Author Topic: Do I even need cash savings?  (Read 26411 times)

Tyson

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Do I even need cash savings?
« on: August 24, 2015, 02:51:25 PM »
So I finally have all my debt paid off (sans mortgage), and I'm able to save $2k-$3k every month.  Last month I put $2500 into a 90 day time deposit, which was a mistake.  I misread the return - I thought it said 5%, but it's actually .05% :O

Anyway, my original thinking was to get several months worth of expenses into a savings account for emergencies, like if I lose my job and have to make mortgage payments, I have something to fall back on.  Although the job front looks pretty stable for at least a few more years. 

Then I started to wonder if having all that cash sitting around in savings, doing nothing, is actually all that wise.  Maybe I should just dump it all into a Vanguard account and at least let it grow while the inevitable layoffs may (or may not) come. 

Are there any downsides to just putting the cash into index funds?  I know there's a chance the market takes a dive, like the last few days, but on the other hand savings accounts miss out on any growth that might happen over time anyway.

CheapskateWife

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Re: Do I even need cash savings?
« Reply #1 on: August 24, 2015, 03:29:40 PM »
I keep my e-fund in a taxable index account at Vanguard.  Got to have those soldiers working...even if they have a bad day, or week, or year; my green soldiers march on!

Tyson

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Re: Do I even need cash savings?
« Reply #2 on: August 24, 2015, 03:39:08 PM »
I keep my e-fund in a taxable index account at Vanguard.  Got to have those soldiers working...even if they have a bad day, or week, or year; my green soldiers march on!

Yes, this is exactly what I have started thinking, after reading MMM and a few other sites, it doesn't seem to make sense to have a bunch of cash sitting around.

grettman

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Re: Do I even need cash savings?
« Reply #3 on: August 24, 2015, 03:57:22 PM »
I keep my e-fund in a taxable index account at Vanguard.  Got to have those soldiers working...even if they have a bad day, or week, or year; my green soldiers march on!

Yes, this is exactly what I have started thinking, after reading MMM and a few other sites, it doesn't seem to make sense to have a bunch of cash sitting around.

Until you need it and something unforeseen, and perhaps, unthinkable happens.  At which point you either A.  Use Credit Card and hope you have a limit large enough or B. Sell stock at a loss (or sell stock at a gain but then lose future opportunity).  Think through a scenario where you have some disaster that costs you 6 months of your income.  What is your strategy to pay for it?  If you don't know, you need to find out!

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Re: Do I even need cash savings?
« Reply #4 on: August 24, 2015, 04:15:48 PM »
Like he said, I would put first on credit card/credit line/Heloc...pay it off the same month. If the emergency expense is more than the leftover money I have at the end of the month, I continue paying it off until it's gone. If the debt is large enough that it would take me 1 year or more to pay it off, then I might think of selling my investments. I would sell the ETF that is at it's peak. In my case, I am invested in bonds (10%), All Canada Stocks (VCN at 30%) and Rest of the world ex. Canada (VXC at 60%). So if I were to sell my investments today, bonds are having a good run lately, while my equities are tanking hard, so I would be selling from my bonds ETF if I really needed the money to pay an emergency.

Tyson

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Re: Do I even need cash savings?
« Reply #5 on: August 24, 2015, 04:31:04 PM »
Until you need it and something unforeseen, and perhaps, unthinkable happens.  At which point you either A.  Use Credit Card and hope you have a limit large enough or B. Sell stock at a loss (or sell stock at a gain but then lose future opportunity).  Think through a scenario where you have some disaster that costs you 6 months of your income.  What is your strategy to pay for it?  If you don't know, you need to find out!


So yes, I'd have the $$ in stocks, which might go up, and might go down.  If it goes up, then selling stocks for cash is definitely better than just having cash in savings.  On the other hand, if stocks go down, they'd have to go down more than any gains that occur between now and the need for a withdrawal. 

Just kind of thinking out loud here.  If I have $30,000 in cash, in one year I still have $30,000 cash, same at 2 years and at 5 years.  On the other hand, if I invest that in an index fund, it will be $30,000 at the start, and assuming 7% growth, it'll be $32k after 1 year, $34k after 2 years and $42k after 5 years. 

Best case scenario is that I don't have any huge emergencies over the next several years.  2nd best scenario is I have a an emergency and stocks are doing well.  Worst case scenario is I have an emergency when stocks are down, relative to when I started investing the money.

Looking at the worst case scenario - if in 1 year it's grown to $32k, the market would have to tank more than 7% to dip me below my original $30k starting point.  After 2 years, it'd have to tank more than 14% to drop me below my original $30k, and at 5 years it'd have to tank massively to drop me below my original starting point.

So I guess the issue is risk and time. 

GGNoob

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Re: Do I even need cash savings?
« Reply #6 on: August 24, 2015, 05:00:03 PM »
My "emergency fund" is my taxable Vanguard account. It's invested the same as our retirement portfolios. However, I do keep 1 months expenses in my checking account to prevent any issues of accidentally overdrawing the account. That money also covers the larger expenses that come 1 or 2 times a year (car insurance, vehicle registration, etc.).

My Own Advisor

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Re: Do I even need cash savings?
« Reply #7 on: August 24, 2015, 06:03:12 PM »
I think any money potentially needed within now and 3 or 5-years from now, should not be in stocks.

We always keep a few thousand in cash for emergencies.

fb132

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Re: Do I even need cash savings?
« Reply #8 on: August 24, 2015, 06:05:53 PM »
I think any money potentially needed within now and 3 or 5-years from now, should not be in stocks.

We always keep a few thousand in cash for emergencies.
So I guess that means you disagree with MMM, which is fair, debt springy is not for everyone.

Dicey

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Re: Do I even need cash savings?
« Reply #9 on: August 25, 2015, 10:46:03 AM »
I think any money potentially needed within now and 3 or 5-years from now, should not be in stocks.

We always keep a few thousand in cash for emergencies.
I'll see the comment above and raise it a few more thousand, lol. I suspect there's a direct correlation between age and amount of cash on hand. The older you are, the more you appreciate the value of readily available money when an opportunity presents itself. And to be fair, you've had longer to amass a nice stache.
DH and I just finished flipping a house and have 500k sitting in the bank right now. It's so tempting to throw it in the market on this dip, but we want to do another flip. If you had told me twenty years ago that I'd be facing such a "dilemma", I never would have believed it. FWP indeed.

rugorak

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Re: Do I even need cash savings?
« Reply #10 on: August 25, 2015, 01:55:04 PM »
I think you need an emergency financial plan. Whether it includes cash savings or not is up to you. Plan for the most likely emergencies and see whether it would work for you. Can you wait for the amount of time to sell and have the funds clear if it is all in stocks/funds? Do you have alternative ways to pay things? How fast would you need the money? Does keeping some amount in cash make things work better? Create some simulations given worst case scenarios.

My personal line of thought is as follows. I would have been really unhappy if an emergency had hit forcing me to sell first thing yesterday morning. Having some cash in reserve allows me to not have to respond so quickly that I might get caught. Yes I may be potentially missing out on some growth but the fast access to liquid reserves and the comfort it gives me is worth the potential cost. I don't keep a years worth of expenses or anything like that. I personally keep about 4 months at the moment. I am considering reducing it down to 3. The rest is working hard in the market.

fb132

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Re: Do I even need cash savings?
« Reply #11 on: August 25, 2015, 03:06:49 PM »
I think you need an emergency financial plan. Whether it includes cash savings or not is up to you. Plan for the most likely emergencies and see whether it would work for you. Can you wait for the amount of time to sell and have the funds clear if it is all in stocks/funds? Do you have alternative ways to pay things? How fast would you need the money? Does keeping some amount in cash make things work better? Create some simulations given worst case scenarios.

My personal line of thought is as follows. I would have been really unhappy if an emergency had hit forcing me to sell first thing yesterday morning. Having some cash in reserve allows me to not have to respond so quickly that I might get caught. Yes I may be potentially missing out on some growth but the fast access to liquid reserves and the comfort it gives me is worth the potential cost. I don't keep a years worth of expenses or anything like that. I personally keep about 4 months at the moment. I am considering reducing it down to 3. The rest is working hard in the market.
Having an EF i is a trade off between a 100% chance of earning less on your money by having it sit in a savings account and an x% chance of drawing down on a higher cost source of emergency funds. If you can work out the variables in your high probability, low impact vs low probability, high impact situation you will have your answer.

Kroaler

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Re: Do I even need cash savings?
« Reply #12 on: August 25, 2015, 04:39:39 PM »
I just recently asked myself this question. My conclusion was no..... I do not need to keep cash on hand.   

I keep a high limit credit card for a true emergency that will buy me some time to cash out my investments as needed.     Like the above poster stated, I would have been mad if my emergency happened Monday morning when the market tanked. But there is a 100% chance it will lose buying power in my comically low interest saving account. Also I invest 150% of my emergency amount. I believe somewhere else on this forum that has been determined to be a fairly safe amount. 

Saving in Austin

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Re: Do I even need cash savings?
« Reply #13 on: August 25, 2015, 05:03:21 PM »
I have my emergency fund (8 months worth of expenses) sitting in 3 different reward checking accounts earning between 2.5% and 3.25%. I know this is not a popular strategy around here but I like the piece of mind.

The air conditioner in my home just failed yesterday and it's still mighty warm around here. Even though it's going to cost between $6,000 - $8,000 to replace I'm not breaking a sweat over my investments or the unexpected expense.

MoonShadow

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Re: Do I even need cash savings?
« Reply #14 on: August 25, 2015, 05:11:00 PM »
I keep the majority of my taxable account funds in short to mid term bond funds, which I can get to within 4 business days.  I keep one week's funds for a week, to cover a cash crunch occuring during those 4 business days.  This is about $1500 for me, but YMMV.

Retire-Canada

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Re: Do I even need cash savings?
« Reply #15 on: August 25, 2015, 06:17:01 PM »
Are there any downsides to just putting the cash into index funds?  I know there's a chance the market takes a dive, like the last few days, but on the other hand savings accounts miss out on any growth that might happen over time anyway.

How to deal with shit that happens without a cash EF:

1. credit card - defers cost to next pay period so you can use your planned savings to pay it off
2. line of credit - for expenses to big to clobber over 1 pay period
3. redirect planned savings to LOC/CC
4. find additional savings to pay of LOC for large expenses by deferring non-essential spending [ie. travel plans, non-essential repairs car/house, etc..]
5. additional earning to pay of LOC - over time or a side hustle evenings/weekends
6. cash in investments if absolutely needed

NoraLenderbee

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Re: Do I even need cash savings?
« Reply #16 on: August 26, 2015, 11:04:56 AM »
I absolutely agree with keeping several months of expenses in a cash account. Think about what an emergency is. It's not "Car needs a new engine, I'll put it on my CC and pay it off next month." An emergency can be when you lose your job, and unemployment insurance just covers your COBRA payment, and your investments are down, and the car needs a new engine. If you're not earning anything because you're out of work, you don't want to be forced into borrowing money that you might end up paying interest on for six months (or longer).

Kaspian

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Re: Do I even need cash savings?
« Reply #17 on: August 26, 2015, 11:32:56 AM »
I keep my e-fund in a taxable index account at Vanguard.  Got to have those soldiers working...even if they have a bad day, or week, or year; my green soldiers march on!

Yes, this is exactly what I have started thinking, after reading MMM and a few other sites, it doesn't seem to make sense to have a bunch of cash sitting around.

Until you need it and something unforeseen, and perhaps, unthinkable happens.  At which point you either A.  Use Credit Card and hope you have a limit large enough or B. Sell stock at a loss (or sell stock at a gain but then lose future opportunity).  Think through a scenario where you have some disaster that costs you 6 months of your income.  What is your strategy to pay for it?  If you don't know, you need to find out!

Here's what historically happens:  "I don't need no emergency fund, I'll be smart and put it in investments!"  Market tanks.  Investor loses his/her job because market tanked.  Investor needs to tap funds while market is at historic low, selling at a giant loss.  Boo-ya!  ...This happy story happened to only millions and millions of Americans 7 years ago.

Dunno about you but if the market takes a dump and I lose my job I don't want to be living off of credit cards.
« Last Edit: August 26, 2015, 11:34:49 AM by Kaspian »

MoonShadow

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Re: Do I even need cash savings?
« Reply #18 on: August 26, 2015, 12:15:42 PM »
I absolutely agree with keeping several months of expenses in a cash account. Think about what an emergency is. It's not "Car needs a new engine, I'll put it on my CC and pay it off next month." An emergency can be when you lose your job, and unemployment insurance just covers your COBRA payment, and your investments are down, and the car needs a new engine. If you're not earning anything because you're out of work, you don't want to be forced into borrowing money that you might end up paying interest on for six months (or longer).

Yes, but if you have a long running economic crisis, you can still get to your bond funds during such a time.  No one needs to keep months of expenses sitting in a cash account.

index

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Re: Do I even need cash savings?
« Reply #19 on: August 26, 2015, 12:31:14 PM »
The responses to this thread are pretty indicative of people who started saving during the 6 year bull market. Kaspian nailed the scenario.

Think of it this way:

If you have a 20k emergency fund earning 2% in CD's and the market on average return 7% you are missing out on the spread of 5%. This amounts to about 12.5k over 10 years.

A job loss where you really need 6 months of expenses is likely to coincide with a recession which could trim 40% off your emergency fund easily. If you run the numbers you need 10 years of 7% growth to make up for one loss of 40% to be even with the just keeping your money safe in CD's.

Investing your EF might seem like a no brainer to those with short memories or who have a only bull market as a reference point. Let those wiser than you help you out.

You will not miss the 12k in the slightest when you are retired living of a stache 50x that size!

MoonShadow

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Re: Do I even need cash savings?
« Reply #20 on: August 26, 2015, 12:39:38 PM »
I have been laid off numerous times.  Not once was corrolated with a market crash.  Since regular banks really don't make a habit of keeping mortgages anymore, your CD's are invested in bonds anyway.

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Re: Do I even need cash savings?
« Reply #21 on: August 26, 2015, 01:12:31 PM »
Since regular banks really don't make a habit of keeping mortgages anymore, your CD's are invested in bonds anyway.

CD's are FDIC insured; your bonds are not. Furthermore, the price of your bond funds are tied to interest rates. If rates are already at 0 I'm not sure bonds are going to respond a well as they have in the past to a recession. If bond rates go up, then that 2% CD will become a 3-5% CD.

Also, if you read around the investors ally board, it seems most like being 90-100% in equities. Again, not very smart.

I have been laid off numerous times.  Not once was corrolated with a market crash.

Your experience differs with millions of those who lost their job during the recession.

fb132

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Re: Do I even need cash savings?
« Reply #22 on: August 26, 2015, 01:39:54 PM »
The responses to this thread are pretty indicative of people who started saving during the 6 year bull market. Kaspian nailed the scenario.

Think of it this way:

If you have a 20k emergency fund earning 2% in CD's and the market on average return 7% you are missing out on the spread of 5%. This amounts to about 12.5k over 10 years.

A job loss where you really need 6 months of expenses is likely to coincide with a recession which could trim 40% off your emergency fund easily. If you run the numbers you need 10 years of 7% growth to make up for one loss of 40% to be even with the just keeping your money safe in CD's.

Investing your EF might seem like a no brainer to those with short memories or who have a only bull market as a reference point. Let those wiser than you help you out.

You will not miss the 12k in the slightest when you are retired living of a stache 50x that size!
I could argue with that, but I won't, I think Pete himself proved why an EF is useless, just go read his arguments on EF.

Retire-Canada

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Re: Do I even need cash savings?
« Reply #23 on: August 26, 2015, 01:52:21 PM »

Dunno about you but if the market takes a dump and I lose my job I don't want to be living off of credit cards.

Firstly if you can't walk out into the world and get a paying job doing something than you need to make sure you are still breathing!

I was employed as an engineer making well over $100K. The company had a speed wobble between large contracts. I walked down town and got a retail job that week selling outdoors gear. Did that for a few months until the company got their new contract and went back to business as usual. My cost of living wasn't super high and I shut down all but my essential expenses so I only had to dip into my LOC a little and my crappy job was more than enough cash flow to keep everything going. It never once occurred to me to cash in any investments.

If you can't out compete for a retail sales job hang your head in shame.

Secondly you only use credit cards for a short term deferment to the next pay period. If you finance a job lay off on your credit cards and not your low interest rate LOC you are a moron and deserve the 19% interest.


The responses to this thread are pretty indicative of people who started saving during the 6 year bull market. Kaspian nailed the scenario.


I lived through the tech bubble bursting and 2008. I've had a temporary lay off in that period and then later had to re-start my career in a small job market. None of that has made me want to hold month's of cash just in case something maybe might possibly happen someday.



Think of it this way:

If you have a 20k emergency fund earning 2% in CD's and the market on average return 7% you are missing out on the spread of 5%. This amounts to about 12.5k over 10 years.

A job loss where you really need 6 months of expenses is likely to coincide with a recession which could trim 40% off your emergency fund easily. If you run the numbers you need 10 years of 7% growth to make up for one loss of 40% to be even with the just keeping your money safe in CD's.

Investing your EF might seem like a no brainer to those with short memories or who have a only bull market as a reference point. Let those wiser than you help you out.

You will not miss the 12k in the slightest when you are retired living of a stache 50x that size!

Losing 5% of $20K compounded over 10yrs = $12.6K

Losing 5% of $20K compounded over 15yrs = $20.6K

Losing 5% of $20K compounded over 20yrs = $33.7K

Cost of borrowing $20K from LOC for 6 months at 2% = $200

Cost of borrowing $20K from LOC for 6 months at 7% = $500

Cost of borrowing $20K from LOC for 6 months at 15% = $1.6K

Cost of cashing out $20K from investment at 20% market drop = $5K

Cost of cashing out $20K from investments at 40% market drop = $13.3K

Holding cash is expensive insurance against a job loss.

KittyCat

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Re: Do I even need cash savings?
« Reply #24 on: August 26, 2015, 02:27:08 PM »
I currently have 5k in emergency funds in a savings account; now I'm taking a long, hard look at putting that to work, too. Ahh, decisions.

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Re: Do I even need cash savings?
« Reply #25 on: August 26, 2015, 02:30:29 PM »

Dunno about you but if the market takes a dump and I lose my job I don't want to be living off of credit cards.

Firstly if you can't walk out into the world and get a paying job doing something than you need to make sure you are still breathing!

I was employed as an engineer making well over $100K. The company had a speed wobble between large contracts. I walked down town and got a retail job that week selling outdoors gear. Did that for a few months until the company got their new contract and went back to business as usual. My cost of living wasn't super high and I shut down all but my essential expenses so I only had to dip into my LOC a little and my crappy job was more than enough cash flow to keep everything going. It never once occurred to me to cash in any investments.

If you can't out compete for a retail sales job hang your head in shame.

Secondly you only use credit cards for a short term deferment to the next pay period. If you finance a job lay off on your credit cards and not your low interest rate LOC you are a moron and deserve the 19% interest.


The responses to this thread are pretty indicative of people who started saving during the 6 year bull market. Kaspian nailed the scenario.


I lived through the tech bubble bursting and 2008. I've had a temporary lay off in that period and then later had to re-start my career in a small job market. None of that has made me want to hold month's of cash just in case something maybe might possibly happen someday.



Think of it this way:

If you have a 20k emergency fund earning 2% in CD's and the market on average return 7% you are missing out on the spread of 5%. This amounts to about 12.5k over 10 years.

A job loss where you really need 6 months of expenses is likely to coincide with a recession which could trim 40% off your emergency fund easily. If you run the numbers you need 10 years of 7% growth to make up for one loss of 40% to be even with the just keeping your money safe in CD's.

Investing your EF might seem like a no brainer to those with short memories or who have a only bull market as a reference point. Let those wiser than you help you out.

You will not miss the 12k in the slightest when you are retired living of a stache 50x that size!

Losing 5% of $20K compounded over 10yrs = $12.6K

Losing 5% of $20K compounded over 15yrs = $20.6K

Losing 5% of $20K compounded over 20yrs = $33.7K

Cost of borrowing $20K from LOC for 6 months at 2% = $200

Cost of borrowing $20K from LOC for 6 months at 7% = $500

Cost of borrowing $20K from LOC for 6 months at 15% = $1.6K

Cost of cashing out $20K from investment at 20% market drop = $5K

Cost of cashing out $20K from investments at 40% market drop = $13.3K

Holding cash is expensive insurance against a job loss.

A HELOC is great until your home loses value and you are shopping for a LOC during a recession. I can see the HELOC being a great option if you have your home substantially paid off, but those in many cities with 40% equity in 2007 had 0 equity in 2009. 

What you are not considering by projecting 5% growth for 20 years is what happens when you need that money year 4 when you lose your job. That EF is now worth 14.5k which is only 4 mos. of expenses instead of the 6. You then have to withdrawl 5.5k of stached money. That 5.5k of stached money is worth 37k 20 years later if you had never touched it at the bottom of the market.   

If you need 600k to retire, and maxing out your tax advantaged accounts, missing out on that 34k gained by investing in a make believe world is delaying your retirement by 4 months.

Who cares?

Kaspian

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Re: Do I even need cash savings?
« Reply #26 on: August 26, 2015, 02:42:20 PM »

A HELOC is great until your home loses value and you are shopping for a LOC during a recession. I can see the HELOC being a great option if you have your home substantially paid off, but those in many cities with 40% equity in 2007 had 0 equity in 2009. 

What you are not considering by projecting 5% growth for 20 years is what happens when you need that money year 4 when you lose your job. That EF is now worth 14.5k which is only 4 mos. of expenses instead of the 6. You then have to withdrawl 5.5k of stached money. That 5.5k of stached money is worth 37k 20 years later if you had never touched it at the bottom of the market.   

If you need 600k to retire, and maxing out your tax advantaged accounts, missing out on that 34k gained by investing in a make believe world is delaying your retirement by 4 months.

Who cares?

I like you.  You're good people. 

Maybe people don't realize how difficult it is to get a low interest loan if your country's in recession, you owe more on your mortgage than the house is worth, your portfolio's worth half what is was a few months earlier, and you have to report that you're unemployed?  ...Ah, well--fuck it.

I don't think we'll see another recession like '08 for 30+ years, but there's bound to be lots more crazy times ahead.

NoraLenderbee

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Re: Do I even need cash savings?
« Reply #27 on: August 26, 2015, 05:43:02 PM »

A HELOC is great until your home loses value and you are shopping for a LOC during a recession. I can see the HELOC being a great option if you have your home substantially paid off, but those in many cities with 40% equity in 2007 had 0 equity in 2009. 

What you are not considering by projecting 5% growth for 20 years is what happens when you need that money year 4 when you lose your job. That EF is now worth 14.5k which is only 4 mos. of expenses instead of the 6. You then have to withdrawl 5.5k of stached money. That 5.5k of stached money is worth 37k 20 years later if you had never touched it at the bottom of the market.   

If you need 600k to retire, and maxing out your tax advantaged accounts, missing out on that 34k gained by investing in a make believe world is delaying your retirement by 4 months.

Who cares?

I like you.  You're good people. 

Maybe people don't realize how difficult it is to get a low interest loan if your country's in recession, you owe more on your mortgage than the house is worth, your portfolio's worth half what is was a few months earlier, and you have to report that you're unemployed?  ...

... or you're employed, but making $300/week as a part-time barista instead of the 1000/week you made before in your field.

fb132

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Re: Do I even need cash savings?
« Reply #28 on: August 26, 2015, 05:53:36 PM »
I agree that if you have a small networth and you are able to save less than 50% of your income, then you should have an EF. But once you have good sizeable networth and you are able to save more than 50% every month, having an EF is useless. Normally the 50%+ that you save every month should cover most emergencies (especially if you are in a relationship where both partners save 50+%) and if you lose your job, put everything on LOC or HELOC (if you have that option) until you find work...if you are worried with the amount of LOC used for the duration you have no work, then you can use your sizeable investments to live on for awhile. Not sure how it works in the US with the Roth IRA and all those other investment options, but in Canada, we are able to use the TFSA in which we are not penalized when we withdraw our funds from our investments. 
« Last Edit: August 26, 2015, 05:55:34 PM by fb132 »

K-ice

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Re: Do I even need cash savings?
« Reply #29 on: August 26, 2015, 05:57:00 PM »
Congrats on paying off the mortgage! 

I think that point in particular is important in you decision process for two reasons.

First, you no longer have a mtg payment. 
Second, you have substantial equity in your home and can set up a HELOC now before you need it.

Brief answer, no I do not think I need months of extra cash in a separate Emergency account.

But everyone does need something.    

You can read why I feel that way and then see for yourself.

I have about 1 month extra cash in a savings account. I usually need to use it to pay my bills before my paycheque comes in.
(I'm kind of living paycheque to paycheque :) because I like to save every month)

In addition to that, I have about 3 checking accounts (don’t ask).  But all of them have 1.5 to 3K balance so I pay no fees.   OK that’s 2-3 more months.  And all of those accounts have overdraft for a few more thousand. So I probably have more "cash" on hand than some MMM here. 

However, I would use my CreditCard (pay in full 1 month later) then HELOC before letting my checking accounts drop below the minimum and certainly before using the overdraft.  The HELOC interest is lower than the fees per account.
Only once I dug a hole of about 20K into my HELOC, or 10 months expenses, would I cash out some of my investments. But before that, I would turn off the DRIP (dividend re-invest) for a measly $200/month. 

I do currently have a house “emergency” (that I kind of saw coming) of about $7-10K this month.  It will be put on the HELOC and paid off within 2-6 months. I can throw a few 1-2 K on it ASAP then depending on if I continue to invest my savings and pay this “emergency” slowly (6 months) or halt my savings and pay it all ASAP (2 months).

I think there are some factors that have not been mentioned.
A real emergency may be a car crash. Or as some have pointed out, 3 shitty things at once. My job is stable. It could end in 1y or in 2y but I will have at least 4 months warning/severance. Are you single or the only income earner in the house? Could you get any family support?  If you are single, I would add 1 month cash to your emergency fund. If you have kids, or others relying on you, I would add 1 more month. If you have no chance of family support in an emergency I would add another month.
 
MMM has a large stash, secure income (dividends from stash & website), a paid off house, a supportive wife, probably a supportive extended family (I can’t picture any Canadian/Indian family not helping) and an emergency HELOC so he doesn’t need an emergency fund.

Not very many of us can check off all of those boxes. I can’t! But that is why you get so many varied answers.   

My Own Advisor

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Re: Do I even need cash savings?
« Reply #30 on: August 26, 2015, 06:28:30 PM »
"A job loss where you really need 6 months of expenses is likely to coincide with a recession which could trim 40% off your emergency fund easily."

Correct.

Having a small emergency fund is a no-brainer.  The only people who don't need it are a) those folks who have significant cash flow over their expenses and are financially free and b) folks who have absolutely no liabilities, dependents or any risk of losing income.

Pete (MMM) is definitely a).


MoonShadow

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Re: Do I even need cash savings?
« Reply #31 on: August 26, 2015, 06:56:41 PM »

Having a small emergency fund is a no-brainer. 


Sure, but how does one define "small" in this context.  In my view, the odds that anyone will have a fiscal crisis that requires immediate access to a 3 to 6 month liquid cash account is remote.  A job loss would not, itself, require immediate access to next month's emergency funds.  If there is a correction (like we are seeing now) occurring during the same week you happen to be laid off, then just sell as many stocks & bonds as may be necessary to make it another week.  Therefore, one pay period of take home pay in a cash account in a local bank is your "small emergency fund", and whatever more weeks & months of emergency funds you feel you need should be in a bond heavy, diversified, taxable investment account.

But then, being late on the cell phone bill doesn't qualify as an emergency, IMHO.  For that matter, it's been my experience that a layoff isn't that much of a crisis anyway, there are just too many ways to reduce the downside impact of an unexpected loss of employment in this country; from frugal 'belt tightening' to seasonal 'gap' work to federal, state & private unemployment insurance and/or benefits.

I'd say that totaling your commuter car (without insurance), or your furnace dies dies during winter, or your only toilet refuses to flush, or your kid wakes up puking bile; these things are emergencies.  Yet most similar examples can be managed with a liquid cash fund of less than a month's take home pay, even if the entire crisis can't be paid for immediately.

Murdoch

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Re: Do I even need cash savings?
« Reply #32 on: August 26, 2015, 08:39:56 PM »
I like this thread, and it partly highlights why I was attracted to MMM.

One of the biggest lessons I've taken from MMM is the 'Frugality Muscle' concept.
Knuckling down on ridiculous expenses/overheads, and obtaining as much, or more, joy from life is a double edged sword of power.
More money to invest, and less need for money.

The EF question speaks to the 'less need for money' side.
If your annual expenses are $25k for you and family, then your 3 month EF in cash is $6,250.
Sure, we can argue the maths and hypotheticals, but in the end it is a minuscule amount that is unlikely to alter many planned retirement dates.
Even at 6 months EF we are talking small amounts.

Even if that multi pronged disaster strikes all on the same day, the prior work you've done becoming a frugal, happy, confident, healthy individual who hopefully has the gumption and fortitude to go out and find some other job the next day, will put you in good stead to survive a prolonged assault of misfortune. The ability to be flexible, roll with the punches, and keep on keeping on, is vital in any emergency or disaster.

For these reasons I think valid arguments can be made to either hold, or not hold an EF depending on your own situation.

Murdoch

NoraLenderbee

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Re: Do I even need cash savings?
« Reply #33 on: August 26, 2015, 09:18:08 PM »


Brief answer, no I do not think I need months of extra cash in a separate Emergency account.

But everyone does need something.    

You can read why I feel that way and then see for yourself.

I have about 1 month extra cash in a savings account. I usually need to use it to pay my bills before my paycheque comes in.
(I'm kind of living paycheque to paycheque :) because I like to save every month)

In addition to that, I have about 3 checking accounts (don’t ask).  But all of them have 1.5 to 3K balance so I pay no fees.   OK that’s 2-3 more months.   

In other words, you DO have several months of cash in accounts--just not in an account labeled "Emergency." It's still an e-fund.

Having a small emergency fund is a no-brainer. 


Sure, but how does one define "small" in this context.  In my view, the odds that anyone will have a fiscal crisis that requires immediate access to a 3 to 6 month liquid cash account is remote.  A job loss would not, itself, require immediate access to next month's emergency funds.  If there is a correction (like we are seeing now) occurring during the same week you happen to be laid off, then just sell as many stocks & bonds as may be necessary to make it another week. 



If the market is down 40%, selling even a little will suck a lot. Plus transaction costs if you do this repeatedly.

MoonShadow

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Re: Do I even need cash savings?
« Reply #34 on: August 26, 2015, 09:42:08 PM »
.

Having a small emergency fund is a no-brainer. 


Sure, but how does one define "small" in this context.  In my view, the odds that anyone will have a fiscal crisis that requires immediate access to a 3 to 6 month liquid cash account is remote.  A job loss would not, itself, require immediate access to next month's emergency funds.  If there is a correction (like we are seeing now) occurring during the same week you happen to be laid off, then just sell as many stocks & bonds as may be necessary to make it another week. 



If the market is down 40%, selling even a little will suck a lot. Plus transaction costs if you do this repeatedly.

The odds of anyone needing funds during a 40%, or even a 20%, correction are truly remote.  The number of times crashes of that magnitude have occurred in the history of the US stock market can be counted on one hand.  Furthermore, the odds that a middle class American will actually need emergency funds in excess of one month's take home pay during their entire working career is about an even 50/50.  High enough that it's a good idea, but still not dramatic over an entire lifetime.  Like I already said, I've been laid off more than a dozen times, twice for longer than two months time, and have never actually needed more than one month's e-funds.  If you look at the article from Betterment that another poster provided above, putting 130% of your target e-fund amount into a 40% Bond 60% Stock portfolio (pretty conservative) gives you a 95+% chance of having at least your target e-fund amount available for any month since 1956.  Do it however you like, it concerns me not, but try not to be a zealot about your own plan.  There is more than one way to do it.

K-ice

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Re: Do I even need cash savings?
« Reply #35 on: August 26, 2015, 10:26:25 PM »

In other words, you DO have several months of cash in accounts--just not in an account labeled "Emergency." It's still an e-fund.


Touché!

But I would use my HELOC first and also before I saved even more in a specific e-fund.

I guess the point is to take stock of all your accounts before deciding your e-fund requirements.


 


Cathy

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Re: Do I even need cash savings?
« Reply #36 on: August 26, 2015, 10:42:47 PM »
Plus transaction costs if you do this repeatedly.

Transaction costs are negligible for the securities we talk about on this forum. Commissions are zero or near-zero at various retail brokers. The average spread for VTI is 0.01% of the market value. In a sale of $10,000 of VTI, you would lose roughly $1 (one dollar) to transaction costs.

I'm calling for a moratorium on "transaction cost" arguments in the context of the stocks and ETFs that we talk about here. There is no reason to pay any nontrivial transaction costs on these transactions in the year 2015. In the old days, securities markets were less liquid and so transaction costs were significant. That is not the case anymore for the securities that we talk about on this forum.

LadyMaWhiskers

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Re: Do I even need cash savings?
« Reply #37 on: August 26, 2015, 11:11:27 PM »
I have my emergency fund (8 months worth of expenses) sitting in 3 different reward checking accounts earning between 2.5% and 3.25%. I know this is not a popular strategy around here but I like the piece of mind.

The air conditioner in my home just failed yesterday and it's still mighty warm around here. Even though it's going to cost between $6,000 - $8,000 to replace I'm not breaking a sweat over my investments or the unexpected expense.

Where are you getting the sweet rates?

sabertooth3

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Re: Do I even need cash savings?
« Reply #38 on: August 27, 2015, 06:11:43 AM »
I'm in the cash camp on this one. I understand the springy debt concept and the idea of keeping your money working, but having zero cash on hand is irresponsible to me.

A lot of really good points have already been outlined so I won't repeat them here, but consider also that your emergency provider (broken AC, car engine malfunction, etc.) may not even take credit cards. If your AC breaks and you do your research and find a small business/contractor who's highly rated and recommended but doesn't take credit cards, what are you going to do?

Regardless of stock market movement and job loss, even selling stocks when they're up incur capital gains taxes that you'll be on the hook for come next April. And if you're so "optimized" that you don't  have any cash e-fund, then you probably didn't account for paying an extra $800-1,200 in taxes that come from liquidating stock assets.

It's really not a big deal to have 3 months of living expenses in a checking/savings account.

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Re: Do I even need cash savings?
« Reply #39 on: August 27, 2015, 06:19:21 AM »
I'm in the cash camp on this one. I understand the springy debt concept and the idea of keeping your money working, but having zero cash on hand is irresponsible to me.

A lot of really good points have already been outlined so I won't repeat them here, but consider also that your emergency provider (broken AC, car engine malfunction, etc.) may not even take credit cards. If your AC breaks and you do your research and find a small business/contractor who's highly rated and recommended but doesn't take credit cards, what are you going to do?

Regardless of stock market movement and job loss, even selling stocks when they're up incur capital gains taxes that you'll be on the hook for come next April. And if you're so "optimized" that you don't  have any cash e-fund, then you probably didn't account for paying an extra $800-1,200 in taxes that come from liquidating stock assets.

It's really not a big deal to have 3 months of living expenses in a checking/savings account.
If you are already saving more than 50% of your income, it should easily pay for AC breaking especially if both you and your wife have a big savings rate. I have a credit line, I can easily transfer to my account at no time if they need cash now. There are many ways. People put too much emphasis on "What happens if that 1% chance hits me". Like I said previously, if you have a small net worth and are not able to save more than 50% of your income, then you need an EF. But once you have more money and a high savings rate, having an EF is useless.
« Last Edit: August 27, 2015, 06:22:13 AM by fb132 »

aperture

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Re: Do I even need cash savings?
« Reply #40 on: August 27, 2015, 06:53:59 AM »
From Random Walk Down Wall Street (Malkiel)
Range of annual return rates on common stocks for various time periods 1950 - 2013:
1 year: -37% to +52.6%
5 years: -2.58% to +28.76%
10 years: -1.47% to +19.61%
15 years: 4.21% to 19.1%
20 years: 6.46% to 17.99%
25 years: 7.96% to 17.57%

Of course even this is not guaranteed, but you still need a 15 year horizon to start having expectations that the stock market is a safe bet.  It has already been said better, but I repeat - don't put your e-funds into stocks. And read Random Walk - hugely helpful to understand the game you want to join.  -aperture

index

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Re: Do I even need cash savings?
« Reply #41 on: August 27, 2015, 07:04:03 AM »
I'm in the cash camp on this one. I understand the springy debt concept and the idea of keeping your money working, but having zero cash on hand is irresponsible to me.

A lot of really good points have already been outlined so I won't repeat them here, but consider also that your emergency provider (broken AC, car engine malfunction, etc.) may not even take credit cards. If your AC breaks and you do your research and find a small business/contractor who's highly rated and recommended but doesn't take credit cards, what are you going to do?

Regardless of stock market movement and job loss, even selling stocks when they're up incur capital gains taxes that you'll be on the hook for come next April. And if you're so "optimized" that you don't  have any cash e-fund, then you probably didn't account for paying an extra $800-1,200 in taxes that come from liquidating stock assets.

It's really not a big deal to have 3 months of living expenses in a checking/savings account.
If you are already saving more than 50% of your income, it should easily pay for AC breaking especially if both you and your wife have a big savings rate. I have a credit line, I can easily transfer to my account at no time if they need cash now. There are many ways. People put too much emphasis on "What happens if that 1% chance hits me". Like I said previously, if you have a small net worth and are not able to save more than 50% of your income, then you need an EF. But once you have more money and a high savings rate, having an EF is useless.

I can agree if you already have your financial situation figured out, i.e. saving 50% of your income and have a couple hundred thousand in a taxable/roth account, then you can reduce the need for liquid cash. If you are well on your way to early retirement, congratulations! You are definitely not here looking for advice!

There are many people who come to this forum like the OP who are just starting out. I believe the OP stated they had saved $2500 and was wondering if they even needed the cash for an EF. The answer to this question is you absolutely need the liquid cash!

If the OP said: "I have 200k in a vanguard taxable account, 400k in my 401k, and saving 50% of my income; do I need this 20k in my bank account? Then I can see the arguments for springy debt etc...

Those posters who have it figured out need to be careful what they are recommending to new members (those with a nw <300k). Being FI and having a fortress like balance sheet lets you do things like: no need life insurance, liability only insurance on the car, HDHP, no cash EF, and 100% equities (though this is still stupid!). This advice can be disastrous for new ER converts who don't have it dialed in yet.   

FI40

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Re: Do I even need cash savings?
« Reply #42 on: August 27, 2015, 09:36:14 AM »
Just because it seems like nobody has linked the MMM article yet, I'll do it: http://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/

I think it's important to keep in mind that it's possible to:
1. Get another job
2. Lower expenses
3. Use credit cards for the usual 1 month no interest loan
4. Use the line of credit
5. Use dividends/interest from index funds

...all before having to sell any investments. Emergency funds are often never used by prudent people anyway. Have enough cash to manage your usual monthly expenses, but invest the rest and open a credit line if you feel you need it.
« Last Edit: August 27, 2015, 09:41:50 AM by FI40 »

Left

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Re: Do I even need cash savings?
« Reply #43 on: August 27, 2015, 09:38:09 AM »
I keep cash because I find it more convenient.

I don't count cash in my networth/investments so when I hit FI, I will be FI without the cash so me investing it for a "boost" would be the same as working "1 more year". IE, not needed.

 

FI40

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Re: Do I even need cash savings?
« Reply #44 on: August 27, 2015, 09:38:36 AM »
However it hardly matters much. The opportunity cost of keeping a small emergency fund in cash is fairly low. So this discussion is pretty academic.

Kaspian

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Re: Do I even need cash savings?
« Reply #45 on: August 27, 2015, 10:21:04 AM »
It's really not a big deal to have 3 months of living expenses in a checking/savings account.

That's me.  5,000 bucks sitting there doing just a few percentage points.  ...But it was good to have as a cushion when I screwed up earlier this year to the tune of $1300.  Since Mustachians are pretty tight with their budgets and our automatic DCA schemes, it took me about 3 months to put back.  On my LOC this would only have been a paltry $10. On a credit card, more like $55.  From my savings account?  Nothing.  If the number had've been much larger and I had to go to credit or cash out investments, I would have been uncomfortable.

However it hardly matters much. The opportunity cost of keeping a small emergency fund in cash is fairly low. So this discussion is pretty academic.

This thread actually made me laugh last night when I was thinking about.  Here are all these high percentage stash-cashers, we're all on the same page, reading the same manual, and heatedly quibbling over the finer points.  :)  It's like we're all on a giant yacht and sitting around arguing over the colour the boat horn should be while the rest of society is drowning themselves by jumping overboard.

HBFIRE

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Re: Do I even need cash savings?
« Reply #46 on: August 27, 2015, 10:35:41 AM »
I keep a small emergency fund in a 3% checking account (yes, it exists). 

Now I'm just trying to figure out the best way to diversify everything else, I certainly don't want everything in index funds.  I'll probably start putting some into real estate in 2016.  Helps to be diversified imo.


MoonShadow

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Re: Do I even need cash savings?
« Reply #47 on: August 27, 2015, 11:55:38 AM »
I'm in the cash camp on this one. I understand the springy debt concept and the idea of keeping your money working, but having zero cash on hand is irresponsible to me.


I don't think anyone was advocating for a zero cash position.  The debate is between a small fund of a couple thousand, or a large cash fund that can cover months of zero income.  I just favor the small cash fund coupled with a few months worth of investments in an accessible (read taxable) account.  It's not a great idea to keep those invested e-funds in a retirement account, but to some degree, even the contributions to a five year old Roth; or the 'loan' feature of a 401k for those who have access to that, can count towards the most extreme of crisis funds.

KittyCat

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Re: Do I even need cash savings?
« Reply #48 on: August 27, 2015, 12:36:08 PM »
I don't think anyone was advocating for a zero cash position.  The debate is between a small fund of a couple thousand, or a large cash fund that can cover months of zero income.  I just favor the small cash fund coupled with a few months worth of investments in an accessible (read taxable) account.  It's not a great idea to keep those invested e-funds in a retirement account, but to some degree, even the contributions to a five year old Roth; or the 'loan' feature of a 401k for those who have access to that, can count towards the most extreme of crisis funds.
I thought the whole thing was about having near-zero-cash vs EF. If the debate is what you say it is, I guess that since my average monthly expenditure is $700, a few thousand already covers several months of zero income. Maybe I don't have to change anything after all.

boarder42

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Re: Do I even need cash savings?
« Reply #49 on: August 27, 2015, 12:39:01 PM »
i keep everything invested.  i dont understand the concept of keeping massive amounts of cash for emergency sitting around.