Today we’re bringing you another round of He Said/She Said. These posts are really your chance as readers to hear how discussions (and sometimes disagreements) play out when managing our lives with each other. For a look at some of the past He Said/She Said discussions – check ‘em out here.
Mr PoP and I are getting ready to change gears. We paid off all that non-mortgage debt. We’ve maxed out our 401Ks and Roth IRAs for the year, even Mr PoP’s HSA is fully funded. *whew!*
So as we are looking at more after-tax investing, we’re faced with a question that doesn’t necessarily have the same answer that it did earlier in our marriage: How much do we want to keep on hand?
We don’t really call it an “Emergency Fund” the way many people in the blogosphere do. We’ve just always called it the cash buffer… but how big should it be these days?
Having large wads of cash on hand is somewhere between a guilty pleasure, a security blanket, and dry powder. Investments are great to have, cash-flow can’t be beat, but there is something about being able to walk about and knowing you could buy that car, boat, lot, house, business, etc. with the cash in your account.
And the sense of security is important as well, in a way that can only be understood if you have been well and truly broke once or twice. Nothing, and I mean nothing, makes you sleep better at night than having a few years of living expenses on hand in small, unmarked bills.
Lastly, it’s dry powder. At some point there will be another down turn of some kind; credit will be expensive, valuations will be cheap, and cash will once again be king. I know the HELOC is there, and we can probably borrow from the the family again, but there is just something nice about knowing that its there.
If I had to put a number on it, I’ll go for one full year of our living expenses-about $50K. (Mrs PoP – In verbal discussions, the number is actually $100K…)
As recently as two years ago we were trying to have as much cash on hand as possible. We were buying foreclosures and banks didn’t want to deal with financing. They wanted cash! (Which was the whole reason behind the fancy financing we did with the loan from Mr PoP’s parents and the $38K HELOC…)
But the market has changed – those kinds of real estate deals aren’t around anymore, and we’re not buying with cash at today’s prices. (Heck we’re not really buying real estate at all at today’s prices.) So why would we hold that much cash now?
Now, I think we should keep a small amount in cash. Probably $5K, but letting that grow to $16K throughout the year as we set aside $11K for our Roth IRAs. One of the main reasons I feel this way is because of our $38K HELOC that has a current balance of $0.
Since we asked if we should close the HELOC, my view on it has changed. Sure we buy flood insurance on our duplex when we have it open and probably wouldn’t otherwise. That’s a cost of $312/year. But having that credit line available to us lets us draw on it as needed and keep an additional $38K in the market instead of earning very little sitting in cash. A 6% market gain on $38K is $2,280, and since we’ve already paid the sunk costs associated with the HELOC, we may as well use it for the full 10 years. I’m starting to see keeping an extra $38K in cash on hand “just because” as costing us $2,2800 per year.
I can’t remember a month where we haven’t been able to cover expenses out of regular cash flow, even insanely expensive months like last month. So over the next 20 years, I think we’d be better off if we got in the habit of having more like $5-$10K in cash accounts instead of $50-$100K.
For now, we’ve decided to compromise. We’re going to start the cash accounts each year at $20K, and then add the Roth IRA money to them incrementally throughout the year. This will mean the average balance during the year will be somewhere in the range of $25.5K. We’ll still have the HELOC available to us, too. So if some amazing investment opportunity comes up, we’ll have access to ~$63K worth of capital before having to sell any taxable investments.
Where’s your cash comfort zone? Would you rather have a lot of cash available quickly, or let more ride in the market?