Strategy of investing, paying debt, and building cash reserves?

[albireo13]

We've built up short term debt (CC, car loans,etc) last year and I have cut back on 401k contributions and building up cash savings to pay it off quickly.   I've come to realize that the reason we got in to this debt was lack of cash reserves.  Our philosophy had been to try and save as much as possible into retirement and sort of ignored  building a cash reserves buffer.  Head-slap!

 So my question to folks ...  how large a cash reserves do folks build?
Where do you place it in your list if priorities?

[Monkey Uncle]

We typically keep 5-10k in cash.  We just make sure we've got our current spending needs covered prior to saving/investing the surplus.  Sort of a "pay yourself last" strategy.  But we have enough discipline not to spend money on unnecessary stuff, so we don't really need to carve out the savings first.  If you had to take out loans to cover your spending, it sounds like either you didn't really have a good handle on your spending needs, or you gave in to temptation.  You might want to track your actual spending for 6 mos to a year to get a good handle on where the money is going.  Then you can target specific items for elimination or reduction, and you'll have a good idea of your cashflow needs and potential savings.

[specialkayme]

"Cash reserves" and "emergency fund" aren't necessarily synonymous. Cash reserves could mean money in the checking/savings/taxable market account. All are sitting there for a rainy day (the car breaks down, the AC unit goes out, ect.) and hopefully growing while the sun is shining. Your emergency fund could include your cash reserves, but can also include access to funds that aren't part of your cash reserves. Examples include principal contributions to Roth IRAs or withdrawlable HSA deposits. These types of funds can double as your rainy day monies AND your retirement funds. Or access to immediate, low interest credit (such as a HELOC).

If you assume you don't currently max out your retirement options, and you assume that if you dip into your "rainy day fund" that you'll replenish it whenever the sun starts shining again, then it doesn't matter if those emergency funds are in cash or retirement accounts or low interest loans, as long as you can have access to the funds today AND you put the money back tomorrow (or over a short period of time).

But your personal strategy may vary. For me, my "cash reserves" are $20k. I don't sleep well if I have less than that in a market account. But I have access to funds to support me for up to a year if I need to. I don't like to mess with HELOC loans, and it takes a while to get a sufficient withdrawlable amount into an HSA, and I'm not eligible to contribute to Roth IRAs, so I keep a larger amount in a market account than others might.

[abhe8]

I would not include HSA or Roth IRA contributions as emergency funds, because while you can withdraw the money, you can't replace it.

Sent from my MotoG3 using Tapatalk

[Dicey]

Much better to stop buying shit than to cut back on your 401k contributions.

Start by learning to live on last month's pay. Do it a week at at a time. When you get to one month, call it an EF and do it again. Lather, rinse, repeat until you get to a place that feels right.

[Mustache ride]

I would not include HSA or Roth IRA contributions as emergency funds, because while you can withdraw the money, you can't replace it.

Sent from my MotoG3 using Tapatalk

Can I ask why not? I've always had the mindset that money is money. Categorize it however you want, checking, savings, Roth IRA, it can all be used for cash when needed. I don't know what normal CC interest rates are as I always pay mine off each month, but I've heard of coworkers paying 15-30% interest. There has to be a point where it makes sense to pull from the Roth. Like OP, I also have no problem scaling back 401k if necessary, and hopefully catching back up before the end of the year. At the very least I look at it as getting a good return on my money for a potential short period of time, rather then making no interest in a bank.

To answer OP, I keep 10k cash and my wife about 17k. Personally I think that is too much, and would be more comfortable between 12-15k combined, but she doesn't agree. We have car loans and pay less than 2% so there isn't any rush to pay off such a small amount. Track your spending and see where your money is going.

[albireo13]

Much better to stop buying shit than to cut back on your 401k contributions.

Start by learning to live on last month's pay. Do it a week at at a time. When you get to one month, call it an EF and do it again. Lather, rinse, repeat until you get to a place that feels right.

Not so much buying "shit" ....  sold house and  accrued unexpected moving expenses plus my car died so it had to be replaced so I could go to work.
In any case, my original question still stands.

[Kapiira]

We keep 20k in a savings account that we have set aside only for true emergencies.  We also keep no more than 5k in a more accessible account to deal with unexpected car repairs, ect.  If we needed live off of savings for a while we could tap into our HELOC and Roth IRA principal.

[HipGnosis]

I would not include HSA or Roth IRA contributions as emergency funds, because while you can withdraw the money, you can't replace it.

While that true, it shouldn't remove them from consideration, esp. for a true emergency.

[PiobStache]

We struggled with the balance between an adequate emergency fund yet keeping all possible wealth invested.  Before I ever tapped a tax advantaged account I would tap one of our post-tax investment accounts but I hope that never has to happen.  Outside of our household operating account we keep 50k in cash/cash equivalents and then have a 250k HELOC in case TSHTF.  It costs $50 a year maintenance for the HELOC but $50 vs. the opportunity cost of have 250k in cash/cash equivalents is a no-brainer.

[SK Joyous]

I think this is different for everyone, but for us my 'sleep well at night' cash reserves is $12,000.  We arrived at this amount originally because it was the difference between our lowest income earner's annual income and our annual expenses. This means that if the higher earner lost their job, we would have a year in cash reserves. If emergencies came up (our water heater went bust, our vehicle needed an unforseen major repair), we 'borrowed' from our own cash reserves, and then built it up again over time back to the $12,000. 

Our reasoning was that it is statistically very unlikely for both of us to become unemployed (very different jobs in different industries), and if that were to happen we would need more major actions than our cash reserves anyways, so we were going with the more possible scenario (even if still somewhat unlikely)

I admit, that number isn't accurate anymore; our incomes have gone up and our expenses not so much, so could be a much lower number now, but I feel very comfortable at the $12,000 so that's where I stay. 

[Aggie1999]

To the OP, was the reason you got into debt the lack of cash reserves or was it really simple over spending? IMO, for someone with a stable job or an unstable job with severance there is not a lot of reason to have a huge cash reserve/emergency fund. If you are truly living the MMM lifestyle and an emergency comes up you should be able to halt retirement contributions immediately and divert the money to your checking account. Live on 30 day CC credit while the funds make it to your checking account. Of course this works better the higher savings rate you routinely do and the higher salary you have.

IMO, for many people, there is not a lot of reason to keep huge sums of cash reserves.

[albireo13]

This was a case of a rare "perfect storm" of expenses (moving, the car) while having no cash reserves.
My philosophy had always been to put all money into 401K and not into a cash fund. 
Maybe I need to rethink that.  I didn't want to stop 401K contributions because I'd lose the company matching.

[albireo13]

The way I look at it, my 401K is like a savings account. I'm past the age of penalties now.  If I withdraw I pay taxes.
However, if I had instead put funds into a savings account or such it would be from post-tax dollars anyway.

[rpr]

OK, so you are above 59 years old and can withdraw without penalties. I also recall you mentioned in a previous thread that you had $1.4 million. So why don't you just withdraw enough from the 401k and pay off the debt.

[Dicey]

Much better to stop buying shit than to cut back on your 401k contributions.

Start by learning to live on last month's pay. Do it a week at at a time. When you get to one month, call it an EF and do it again. Lather, rinse, repeat until you get to a place that feels right.

Not so much buying "shit" ....  sold house and  accrued unexpected moving expenses plus my car died so it had to be replaced so I could go to work.
In any case, my original question still stands.

Funny, I meant to write "shiny" shit. You stated CC, car loans, etc, so I am only working on the limited info you provided. If you bought a (shiny?) car on an installment plan, just make payments for as long as you need to. Not the end of the world. Without more details, I can't comment to further.

As to your original question, I answered it. It's in bold above.

[albireo13]

Yup, I don't disagree.
Now that we are settled in our new house we will do better. We are better positioned for retirement.  The house is much smaller, more efficient, and less costly.  Our monthly cash flow (not counting the debt)  is much better.  Once the debt is cleared we will be good to go.  I just want to retire ASAP ... LOL.

No "clown" car for me ...  I buy used and nothing flashy.

[Mmm_Donuts]

We have a cash allocation in our AA - 5%. We are essentially FIREd now, but even before FIRE it was about 3-4% (currently bonds at 20%, equities 75%).

For rainy day fund building and planning future expenses, nothing beats YNAB. It means you have to plan for big expenses, which I like. Need to buy a car? Set a line for it in YNAB and put (cost of car) / (months until you need to buy the car) aside every month. There aren't really unexpected expenses in life - just poor preparation.

Also if you own a home, a HELOC is a good idea. There should be no reason  to carry a CC balance, ever, if you plan well and have a HELOC.