Author Topic: Do I even need cash savings?  (Read 25685 times)

sabertooth3

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Re: Do I even need cash savings?
« Reply #50 on: August 27, 2015, 01:34:24 PM »
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...

OP was advocating for a zero cash position. Perhaps he/she could clarify if I'm mistaken.

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... 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.

MoonShadow

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Re: Do I even need cash savings?
« Reply #51 on: August 27, 2015, 04:25:41 PM »
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...

OP was advocating for a zero cash position
. Perhaps he/she could clarify if I'm mistaken.


He was asking for the forum's opinons on the matter, so I don't consider his statement advocation.  No one who was responding with an opinion was advocating zero cash, at least not until boarder43.

MoonShadow

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Re: Do I even need cash savings?
« Reply #52 on: August 27, 2015, 04:30:21 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.

Near, maybe.  Not zero.

Quote

 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.

I was basing that statement on roughly my own setup.  I keep $1500 in cash, which is about one week's take home pay for me.  A minimalist week's expenses, for me, would be $927; so a month of e-funds would be $3700 and a six month e-fund would be $22K.  Everything is relative.

KittyCat

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Re: Do I even need cash savings?
« Reply #53 on: August 27, 2015, 05:01:31 PM »
I was basing that statement on roughly my own setup.  I keep $1500 in cash, which is about one week's take home pay for me.  A minimalist week's expenses, for me, would be $927; so a month of e-funds would be $3700 and a six month e-fund would be $22K.  Everything is relative.
Now I can see why some people would not want several months of EF. I'd only need 4.2k, and I am currently keeping 5k in savings

Tyson

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Re: Do I even need cash savings?
« Reply #54 on: August 27, 2015, 06:37:54 PM »
I was basing that statement on roughly my own setup.  I keep $1500 in cash, which is about one week's take home pay for me.  A minimalist week's expenses, for me, would be $927; so a month of e-funds would be $3700 and a six month e-fund would be $22K.  Everything is relative.

Those are almost exactly the same #'s for me.  I have $2500 in cash on hand already saved, and I won't touch that.  But it just seems a bit 'chicken-little' to keep more than that liquid. 

Anyway, thanks for everyone's input - I am keeping $2500 in cash and just opened up a Vanguard index found account today and put in my first $3k! 

Dicey

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Re: Do I even need cash savings?
« Reply #55 on: August 27, 2015, 09:29:49 PM »
1. I think I recall that limits on many, many HELOC's were slashed drastically or even disappeared during the Great Recession. Am I wrong?

2. Did the OP actually say he killed his mortgage? I thought he said he killed everything except the mortgage. Am I wrong?

3. In general, it seems the more a person has to lose, the more they're willing to keep a well-stocked EF. Newbs with little NW seem to make up the bulk of the anti-EF crowd. Am I wrong?

WTF does it matter in the grand scheme of things if you keep a little cash available for emergencies? Why are folks so vehemently against it? I do not understand why it's such a polarizing topic.

P.S. It doesn't really matter if I'm wrong or right, I'm just trying to be funny.


MoonShadow

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Re: Do I even need cash savings?
« Reply #56 on: August 27, 2015, 09:41:36 PM »
3. In general, it seems the more a person has to lose, the more they're willing to keep a well-stocked EF. Newbs with little NW seem to make up the bulk of the anti-EF crowd. Am I wrong?

Well, I have a net worth around a quarter million, so I guess it depends upon what defines "little NW" in this context.

Quote

WTF does it matter in the grand scheme of things if you keep a little cash available for emergencies? Why are folks so vehemently against it? I do not understand why it's such a polarizing topic.

Religion, politics and cash emergency funds are always dangerous topics.
« Last Edit: August 27, 2015, 11:24:09 PM by MoonShadow »

Dicey

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Re: Do I even need cash savings?
« Reply #57 on: August 27, 2015, 11:05:15 PM »
Religion, politics and cash emergency funds are always dangerous topics.
Perfect, MoonShadow, I'll make a note of that for future reference. I literally laughed out loud, now DH is wondering what I'm up to.

Left

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Re: Do I even need cash savings?
« Reply #58 on: August 28, 2015, 06:03:16 AM »
Quote
Religion, politics and cash emergency funds are always dangerous topics.
so that's why no one talks about the politicians that cater to the religious while hiring prostitutes with cash?

Ox05

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Re: Do I even need cash savings?
« Reply #59 on: August 28, 2015, 09:03:48 AM »
Really interesting discussion so far! The MMM community really kicks ass at threshing out tough issues like this. I have a couple of thoughts, and a question.

You can also limit your need for a cash cushion by diversifying your income sources. Side jobs will cushion some of the blow from a layoff - however, they won't offer as much protection you from unexpected medical expenses or home repairs (though home repair costs can be nullified by renting).

At the end of the day, the size of your emergency fund should be tied to the risks you face in your own life, not a one size fits all approach. What's your job security like (are you a contractor or government employee; do you have a spouse? are they employed by the same company)? What housing expenses do you have (do you rent or own)? What about transportation expenses (do you have an old car that could breakdown or do you use the subway)? What's your health situation (medical history and how much insurance do you carry - and what's the deductible)? If you evaluate the downside risks in your life, it should help you determine how much of an emergency fund cushion is appropriate.

Now for my question - I'm seeing people refer to LOCs and HELOCs in this post. Are they different, or are people abbreviating? Is it possible for a non-homeowner with excellent credit to walk into his bank today and request a line of credit? Are there any products you'd recommend?

Thanks!!!

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Re: Do I even need cash savings?
« Reply #60 on: August 28, 2015, 10:11:07 AM »
Really interesting discussion so far! The MMM community really kicks ass at threshing out tough issues like this. I have a couple of thoughts, and a question.

You can also limit your need for a cash cushion by diversifying your income sources. Side jobs will cushion some of the blow from a layoff - however, they won't offer as much protection you from unexpected medical expenses or home repairs (though home repair costs can be nullified by renting).

At the end of the day, the size of your emergency fund should be tied to the risks you face in your own life, not a one size fits all approach. What's your job security like (are you a contractor or government employee; do you have a spouse? are they employed by the same company)? What housing expenses do you have (do you rent or own)? What about transportation expenses (do you have an old car that could breakdown or do you use the subway)? What's your health situation (medical history and how much insurance do you carry - and what's the deductible)? If you evaluate the downside risks in your life, it should help you determine how much of an emergency fund cushion is appropriate.

Now for my question - I'm seeing people refer to LOCs and HELOCs in this post. Are they different, or are people abbreviating? Is it possible for a non-homeowner with excellent credit to walk into his bank today and request a line of credit? Are there any products you'd recommend?

Thanks!!!
I remember the bank kept sending me panflets to open up a credit line. If you have good credit, I think all banks offer them.

Tyson

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Re: Do I even need cash savings?
« Reply #61 on: August 28, 2015, 10:29:24 AM »
Also, if you have money in a 401k, you can take a loan against your 401k funds at any time.  When you pay back the loan, the interest goes to you, not to the bank.

MoonShadow

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Re: Do I even need cash savings?
« Reply #62 on: August 28, 2015, 11:55:13 AM »
Now for my question - I'm seeing people refer to LOCs and HELOCs in this post. Are they different, or are people abbreviating? Is it possible for a non-homeowner with excellent credit to walk into his bank today and request a line of credit? Are there any products you'd recommend.

I don't like the idea of a credit line.

Retire-Canada

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Re: Do I even need cash savings?
« Reply #63 on: August 28, 2015, 12:13:22 PM »

Now for my question - I'm seeing people refer to LOCs and HELOCs in this post. Are they different, or are people abbreviating? Is it possible for a non-homeowner with excellent credit to walk into his bank today and request a line of credit? Are there any products you'd recommend?

Thanks!!!

I'm a home owner, but my EF plan is based around a LOC that is not home equity based. My mortgage is not with my bank. They have no idea I have any home equity. My LOC is strictly based on my credit score and reported income. Nobody has verified that I actually have a job/business income in decades beyond noting that I pay my bills reliably. My LOC has no collateral.

I've been with the same bank for 25yrs+ and have an amazing credit record. So I got a low interest LOC that will not be affected if housing prices tank [which is unlikely in my area anyways]. My long credit history with the bank means that they are unlikely trouble me as long as my minimum LOC payments are made. I can live off my LOC for 1yr+ if I needed to without taking in any extra cash.

So the answer is yes you can get a LOC with no home equity. You may even prefer that so there is no risk that a housing crash affects your LOC.

IMO a LOC makes an excellent EF with the dual back up of the willingness to work even if it's a crappy retail job and having a large investment account. With so many levels of redundancy you can select the best way to respond to a problem and the actual costs of borrowing against a LOC are so much less than the costs of carrying months $$ for an EF in a low interest account for decades just in case you'll be several years of savings or RE ahead of yourself by not holding cash.
« Last Edit: August 28, 2015, 12:17:11 PM by Vikb »

Gray Matter

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Re: Do I even need cash savings?
« Reply #64 on: August 28, 2015, 12:34:06 PM »
3. In general, it seems the more a person has to lose, the more they're willing to keep a well-stocked EF. Newbs with little NW seem to make up the bulk of the anti-EF crowd. Am I wrong?

WTF does it matter in the grand scheme of things if you keep a little cash available for emergencies? Why are folks so vehemently against it? I do not understand why it's such a polarizing topic.

When I was young, and house prices and markets only ever went up, I kept virtually no EF--we had a HELOC attached to our checking account and never paid any attention to it.  We'd dip into it, pay it off, dip into it, pay it off, sometimes to the tune of tens of thousands of dollars.  Market crash of 2008-09 scared us, and we started amassing cash, at one point we had over $150K in cash.  Then, after finding MMM, we invested most of that, but still kept 35K or so in cash.  And just this week, I invested another 25K of it in stocks.  So, not sure if I've proven or disproven your point, but we have the smallest EF we've had in years, despite our advanced age (44 and 47) and decent NW (1.7 million).

Now, 10K may seem like a big EF to most people here, but that is something more than one month's, but less than two month's, expenses for us, so not large by my estimation.

Having a plan for a number of different scenarios is smart, though, so I'd probably better rethink mine since my EF is newly-small.

And I, for one, couldn't care less whether or not people have a large EF.  It's an unwinnable argument, as it's simply about tradeoffs, and some people prefer one set of tradeoffs and others prefer another, and at various points in my life, I have preferred one over the other and then flip-flopped.

NoraLenderbee

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Re: Do I even need cash savings?
« Reply #65 on: August 28, 2015, 02:33:17 PM »
Quote
Religion, politics and cash emergency funds are always dangerous topics.
so that's why no one talks about the politicians that cater to the religious while hiring prostitutes with cash?

We only care if they hired them on credit.

MoonShadow

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Re: Do I even need cash savings?
« Reply #66 on: August 28, 2015, 02:44:13 PM »
Quote
Religion, politics and cash emergency funds are always dangerous topics.
so that's why no one talks about the politicians that cater to the religious while hiring prostitutes with cash?

We only care if they hired them on credit.

'Cause only a Dem is stupid enough to do it.  The mayor of Cincinnati wrote a personal check.

rocketpj

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Re: Do I even need cash savings?
« Reply #67 on: August 28, 2015, 04:47:12 PM »
I have a bunch of perpetually recycling Term Deposits that it would be too much of a PITA to shift over into my investment account.  They amount to about 3 months of income (though of course in the event of job loss our costs would drop dramatically, as well as savings opportunities).  I just leave them alone and accept that I might lose the 1.5% or whatever if I cash them prematurely.

Ultimately I'd like to set up 12 GICs (term deposits) that mature on the first of each month, and each value at the equivalent of just over 1 month of expenses.  They will be earning something at least, be totally secure, and I can start cashing them out in the event of an emergency.  If it's more than a year long then it's a more serious emergency and all bets are off anyway (time to sell the house?)


milwookie

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Re: Do I even need cash savings?
« Reply #68 on: September 02, 2015, 11:48:37 AM »
Messing with some numbers here with the following assumptions...
$20k emergency fund
$3k in monthly expenses
$3k in "savings" each month (when employed)
1% return on savings account
7% market return

If there are no emergencies, over 10 years investing that emergency fun will give an 82% return ($16.3k) over keeping it in the savings fund.

Now in a worst case scenario (which would be exceedingly unlikely) you experience, in order...
1) 40% drop in the market
2) Job Loss (6 months)
3) Pull 20k from investments to cover expenses while OOW
4) Market recovers to previous levels (your $20k is already out)

In that scenario, you would end up losing out on 76% ($15.3k) over 10 years vs having a EF in a savings account...

IMO its worth the risk to invest that money as the worst case scenario is so unlikely to happen.

ChaseJuggler

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Re: Do I even need cash savings?
« Reply #69 on: September 02, 2015, 12:19:14 PM »
I keep about $10,000 in cash, and use it for checking sign up bonuses. So far it's up 5.5 percent since May!

It's not for everybody, but it's an easy way to put your emergency fund to work once you get the hang of it. Doctorofcredit was the site that helped me get started on it.

zephyr911

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Re: Do I even need cash savings?
« Reply #70 on: September 02, 2015, 01:51:14 PM »
As long as you have high income, low expenses, and cheap credit on tap, no.

MoonShadow

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Re: Do I even need cash savings?
« Reply #71 on: September 02, 2015, 03:02:01 PM »
As long as you have high income, low expenses, and cheap credit on tap, no.

Well, the basic idea of an emergency fund is that one or more of the above conditions could suddenly change.

My Own Advisor

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Re: Do I even need cash savings?
« Reply #72 on: September 02, 2015, 03:22:49 PM »
In reading through this thread, it seems people have "savings" and "investing" in the same breath.

Savings are not technically investments.

According to Keynesian economics, the amount left over when the cost of a person's consumer expenditure is subtracted from the amount of disposable income that he or she earns in a given period of time.

Savings can be turned into further increased income through investing.

Read more: Savings Definition | Investopedia http://www.investopedia.com/terms/s/savings.asp#ixzz3kcQ5NFf8
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Radagast

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Re: Do I even need cash savings?
« Reply #73 on: September 02, 2015, 09:52:26 PM »
I would want $10,000 or 6 months expenses as an EF. However, I would reduce that by $1,000 per $10,000 taxable investments down too a small amount just to avoid the inconvenience of selling and transferring routine $.

So if I had $80,000 or more in a Vanguard taxable account I'd be fine with a $2,000 "emergency fund" which basically just covered daily expenses.

MoonShadow

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Re: Do I even need cash savings?
« Reply #74 on: September 02, 2015, 10:23:27 PM »
I would want $10,000 or 6 months expenses as an EF. However, I would reduce that by $1,000 per $10,000 taxable investments down too a small amount just to avoid the inconvenience of selling and transferring routine $.

So if I had $80,000 or more in a Vanguard taxable account I'd be fine with a $2,000 "emergency fund" which basically just covered daily expenses.

That is an excellent rule-of-thumb.

Kalergie

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Re: Do I even need cash savings?
« Reply #75 on: September 03, 2015, 04:49:57 AM »
Messing with some numbers here with the following assumptions...
$20k emergency fund
$3k in monthly expenses
$3k in "savings" each month (when employed)
1% return on savings account
7% market return

If there are no emergencies, over 10 years investing that emergency fun will give an 82% return ($16.3k) over keeping it in the savings fund.

Now in a worst case scenario (which would be exceedingly unlikely) you experience, in order...
1) 40% drop in the market
2) Job Loss (6 months)
3) Pull 20k from investments to cover expenses while OOW
4) Market recovers to previous levels (your $20k is already out)

In that scenario, you would end up losing out on 76% ($15.3k) over 10 years vs having a EF in a savings account...

IMO its worth the risk to invest that money as the worst case scenario is so unlikely to happen.

I think your assumption is that the worst case scenario happens at the end of the 10 year period. If it happened in year 1, the result would greatly differ. That's the problem with risk. You never know when shit hits the fan. That's why it's called emergency fund.

flan

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Re: Do I even need cash savings?
« Reply #76 on: September 03, 2015, 05:42:27 AM »
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.

Where do you bank? I want in on this for where my paycheck directly deposits to.

milwookie

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Re: Do I even need cash savings?
« Reply #77 on: September 03, 2015, 08:25:30 AM »
Messing with some numbers here with the following assumptions...
$20k emergency fund
$3k in monthly expenses
$3k in "savings" each month (when employed)
1% return on savings account
7% market return

If there are no emergencies, over 10 years investing that emergency fun will give an 82% return ($16.3k) over keeping it in the savings fund.

Now in a worst case scenario (which would be exceedingly unlikely) you experience, in order...
1) 40% drop in the market
2) Job Loss (6 months)
3) Pull 20k from investments to cover expenses while OOW
4) Market recovers to previous levels (your $20k is already out)

In that scenario, you would end up losing out on 76% ($15.3k) over 10 years vs having a EF in a savings account...

IMO its worth the risk to invest that money as the worst case scenario is so unlikely to happen.

I think your assumption is that the worst case scenario happens at the end of the 10 year period. If it happened in year 1, the result would greatly differ. That's the problem with risk. You never know when shit hits the fan. That's why it's called emergency fund.


No my assumption was that the "event" happened in month 5 of the 10 year period. 

I think what people fail to account for when doing this comparison is the 6 months of building back up your emergency fund after you spend 6 months depleting it.  That money would otherwise be going to your investment accounts.

milwookie

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Re: Do I even need cash savings?
« Reply #78 on: September 03, 2015, 10:15:48 AM »
Messing with some numbers here with the following assumptions...
$20k emergency fund
$3k in monthly expenses
$3k in "savings" each month (when employed)
1% return on savings account
7% market return

If there are no emergencies, over 10 years investing that emergency fun will give an 82% return ($16.3k) over keeping it in the savings fund.

Now in a worst case scenario (which would be exceedingly unlikely) you experience, in order...
1) 40% drop in the market
2) Job Loss (6 months)
3) Pull 20k from investments to cover expenses while OOW
4) Market recovers to previous levels (your $20k is already out)

In that scenario, you would end up losing out on 76% ($15.3k) over 10 years vs having a EF in a savings account...

IMO its worth the risk to invest that money as the worst case scenario is so unlikely to happen.


I would also like to point out that a 40% drop would be far and away the biggest crash in US history.  Black monday was around 20% and oct 1929 was about 13%.  The whole year of 2008 was 32%.

If you left everything else the same, but changed the 40% drop to a 20% drop, then investing you EF would result in a 5% GAIN over leaving it in savings even during the "worst case scenario".

Ive also attached the spreadsheet I used if you want to poke holes in it.

bord

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Re: Do I even need cash savings?
« Reply #79 on: September 03, 2015, 10:43:38 AM »
I would want $10,000 or 6 months expenses as an EF. However, I would reduce that by $1,000 per $10,000 taxable investments down too a small amount just to avoid the inconvenience of selling and transferring routine $.

So if I had $80,000 or more in a Vanguard taxable account I'd be fine with a $2,000 "emergency fund" which basically just covered daily expenses.

This is what I do. Really fits with my risk temperament.

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Re: Do I even need cash savings?
« Reply #80 on: September 03, 2015, 11:10:47 AM »
I think having an EF is a no-brainer.

HOW MUCH, that's the wildcard.

I suspect for most people, at least $1k - $2k should be expected.

Do you need $5k?
Do you need $10k?

Do you need $30k?

I can't tell you since I don't know your tolerance for risk. 

The universal truth for almost everyone though is, you need some cash now and then (versus 100% credit) so at least $1k - $2k is worth having on hand.


zephyr911

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Re: Do I even need cash savings?
« Reply #81 on: September 03, 2015, 11:14:45 AM »
As long as you have high income, low expenses, and cheap credit on tap, no.

Well, the basic idea of an emergency fund is that one or more of the above conditions could suddenly change.
It's different for each of us, I suppose. As a nearly unfireable federal employee with disability insurance and multiple side gigs, I have a pretty cush worst-case scenario that gets better every month. During aggressive course corrections, I've literally emptied my checking account more than once to maximize the utility of every dollar. Having free overdraft protection and $20K+ on tap means no risk there - any surprises can be covered within two weeks. Cash on hand reduces risk for every scenario; if risk is vanishingly low, for whatever reason, that cash is better invested.


BlueMR2

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Re: Do I even need cash savings?
« Reply #82 on: September 05, 2015, 03:12:43 PM »
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.

Yeah, nothing like having the Furnace fail in the house, requiring total replacement last month, then all 3 cars broke down in the same week, and I found bad rot on both the house and shed siding too.  A cash buffer is nice when all the bad stuff that we'd like to have spread out decides to happen all at once...  :)

johnny847

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Re: Do I even need cash savings?
« Reply #83 on: September 05, 2015, 03:29:01 PM »
The emergency fund is essentially an insurance problem. Do you forgo the extra investment income you could earn on money that is instead sitting at a bank to guard against a low probability high cost event?

If you can weather the low probability high cost event, by cutting expenses, finding a side gig, selling investments in your taxable account, etc., and the probability of the event is low enough, then the strictly financial answer is no, you should not have an emergency fund.

Of course, you also have to consider whether you can sleep well at night without having an emergency fund.
Additionally, assessing the probability of an emergency, and estimating the actual cost of a true emergency, is hard.

I find myself with what I deem to be a very secure job, a $60k taxable portfolio, $15k in IRAs, and a 50% savings rate. I believe that I can weather any emergency. I sleep well at night without having an explicit fixed value emergency fund.
I do however adhere to some of the YNAB philosophy. The part about living on last month's income. So I always have an emergency fund in the form of the last month's income. The true purpose of this money sitting in the bank is to make sure that I am spending/budgeting money I already have as opposed to money I expect to earn (I use credit cards). However, it is an emergency fund, even if it is not the typical fixed value emergency fund.

Maybe Later

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Re: Do I even need cash savings?
« Reply #84 on: September 06, 2015, 06:50:06 AM »
I have always been in the low/no emergency fund camp.  My family is faced with the potential of a very large legal bill/settlement through no fault of ours. Since it is slow developing, we are able to redirect savings to build a cash buffer and plan for worst case scenarios, but if something of a similar magnitude came up quickly, springy debt/credit would probably be the answer.  I don't think you're ever going to convince me to keep several years take home pay in fixed income or cash on the assumption this will happen again. 

Two points:

- there is no ONE right answer
- the emergency is something you didn't plan for (no way we saw this coming)


aschmidt2930

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Re: Do I even need cash savings?
« Reply #85 on: September 06, 2015, 05:14:39 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.

Agreed, I've heard of a lot of people doing this very thing.  Credit cards can cover you until taxable shares can make it into your bank account. 

Khan

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Re: Do I even need cash savings?
« Reply #86 on: September 08, 2015, 02:40:25 AM »
I'm in the no/low EF group(1-2 months of cash just to prevent overdraft). I understand all the arguments for a substantial EF, but I disagree with the % probability of an emergency being likely enough to warrant having substantial cash positions. I accept the risk that I may have to use my emergency assets in a down market as worth it, given the possible/likely returns having them invested during non-emergency periods will give me.

This discussion is boba, and is akin to the discussion of paying down the mortgage or keeping it. In the end, whatever plan works for you is the one you should take. There may be a handful of Mustachians here who hold to gold as an asset, and the Permanent Portfolio, and then there's everyone else. There are people here who like how "real" dividend investing is as opposed to index investing, and then there are the indexers. There are the hard EMH proponents, vs. the weak EMH proponents. Real estate investors vs. those of us who don't feel up to it.

Every position has validity, and if it's worth it to you, or if an "emergency" is more likely to happen to yourself, or you feel more comfort from cash, then you do you, and those of us who are in the emergency asset class, or springy debt class will do us.

For me, the only emergency that would be a true emergency would be personal incapacitation or armageddon(economic, world, technological), and I honestly don't and haven't ever seen any proper course for planning for either of those events(actually, I think I'll use this topic as the impetus for having a living will or whatever written). For anything else, I will move, I will use the funds I have, I will take the jobs available without regard to location, and I will sleep soundly with my own choices in the matter.

I look to Moonshadow, and VikB's excellent prior posts as good explanations for why I hold the position I have with regards to cash savings.

Khan

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Re: Do I even need cash savings?
« Reply #87 on: September 08, 2015, 03:05:51 AM »
What I mean to say is this, I don't think that us in the no/low cash savings group are here to try and preach the gospel to you heathen unbelievers. ;)

Kalergie

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Re: Do I even need cash savings?
« Reply #88 on: September 08, 2015, 05:51:18 AM »
Wife and I are planning to slow travel after FIRE and will have an international health insurance with a fairly high deductible. We will have the deductible amount as a cash emergency fund. Chances are, when one of us is sick (knock on wood), we won't have the mental clarity and rational we have now leading us to make bad decisions. Also we believe it is the best way to quantitatively assess the right emergency fund amount. Health problems are as hard to predict as a market correction. Therefore shouldn't be timed. So we beat two birds with one stone IMHO.


MoonShadow

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Re: Do I even need cash savings?
« Reply #89 on: September 13, 2015, 05:29:14 AM »
Also, if you have money in a 401k, you can take a loan against your 401k funds at any time.  When you pay back the loan, the interest goes to you, not to the bank.

Although this strategy could cover some emergencies it is typically ineffective against job loss. When you leave your company the loan must be repaid typically in 90 days or it is considered a withdraw and you are hit by taxes and fees.

I know this is true with regard to the tax law that governs it, but I've never worked at a company that both permitted 401k loans and did not also permit continuing of payments.

Cycling Stache

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Re: Do I even need cash savings?
« Reply #90 on: September 13, 2015, 12:12:22 PM »
I have no cash reserves.  The very first MMM post I read was on Springy Debt, and it got me on my path to Mustachianism one year ago.

I'm fortunate to be in a very good position financially, but I completely embraced MMM's concept.  I set up an HELOC on my house.  It's a ridiculous amount, and a very good interest rate.  I told the guy when I set it up I had no intention of ever using it.

The idea as I understood it is that an emergency fund is truly that--an emergency.  Something you can't or don't see coming.  Of course, I save for things that I know about (e.g., property tax bill coming up).  But for me, if I suddenly have a $10,000 expense to replace an air conditioning unit or something, then that's where the HELOC comes in.  It's less than 4% interest, which is not that much over a few months to pay back.  I can also sell mutual funds.  A 10% or 20% market drop is not going to kill you.  Take out only what you need, and maybe you get $800 instead of a $1,000, which sucks, but not crisis-inducing.  And charging the expense to the credit card if possible (assuming it's paid off!) buys you another 4-6 weeks.

I do think it's a good idea to have known short-term items that you're budgeting for in cash or savings, and I might be hesitant to have no cash reserves if I didn't have an HELOC.  But I think MMM's post is spot on that more of your money can be working for you if you've gotten yourself into a reasonably good financial position. 

One more thing.  There is a really good MMM post about the cost of fear.  A few posts above talk about what happens if you lose your job, the market drops 40%, and several other horrible things happen.  I think those posts miss the point of the emergency fund, because most people are not talking having $50,000-$100,000 in cash to protect against worst-case scenarios.  Emergencies are unlikely to happen, and when they fall in the $5,000-$10,000 category, I believe MMM's springy debt concept works well.  The most likely outcome is no emergencies, so extra cash can go in the market, where the most likely outcome (over the long term) is up.

Villanelle

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Re: Do I even need cash savings?
« Reply #91 on: September 13, 2015, 12:44:53 PM »
I think if you don't have a significant amount of equity in your home, then using the HELOC as springy debt carries a lot more risk because it doesn't take much market drop to cancel out equity and essentially make the HELOC go away.  But if you've got a lot of equity, it's pretty unlikely that all of your equity will be wiped out, short of economic collapse

On paper (it's complicated) I've got a couple hundred thousand dollars in equity, though my HELOC is just under 6 figured because we set it up a while ago and it has great terms that are no longer available if we adjust the amount.  Anyway, if the value of my home drops that much, the economy has crashed and burned and it probably won't much matter.  So I feel entirely comfortable with that as much of our emergency plan. 

If something comes up, we'd pay for it with the money we keep in our checking out largely so that we don't have to be on top of every penny at every moment.  If that's not enough, we'd put it on a CC and pay it off within the billing cycle by adjusting spending and stopping automatic investments. That could easily buy is at least several thousand in a month. If that weren't enough, we'd continue those tactics and pull some money out of the CC, which I can have in my checking account in about 4 minutes.  I think the interest is 1.6%.  And we'd pay if off with the spending and investing cuts. 

I'm pretty conservative when it comes to things like SWR and other issues, and yet I'm entirely comfortable with this strategy.  There seems to be so very, very little risk.

MoonShadow

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Re: Do I even need cash savings?
« Reply #92 on: September 13, 2015, 09:41:12 PM »
Yes, HELOC's are incrediblely dangerous as a form of springy debt to finance a crisis.  The rate may be low, but there are a lot of gotcha's and escape clauses that favor the bank.  One common one to watch for is if your credit score drops by a certain amount, that they can either raise your rate, or simply call the outstanding loan similar to a default.  People tend to ignore that bit, because no one thinks their score can drop that much; but simple things like losing your job or losing your insurance (a DUI drop, for example) can undercut your score.  A CC has terrible rates, but for springy debt it's still better; because even if you use it, you are going to want to get out from under it as soon as possible. 

Cycling Stache

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Re: Do I even need cash savings?
« Reply #93 on: September 14, 2015, 05:16:46 AM »
Yes, HELOC's are incrediblely dangerous as a form of springy debt to finance a crisis.  The rate may be low, but there are a lot of gotcha's and escape clauses that favor the bank.  One common one to watch for is if your credit score drops by a certain amount, that they can either raise your rate, or simply call the outstanding loan similar to a default.  People tend to ignore that bit, because no one thinks their score can drop that much; but simple things like losing your job or losing your insurance (a DUI drop, for example) can undercut your score.  A CC has terrible rates, but for springy debt it's still better; because even if you use it, you are going to want to get out from under it as soon as possible.

The contrast between MMM's blog and the forum is sometimes the difference between positivity and negativity.  The question is whether you need some money in cash for a short-term need.  The answer is probably not, and an HELOC is a good place to cover you.  Most of the (rare) times you would need money would be to cover unexpected emergencies like having to buy a new appliance or something.  But even in the worst-case scenario of losing your job and needing money to float for a couple months, do you think your employer immediately calls the bank and lets them know you've been let go?  Do you think the bank is running daily credit checks on you to make sure your credit is the same as yesterday?  Do you think the bank is running appraisals on your property daily to see if today you've dropped below a certain level?

The concerns raised are of course ones to be aware of.  But part of MMM's appeal (at least for me) is that he takes a realistic view of risk.  What is likely to happen?  If the housing market is plummeting and you're getting close to what the equity line is in the house, yes, you probably will take steps to make sure that you have other options.  But that doesn't happen overnight.  Yes, if your credit situation is starting to get out of control, you should get it under control and give yourself some options.

But the realistic and most likely outcome of having an HELOC based on good equity in your house is that you can tap it short-term for when you need unexpected money.  Thinking that you should pay 3-6 times the interest rates on a credit card because of an almost zero risk that the bank is suddenly going to yank the rug out from under you is probably a mistake.  And of course, even then, you can sell stocks or index funds to cover the short-term needs.

There are many options available as the financial picture improves, and worrying about things that are highly unlikely to happen is probably not worth it.

Drifterrider

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Re: Do I even need cash savings?
« Reply #94 on: September 14, 2015, 06:10:56 AM »
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.

I'd like to know what institution you are using to get those rates.  The best I've found is 1% on money market accounts.

Thanks.

johnny847

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Re: Do I even need cash savings?
« Reply #95 on: September 14, 2015, 08:23:43 AM »
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.

I'd like to know what institution you are using to get those rates.  The best I've found is 1% on money market accounts.

Thanks.

One example is consumers credit union {my consumers.org - there's two named that).
Be aware that most rewards checking accounts require a certain number of debit card transactions per month

Wolf359

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Re: Do I even need cash savings?
« Reply #96 on: September 16, 2015, 01:02:27 PM »
I keep a few months of cash to ensure I can cover if we go over budget and have to balance checks.

The whole point of saving heavily is to develop an early retirement/financial independence fund.  I measure my progress in how many years it can sustain me.

Well, if that isn't a job-loss fund, what is?  Why do I have to wait to use it until it's fully funded?  So what if it will only sustain my family for x years at this point?  Retiring early is optional.  Having my family starve is not. 

If all goes well, I will have it fully funded and be able to retire early.  If not, I'll still keep my retirement savings intact and retire in the traditional way, when I'm 67 or whatever.

Retire-Canada

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Re: Do I even need cash savings?
« Reply #97 on: September 16, 2015, 03:07:59 PM »

But the realistic and most likely outcome of having an HELOC based on good equity in your house is that you can tap it short-term for when you need unexpected money.  Thinking that you should pay 3-6 times the interest rates on a credit card because of an almost zero risk that the bank is suddenly going to yank the rug out from under you is probably a mistake.  And of course, even then, you can sell stocks or index funds to cover the short-term needs.

There are many options available as the financial picture improves, and worrying about things that are highly unlikely to happen is probably not worth it.

Agreed about the negativity and worrying about stuff that is so unlikely as to be not worth thinking about. Fear can get very expensive.

I would also [again] add that you can get a LOC with low interest rate that is not tied to your home equity if that element of the HELOC bugs you.