Too much cash in EF?

[cypher1]

I'm with Jluke with 4K per month. Ultimately it depends on your comfort level (or for me peace of mind with x amount of cash). Rule-of-thumb is usually 3-6 months of expenses, but that will vary depending on your lifestyle, job security, any upcoming expenses/purchases.

As for me, I'm probably going to start dumping more in taxables this year, like LAL suggested. I feel my cash reserve balance is more than enough right now.

[StepRightUp]

Cypher, thanks for posting this as I was thinking of posting something similar. It's hard to put a price on peace of mind, and it sounds like you have. Like you, I have a year EF in cash right now and that's largely because I experienced a layoff and a year of unemployment a few years back. Fortunately I was prepared and I remember afterwards saying "I want to have a year's living expenses just sitting in the bank just in case this happens again." But if I'm honest, I really have a year in the bank + 10 mos in taxable accounts (75/25 S&Pindex/bonds).

I rent and am single and sure it would be nice to buy but the only way to buy property where I live is to find someone to buy it with because I work in the nonprofit sector.

Intellectually I know I need to be doing more with that year in cash. But psychologically it's comforting to have. Like you, I think I'm going amp up my investing going forward. But I don't know if I can bring myself to touch the 12 mos in cash that I find so calming.

[disneysteve]

This is one of those times it's good to remember that rules of thumb are general and generic. Your personal situation may dictate that you do more or less than what the rule of thumb suggests. That might mean spending more for a house, or having a larger EF, or spending less on a car, or having a different amount of life insurance.

3-6 months of cash in your EF is not the right amount for absolutely everyone. I'd say everyone should have at least that much but there are plenty of reasons why you might want or need more. Single income couple likely needs more. Someone with health issues might need more. An older person who might have more trouble finding a new job might need more. I'm personally prepping for retirement so I feel I need a larger cash position as part of getting ready for that transition.

Pay attention to the rules of thumb, but then do what makes the most sense for your individual situation.

[cypher1]

Cypher, thanks for posting this as I was thinking of posting something similar. It's hard to put a price on peace of mind, and it sounds like you have. Like you, I have a year EF in cash right now and that's largely because I experienced a layoff and a year of unemployment a few years back. Fortunately I was prepared and I remember afterwards saying "I want to have a year's living expenses just sitting in the bank just in case this happens again." But if I'm honest, I really have a year in the bank + 10 mos in taxable accounts (75/25 S&Pindex/bonds).

I rent and am single and sure it would be nice to buy but the only way to buy property where I live is to find someone to buy it with because I work in the nonprofit sector.

Intellectually I know I need to be doing more with that year in cash. But psychologically it's comforting to have. Like you, I think I'm going amp up my investing going forward. But I don't know if I can bring myself to touch the 12 mos in cash that I find so calming.

I completely understand where you're coming from with layoffs and recovery. I was fortunate to avoid lay-offs in 2008 era bubble (at age 27), as friends and family were directly impacted. I faced constant re-orgs being done with employer and upper management, wondering when my team was next (not till 2012 but I was already out). So I have more a survival mode mentality when it comes to holding onto cash with 12 months being ideal. A buddy in my same position/employer was laid off 7 months ago, and still looking even if he isn't a big hurry. But I've read others laid off in the last year point new employment has taken 3-6 months, depending on their field/location.

As what DS pointed out with rules of thumb, they're not absolute and certainly vary between everyone's situation. Based on what you've laid off out for finances, it sounds like you're on the right track and just need that little push for focusing on more on investments in taxable as well. Not a bad problem to have.

[bjl584]

I would rather have too much than not enough.

I'd keep whatever amount you feel comfortable with.

My stepdad keeps 2 years salary on hand in cash at all times.
That is where he is comfortable.
He is a multi-millionaire, so who am I to say that he has too much cash?

[kork13]

I think in the end, setting a max limit for our savings accounts will be the best way forward, at least for us (hard part being where to set those caps). I really like the flexibility of having plenty of cash on hand, and the reassurance that when I spend a large chunk of it, I know it's been so aside for it. Funny thing is that it's not really even a security thing (I think), because you're right -- I'll be FIRE once I hit military retirement. We're in a great place, I really just want the money I want to spend readily available to me, and the knowledge that I never need to resort to debt to spent that money.

So I spent a bit of time thinking about it today, and came away surprised by my appetite for having cash on hand.

I currently have around $75k in cash. I think my lower end figure for where I really feel comfortable is about $50k in cash, which actually equates to roughly 1 year's expenses. As I worked out some caps for our various savings buckets, based on when I felt the amounts became excessive, the total of them all came out to around $100k .... Wow.

I generally consider myself pretty risk tolerant, and fairly aggressive with my investments. So for me to decide that a full year's expenses is what makes me comfortable, and only with ~2 years of expenses on hand does it become "excessive" ... That's really shocking to me. I almost wonder if perhaps having all of that cash on hand, knowing that it's available as a backstop, is what allows me to invest aggressively and handle a higher risk tolerance with ease. I haven't really thought into it previously, but that has a ring of truth to it... I wonder if that's a common mindset?

[cypher1]

I generally consider myself pretty risk tolerant, and fairly aggressive with my investments. So for me to decide that a full year's expenses is what makes me comfortable, and only with ~2 years of expenses on hand does it become "excessive" ... That's really shocking to me. I almost wonder if perhaps having all of that cash on hand, knowing that it's available as a backstop, is what allows me to invest aggressively and handle a higher risk tolerance with ease. I haven't really thought into it previously, but that has a ring of truth to it... I wonder if that's a common mindset?

I think you're onto something with more cash on hand = allows for more aggressiveness with investments, like a buffer or peace of mind. Having read all the great suggestions, I feel more content with maintaining current cash amount, while probably more excessive to other people. Thus giving more confidence in moving future amounts to taxable account without overthinking it (I'll deal with re-balance towards end of year). I'm already contributing 37% of gross income to retirement accounts, so even more comfortable that I'm still on track with goals.

[disneysteve]

So I spent a bit of time thinking about it today, and came away surprised by my appetite for having cash on hand.

I currently have around $75k in cash. I think my lower end figure for where I really feel comfortable is about $50k in cash, which actually equates to roughly 1 year's expenses. As I worked out some caps for our various savings buckets, based on when I felt the amounts became excessive, the total of them all came out to around $100k .... Wow.

I generally consider myself pretty risk tolerant, and fairly aggressive with my investments. So for me to decide that a full year's expenses is what makes me comfortable, and only with ~2 years of expenses on hand does it become "excessive" ... That's really shocking to me. I almost wonder if perhaps having all of that cash on hand, knowing that it's available as a backstop, is what allows me to invest aggressively and handle a higher risk tolerance with ease. I haven't really thought into it previously, but that has a ring of truth to it... I wonder if that's a common mindset?

One thing that isn't really being mentioned here is asset allocation. What percentage of your money is in cash? That's a different question than how many months of expenses is in cash.

If you have 2 years worth of spending in cash and that represents 50% of your portfolio, that's entirely different than if it represents 5%.

Right now we have about 7.5% of our portfolio in cash (outside of retirement accounts). Is that excessive? I don't think so. How long would that pay the bills? At our current pandemic spending level, nearly 2 years. At our "normal" spending level, more like 18 months.

[kork13]

One thing that isn't really being mentioned here is asset allocation. What percentage of your money is in cash? That's a different question than how many months of expenses is in cash.

If you have 2 years worth of spending in cash and that represents 50% of your portfolio, that's entirely different than if it represents 5%.

Right now we have about 7.5% of our portfolio in cash (outside of retirement accounts). Is that excessive? I don't think so. How long would that pay the bills? At our current pandemic spending level, nearly 2 years. At our "normal" spending level, more like 18 months.

That's a good point, and makes sense. Funny enough, the $75k cash is also roughly 7.5% of our total invested assets. So perhaps it's just a consideration of the proportion of cash held. And I expect that as assets go up, the percentage of cash likely goes down.

[cypher1]

One thing that isn't really being mentioned here is asset allocation. What percentage of your money is in cash? That's a different question than how many months of expenses is in cash.

Definitely a good factor in the bigger picture to consider. I'm holding between 7-8% cash of retirement/taxable.

[disneysteve]

And I expect that as assets go up, the percentage of cash likely goes down.

Not necessarily. If you stick pretty tightly to your desired AA, it will stay proportional.

My target AA is between 60/30/10 and 65/30/5. If I suddenly got an influx of cash, I'd rebalance to stay in that range. That would mean having more dollars in cash, but not more of a percentage. I'm not suddenly going to go to 70 or 75% stock just because I have more money to invest.

[LivingAlmostLarge]

Cash 6 months, I bonds = 6 months. 2.4% of portfolio each so about 5% in cash or cash equivalents.

[disneysteve]

Cash 6 months, I bonds = 6 months. 2.4% of portfolio each so about 5% in cash or cash equivalents.

I count bonds as part of my bond allocation so don’t include them in my cash allocation numbers.

[james.hendrickson]

I count bonds as part of my bond allocation so don’t include them in my cash allocation numbers.

Correct. Bonds are lending instruments, not cash.

[LivingAlmostLarge]

Mine are my EF. I don't think I have much bonds anymore.