He Said She Said: How Big A Cash Buffer?

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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?

 

He Said

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…)

She Said

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.

 

Our Compromise

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?

58 comments to He Said She Said: How Big A Cash Buffer?

  • Sounds like a good plan. We’re pumping our extra cash into our mortgage right now, but I’m learning more and more that the flexibility of cash is awesome. Almost as awesome as the flexibility of having no mortgage. :-)
    FI Pilgrim recently posted..Never Forget To Pay A Bill Again – A Manilla ReviewMy Profile

    • Paying down the mortgage is pretty low on the priority list for us, but you guys are going to have that thing paid off in no time!

    • trudy

      It is awesome having no mortgage, but in my case tempered by knowing my area has astronomical property taxes. That takes away a lot of the feeling of security.

  • We lean more in the direction of keeping several months worth of expenses in cash… it has been increasing lately because we have two rental properties AND we are hoping to adopt a child in 2014 so we want to make sure we are adequately covered in case anything happens. I agree with the sentiment that nothing helps you sleep better at night than having cash readily accessible “just in case!”
    Dee @ Color Me Frugal recently posted..Start 2014 With Cash GiveawayMy Profile

  • We are torn on this as well. We’ve always had a very large emergency fund and it’s mostly gone unused. And even when we’ve had to tap it for something, we’ve replaced the funds quickly.
    On the other hand, I like having a big E-fund. It makes me feel secure. I think we’ll probably just cut it down a little next year.
    Holly@ClubThrifty recently posted..Squashing Vacation EnvyMy Profile

    • We’ve always erred on the high side in the past as well, it just doesn’t seem to feel as necessary to me as we grow other more liquid assets.

  • I’ve got a giant cash buffer (for my net worth: $10k) that I’ve been trying to decrease over the past year. I’d love to be able to pounce on a down market, but statistics tells me that just keeping it in the market would work out better most times
    Cash Rebel recently posted..Raises are the second most powerful force in the universeMy Profile

  • It’s a good question. For us it was obvious when our sole income was from the university. We had to save for the unpaid summer plus tuition. Now it isn’t as clear because in theory we could live off dh’s salary in the summer. But he can also be fired with 2 weeks notice. So I dunno. We’re working on it. Currently we have about 45k in there but that is down from right before he got the job.
    Nicoleandmaggie recently posted..Let us help you get rid of that extra doughMy Profile

    • Do you think you’ll let the $45K drift down again as he gets more comfortable and secure in the position?

      • Turns out the answer was no because we started saving for me being able to take a year leave from my job and to move someplace super expensive. It got up to 84K and is sitting at 65K right now with another 10 months of fancy living to go before we return to our usual lives.
        nicoleandmaggie recently posted..link loveMy Profile

  • We have this same discussion. We like the security of having a large amount of cash on hand, but at the same time it makes us anxious thinking that it’s just sitting there not earning anything for us! We’ve not had to use our emergency fund/cash buffer for anything (yet – knock on wood), and it seems smarter to put it in a place where it can earn a bit for us while still being relatively accessible in a real emergency.
    Kali @ CommonSenseMillennial recently posted..Millennials Who Break Negative GenY StereotypesMy Profile

  • I’ve kept 1 year of expenses in the bank the last few years. I have two small children and having that cushion in the bank just makes me feel better in case something happens to either one of them.
    H @ Minding My Cents recently posted..A Not So Frugal But Fun Birthday PartyMy Profile

    • I can see how kids would change the perspective on the matter. Luckily Kitty PoP’s pretty cheap to take care of. =)

      • trudy

        Wait until Kitty PoP gets older. Some of my guys went into four figures, one into five with vet bills. Cats have the same major illness stuff people do.

  • We have the same dilemma. We are heavy in cash now so we can either purchase a rental property in 2014 (if the numbers work out) or our next primary residence in 2016. But like you note, there’s an opportunity cost to this approach.

    In general, I am okay with opportunity costs as long as we are still throwing a lot at investments. When the market is going gangbusters, a I worry about the opportunity costs of cash. But if we suffer a market correction, my focus will change. :)
    Done by Forty recently posted..Why I Cannot Watch Extreme CheapskatesMy Profile

    • Yeah, I like to think that I’m not being swayed by the market movement of the last year, but maybe I wouldn’t be saying the same thing had the last year been a giant correction!

  • This is a huge issue for us as well, because we’ve been so nervous with investing for so long that we’ve let way too much cash accumulate. We’ve now agreed on a cash cushion (I also don’t love “emergency fund”) of about $30,000 and every dollar over that will be invested in either our Vanguard or Lending Club accounts.

    We’re not dumping all the additional funds in right now — more of a gradual investment to dollar cost average a bit (more psychological than anything) and then this new rule gets instituted.
    Brad @ RichmondSavers.com recently posted..How much are you Spending Each Year on Gifts?My Profile

  • Our compromise is 6 months worth of living expenses on hand and a separate savings for our lofty travel goals. But none of that happens until we are debt free. I wish we could have this debate now though!
    Michelle @fitisthenewpoor recently posted..Diet Like Beyonce, Spend Like Mom- Vegan Diet On a BudgetMy Profile

  • Hey Mrs. Pop, another great article as always! As far as my cash comfort zone, I’m good with six months worth of income in savings. The rest goes in the market and works for me! Thanks for the great morning read!
    Joshua R @ CNAFinance recently posted..I’m Back! Did You Miss Me?My Profile

  • As a freelancer with variable income, I’d say 15k would be my ideal amount. I’m 1/2 way there, but I’m also contributing to other savings plans like a future new (used) car and vacation as well.
    Budget and the Beach recently posted..Finding The Right Car for Your Road TripMy Profile

  • We stick with the 3-6 months of expenses for our cash reserves. I think that’s plenty. Once that’s fully funded, we put any other cash into investing or rental real estate.
    Brian @ Luke1428 recently posted..My 8 Step Method for Writing a Blog PostMy Profile

  • I prefer to have at least 6-9 months of expenses in reserve. I think bf would be comfortable with less, but he’s fine with whatever I decide (within reason) because he knows it makes me feel financially secure. Thankfully he and I both have relatively secure jobs, so it would be very unlikely for both of us to be laid off at the same time.

    We have our emergency fund fully funded now, so we’re trying to decide how much to keep in the emergency fund and how much we’d be comfortable putting somewhere else (we’re thinking about buying a rental property and would want at least 20-30% down). That’s our next big goal I think.
    KK @ Student Debt Survivor recently posted..Are Community-Supported Agriculture (CSA) Shares a Good Deal?My Profile

    • oooh – where would you buy a rental? I’ve heard that returns on rentals in the city aren’t very good because purchase prices are so high – but I have no idea if that is borough by borough or what.

  • I would prefer around $10,000 in reserves but we are quite a bit below that now due to some unexpected expenses. Like you, we have a HELOC that we can borrow against. Also, we have pretty stable jobs and both my husband and I have back up job offers (we live in a small town and they are just verbal offers).
    ND Chic recently posted..How To Save Without a BudgetMy Profile

    • Having additional job offers (even just verbal ones) is a definite confidence booster!

      You guys have had some big expenses lately with the well and all, but you’ll get that reserve fund back up before long I’m sure.

  • I’ve never really called it an emergency fund either. I always had an account labelled “general savings” and then some more specific ones. I’m already maxing out my 401(k), HSA, and Roth IRA (through the back door), which are all the tax advantaged accounts I have. I have at least $2,000/month of spare cash flow that I am throwing at the mortgage today or using for any cash flow issues.

    Right now, I am keeping about 6 months’ expenses in cash and that’s mostly because I’m paying down my mortgage aggressively. I say ‘about’ because I took that dollar amount and then rounded it up to the nearest $10,000 for the nice round number of $20,000.

    If I wasn’t paying down the mortgage aggressively, I would be investing in index funds in taxable accounts, which are fairly liquid (minus the fact that they could lose value). So once the mortgage is paid off (two more years to go!), I will probably keep less cash on hand. I think I would probably reduce my cash on hand slowly as I increase my taxable investments. Once 50% of the amount I have in stock index funds is $20,000 (so when I have $40,000 in taxable stock index funds), I would feel fairly safe to have more like $5,000 on hand in cash.

    There’s also the fact that most emergencies can be paid for with a credit card and then you come up with the funds at some point later, whether it’s from an online savings account or stock index funds. And since I have about $25,000 in credit limits, that’s not really the end of the world there either.
    Leigh recently posted..My Goal Isn’t to Retire EarlyMy Profile

    • The credit available is definitely a big aspect. Even outside of the HELOC, we actually have a ridiculous amount of credit available to us on cards. So I figure worst case if we had to extend the HELOC, our credit utilizations (used for credit scores) would actually still be pretty low overall.

  • I think it depends on a lot of things like your insurances, health, and job security too. For us, when the debt is paid off, I would like to build up 3 months worth of savings because we’re well insured (plus live in Canada, will never have to worry about major medical expenses) and are both in fields that will gain us jobs very quickly should we lose them for some reason. Honestly whatever helps you sleep at night!
    Catherine recently posted..I’m Not Buying My Husband A Christmas Gift….My Profile

    • I think you’re right that sleeping well at night and not having it be a stress point is key. I think our compromise will allow that pretty well. =)

  • I would probably opt to put more in the market. If there is the consideration about maybe needing the money at some point, you can opt for some more conservative, safer investments. This way the money is not as volitile as the rest of the market. You can the added benefit though of having the money gain a bigger return over having it in the bank.
    Micro recently posted..Settle your debt for less than the full amount – The debt settlement process in detailMy Profile

  • I have just a general savings account. It has savings for an eventual new car, vacations, etc. Though, actually, we’ve always managed to pay for vacations with cash flow too. Hmmm. The savings is also for a someday down payment when we theoretically leave boarding school life (ha!).

    We keep separate accounts since we have so few joint bills (really, just car insurance on our one car — we take turns paying). I know roughly what he has, but I’m not 100% sure at the moment. My husband is much better at putting $ in his Roth IRA, so his cushion is lower than mine.

    For me, my goal is to get up to my yearly income. I’m not quite half way there. Once I’m there, I’ll re-evaluate how I want my money to go. Though this post does make me realize that maybe I should slow it down soon and be more sure to max out my Roth IRA first each year before I keep adding to the “I rarely tap it” cash reserves.
    Leah recently posted..Christmas treeMy Profile

    • So, you caused a good discussion with my husband this morning. Looks like I’ll be maxing out my Roth IRA this year and then building up savings. Is it okay that the thought makes me want to vomit a little? My rational brain reminds myself that this is just a shift in savings, but my lizard brain goes “noooo, my pile of precious!”
      Leah recently posted..Christmas treeMy Profile

  • I prefer at least 6 months worth, mostly because getting laid off is never fun, even if it was a few years ago! The next few years will be a lot of ‘saving’ to start a family, so it’ll probably increase more once there are little mouths to feed.
    anna recently posted..November Updates – Debt Repayment, Fitness/Running, and WeddingMy Profile

  • I’ve always kept a relatively small cash buffer, usually 5-10k. My fiance has a huge cash buffer, over 1yr’s worth of expenses. We’re having the same debate right now & I’m sure we’ll compromise somewhere between our two styles.

    I really believe that there’s no “right” amount of a buffer someone would have, it all depends on what you might be personally comfortable falling back on.
    The First Million is the Hardest recently posted..Early Upgrade Plans – What Your Wireless Company Doesn’t Want You To KnowMy Profile

  • Wow, I am Mr. PoP and Mrs. PoP all at the same time. When I read your title, I asked myself what my ideal cash buffer would be. The answer that PoPped into my head was $5,000. Despite that, we have $50,000 sitting rotting around. We hope to buy more real estate with it.

    While I totally get and can appreciate Mr. PoP’s powder-keg comment, it kills me to have this money earning 1% in the savings account, not even keeping pace with inflation. Just like those who buy government bonds, we’re actually losing money. If we didn’t want to buy real estate, it would be fully invested.
    Mr. 1500 recently posted..10 Questions with Red Debted StepchildMy Profile

  • The magic question and what a good problem to have! We have been hoarding cash since paying off the credit cards and student loans. This year has been one of so many variables with the flip house and potentially buying more real estate and not knowing 100% if the practice was finally going to sell. I am almost afraid to write this yet, but we are scheduled to close on getting out of the flip property tomorrow! This will pay off our HELOC, which has a $100K credit line. I don’t see the reason to keep as much cash around with that available, so I think ideally, we’ll have maybe $10K in liquid savings by spring and have everything else invested either in another rental or in the markets. Let’s hope there isn’t some last minute monkey wrench to spoil the deal!
    Kim@Eyesonthedollar recently posted..Pros and Cons of Being a CaregiverMy Profile

  • My “cash buffer” has actually shrunk as time has gone on. I had almost $80k at one point, but cash just kind of piled up on me when I wasn’t paying attention. But, as my taxable investments have grown, I have lowered the amount of cash I hold. I use the 50% loss rule, assuming I put cash into the market, I assume 50% will be available when crap let’s loose. It’s a risk, but it leaves me with less money earning <1%. My cash is either in CD's or ibonds (which technically do pay more than inflation).

    As to the opportunity of having cash around for spur of the moment investments, I have my plan and invest according to the plan. I'm not the type of investor who makes moves based on new information or "opportunities." Most of all, I don't want to own real estate.
    Elroy recently posted..3% CD’s…..Holla!My Profile

  • CincyCat

    I am torn between paying off what’s left of our debt vs. feeding a cash buffer fund with a few thousand dollars. I know from a strictly interest paid vs. earned perspective, it doesn’t make sense, but it seems to me that having at least *something* in a cash reserve fund would be a good idea so that we won’t have to reach for the plastic whenever something unexpected happens.

  • I get a crazy itch to invest when I reach $5K. At the moment a few investments ended so I have a lot of cash and am refraining from investing in the first thing that crosses my path, trying to find a good deal instead.
    I wouldn’t have more than $10K on a regular basis, I’d rather earn more with investing and charge a card if need be for a month or two.
    Pauline recently posted..Making enough money for retirementMy Profile

  • First, congratulations on your financial achievements this year. My husband and I have been trying to aggressively pay off our debt (mostly my studnet loans) while making a few investments. Sounds like you two have come to a good compromise.
    Mrs. Snarkfinance recently posted..Discounted Earnings PotentialMy Profile

  • Anne

    I like to keep a minimum of $15000 in the emergency fund/cash buffer.

    Cars are something that have gotten us into trouble in the past. One bad accident means that you are forking out cash to get another car. Just last year, a driver came into my lane on the freeway. I was ok, but the car was totaled. We take good care of our cars and keep them a long time. But this one had almost 100,000 miles on it and almost any damage will result in the car being totaled. With the money already in the account, it was not stressful at all. It took me two days to find and purchase a good used car. When the settlement on the old car came through, I just put the money in the bank.

    We also want to do more work on the house. Any amount above $15000 is fair game for a major house project.

    Also, my daughter is a junior in high school and she goes to college soon. She has a college fund that will pay for her first year, but after that we want to have the money to help her out.

  • I don’t think we’ll have to worry about a $50k cash buffer for a loooong time. We still have some major bills on the horizon. Dental implants for Tim will be around $20,00 (or more), double pane windows another $12,000 (or more). I think $50,000 is way too much for us to keep on hand. for that price, we could nearly buy a rental house here in Phoenix. I think I’d be good with $10,000 — maybe $15,000 — sitting around. Enough for, say, the roof going kablooey (that’s the technical term, by the way) but not so much that we’re missing out on making our money work for us.
    Abigail recently posted..I need some inspirationMy Profile

  • I am only a year out of credit card debt, so having cash on hand is awesome. I am growing it quickly, but plan on keeping it out to use as our down payment. Once that is done, I will probably keep around 6 months of expenses and invest the rest.
    Grayson @ Debt Roundup recently posted..Republic Wireless Review – A Hybrid Approach To WirelessMy Profile

  • Well, my e-fund is currently itty bitty as we are paying off debt, but after it is paid off, I only want to keep about $5k in cash. For one, I’m a risk taker by nature, so I don’t need a huge buffer to feel secure. Also, I don’t want to have too much cash accessible should family members ask to “borrow” it. People ask us for money now and we don’t have it, I can’t imagine how bad it will get when we do.
    Erin @ My Alternate Life recently posted..That Time I Almost Bought a HouseMy Profile

  • Debbie M

    My old answer is that I save up a certain amount each month for various things. So for example, I bought a car a few years ago, so I don’t have that much saved up for my next car yet. I haven’t had to fix or replace much on the house for a long time, so I have a lot saved up for house maintenance.

    My new answer is that I don’t feel like working anymore even though I’m not quite getting my pension yet. This doesn’t mean I won’t take any jobs, but I don’t be taking any full-time permanent jobs, so I’m probably going to be withdrawing quite a lot from my IRA. Except once my early-retirement fund is drained, I’m planning to just borrow from my other savings funds. At the same time, because stock prices are so high, every month that I don’t earn any money, I’m converting enough stocks and/or bonds to cover one month’s expenses into a money market fund. Then if I do have to dig into my IRA, I can take money from the money market fund instead of just hoping prices are good then. And if I don’t have to dig into my IRA after all, I can convert the money back into stocks and bonds. I haven’t quite decided how low I will let the cash savings go before I start drawing from the IRA. But it looks like I’m keeping a little over 1.25 years’ expenses in cash and money market funds.

  • […] The PoP’s are having one of those civil “discussions” between husband and wife [….] my money is on Mrs. PoP.  But, they are asking the correct questions when it comes to having a cash pile – how much do I keep in cash?… […]

  • We are still early in the financial journey so for me cash is king. T starts a new job tomorrow in sales that’s 100% commission, so I think a cash buffer is even more vital now.
    eemusings recently posted..Confession: Our finances are a mess right now (and I’m okay with that)My Profile

  • Patrick

    The Roth IRA could be your cash buffer? I just bought a house with cash and the transfer out of the roth to my checking account took a whole 3 days. I can’t think of a realistic scenario in which you would need more than $10,000 on less than a 3 day notice.

  • […] inconvenient.  (Mrs PoP – We don’t like the term emergency fund either, so we call it a cash buffer.) But, why would you need to save three to six months of post-tax income for those kinds of […]

  • […] Rebuild – $1,857. After negotiating the new buffer level, we still need another $5K or so […]

  • I’m learning more and more about how important having cash laying around is, especially with house repairs. I think this year will be investment heavy but building those cash buffers are so important.
    Even Steven recently posted..An Interview of Sorts with 1500 DaysMy Profile