Question - Cash Flow from Savings 2 Investing

[LuxLiving]

Saaalrighty, the scenario is we are using YNAB for a while now and the reserves have built up nicely in our escrow accounts. At what point / dollar figure does it become evident to you that it's time to move some of that money to a higher paying vehicle?

For instance, CashHappySon had about 3200.00 in his escrow slush fund the other day before car purchase which was for 2500.00. His Dad nor I either one wanted him to cash in most of his chips, so he borrowed the 2500.00 from us short term while we retrieved 1500.00 from his slush fund and then he'll pay back the remaining 1000.00 + a tiny bit of interest when the old car sells. (new to him car 89 Merq Gr.Marquis w/18,000 miles - too good a deal to pass up but that's another story.)

My point is without any big purchase looming had he 3200.00 in there today just sitting at Emigrant collecting 5.05% how does one determine when it's cashflow safe to move a chunk of it back by saying, "I'm not likely to need this big of a hunk all at once and can safely put it into my Roth?" or should I put them in CDs?"

The next big purchase he is saving for will be a house down payment while he's also putting back smaller amounts for the NEXT car. I know we aren't going to be putting down payment money away in a Roth.

I'm asking not so much for his sake but FrugalSon also has a nice big chunk of cash, w/o a near-term large need looming...I wonder at what rate of speed do you account for the influx of continuing income to cover any subsequent need vs. I've put back $500 for the vet and have yet to need it, do I continue to fund that account or leave it sit and then switch that line item to funding the Roth? or other investment vehicle?

Hope I'm not being too confusing, I just wonder how others decide enough w/the cash already just sitting, I'm ready to move part of it on to longer term investments at a greater return? These guys are young - 18 & 20. What am I forgetting? Is a fifteen hundred $ slush fund enough to be sitting idle on standby?

Theories? Thoughts? Opinions? Facts??

[trillium]

Re: Question - Cash Flow from Savings 2 Investing

Are these funds that you are funding or that your son's are providing the funding for? What are their ages?

[LuxLiving]

Re: Question - Cash Flow from Savings 2 Investing

They work, it's their money - ages 18 & 20. I just help them manage it.

Most likely we will do their's as I've done Hubster & mines and that is to put the extra back into laddered CDs, but am wondering what the jump off point is for someone that age. Is 1500 enough to have in cash, or is 2000 a better figure? How do other people decide?

[tinapbeana]

Re: Question - Cash Flow from Savings 2 Investing

well, if it were me i'd be ok leaving the money where it is as a general EF and targeted savings account (i.e. i've got 5k in there, 3k is EF 1k is car savings and 1k is trip savings). perhaps if your sons sat down with you and thought about goals they have for their money and amounts they'd like to reach. for instance, one might want a 2k EF and at least 2k going into a house fund, and then after that he might be comfortable with splitting all savings into 3rds between ef, house, and roth. once the ef reaches a specified point, then it would be house and roth...

for me this is a bit different that the question regarding your own budget (i.e. the vet fund). in my world i would have a vet fund be an amount that would cover shots, meds, etc that normally pop up but not emergency care (that would be EF). in that case i'd set a goal (i want 500 available if needed for vets) and once that's reached i'd funnel overages to another vehicle. if some of the vet money gets used, stop the funneling until it's back up to the desired level and start again...

please bear in mind i'm still on my first cuppa coffee if this doesn't make huge sense

[trillium]

Re: Question - Cash Flow from Savings 2 Investing

Sounds like any extra could definately be put towards future education (college) if thats in their plan.

Do they have enough saved up that if they lost their jobs or something bad happened (illness or accident) that if they missed work for 3-6 months that they could continue to live?

[LuxLiving]

Re: Question - Cash Flow from Savings 2 Investing

The vet is son's vet money for his dog. I call her mine, but she's his and the expenses for her belong solely to him. We also have a vet line item in our budget but it's for the other dog which I also call mine, but really belongs to Hubster.

[tinapbeana]

Re: Question - Cash Flow from Savings 2 Investing

well, then, if the dog's his and something of an emergency were to befall her, would 500 cover it? if not, would he use the rest of his savings, take a loan from the bank of Mom&Pop, or tell the vet that 500 is all that could be spent? i guess it's a matter of what he'd be comfortable with and how much he's willing to invest in the dog... some folks will run their savings dry for a pet, some will put an animal down rather than going for thousands of dollars worth of say cancer treatment. not saying one is better or worse, just saying a person's personality plays a huge roll in this particular decision and how much to be willing to invest in a pet something your son will have to decide for himself...

[disneysteve]

Re: Question - Cash Flow from Savings 2 Investing

how does one determine when it's cashflow safe to move a chunk of it back by saying, "I'm not likely to need this big of a hunk all at once and can safely put it into my Roth?" or should I put them in CDs?"

I just wonder how others decide enough w/the cash already just sitting, I'm ready to move part of it on to longer term investments at a greater return?

I think it all depends on the individual's needs and risk tolerance. We frequently talk about having an emergency fund. Some feel that should be 100% readily accessible, like in an MMA. Others prefer a small amount in an MMA and the rest laddered in CD's. Still others are comfortable having most of their MMA in the stock market and if they need it, they will just liquidate some of their holdings.

Some folks put money in a Roth with the knowledge that they can withdraw their contributions penalty-free at any time. Others, like me, feel that retirement accounts are sacred and should never be touched for any reason other than retirement. Same goes for 401Ks. Some will borrow from themselves to buy a house, a car, a vacation. Others think borrowing from 401Ks is a really bad idea.

And even though we all know what the "experts" say about EFs, how much you actually need varies based on your situation. Some jobs are more secure than others. If you have relatively high fixed expenses, you may need a larger EF than someone who has lower fixed expenses. For example, the person with a mortgage and a car payment needs more than the person without either. And if you are young and have parents who would gladly help out in a crisis, you probably need less than if you are totally on your own.

I have a general "feel" for what I've got and what my needs are. Can't really explain it any better than that. When my checking account balance tops about $5,000, I move money to my MMA. When my MMA balance tops about $15,000, I move money elsewhere. Where I put everything also depends on market performance. My money is in frequent flux based on a bunch of variables.

[LuxLiving]

Re: Question - Cash Flow from Savings 2 Investing

Oh he'd tap the EF money for a bit, but we'd be advising that he not go too deep for intensive treatment.

Projections show that by the end of this year he'll have a month's worth of income in his dedicated Emergency Fund baring anything unforseen happens.

The vet is just an example of a category item that is funded but not always used up vs. one such as a Car Tire Category which is generally funded and then used up w/some certainty. I like tinap's idea of thirds after the mini-EF is at $2000.00 and then taking the rest out to Roth & House Down.

Any other suggestions?

[LuxLiving]

Re: Question - Cash Flow from Savings 2 Investing

Yes, Steve, I have some of those same subjective feelings about money myself. Hubster likes more cash sitting than I'm comfortable with, but we go with his thoughts on this for us currently. I'm still persuading.

I'm one of those retirement funds are sacred people who doesn't go in for borrowing from them. I'd like it very much if I can convince my children that this is sound fiscal policy as well.

In reality w/the YNAB system, they have the entire last month's salary sitting in checking, then when the first of the month hits, it is used for this month's billpay & dedicated savings/investments. (This sitting around for a month w/no interest gripes me, but we're doing it! - a different story) So, that does give them a mini e-fund of sorts right there, then they have an Emergency Fund line item, Roths which they are not yet able to max out. They are on an increasing schedule for upping their Roth contributions though.

As young men would they be wiser to fully fund the Roth or the House D.Pymt fund? To me this is a given that fully funding the Roth is the wiser choice and the house can come later, but wonder what are the financial advantages in getting into a house sooner on the long-term bottom line. We'd prefer that they stay at home until they can buy either a condo or starter home, which in our market isn't totally out of reach in the current conditions.

I know there has been debate here on the rent vs. home profitability, but I fall into the pro home owner camp as having a place to live that's secure is a pretty basic human need. And I can see advantages to the younger man getting into a house that's big enough for wife & at least one baby while he doesn't yet have the expense of actually supporting them...IOW, getting a head start on it.

Job stability? Who knows. Neither have indicated a career choice that requires college educations, although they do have educational savings as well if/when they so desire to pursue it.

Currently - one son's salary is in the $800-1100.00 range depending on the hours he can get at this part time job, and the second one's salary is running from $1000 up to 1700 depending on his hours. We are looking at another PT job for the PTer or one FT job if he can find one. He is supposedly up for the next FTopening at the same place the other son works.

Thanks everyone for your input. I really appreciate it.

[jIM_Ohio]

Re: Question - Cash Flow from Savings 2 Investing

well, if it were me i'd be ok leaving the money where it is as a general EF and targeted savings account (i.e. i've got 5k in there, 3k is EF 1k is car savings and 1k is trip savings). perhaps if your sons sat down with you and thought about goals they have for their money and amounts they'd like to reach. for instance, one might want a 2k EF and at least 2k going into a house fund, and then after that he might be comfortable with splitting all savings into 3rds between ef, house, and roth. once the ef reaches a specified point, then it would be house and roth...

for me this is a bit different that the question regarding your own budget (i.e. the vet fund). in my world i would have a vet fund be an amount that would cover shots, meds, etc that normally pop up but not emergency care (that would be EF). in that case i'd set a goal (i want 500 available if needed for vets) and once that's reached i'd funnel overages to another vehicle. if some of the vet money gets used, stop the funneling until it's back up to the desired level and start again...

please bear in mind i'm still on my first cuppa coffee if this doesn't make huge sense

At age 18 and 20, the "kids" have time few others do to "save". Meaning they could contribute less than you or I and have more in the end. To me, sitting on cash does not make much sense.

The sooner money is "put to work", the sooner you won't to work for money.

I do believe in having ~ 1 month of bills in cash... and having funds equal to 2-4 months available. But the 2-4 months do not have to be "liquid". Could be a credit card, stock account, CD or other.

Mid term purchases (like cars) change this somewhat (need more than 4-5 months cash on hand).

In addition "free cash flow" each month changes the equation. If I make 10k per month, and need only 4k for bills, the 6k "positive cash flow" is 1.5 months emergency cash.

[LuxLiving]

Re: Question - Cash Flow from Savings 2 Investing

Thanks jIM_Ohio, I've been having some of the same thoughts which is why the question came up. Optimum usage of funds is what I'm after for them to help them set the stage for a profitable future with as few lumps/bumps as possible. My Mom helped steer me towards a condo purchase at a very young age and that alone put Hubster and I on a good financial footing when we first married.

We are just now getting to the point of exploring expanding their credit footprint in possibly getting them a CC w/a small limit or opening a local line of credit at say a jewelry store or some such in order to get their borrowing skills off to a decent start while Mom is still helping them learn to control themselves.

Right now the only true bill either of them has is their car insurance payments and they have enough cash where they could go to the year pay plan if we wanted to - it would save them a few bucks on the premiums but I also think they'd be better off investing the cash instead of giving the insurance company a boost. Need to explore exactly what the cash discount is. Hubster & I could help them here with letting them list their cars under our policy for greatly reduced rates BUT Hubster does not want to be considered liable should they seriously injure or kill someone in an auto accident, so they have a joint policy together.

[jIM_Ohio]

Re: Question - Cash Flow from Savings 2 Investing

Thanks jIM_Ohio, I've been having some of the same thoughts which is why the question came up. Optimum usage of funds is what I'm after for them to help them set the stage for a profitable future with as few lumps/bumps as possible. My Mom helped steer me towards a condo purchase at a very young age and that alone put Hubster and I on a good financial footing when we first married.

We are just now getting to the point of exploring expanding their credit footprint in possibly getting them a CC w/a small limit or opening a local line of credit at say a jewelry store or some such in order to get their borrowing skills off to a decent start while Mom is still helping them learn to control themselves.

Right now the only true bill either of them has is their car insurance payments and they have enough cash where they could go to the year pay plan if we wanted to - it would save them a few bucks on the premiums but I also think they'd be better off investing the cash instead of giving the insurance company a boost. Need to explore exactly what the cash discount is. Hubster & I could help them here with letting them list their cars under our policy for greatly reduced rates BUT Hubster does not want to be considered liable should they seriously injure or kill someone in an auto accident, so they have a joint policy together.

To see 20 and 18 year olds with good financial sense, I think a few things to help them along the way:

1) Save regularly. I think you have done well to teach them this. The next logical step (to me) is

2) invest regularly (in stock market). To see what their "risk tolerance is". How do they react if their investment drops 10-20%.

then

3) diversify/ adjust investments.

4) credit is not something everyone "needs". If either are in college, consider using a subidized student loan (subsidized means gov't pays interest while kids are in school). Even if kids have cash to pay tuition, paying off loans give a tax deduction and credit history. If neither has the inkling to further their education, then the CC route might work... but I think credit like this will be sink or swim. And if parents bail them out, they will only sink deeper (happened to my brother 3 times and father in law twice that I know of).

[disneysteve]

Re: Question - Cash Flow from Savings 2 Investing

the YNAB system

What is this?

[LuxLiving]

Re: Question - Cash Flow from Savings 2 Investing

Jesse 'who used to hang out here' Beacham's YouNeedABudget.com (a/k/a YNAB) budgeting software -Excel based.

http://youneedabudget.com/