Brand New Investor - naive question

[2buttons]

I am maxing my sep-ira (self employed), and I have extra cash in an ER fund that is sitting fully in a savings account. 

I am just now starting to pay attention to returns. Rounding numbers to make it easy. Savings account last year made $15 total.

I had a fraction of that amount in investments index some mutual and some dividend mutual funds, that admittedly went down a bit, but the dividend return made $100. 

Am I nuts to leaving all that cash in an savings account? I understand there could be swings, but wouldn't I be better off putting half into my taxable investment account?

For more information - I am sticking half of my monthly extra cash onto mortgage at 3.5% and the other half into taxable account so that I will be reducing my mortgage and increasing my investment account.

Just curious what others are doing?

[ScarElbow]

Me? I'm one of a few who don't follow the crowd and let my money passively collecting scrap. I rather take charge and veer toward self directed endeavor.

[GrowingTheGreen]

I pay very little on top of my minimum mortgage payment. In percentage terms, it's about 10% of the extra money I bring in vs the 90% that goes into a taxable account. You've got a smokin deal on your mortgage rate, which means your extra money would probably be better of going towards investments.

You didn't specify how many months living expenses you have tied up in cash. More than 6? Then maybe you do have too much in the savings account.

[2buttons]

Thanks. I have about 3 months in cash, but that is full tilt, not a pared down survival mode budget.  Then I have an additional 2.5 months in investments that I sorta kinda consider my "invested" fund. 

I know there is conflicting opinions on mortgage, but I really want to get it paid down as well, which is why I am on a 50/50 split.  Currently, 70% of my monthly household outlay is mortgage and daycare.

[PARedbeard]

It sounds like you are on the right track here. Besides your mortgage, do you have any other debt? The mortgage debt at 3.5% sounds like a sweet deal, and I would encourage you to invest instead of paying down the mortgage. Giving your money time to grow (especially in an index fund or a solid, dividend-paying stock should easily beat the 3.5%

Here is what I would do, and I am probably considered relatively conservative by the forum's standards:
1. Get a 6 month Emergency cash fund. I would do this both to keep you afloat in case of an emergency and to keep some of your assets liquid so you can take advantage of an opportunity (stocks, rental properties, etc)
2. Pay off any debt over 4%. Now, it sounds like you might be able to just skip over this. If you are EXTREMELY risk adverse, you could consider putting some money towards your mortgage, but the numbers tell you to...(read on)
3. Fund that SEP-IRA. You've got this nailed!
4. Fund an HSA, if you can. I am just researching these myself, and I am unsure if they are available to the self-employed.
5. Start investing in a taxable account. Find a system that is comfortable for you, and commit to 'stashing!

[2buttons]

6 months cash fund?????!!!!!  This question is what is tearing me apart. I keep going back and forth on this.  Returns are better in investments, but the security of 6 months in cash seems awesome. 

I don't have any other debts.  I was a DR person, before landing over here. 

Thanks for the advice. I really appreciate it.

[Curbside Prophet]

To me 6 months of living expenses is the minimum someone should have, especially someone who is self-employed.  Look at the thread about Brinks/Netspend, you can put around $20k-$25k in an FDIC insured bank account that earns 5%.  There's some hoops to jump through but worthwhile IMO for the return.

[PARedbeard]

Like I said, I can be a bit conservative. I like 5-6 months for myself, but if you are a single person in a reliable job, I concede that 6 months could be a bit much. My family has a relatively low budget, so the amount of actual cash on hand is relatively low, but it could last us a long time.

Good luck!

[PARedbeard]

I do second the concerns about being self-employed. I grew up in a family of business owners and the ebb and flow of money cycles definitely worried my parents. Cash can be good for that kind of headache.

[2buttons]

Really helpful advice. Much appreciated.  So if I can bend your ears a little longer. 

I am self employed, but revolve around yearly contracts so its definitely volatile, but much less so than other self-employed gigs.

That said, if you were in my shoes, I assume you would dump any of the extra cash that has been going into the taxable account and reducing principal on the mortgage into my cash fund? Would you go beyond that and stop or cutback retirement until you reach six months in cash?  The only reason I ask is, I lost a couple of years in retirement while deleveraging debt. 

I am still a little anxious about having all that cash tied up in a savings account even if its 5%. 

[PARedbeard]

Before I answer, let me just put out this caveat: this is what I would do in my situation. I'm not self-employed, and I work in human services in a state that still can't get its budget together. As a result, cash looks pretty good to me at the moment.

I would get your cash stash up to 6 months and then start maxing out that SEP-IRA. The numbers and the tax efficiency would tell you the reverse (to save in the IRA and then cash stash), but I am a big believer in being prepared for a financial tailspin, and my emergency fund is there for that very instance. The beautiful thing about a large emergency fund (or a HELOC for that matter), is that once it is in place, you will rarely have to tend it again. You can simply ignore volatility in life and continue investing.

[2buttons]

Really helpful. Thanks!

[Curbside Prophet]

Before I answer, let me just put out this caveat: this is what I would do in my situation. I'm not self-employed, and I work in human services in a state that still can't get its budget together. As a result, cash looks pretty good to me at the moment.

I would get your cash stash up to 6 months and then start maxing out that SEP-IRA. The numbers and the tax efficiency would tell you the reverse (to save in the IRA and then cash stash), but I am a big believer in being prepared for a financial tailspin, and my emergency fund is there for that very instance. The beautiful thing about a large emergency fund (or a HELOC for that matter), is that once it is in place, you will rarely have to tend it again. You can simply ignore volatility in life and continue investing.

+1 to this

I think it's also good that you're a little anxious, more incentive to get that nest egg in place so that you can focus on other avenues of saving/investing. 

[Heckler]

I carry 4 months expenses in cash in a taxable savings account, and then 10 months in short term bonds in a tax free account.  Thats in case of job loss, for which I'd also most likely get a 7 month severance.  Planning to work for another ten years at the very most.  The rest is equity index funds and long term bonds.

[Heckler]

PS - paying iff tge mortgage is an awesome feeling!   Its like winning.  Now we've got 50% of our take-home  to invest that we were used to not spending other than the mortgage.  (Paid off the place in 13 spendypants pre-MMM years)

[2buttons]

Thanks for all the advice. One more question. While I will be maxing out my SEP Ira eventually. My wife works too, and we are not maxing her 401k contributions. That should be the next step correct?

So in order of steps.
1. Max my ER fund
2. Max my sep Ira
3. Max wife's contribution to retirement
4. Invest in Taxable account

Note we don't have an option to do a HSA. 

[PARedbeard]

If you have the wiggle room to max out her 401k, that's a huge bonus! If not, though, make sure that you at least contribute to the match (if there is one).

[2buttons]

Excellent. Thanks!