100k milestone. Seeking evaluation

[disneysteve]

Yeah that's what I'm sayin though. If my expenses were $5k/month, and I had $30k in cash, I'd go insane.

All I could think is 'well I only need $15k in cash, and this extra 15k could be invested at 8%, so that's around $1200 I'm missing out on.

Doesn't work that way. They don't recommend a 6-month EF if you earn 50K and only a 3-month EF if you earn 100K. The recommendation is the same regardless of income and regardless of the dollar amount involved.

That said, I do agree that not all 6 months of your EF needs to be sitting in cash accounts earning next to nothing. Personally, we have some in money market, some in CD, some in I-bonds (bought years ago when the rate was quite good). But the money invested aiming for that 8% return is not part of our EF.

[jpg7n16]

Doesn't work that way. They don't recommend a 6-month EF if you earn 50K and only a 3-month EF if you earn 100K. The recommendation is the same regardless of income and regardless of the dollar amount involved.

Yes I know. But the recommendation is 3-6 months expenses as an acceptable range, based on lifestyle and risk tolerance.

The recommendation isn't 6 months only, regardless of income.

I view me, as a single individual with enough income, disability coverage through work, with brokerage account holdings, with a high risk tolerance, and no dependents, low fixed monthly expenses, and ample lines of credit - to be a great candidate for the low end of the range regardless of my income.

And if I made $150k, or $50k, I'd live virtually identical to what I do now, so it'd have no impact on how much cash I held. 3 months expenses (not income) is good for me.

And it seemed to me that the OP was in a similar position. Hence my recommendation for 3 months in cash.


In other words, I don't believe that everyone needs a 6 month EF. I think 3-6 months is good. 6 months is the max.


People who might need 6 months in cash would have others dependent on them (married and/or with kids), high fixed expenses (mortgage, car payment, child support, other fixed obligations), low risk tolerance, etc.


I don't think the OP fits in any of those categories. So I agree that $1k is too low, but IMO $3-4k seems very reasonable given his overall situation.

[jteezie]

Thanks for all the feedback and perspectives.

jpg7n16 - Good point, the ETFs are semi diversified. Also you are right, I fall in the same profile as you, but I may be even more of an outlier in some ways.

I mainly just wanted to get an idea on my portfolio, but since there's much attention focused on my $1k cash position, I thought I should address the issue.

I actually do recommend that most people hold 3-6months of living expenses in an EF, but I am not doing it because having money creates flexibility and options so with that, here is my logic:

I pay for everything on my credit cards (I have a pretty high line of credit). This creates a 1 month buffer (not to mention interest arbitrage), where I can move money to my checking account in time to cover the expenses. (My brokerage is very quick about online money transfers. 3 business days.) During this 1 month lead time I continue to earn income, so it's not like I have only 1k in cash, if that makes any sense. It's 1k + 1 month future income + however much money I can divert over in the time (this assume a non-job loss scenario).

My company allows me to borrow against the Roth 401k. It's a nice clause which I intend to use if the world market were to tank again - that way I can guarantee myself LIBOR+ up to 6% growth on the Roth account to take advantage of the take advantages (I can set my own repayment terms since it is a loan to myself). This thinking should clearly suggest that I have no intention of drawing from my retirement accounts and my long term goal is growth.

Health scenario. I have a company sponsored Health Savings Account and plenty of insurance to buffer the 1k. The nice thing is that it is is essentially cash, but only for health.

Job loss scenario. I don't think companies let go of their top 10% performers, but if I were to lose my job, I don't see it as negative - it's just an opportunity to do other things.

I might understand the need for more cash if I owned a house, but I've already worked out the math and decided that I will rent forever.

So, with all the above in mind, what are your recommendations? Is there a flaw in my logic? What am I not accounting for?

[bjl584]

Thanks for all the feedback and perspectives.

jpg7n16 - Good point, the ETFs are semi diversified. Also you are right, I fall in the same profile as you, but I may be even more of an outlier in some ways.

I mainly just wanted to get an idea on my portfolio, but since there's much attention focused on my $1k cash position, I thought I should address the issue.

I actually do recommend that most people hold 3-6months of living expenses in an EF, but I am not doing it because having money creates flexibility and options so with that, here is my logic:

I pay for everything on my credit cards (I have a pretty high line of credit). This creates a 1 month buffer (not to mention interest arbitrage), where I can move money to my checking account in time to cover the expenses. (My brokerage is very quick about online money transfers. 3 business days.) During this 1 month lead time I continue to earn income, so it's not like I have only 1k in cash, if that makes any sense. It's 1k + 1 month future income + however much money I can divert over in the time (this assume a non-job loss scenario).

My company allows me to borrow against the Roth 401k. It's a nice clause which I intend to use if the world market were to tank again - that way I can guarantee myself LIBOR+ up to 6% growth on the Roth account to take advantage of the take advantages (I can set my own repayment terms since it is a loan to myself). This thinking should clearly suggest that I have no intention of drawing from my retirement accounts and my long term goal is growth.

Health scenario. I have a company sponsored Health Savings Account and plenty of insurance to buffer the 1k. The nice thing is that it is is essentially cash, but only for health.

Job loss scenario. I don't think companies let go of their top 10% performers, but if I were to lose my job, I don't see it as negative - it's just an opportunity to do other things.

I might understand the need for more cash if I owned a house, but I've already worked out the math and decided that I will rent forever.

So, with all the above in mind, what are your recommendations? Is there a flaw in my logic? What am I not accounting for?

The only flaw, if you could call it that, is that by not holding 3 to 6 months in cash you are making things more complicated than they need to be. If you held a heavier position in cash you wouldn't need to worry about moving money around between accounts or timing issues with credit cards and banking institutions.

[disneysteve]

The only flaw, if you could call it that, is that by not holding 3 to 6 months in cash you are making things more complicated than they need to be. If you held a heavier position in cash you wouldn't need to worry about moving money around between accounts or timing issues with credit cards and banking institutions.

That's only true if you keep your cash all in your checking account. I don't. And I do occasionally need to transfer money from my money market to my checking account to cover a bill so I do need to time credit card payments accordingly.

The biggest problem I still see with OP's plan is the consideration of borrowing from a retirement plan. No matter how you rationalize it, that just isn't a good idea.

[yulianisakov]

You have a pretty good asset allocation and it's consistent with where the opportunities are in our current market environment for the most part. Being invested in individual stocks is fine as long as you have a basis for investing in them and then monitoring movement in those stocks so that you can reallocate your earnings to new positions and/or get out while you're ahead. Generally speaking unless the expectation is that the stock will continue to move up on some fundamental and/or technical analysis, you should get out after 20% gain and reinvest in other positions you feel you can similarly take advantage of. Some stocks you can keep for the long-haul, but the ones you are investing in just for "fun" should be kept for as long as needed and then reallocated.

As far as bonds are concerned, there is certainly a scarcity of yields. You may have to go right on the border between investment grade and junk just to get a decent yield around 5.5% on debt. As interest rates get lower, U.S. and corporate bonds will seem a lot less attractive to investors both foreign and domestic, and as the money starts flowing out this can cause a major drag on the overall bond market in the U.S.. The better play would be to get involved in emerging market debt. Those yields are substantially higher and most of those markets are currently experiencing a boom; so firms are growing and expanding.

Options are great way to take advatange of market fluctuations in a volatile market. Consider options on commodities. Some are at their all time highs.

I hope some of these suggestions are helpful.

[jpg7n16]

So, with all the above in mind, what are your recommendations? Is there a flaw in my logic? What am I not accounting for?

We tend to focus on the EF because it is a basic of a good financial picture. And it's really one of the only weaknesses you have in your plan. (The only other weakness I see is a lack of an intentional investment program. I mentioned this in my first reply.)

You can't really harp on someone who has a ton of investments held across diversified ETFs and is doing great towards saving in his retirement accounts. There's not much to say there, except 'good job'


Something you're not considering:

The whole point of the EF is to avoid taking on debt or borrowing against retirement accounts, or even needing to touch your investment assets - in the event of an emergency.

So considering things like credit line on CC's as part of your 3-6 months, or planning to borrow against retirement assets as part of an EF - these are the very things the EF is designed to avoid!

The EF is a fundamental basic (redundant? eh maybe...) of your financial picture. If we didn't make sure your fundamentals were good, we'd be doing you a disservice. And $1k in cash isn't good.

[disneysteve]

The whole point of the EF is to avoid taking on debt or borrowing against retirement accounts, or even needing to touch your investment assets - in the event of an emergency.

So considering things like credit line on CC's as part of your 3-6 months, or planning to borrow against retirement assets as part of an EF - these are the very things the EF is designed to avoid!

Exactly. Well said.

[zetta]

I might understand the need for more cash if I owned a house, but I've already worked out the math and decided that I will rent forever.

So, with all the above in mind, what are your recommendations? Is there a flaw in my logic? What am I not accounting for?

Here's one -- you're 26. It's a high probability that in the next 5-10 years you will meet the love of your life and SHE will want to own a house rather than rent forever.

I would suggest starting to save for a 20% downpayment. You can always spend it on a trip around the world if 10 years from now you still have no desire for a house.

As for the EF, how much is your car insurance deductible and your max annual out of pocket with your health plan? How long does disability take to kick in? Run some disaster scenarios -- what would you need to do financially if you were in a major car accident resulting in your car being totalled and you in the hospital for 3 weeks, and then on disability for a year? (It happened to a friend of mine -- she actually had a brain injury and was ultimately unable to return to her previous career.)

[jteezie]

Thank you everyone.

I will raise my cash balance to 2k and gradually increase to 3k. It sounds reasonable. Though, I'd like to challenge the idea of an EF using the logic of insurance. Insurance is very important but only up to a point where you can self insure, right? Is there a point in savings or a level of liquidity where holding actual cash under the mattress (in checking), no longer makes sense?

zetta - i definitely do not intend to buy a house especially after renting for so long. I will stick with this strategy otherwise I will be "throwing" money away. Beyond the cost (which I think are about equal actually), I just don't want to deal with house maintenance, liquidity, mortgage debt, poor investment diversification, etc. I certainly hope that doesn't reduce the available population of women too dramatically...
And as for my car insurance. I drive ~3-4k miles a year. It's like $600 a year. I really don't need a car, but it's a luxury/convenience I want.

yulianisakov - thanks for the advice. I am considering corporate bonds but I think I will wait for boom era to lock in some better rates. Can you explain the 20% rule? It seems like a day trader strategy, whereas I'm going long. I don't want to play against the high speed traders. Does holding longer term still make sense in your opinion? why?

[bjl584]

Thank you everyone.

I will raise my cash balance to 2k and gradually increase to 3k. It sounds reasonable. Though, I'd like to challenge the idea of an EF using the logic of insurance. Insurance is very important but only up to a point where you can self insure, right? Is there a point in savings or a level of liquidity where holding actual cash under the mattress (in checking), no longer makes sense?

zetta - i definitely do not intend to buy a house especially after renting for so long. I will stick with this strategy otherwise I will be "throwing" money away. Beyond the cost (which I think are about equal actually), I just don't want to deal with house maintenance, liquidity, mortgage debt, poor investment diversification, etc. I certainly hope that doesn't reduce the available population of women too dramatically...
And as for my car insurance. I drive ~3-4k miles a year. It's like $600 a year. I really don't need a car, but it's a luxury/convenience I want.

yulianisakov - thanks for the advice. I am considering corporate bonds but I think I will wait for boom era to lock in some better rates. Can you explain the 20% rule? It seems like a day trader strategy, whereas I'm going long. I don't want to play against the high speed traders. Does holding longer term still make sense in your opinion? why?

Holding cash no longer makes sense at the point that you have adequate cash holdings for an EF, and for life (think, car fund, vacation fund, xmas money, etc.) After that point (which is different for everyone) there is lost opportunity to holding cash, since you could earn a better return by investing it elsewhere.

[TrunkMonkey]

Thank you everyone.

I will raise my cash balance to 2k and gradually increase to 3k. It sounds reasonable. Though, I'd like to challenge the idea of an EF using the logic of insurance. Insurance is very important but only up to a point where you can self insure, right? Is there a point in savings or a level of liquidity where holding actual cash under the mattress (in checking), no longer makes sense?

zetta - i definitely do not intend to buy a house especially after renting for so long. I will stick with this strategy otherwise I will be "throwing" money away. Beyond the cost (which I think are about equal actually), I just don't want to deal with house maintenance, liquidity, mortgage debt, poor investment diversification, etc. I certainly hope that doesn't reduce the available population of women too dramatically...
And as for my car insurance. I drive ~3-4k miles a year. It's like $600 a year. I really don't need a car, but it's a luxury/convenience I want.

yulianisakov - thanks for the advice. I am considering corporate bonds but I think I will wait for boom era to lock in some better rates. Can you explain the 20% rule? It seems like a day trader strategy, whereas I'm going long. I don't want to play against the high speed traders. Does holding longer term still make sense in your opinion? why?

I tend to agree with you on the emergency fund. Who said you need 3-6 months emergency fund in cash? Where is the evidence for this.

Again this is another "Rule of Thumb" with no evidence. Since you have 22K in a non retirement account you could simply liquidate your stocks. You only make 50K so you are not paying a high rate on any gains, and you get to offset income with your losses.

Number 2#, I would tend to avoid individual stocks, because it is really hard to outperform the market. It would be better to own an ETF that tracks the S&P500 or some other index. But if you like investing then whatever.

I think you should make a long term goal and shape your savings & investing around that goal. Like a down payment for a house.

[jpg7n16]

I tend to agree with you on the emergency fund. Who said you need 3-6 months emergency fund in cash? Where is the evidence for this.

Again this is another "Rule of Thumb" with no evidence.

It's only the recommendation of the CFP Board. You know how they love to make up stuff all the time.

For instance, see the Finacial Planning board training presentations like:
http://www.savingadvice.com/forums/p...tml#post283908 - slide 16
http://www.cfp.net/clinic/includes/M...als-Whitby.pdf - slide 15
http://www.cfp.net/clinic/includes/D...ebt-Sawyer.ppt - slide 29

But then again, they are only the recommendations of the board of certified financial planners. What do they know?

And I like how you continue to claim that these rules of thumb have no evidence - in spite of our posts that show you the evidence. (see this post for an example)

Since you have 22K in a non retirement account you could simply liquidate your stocks. You only make 50K so you are not paying a high rate on any gains, and you get to offset income with your losses.

So if you wanted a cash buffer to avoid needing to liquidate any stocks, about how much cash would you need? Liquidating stocks involves commissions, taxes, and maybe some fees.

So how much cash buffer would you suggest in order to avoid cashing out stocks?

Number 2#, I would tend to avoid individual stocks, because it is really hard to outperform the market. It would be better to own an ETF that tracks the S&P500 or some other index. But if you like investing then whatever.

The OP mistakenly listed several ETFs as 'individual stocks.' The majority of his money is held in diversified funds.

I think you should make a long term goal and shape your savings & investing around that goal. Like a down payment for a house.

OP has already stated that he does not have a desire to own a home.

...I've already worked out the math and decided that I will rent forever.

[disneysteve]

Liquidating stocks involves commissions, taxes, and maybe some fees.

Not only that, but you may not know how much you'll need or when. Let's say you lose your job. You don't know how long you'll be out of work. You don't want to have to keep dipping into your investments, paying commissions each time. And you don't want to cash out more than you need and pay taxes and fees for no reason.

That's why virtually everyone advises keeping some degree of liquid cash reserves. You can argue about 3 months or 6 months or 8 months or a year, but I don't see how anyone can argue against the concept of having an emergency fund.

[jteezie]

It seems like a cost-benefit comparison of opportunity costs:

Scenario, job loss:
Lets assume:
No income, increase in spending (job search), and 9 months unemployment (average), 10% capital gains tax.

That means I need 7k EF right away. This means selling 2 stocks at a cost of $20 (commission) + 7000 (10%) = $720. This is the cost of not holding cash in an EF. How does that compare to holding cash?*

Holding 7k cash = no returns. What are the opportunity costs of holding cash?

7k at 10% annual growth (historic inflation unadjusted number?! [since I am not factoring in inflation on the above cash scenario. Obviously you have to use actual portfolio returns). Gains from holding stocks for 1 year > costs of liquidation to create a 9 month EF.

This calculation would have to be remade for every change in monthly cost of living, but so long as I maintain about the same, I have already made my returns to offset any selling and I should just tilt toward stock over holding cash.

Does this seem logical and realistic?

jpg - Reading the post you cited, why do you assume 3% income growth other than the obvious because people's income grow on average 3% a year over their life?

John

*(after typing everything up, I realized that it would be ridiculous to pay 10% tax on every dollar sold. It is only a tax on gains, so my cost of holding stock is actually much much lower, but I don't want to rewrite everything because the logic is the same regardless, but maybe much later in life when my returns >100%, this will be the case. I realize I also assume that job loss is independent of a major economic downturn which would impact portfolio holdings.)
I also think that this model assumes an overly high rate of turnover. There is at worst a 13% chance of losing your job in any given year (unemployment x 12/9), which also breaks down by demographic and other factors so realistically your chances of not needing to liquidate are very high. This only assumes a job loss scenario of course.
Other things like some guy smashing into your car; well that's a different calculation because you still have income to offset some of need to liquidate. Health issues also kinda fall into this boat, assuming you have good health insurance. Wow, lots of notes.