down our mortgage principal a bit.
2) We also want to do some projects around the house.
3) Our kids are under 5 but we do want to send them to the local Catholic high school in 8-9 years (b/c that's important to us), so we're starting to think about planning for that (not sure what the best option for that would be? federal money market? or??).
4) Assuming the market has another correction, would be nice to buy extra when equities go on sale (see Morgan H: https://www.fool.com/investing/general/2013/08/19/what-i-plan-to-do-when-the-market-crashes.aspx)

Anyway, this is what we've been noodling. Thanks for the input.

Albatross

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Re: Right amount of cash?
« Reply #1 on: April 22, 2021, 12:49:10 AM »
DW and I have pretty stable high income jobs, so our cash portion is tiny. We're currently at about 1% cash (including some foreign currencies for holidays etc), sometimes less after we do our monthly stock purchases.

The remaining 99% (approx. $1.4m) is all in index funds except for a single stock 'bet' (which comprises 3.6% of our portfolio). We still rent.

Up until yesterday our cash portion was actually 11%, but then we just piled it in equities for the long term.

I guess if you're investing for the long term then the less cash the better. Some people like to keep 5% to 10% cash (outside of emergency funds) to pile in if there's a crash, but that's basically market timing so I don't really bother. Otherwise, so long as you have an emergency fund or consider that there is basically 0% chance of either or both of you losing your jobs, then there isn't a huge benefit to hoarding cash.

Dicey

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Re: Right amount of cash?
« Reply #2 on: April 22, 2021, 01:26:59 AM »
We keep a ton more cash on hand, but we call it our "Dry Powder". We like to flip houses, so ready cash is useful for us. Most of the cash is profit from previous projects. We'd like to find another, but the market is insane right now, so we're waiting.

We're FI and DH is finally getting ready to retire, so this cash will also protect us from SORR.

IMO keeping that much cash OH at your age isn't optimal, but it's way less bad than throwing chunks of money at your mortgage. Feel free to swing by the DPOYM thread to learn why. Everybody's welcome; the more the merrier.

https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/

DadJokes

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Re: Right amount of cash?
« Reply #3 on: April 22, 2021, 07:01:00 AM »
I don't think that there is a "right amount" to hold in cash.

You can weigh the likelihood and impact of your risks and take into account your risk tolerance. Risks to consider generally include job loss, large expenses, and large expenses that prevent you from working (double whammy).

Some risks can be reduced or mitigated entirely. Insurance can help with the latter two risks, and keeping expenses low enough to live on one income can help with the first and last risks.

I currently have $20k, which is more than I prefer to keep (I'd prefer to be in the $10-15k range), but my wife and I both have stable jobs, live on one income, and have great insurance.

ender

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Re: Right amount of cash?
« Reply #4 on: April 22, 2021, 07:02:19 AM »
We have too much most likely. Our emergency fund is a year worth of cash ($60k) and then we've got almost that much again that's built up in our checking account.


nereo

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Re: Right amount of cash?
« Reply #5 on: April 22, 2021, 07:06:09 AM »
I don't think that there is a "right amount" to hold in cash.


I agree - it's going to be highly individual (or couple) dependent. 

Spouse and I have worked contract positions (18 to 60 months) where it would (literally) take an act of congress to lose our employment.  Ergo, towards the start of a contract we have super-job-security and keep just enough cash on hand to pay a month's bills.  Towards the end of a contract when unemployment is a possibility we'll build up a cash reserve of 3 - 4 months.

We also use 'squishy debt' and a high savings rate as additional buffers.

Rdy2Fire

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Re: Right amount of cash?
« Reply #6 on: April 22, 2021, 07:07:15 AM »
I think some people hold MUCH more than myself my breakdown, based on your categories, is approximately

Cash - 5%
Investments - 70%
Home Equity - 25%

Edit * I should add the 5% is well over a year (approximately 15 months) of living expenses
« Last Edit: April 22, 2021, 07:08:50 AM by Rdy2Fire »

cool7hand

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Re: Right amount of cash?
« Reply #7 on: April 22, 2021, 07:12:30 AM »
We don't hold onto much cash. I'm FIREd and the wife is joining me in June. We're 49 this year. We keep about 4 months of expenses in cash, sometimes less. Our investments available before 59.5 are sufficiently large (7 plus years of expenses) that we'd rather have all of the money working for us. Even when Covid cracked us with a 15% drop across the board, we still had plenty. We're glad that all the money was in the market ready to grow as it rebounded. In short, we don't keep much cash on hand because we want our individual soldiers working all of the time.

Rdy2Fire

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Re: Right amount of cash?
« Reply #8 on: April 22, 2021, 07:19:25 AM »
We don't hold onto much cash. I'm FIREd and the wife is joining me in June. We're 49 this year. We keep about 4 months of expenses in cash, sometimes less. Our investments available before 59.5 are sufficiently large (7 plus years of expenses) that we'd rather have all of the money working for us. Even when Covid cracked us with a 15% drop across the board, we still had plenty. We're glad that all the money was in the market ready to grow as it rebounded. In short, we don't keep much cash on hand because we want our individual soldiers working all of the time.

I agree with this thinking completely and prior to COVID I had 5 months. That has increased to the above numbers (15 months) because of the proceeds of a house sale and a few other things but I too am 49 and agree with your thinking. I plan to reduce mine back to 6 months

yachi

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Re: Right amount of cash?
« Reply #9 on: April 22, 2021, 09:39:22 AM »
Hi all,

I'm curious to get a sense of what folks' cash allocations are. When Covid hit last year, my wife and I had some uncertainty with our jobs. I did take a pay cut for several months but thankfully we didn't lose them and things are pretty stable now. So we just built up our cash position just in case and we sorta kept at it (while still contributing to our retirement accounts, maxing 401ks and IRAs). Our savings rate has been about 50%. Right now, this is how we're allocated:

Cash - 10.6% (approx. $91k)
Investments - 68.9% (approx. $604k)
Home Equity - 20.5% (approx. $179k)

Definitions:
> Cash = checking and savings accounts
> Investments = multiple retirement accounts, two brokerages, and two 529s
> Home Equity = last appraisal value when we refi'd minus mortgage balance (we bought our home 3 years ago so the mortgage is still big)

I know there's a lot out there about the right amount of emergency funds, i.e. 6 months spend. I also know what we have a large amount of cash, probably way too much in the Mustachian world, but it does give us peace of mind. It also gives us options:

1) I think we'll probably take some chunks to pay down our mortgage principal a bit.
2) We also want to do some projects around the house.
3) Our kids are under 5 but we do want to send them to the local Catholic high school in 8-9 years (b/c that's important to us), so we're starting to think about planning for that (not sure what the best option for that would be? federal money market? or??).
4) Assuming the market has another correction, would be nice to buy extra when equities go on sale (see Morgan H: https://www.fool.com/investing/general/2013/08/19/what-i-plan-to-do-when-the-market-crashes.aspx)

Anyway, this is what we've been noodling. Thanks for the input.


I'm at about 15-16% cash, depending on if I include home equity.  But I also have a large percentage of long term stock options, so I'm still very invested.

Regarding #3, our state allows the use of 529 plans for private school tuition, and they also allow a state tax deduction for contributions.  There doesn't seem to be a restriction on contributing and withdrawing in the same year, so that would be my choice for funding private school.
#4 is why I'm keeping the cash, but I also expect a runup based on coronavirus restrictions ending.

legalstache

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Re: Right amount of cash?
« Reply #10 on: April 22, 2021, 11:47:01 AM »
We're at like 2%, so basically just enough for our emergency fund

joe travers

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Re: Right amount of cash?
« Reply #11 on: April 22, 2021, 08:50:41 PM »
Hey, thanks everyone for the thoughtful replies -- particularly @Dicey for sharing the DPOYM thread. Just what I needed to read through. And also thanks to @yachi for the tip on the 529's for private HS.
« Last Edit: April 22, 2021, 08:59:42 PM by joe travers »

Dicey

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Re: Right amount of cash?
« Reply #12 on: April 23, 2021, 07:28:49 AM »
Hey, thanks everyone for the thoughtful replies -- particularly @Dicey for sharing the DPOYM thread. Just what I needed to read through. And also thanks to @yachi for the tip on the 529's for private HS.
Well, that warms my mustachian little heart and makes my day before I even get out of bed. Thank you and welcome to the club.