Psychology behind TOO much emergency fund
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Psychology behind TOO much emergency fund
I own a house (brought for 290,000 - now appreciated to 350,000) and have 210,000 left in mortgage (2.5% for 15 years; monthly ~2300 including HOA). My monthly spending is ~$3500 (more like $3000 - but then one will call me frugal).
My assets (investable stock + 401k) is $600,000. I have cash worth 150,000 (investable) sitting in a bank. I am putting cash to work regularly and after everything, will still have $100,000 in the bank (after taxes in April' 2021).
I automatically put in ~58,000 (little more with match, etc) in my 401k every year (including after-tax automatic roth conversion). Some ask - why roth; why not more taxable account...do the math and check - the taxable account will be better especially if you want to retire early. I have done the math. I know taxable is better (after putting the ~19,500 in pre-tax 401k). Why do I still do the ~$58,000 then? My psychology - I just cannot seem to put in money by myself...so I prefer the biweekly "automatic" 401k.
I understand economics, markets (at a somewhat deep level).
I am 40 - a PhD (from ivy league), work for reputable pharma.
What keeps me from being able to invest more freely? Why do I have such a huge emergency fund?
My assets (investable stock + 401k) is $600,000. I have cash worth 150,000 (investable) sitting in a bank. I am putting cash to work regularly and after everything, will still have $100,000 in the bank (after taxes in April' 2021).
I automatically put in ~58,000 (little more with match, etc) in my 401k every year (including after-tax automatic roth conversion). Some ask - why roth; why not more taxable account...do the math and check - the taxable account will be better especially if you want to retire early. I have done the math. I know taxable is better (after putting the ~19,500 in pre-tax 401k). Why do I still do the ~$58,000 then? My psychology - I just cannot seem to put in money by myself...so I prefer the biweekly "automatic" 401k.
I understand economics, markets (at a somewhat deep level).
I am 40 - a PhD (from ivy league), work for reputable pharma.
What keeps me from being able to invest more freely? Why do I have such a huge emergency fund?
Last edited by grouponde2000 on Sat Jul 24, 2021 1:50 pm, edited 2 times in total.
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Re: Psychology behind TOO much emergency fund
Wrong question. The better question is, "are you able to meet your financial goals if you keep on doing what you are doing now?"
We plan. G-d laughs.
Re: Psychology behind TOO much emergency fund
Try taking baby steps. Go from 100k to 95k and see how you feel. Perhaps you can go lower and still be comfortable (as long as you still have enough saved to survive several months of unemployment, of course).
May all your index funds gain +0.5% today.
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Re: Psychology behind TOO much emergency fund
I don't know. But if I have questions like these, I'd pay down the mortgage.grouponde2000 wrote: ↑Sat Jul 24, 2021 11:51 am I own a house (brought for 290,000 - now appreciated to 350,000) and have 210,000 left in mortgage.
My assets (investable stock + 401k) is $600,000. I have cash worth 150,000 (investable) sitting in a bank. I am putting cash to work regularly and after everything, will still have $100,000 in the bank (after taxes in April' 2021).
I understand economics, markets (at a somewhat deep level).
I am 40 - a PhD (from ivy league), work for reputable pharma.
What keeps me from being able to invest more freely? Why do I have such a huge emergency fund?
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Re: Psychology behind TOO much emergency fund
Only you can tell us. Did you grow up without a lot of money? Did your parents have bad financial habits?
For us, we found that paying off all debt- no matter how low the rate-allowed us to reduce the emergency fund and to feel secure enough to put more money in the market.
For us, we found that paying off all debt- no matter how low the rate-allowed us to reduce the emergency fund and to feel secure enough to put more money in the market.
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Re: Psychology behind TOO much emergency fund
Some people are more risk averse than others. When you drive how close to (or past) E do you let your gas?grouponde2000 wrote: ↑Sat Jul 24, 2021 11:51 am I own a house (brought for 290,000 - now appreciated to 350,000) and have 210,000 left in mortgage.
My assets (investable stock + 401k) is $600,000. I have cash worth 150,000 (investable) sitting in a bank. I am putting cash to work regularly and after everything, will still have $100,000 in the bank (after taxes in April' 2021).
I understand economics, markets (at a somewhat deep level).
I am 40 - a PhD (from ivy league), work for reputable pharma.
What keeps me from being able to invest more freely? Why do I have such a huge emergency fund?
Last edited by anon_investor on Sat Jul 24, 2021 6:21 pm, edited 1 time in total.
Re: Psychology behind TOO much emergency fund
Fear of losing what you have is stronger than the joy of getting more.grouponde2000 wrote: ↑Sat Jul 24, 2021 11:51 am I own a house (brought for 290,000 - now appreciated to 350,000) and have 210,000 left in mortgage.
My assets (investable stock + 401k) is $600,000. I have cash worth 150,000 (investable) sitting in a bank. I am putting cash to work regularly and after everything, will still have $100,000 in the bank (after taxes in April' 2021).
I understand economics, markets (at a somewhat deep level).
I am 40 - a PhD (from ivy league), work for reputable pharma.
What keeps me from being able to invest more freely? Why do I have such a huge emergency fund?
Not sure what your asset allocation is, but you could put $10K into ibonds and another $10K into EE bonds. The latter are guaranteed to double after 20 years.
For the rest, cover 100% of your expenses for 12 months and invest the rest... Or even pay down your mortgage and ask your mortgage company to recast it, which will save you thousands in interest.
Re: Psychology behind TOO much emergency fund
Lol…I dunno if those are correlated. I tend to let it run toward E even though I know that’s bad but still keep more cash than I should.anon_investor wrote: ↑Sat Jul 24, 2021 12:00 pmSome people are more risk adverse than others. When you drive how close to (or past) E do you let your gas?grouponde2000 wrote: ↑Sat Jul 24, 2021 11:51 am I own a house (brought for 290,000 - now appreciated to 350,000) and have 210,000 left in mortgage.
My assets (investable stock + 401k) is $600,000. I have cash worth 150,000 (investable) sitting in a bank. I am putting cash to work regularly and after everything, will still have $100,000 in the bank (after taxes in April' 2021).
I understand economics, markets (at a somewhat deep level).
I am 40 - a PhD (from ivy league), work for reputable pharma.
What keeps me from being able to invest more freely? Why do I have such a huge emergency fund?
I think it’s because the close gas stations are expensive and I have to make a deliberate run to Costco for cheap gas…
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Re: Psychology behind TOO much emergency fund
You aren't worried because you have easy access to nearby gas stations. It sounds like you have extra cash around for ease of access.nigel_ht wrote: ↑Sat Jul 24, 2021 12:04 pmLol…I dunno if those are correlated. I tend to let it run toward E even though I know that’s bad but still keep more cash than I should.anon_investor wrote: ↑Sat Jul 24, 2021 12:00 pmSome people are more risk adverse than others. When you drive how close to (or past) E do you let your gas?grouponde2000 wrote: ↑Sat Jul 24, 2021 11:51 am I own a house (brought for 290,000 - now appreciated to 350,000) and have 210,000 left in mortgage.
My assets (investable stock + 401k) is $600,000. I have cash worth 150,000 (investable) sitting in a bank. I am putting cash to work regularly and after everything, will still have $100,000 in the bank (after taxes in April' 2021).
I understand economics, markets (at a somewhat deep level).
I am 40 - a PhD (from ivy league), work for reputable pharma.
What keeps me from being able to invest more freely? Why do I have such a huge emergency fund?
I think it’s because the close gas stations are expensive and I have to make a deliberate run to Costco for cheap gas…
Re: Psychology behind TOO much emergency fund
grouponde2000,grouponde2000 wrote: ↑Sat Jul 24, 2021 11:51 am
My assets (investable stock + 401k) is $600,000. I have cash worth 150,000 (investable) sitting in a bank. I am putting cash to work regularly and after everything, will still have $100,000 in the bank (after taxes in April' 2021).
A) What is your asset allocation? 100% stock plus CASH? If that is the answer, your problem is not too much CASH. It is too much STOCK.
B) Economic is not personal finance.
C) Can you reach your current pace with your current saving rate? That is the KEY QUESTION. Whether you invest this 100K CASH will not make a difference.
KlangFool
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Re: Psychology behind TOO much emergency fund
I have a similar problem - tend to hold too much cash. Not sure why but ultimately I’ve made peace with it - it’s the only way I can feel relaxed.
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Re: Psychology behind TOO much emergency fund
Broadly speaking, there is a lot of variation in emergency funds. A common recommendation is in the neighborhood of 3-6 months of current expenses. However, people sometimes recommend across the range from 0-24 or more months of current expenses depending on individual circumstances. Some people include their emergency fund in their AA but some don't.
You know yourself best and need to find your own level. What makes you think you have too much emergency fund? How many months expenses does it represent? Does keeping an emergency fund help you be more confident in investing other money? How much stress would you feel if you decreased your emergency fund?
You know yourself best and need to find your own level. What makes you think you have too much emergency fund? How many months expenses does it represent? Does keeping an emergency fund help you be more confident in investing other money? How much stress would you feel if you decreased your emergency fund?
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Re: Psychology behind TOO much emergency fund
We had the same problem. Was too easy to just ignore the growing balance each month of cash. However, we have recently taken care of that by paying off the house and I am now doing DCA into our post-tax investment account to lower the balance. We have dropped it down significantly, but have a ways to go.
After paying off the house it was easily justified with, "if we find another house to rent, we have cash to utilize". But, with the recent run-up, we know that not happening anytime soon.
After paying off the house it was easily justified with, "if we find another house to rent, we have cash to utilize". But, with the recent run-up, we know that not happening anytime soon.
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Re: Psychology behind TOO much emergency fund
Another way to look at it is to include cash in your Fixed Income allocation, determine your AA and keep the allocation.
I don't know what are in your assets, but if 600K is all equities then your AA is currently 80/20 (600K/150K). If you're comfortable with this allocation then you actually don't have too much EF.
I don't know what are in your assets, but if 600K is all equities then your AA is currently 80/20 (600K/150K). If you're comfortable with this allocation then you actually don't have too much EF.
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Re: Psychology behind TOO much emergency fund
Honestly, it really isn’t that much - many people keep x3 to x5 that in cash - for emergencies, but more often for opportunities that 100% cash purchases may allow for.
My .02
My .02
Re: Psychology behind TOO much emergency fund
One way to view it is that it is your "financial foundation", just like a house everything gets built on it. I would think it gives you comfort. Nothing wrong with that. We usually have about 75K in checking/ savings. It gives us comfort. When my AC unit dies, I can cover the 7 - 10K without hesitation. (AC repair is coming on Monday - hope it is not a real scenario I gave you ).
Marty....don't go to the year 2020....Dr. Emmett Brown
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Re: Psychology behind TOO much emergency fund
Yes. However, nothing wrong if you can meet your financial goals earlier. WIll help one retire early.MishkaWorries wrote: ↑Sat Jul 24, 2021 11:55 am Wrong question. The better question is, "are you able to meet your financial goals if you keep on doing what you are doing now?"
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Re: Psychology behind TOO much emergency fund
My mortgage is only at rate of 2.5% for 15 years. Feel like it is my only 'risk-taking,wise economic decision" to have that as long as possible.!!Marseille07 wrote: ↑Sat Jul 24, 2021 11:56 amI don't know. But if I have questions like these, I'd pay down the mortgage.grouponde2000 wrote: ↑Sat Jul 24, 2021 11:51 am I own a house (brought for 290,000 - now appreciated to 350,000) and have 210,000 left in mortgage.
My assets (investable stock + 401k) is $600,000. I have cash worth 150,000 (investable) sitting in a bank. I am putting cash to work regularly and after everything, will still have $100,000 in the bank (after taxes in April' 2021).
I understand economics, markets (at a somewhat deep level).
I am 40 - a PhD (from ivy league), work for reputable pharma.
What keeps me from being able to invest more freely? Why do I have such a huge emergency fund?
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Re: Psychology behind TOO much emergency fund
My mortgage is only at rate of 2.5% for 15 years. Feel like it is my only 'risk-taking,wise economic decision" to have that as long as possible. (for someone like me) !! (being sarcastic to myself here).lazynovice wrote: ↑Sat Jul 24, 2021 11:59 am Only you can tell us. Did you grow up without a lot of money? Did your parents have bad financial habits?
For us, we found that paying off all debt- no matter how low the rate-allowed us to reduce the emergency fund and to feel secure enough to put more money in the market.
I grew up middle class in an Asian country.
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Re: Psychology behind TOO much emergency fund
It's certainly not bad. But if you are worried having too much EF, slashing EF & paying the mortgage down kill two birds with one stone.grouponde2000 wrote: ↑Sat Jul 24, 2021 1:49 pmMy mortgage is only at rate of 2.5% for 15 years. Feel like it is my only 'risk-taking,wise economic decision" to have that as long as possible.!!Marseille07 wrote: ↑Sat Jul 24, 2021 11:56 amI don't know. But if I have questions like these, I'd pay down the mortgage.grouponde2000 wrote: ↑Sat Jul 24, 2021 11:51 am I own a house (brought for 290,000 - now appreciated to 350,000) and have 210,000 left in mortgage.
My assets (investable stock + 401k) is $600,000. I have cash worth 150,000 (investable) sitting in a bank. I am putting cash to work regularly and after everything, will still have $100,000 in the bank (after taxes in April' 2021).
I understand economics, markets (at a somewhat deep level).
I am 40 - a PhD (from ivy league), work for reputable pharma.
What keeps me from being able to invest more freely? Why do I have such a huge emergency fund?
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Re: Psychology behind TOO much emergency fund
We are later in our investment journey, and had some good luck, but we invested about like it sounds you are, and it worked out. When we were where you are, we prioritized maximizing retirement accounts, paying down debt and mortgages, and establishing an envelope-like budget.
After a long time and some frankly good luck, we have >33x expenses, a 100k emergency fund that's not part of our investments, a paid off house, and a 42% US, 7% intl, 42% bonds, 9% cash portfolio. We actually want a 40% US, 10% intl, 45% bonds, 5% cash portfolio, so I will likely rebalance some cash into intl during this quarter.
Is that too conservative, and too much cash? Possibly, but I learned in the last few recessions that I really hate losing money, and it makes me stop buying and selling, so setting things up for autopilot makes a lot of sense. Part of that, for me, is knowing that I can hold out for more than a year between the cash and emergency fund, and that with the short term bond part of the portfolio added, I can hold out for almost a decade, and thus I can afford a few months of doing nothing when things hit the fan.
Figure out how long and at what realistic spending level you want to hold out in bad times, which risks you want to minimize, and then invest everything over that safety line according to the portfolio that lets you sleep at night while meeting your growth target.
After a long time and some frankly good luck, we have >33x expenses, a 100k emergency fund that's not part of our investments, a paid off house, and a 42% US, 7% intl, 42% bonds, 9% cash portfolio. We actually want a 40% US, 10% intl, 45% bonds, 5% cash portfolio, so I will likely rebalance some cash into intl during this quarter.
Is that too conservative, and too much cash? Possibly, but I learned in the last few recessions that I really hate losing money, and it makes me stop buying and selling, so setting things up for autopilot makes a lot of sense. Part of that, for me, is knowing that I can hold out for more than a year between the cash and emergency fund, and that with the short term bond part of the portfolio added, I can hold out for almost a decade, and thus I can afford a few months of doing nothing when things hit the fan.
Figure out how long and at what realistic spending level you want to hold out in bad times, which risks you want to minimize, and then invest everything over that safety line according to the portfolio that lets you sleep at night while meeting your growth target.
Re: Psychology behind TOO much emergency fund
Simple psychology.grouponde2000 wrote: ↑Sat Jul 24, 2021 11:51 am
What keeps me from being able to invest more freely? Why do I have such a huge emergency fund?
https://psycnet.apa.org/record/2016-17475-001
Could liquid wealth, or “cash on hand”—the balance of one’s checking and savings accounts—be a better predictor of life satisfaction than income? In a field study using 585 U.K. bank customers, we paired individual Satisfaction With Life Scale responses with anonymized account data held by the bank, including the full account balances for each respondent. Individuals with higher liquid wealth were found to have more positive perceptions of their financial well-being, which, in turn, predicted higher life satisfaction, suggesting that liquid wealth is indirectly associated with life satisfaction. This effect persisted after accounting for multiple controls, including investments, total spending, and indebtedness (which predicted financial well-being) and demographics (which predicted life satisfaction).
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Re: Psychology behind TOO much emergency fund
My mortgage is only at rate of 2.5% for 15 years. Feel like it is my only 'risk-taking,wise economic decision" to have that as long as possible. (for someone like me) !! (being sarcastic to myself here).exodusNH wrote: ↑Sat Jul 24, 2021 12:01 pmFear of losing what you have is stronger than the joy of getting more.grouponde2000 wrote: ↑Sat Jul 24, 2021 11:51 am I own a house (brought for 290,000 - now appreciated to 350,000) and have 210,000 left in mortgage.
My assets (investable stock + 401k) is $600,000. I have cash worth 150,000 (investable) sitting in a bank. I am putting cash to work regularly and after everything, will still have $100,000 in the bank (after taxes in April' 2021).
I understand economics, markets (at a somewhat deep level).
I am 40 - a PhD (from ivy league), work for reputable pharma.
What keeps me from being able to invest more freely? Why do I have such a huge emergency fund?
Not sure what your asset allocation is, but you could put $10K into ibonds and another $10K into EE bonds. The latter are guaranteed to double after 20 years.
For the rest, cover 100% of your expenses for 12 months and invest the rest... Or even pay down your mortgage and ask your mortgage company to recast it, which will save you thousands in interest.
Lets say I need annual expense of $40,000. Are you suggesting that I keep $40,000 in cash...$10K into ibonds and another $10K into EE bonds?
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Re: Psychology behind TOO much emergency fund
grouponde2000 wrote: ↑Sat Jul 24, 2021 11:51 am I own a house (brought for 290,000 - now appreciated to 350,000) and have 210,000 left in mortgage (2.5% for 15 years; monthly ~2300 including HOA). My monthly spending is ~$3500 (more like $3000 - but then one will call me frugal).
Annual income - $170,000.
My assets (investable stock + 401k) is $600,000. I have cash worth 150,000 (investable) sitting in a bank. I am putting cash to work regularly and after everything, will still have $100,000 in the bank (after taxes in April' 2021). Asset allocation: all stocks.
I automatically put in ~58,000 (little more with match, etc) in my 401k every year (including after-tax automatic roth conversion). Some ask - why roth; why not more taxable account...do the math and check - the taxable account will be better especially if you want to retire early. I have done the math. I know taxable is better (after putting the ~19,500 in pre-tax 401k). Why do I still do the ~$58,000 then? My psychology - I just cannot seem to put in money by myself...so I prefer the biweekly "automatic" 401k.
I understand economics, markets (at a somewhat deep level).
I am 40 - a PhD (from ivy league), work for reputable pharma.
What keeps me from being able to invest more freely? Why do I have such a huge emergency fund?
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Re: Psychology behind TOO much emergency fund
Excellent point. I like to think I am am cognitively oriented (as opposed to emotional). I understand that my taxable account can easily give me access to cash (within 2 days of settling). Like why do I have so much "emergency fund" sitting around? ALso made some changes to original post - salary/asset allocation, etc.anon_investor wrote: ↑Sat Jul 24, 2021 12:09 pmYou aren't worried because you have easy access to nearby gas stations. It sounds like you have extra cash around for ease of access.nigel_ht wrote: ↑Sat Jul 24, 2021 12:04 pmLol…I dunno if those are correlated. I tend to let it run toward E even though I know that’s bad but still keep more cash than I should.anon_investor wrote: ↑Sat Jul 24, 2021 12:00 pmSome people are more risk adverse than others. When you drive how close to (or past) E do you let your gas?grouponde2000 wrote: ↑Sat Jul 24, 2021 11:51 am I own a house (brought for 290,000 - now appreciated to 350,000) and have 210,000 left in mortgage.
My assets (investable stock + 401k) is $600,000. I have cash worth 150,000 (investable) sitting in a bank. I am putting cash to work regularly and after everything, will still have $100,000 in the bank (after taxes in April' 2021).
I understand economics, markets (at a somewhat deep level).
I am 40 - a PhD (from ivy league), work for reputable pharma.
What keeps me from being able to invest more freely? Why do I have such a huge emergency fund?
I think it’s because the close gas stations are expensive and I have to make a deliberate run to Costco for cheap gas…
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Re: Psychology behind TOO much emergency fund
Thank you KlangFool. Much respect for you and your sage post. Made some changes to original post - salary/asset allocation, etc.KlangFool wrote: ↑Sat Jul 24, 2021 12:14 pmgrouponde2000,grouponde2000 wrote: ↑Sat Jul 24, 2021 11:51 am
My assets (investable stock + 401k) is $600,000. I have cash worth 150,000 (investable) sitting in a bank. I am putting cash to work regularly and after everything, will still have $100,000 in the bank (after taxes in April' 2021).
A) What is your asset allocation? 100% stock plus CASH? If that is the answer, your problem is not too much CASH. It is too much STOCK.
B) Economic is not personal finance.
C) Can you reach your current pace with your current saving rate? That is the KEY QUESTION. Whether you invest this 100K CASH will not make a difference.
KlangFool
A) 100% stock (~620,000 spread between retirement/investment account).
B) "Economic is not personal finance." - 100% agree.
C) "Can you reach your current pace with your current saving rate? That is the KEY QUESTION. Whether you invest this 100K CASH will not make a difference." Yes, I can reach my goal with current saving rate. But I want to get their faster so to enable early financial independence. And keeping 100k cash sounds extreme and crazy to me - but I cannot do anything about it. Am I missing something here?
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Re: Psychology behind TOO much emergency fund
The fear is probably selling equities when down to access cash. Use I Bonds, instead of cash. I have a largish EF but shifted much of it to I Bond, which I count in my fixed income allocation.grouponde2000 wrote: ↑Sat Jul 24, 2021 6:20 pmExcellent point. I like to think I am am cognitively oriented (as opposed to emotional). I understand that my taxable account can easily give me access to cash (within 2 days of settling). Like why do I have so much "emergency fund" sitting around? ALso made some changes to original post - salary/asset allocation, etc.anon_investor wrote: ↑Sat Jul 24, 2021 12:09 pmYou aren't worried because you have easy access to nearby gas stations. It sounds like you have extra cash around for ease of access.nigel_ht wrote: ↑Sat Jul 24, 2021 12:04 pmLol…I dunno if those are correlated. I tend to let it run toward E even though I know that’s bad but still keep more cash than I should.anon_investor wrote: ↑Sat Jul 24, 2021 12:00 pmSome people are more risk adverse than others. When you drive how close to (or past) E do you let your gas?grouponde2000 wrote: ↑Sat Jul 24, 2021 11:51 am I own a house (brought for 290,000 - now appreciated to 350,000) and have 210,000 left in mortgage.
My assets (investable stock + 401k) is $600,000. I have cash worth 150,000 (investable) sitting in a bank. I am putting cash to work regularly and after everything, will still have $100,000 in the bank (after taxes in April' 2021).
I understand economics, markets (at a somewhat deep level).
I am 40 - a PhD (from ivy league), work for reputable pharma.
What keeps me from being able to invest more freely? Why do I have such a huge emergency fund?
I think it’s because the close gas stations are expensive and I have to make a deliberate run to Costco for cheap gas…
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Re: Psychology behind TOO much emergency fund
Thank you for your reply. Made some changes in post to include annual income (~170,000), asset allocation (100% stocks) and annual expense (say ~45,000). I can reach my goal with current saving rate. But I want to get their faster so to enable early financial independence. And keeping 100k cash sounds extreme and crazy to me - but I cannot do anything about it. Am I missing something here?Mike Scott wrote: ↑Sat Jul 24, 2021 12:20 pm Broadly speaking, there is a lot of variation in emergency funds. A common recommendation is in the neighborhood of 3-6 months of current expenses. However, people sometimes recommend across the range from 0-24 or more months of current expenses depending on individual circumstances. Some people include their emergency fund in their AA but some don't.
You know yourself best and need to find your own level. What makes you think you have too much emergency fund? How many months expenses does it represent? Does keeping an emergency fund help you be more confident in investing other money? How much stress would you feel if you decreased your emergency fund?
Re: Psychology behind TOO much emergency fund
Being able to jam the market with a bulk purchase with the cash that you don't have invested if and when we do get a pullback is a pretty good reason not to be fully invested.grouponde2000 wrote: ↑Sat Jul 24, 2021 11:51 am I own a house (brought for 290,000 - now appreciated to 350,000) and have 210,000 left in mortgage (2.5% for 15 years; monthly ~2300 including HOA). My monthly spending is ~$3500 (more like $3000 - but then one will call me frugal).
My assets (investable stock + 401k) is $600,000. I have cash worth 150,000 (investable) sitting in a bank. I am putting cash to work regularly and after everything, will still have $100,000 in the bank (after taxes in April' 2021).
I automatically put in ~58,000 (little more with match, etc) in my 401k every year (including after-tax automatic roth conversion). Some ask - why roth; why not more taxable account...do the math and check - the taxable account will be better especially if you want to retire early. I have done the math. I know taxable is better (after putting the ~19,500 in pre-tax 401k). Why do I still do the ~$58,000 then? My psychology - I just cannot seem to put in money by myself...so I prefer the biweekly "automatic" 401k.
I understand economics, markets (at a somewhat deep level).
I am 40 - a PhD (from ivy league), work for reputable pharma.
What keeps me from being able to invest more freely? Why do I have such a huge emergency fund?
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Re: Psychology behind TOO much emergency fund
Thank you. This is very useful 80:20..hmm!Marseille07 wrote: ↑Sat Jul 24, 2021 12:37 pm Another way to look at it is to include cash in your Fixed Income allocation, determine your AA and keep the allocation.
I don't know what are in your assets, but if 600K is all equities then your AA is currently 80/20 (600K/150K). If you're comfortable with this allocation then you actually don't have too much EF.
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Re: Psychology behind TOO much emergency fund
grouponde2000:
Ever since my 20s, I've never had a low-yielding separate "emergency fund." I knew that in an emergency I could obtain money from my bank, credit card, portfolio, or my family if necessary. It never happened.
Best wishes.
Taylor
Ever since my 20s, I've never had a low-yielding separate "emergency fund." I knew that in an emergency I could obtain money from my bank, credit card, portfolio, or my family if necessary. It never happened.
Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "We ignore the real diamonds of simplicity, seeking instead the illusory rhinestones of complexity."
"Simplicity is the master key to financial success." -- Jack Bogle
Re: Psychology behind TOO much emergency fund
Being 100% stock sounds crazy to me. Maybe it is the large EF that allows you to be so aggressive in the other accounts.grouponde2000 wrote: ↑Sat Jul 24, 2021 6:26 pmAnd keeping 100k cash sounds extreme and crazy to me - but I cannot do anything about it. Am I missing something here?
And if having little cash/fixed income was guaranteed to get one to their goals faster, more people would do/recommend it.
- DWesterb2iz2
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Re: Psychology behind TOO much emergency fund
Morgan Housel has a big cash allocation. He likes it that way. It works for him.
Barry Rithotz interview:
https://ritholtz.com/2020/09/transcript-morgan-housel/
Excerpt:
HOUSEL: So, it’s interesting that you bring that up because I don’t feel like that’s the case. I feel like I’m definitely an optimist. I feel like there’s going to be a tremendous amount of economic growth throughout the rest of my life that I want to take advantage of and invest in and compound and benefit from.
It’s maybe just a difference in how people get there. So, on our personal finances, I write about this in the book, the last chapter is called “Confessions” and I kind of just opened up the kimono on my wife’s [and my] personal finances. There’s no numbers in there but just here’s everything that we do with our money.
And how we invest is we’re quite frugal. We save a high portion of our income. We don’t prevent ourselves from buying anything that we want. It’s just that most of our needs or wants or desires haven’t shifted that much over time.
So, as our incomes have grown, our spending haven’t and therefore, we saved a high percentage of our income. And then we dollar cost average into Vanguard index funds and that’s it. Like our entire net worth is a house, a checking account, and some Vanguard funds and some shares of Berkshire Hathaway that I have for like sentimental reasons.
But that’s it. That’s all of our finances. And back to what we’re talking about earlier, I — our allocation might look for someone our age and our income, our net worth might look conservative. It’s — there’s various ways to measure this but cash is a percentage of our stocks let’s say. It’s something like 20 percent, something like that, which few financial advisers would say that’s necessary.
But for me, it’s important because I just want to make sure, like, my goal as an investor is to make sure, that the stocks that I do own can remain untouched for 30 or 40 or 50 years. That’s my goal. And I’m going to achieve that goal if I can make damn sure that I can be hit with a category five financial storm and maintain it without having to sell my stocks for whatever reason whether that is a job loss or I have a change in expectations that I want to go out and buy a boat or a bigger house or send my kids to private school.
I want to be able to handle all of that without ever having to touch my stocks because if I can do that, if I can leave my stocks untouched for the next 20 or 30 or 40 years, that’s when the big [gains] are going to happen, that’s when there’s going to be extraordinary return.
So, it looks like I’m not taking a lot of risk in the short run but the reason I’m doing that is specifically so I can take the most amount of risk and [have] the most amount of leverage in the long run. To me, it’s this idea of saving like a pessimist and investing like an optimist. I want to be really pessimistic about the short run so that I have the opportunity to take advantage of the optimist long run.
(Late edit to fix inherited transcription errors)
Barry Rithotz interview:
https://ritholtz.com/2020/09/transcript-morgan-housel/
Excerpt:
HOUSEL: So, it’s interesting that you bring that up because I don’t feel like that’s the case. I feel like I’m definitely an optimist. I feel like there’s going to be a tremendous amount of economic growth throughout the rest of my life that I want to take advantage of and invest in and compound and benefit from.
It’s maybe just a difference in how people get there. So, on our personal finances, I write about this in the book, the last chapter is called “Confessions” and I kind of just opened up the kimono on my wife’s [and my] personal finances. There’s no numbers in there but just here’s everything that we do with our money.
And how we invest is we’re quite frugal. We save a high portion of our income. We don’t prevent ourselves from buying anything that we want. It’s just that most of our needs or wants or desires haven’t shifted that much over time.
So, as our incomes have grown, our spending haven’t and therefore, we saved a high percentage of our income. And then we dollar cost average into Vanguard index funds and that’s it. Like our entire net worth is a house, a checking account, and some Vanguard funds and some shares of Berkshire Hathaway that I have for like sentimental reasons.
But that’s it. That’s all of our finances. And back to what we’re talking about earlier, I — our allocation might look for someone our age and our income, our net worth might look conservative. It’s — there’s various ways to measure this but cash is a percentage of our stocks let’s say. It’s something like 20 percent, something like that, which few financial advisers would say that’s necessary.
But for me, it’s important because I just want to make sure, like, my goal as an investor is to make sure, that the stocks that I do own can remain untouched for 30 or 40 or 50 years. That’s my goal. And I’m going to achieve that goal if I can make damn sure that I can be hit with a category five financial storm and maintain it without having to sell my stocks for whatever reason whether that is a job loss or I have a change in expectations that I want to go out and buy a boat or a bigger house or send my kids to private school.
I want to be able to handle all of that without ever having to touch my stocks because if I can do that, if I can leave my stocks untouched for the next 20 or 30 or 40 years, that’s when the big [gains] are going to happen, that’s when there’s going to be extraordinary return.
So, it looks like I’m not taking a lot of risk in the short run but the reason I’m doing that is specifically so I can take the most amount of risk and [have] the most amount of leverage in the long run. To me, it’s this idea of saving like a pessimist and investing like an optimist. I want to be really pessimistic about the short run so that I have the opportunity to take advantage of the optimist long run.
(Late edit to fix inherited transcription errors)
Last edited by DWesterb2iz2 on Sun Jul 25, 2021 4:37 am, edited 3 times in total.
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Re: Psychology behind TOO much emergency fund
Very helpful or may be confirmation bias on my part This is what I tell myself too.KingAAAA3 wrote: ↑Sat Jul 24, 2021 6:28 pmBeing able to jam the market with a bulk purchase with the cash that you don't have invested if and when we do get a pullback is a pretty good reason not to be fully invested.grouponde2000 wrote: ↑Sat Jul 24, 2021 11:51 am I own a house (brought for 290,000 - now appreciated to 350,000) and have 210,000 left in mortgage (2.5% for 15 years; monthly ~2300 including HOA). My monthly spending is ~$3500 (more like $3000 - but then one will call me frugal).
My assets (investable stock + 401k) is $600,000. I have cash worth 150,000 (investable) sitting in a bank. I am putting cash to work regularly and after everything, will still have $100,000 in the bank (after taxes in April' 2021).
I automatically put in ~58,000 (little more with match, etc) in my 401k every year (including after-tax automatic roth conversion). Some ask - why roth; why not more taxable account...do the math and check - the taxable account will be better especially if you want to retire early. I have done the math. I know taxable is better (after putting the ~19,500 in pre-tax 401k). Why do I still do the ~$58,000 then? My psychology - I just cannot seem to put in money by myself...so I prefer the biweekly "automatic" 401k.
I understand economics, markets (at a somewhat deep level).
I am 40 - a PhD (from ivy league), work for reputable pharma.
What keeps me from being able to invest more freely? Why do I have such a huge emergency fund?
-
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- Joined: Sun Sep 13, 2020 11:00 pm
Re: Psychology behind TOO much emergency fund
"Being 100% stock sounds crazy to me. Maybe it is the large EF that allows you to be so aggressive in the other accounts." Perhaps so. But I am bullish - time of our lives next 10 years (with all liquidity, etc).Katietsu wrote: ↑Sat Jul 24, 2021 6:45 pmBeing 100% stock sounds crazy to me. Maybe it is the large EF that allows you to be so aggressive in the other accounts.grouponde2000 wrote: ↑Sat Jul 24, 2021 6:26 pmAnd keeping 100k cash sounds extreme and crazy to me - but I cannot do anything about it. Am I missing something here?
And if having little cash/fixed income was guaranteed to get one to their goals faster, more people would do/recommend it.
"And if having little cash/fixed income was guaranteed to get one to their goals faster, more people would do/recommend it" - Most do recommend less cash (3-6 months), no? Am I missing something?
-
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- Joined: Sun Sep 13, 2020 11:00 pm
Re: Psychology behind TOO much emergency fund
I am 100% stocks (my asset allocation). Does this suggest that my large Emergency fund is what allows me to be so aggressive in my AA?DWesterb2iz2 wrote: ↑Sat Jul 24, 2021 6:50 pm Morgan Housel has a big cash allocation. He likes it that way. It works for him.
Barry Rithotz interview:
https://ritholtz.com/2020/09/transcript-morgan-housel/
Excerpt:
HOUSEL: So, it’s interesting that you bring that up because I don’t feel like that’s the case. I feel like I’m definitely an optimist. I feel like there’s going to be a tremendous amount of economic growth throughout the rest of my life that I want to take advantage of and invest in and compound and benefit from.
It’s maybe just a difference in how people get there. So, on our personal finances, I write about this in the book, the last chapter is called “Confessions” and I kind of just opened up the kimono on my wife’s personal finances. There’s no numbers in there but just here’s everything that we do with our money.
And how we invest is we’re quite frugal. We save a high portion of our income. We don’t prevent ourselves from buying anything that we want. It’s just that most of our needs or wants or desires haven’t shifted that much over time.
So, as our incomes have grown, our spending haven’t and therefore, we saved a high percentage of our income. And then we dollar cost average into Vanguard index funds and that’s it. Like our entire net worth is a house, a checking account, and some Vanguard funds and some shares of Berkshire Hathaway that I have for like sentimental reasons.
But that’s it. That’s all of our finances. And back to what we’re talking about earlier, I — our allocation might look for someone our age and our income, our net worth might look conservative. It’s — there’s various ways to measure this but cash is a percentage of our stocks let’s say. It’s something like 20 percent, something like that, which few financial advisers would say that’s necessary.
But for me, it’s important because I just want to make sure like my goal as an investor is to make sure that the stocks that I do own can remain untouched for 30 or 40 or 50 years. That’s my goal. And I’m going to achieve that goal if I can make damn sure that I can be hit with a category five financial storm and maintain it without having to sell my stocks for whatever reason whether that is a job loss or I have a change in expectations that I want to go out and buy a boat or a bigger house or send my kids to private school.
I want to be able to handle all of that without ever having to touch my stocks because if I can do that, if I can leave my stocks untouched for the next 20 or 30 or 40 years, that’s when the big gains are going to happen, that’s when there’s going to be extraordinary return.
So, it looks like I’m not taking a lot of risk in the short run but the reason I’m doing that is specifically so I can take the most amount of risk and gave the most amount of leverage in the long run. To me, it’s this idea of saving like a pessimist and investing like an optimist. I want to be really pessimistic about the short run so that I have the opportunity to take advantage of the optimist long run.
Re: Psychology behind TOO much emergency fund
The ibonds are locked up for 12 months and have a 3 month penalty if cashed before 5 years, but are guaranteed to maintain purchasing power until maturity. EE bonds earn very little, but if they haven't doubled by 20 years the treasury will double the value. Both are solid holdings that you could count as part of your AA as well as access in an emergency.grouponde2000 wrote: ↑Sat Jul 24, 2021 6:16 pmMy mortgage is only at rate of 2.5% for 15 years. Feel like it is my only 'risk-taking,wise economic decision" to have that as long as possible. (for someone like me) !! (being sarcastic to myself here).exodusNH wrote: ↑Sat Jul 24, 2021 12:01 pmFear of losing what you have is stronger than the joy of getting more.grouponde2000 wrote: ↑Sat Jul 24, 2021 11:51 am I own a house (brought for 290,000 - now appreciated to 350,000) and have 210,000 left in mortgage.
My assets (investable stock + 401k) is $600,000. I have cash worth 150,000 (investable) sitting in a bank. I am putting cash to work regularly and after everything, will still have $100,000 in the bank (after taxes in April' 2021).
I understand economics, markets (at a somewhat deep level).
I am 40 - a PhD (from ivy league), work for reputable pharma.
What keeps me from being able to invest more freely? Why do I have such a huge emergency fund?
Not sure what your asset allocation is, but you could put $10K into ibonds and another $10K into EE bonds. The latter are guaranteed to double after 20 years.
For the rest, cover 100% of your expenses for 12 months and invest the rest... Or even pay down your mortgage and ask your mortgage company to recast it, which will save you thousands in interest.
Lets say I need annual expense of $40,000. Are you suggesting that I keep $40,000 in cash...$10K into ibonds and another $10K into EE bonds?
I'm using ibonds to cover property taxes in retirement and count them as part of my bond AA. But, if something happens and I need cash, they're available. If you buy $833/month, every 12 months, you'd have $833, adjusted for inflation, available to spend.
Re: Psychology behind TOO much emergency fund
I think so, yes, because cash is nothing more than a bond with a really low interest rate. You are losing 2-3% per year to inflation (minus whatever interest you're earning on it), but that's not so much worse than what investment-grade bonds are paying.grouponde2000 wrote: ↑Sat Jul 24, 2021 6:57 pmI am 100% stocks (my asset allocation). Does this suggest that my large Emergency fund is what allows me to be so aggressive in my AA?DWesterb2iz2 wrote: ↑Sat Jul 24, 2021 6:50 pm Morgan Housel has a big cash allocation. He likes it that way. It works for him.
Barry Rithotz interview:
https://ritholtz.com/2020/09/transcript-morgan-housel/
Excerpt:
HOUSEL: So, it’s interesting that you bring that up because I don’t feel like that’s the case. I feel like I’m definitely an optimist. I feel like there’s going to be a tremendous amount of economic growth throughout the rest of my life that I want to take advantage of and invest in and compound and benefit from.
It’s maybe just a difference in how people get there. So, on our personal finances, I write about this in the book, the last chapter is called “Confessions” and I kind of just opened up the kimono on my wife’s personal finances. There’s no numbers in there but just here’s everything that we do with our money.
And how we invest is we’re quite frugal. We save a high portion of our income. We don’t prevent ourselves from buying anything that we want. It’s just that most of our needs or wants or desires haven’t shifted that much over time.
So, as our incomes have grown, our spending haven’t and therefore, we saved a high percentage of our income. And then we dollar cost average into Vanguard index funds and that’s it. Like our entire net worth is a house, a checking account, and some Vanguard funds and some shares of Berkshire Hathaway that I have for like sentimental reasons.
But that’s it. That’s all of our finances. And back to what we’re talking about earlier, I — our allocation might look for someone our age and our income, our net worth might look conservative. It’s — there’s various ways to measure this but cash is a percentage of our stocks let’s say. It’s something like 20 percent, something like that, which few financial advisers would say that’s necessary.
But for me, it’s important because I just want to make sure like my goal as an investor is to make sure that the stocks that I do own can remain untouched for 30 or 40 or 50 years. That’s my goal. And I’m going to achieve that goal if I can make damn sure that I can be hit with a category five financial storm and maintain it without having to sell my stocks for whatever reason whether that is a job loss or I have a change in expectations that I want to go out and buy a boat or a bigger house or send my kids to private school.
I want to be able to handle all of that without ever having to touch my stocks because if I can do that, if I can leave my stocks untouched for the next 20 or 30 or 40 years, that’s when the big gains are going to happen, that’s when there’s going to be extraordinary return.
So, it looks like I’m not taking a lot of risk in the short run but the reason I’m doing that is specifically so I can take the most amount of risk and gave the most amount of leverage in the long run. To me, it’s this idea of saving like a pessimist and investing like an optimist. I want to be really pessimistic about the short run so that I have the opportunity to take advantage of the optimist long run.
Re: Psychology behind TOO much emergency fund
I think so, yes, because cash is nothing more than a bond with a really low interest rate. You are losing 2-3% per year to inflation (minus whatever interest you're earning on it), but that's not so much worse than what investment-grade bonds are paying.grouponde2000 wrote: ↑Sat Jul 24, 2021 6:57 pmI am 100% stocks (my asset allocation). Does this suggest that my large Emergency fund is what allows me to be so aggressive in my AA?DWesterb2iz2 wrote: ↑Sat Jul 24, 2021 6:50 pm Morgan Housel has a big cash allocation. He likes it that way. It works for him.
Barry Rithotz interview:
https://ritholtz.com/2020/09/transcript-morgan-housel/
Excerpt:
HOUSEL: So, it’s interesting that you bring that up because I don’t feel like that’s the case. I feel like I’m definitely an optimist. I feel like there’s going to be a tremendous amount of economic growth throughout the rest of my life that I want to take advantage of and invest in and compound and benefit from.
It’s maybe just a difference in how people get there. So, on our personal finances, I write about this in the book, the last chapter is called “Confessions” and I kind of just opened up the kimono on my wife’s personal finances. There’s no numbers in there but just here’s everything that we do with our money.
And how we invest is we’re quite frugal. We save a high portion of our income. We don’t prevent ourselves from buying anything that we want. It’s just that most of our needs or wants or desires haven’t shifted that much over time.
So, as our incomes have grown, our spending haven’t and therefore, we saved a high percentage of our income. And then we dollar cost average into Vanguard index funds and that’s it. Like our entire net worth is a house, a checking account, and some Vanguard funds and some shares of Berkshire Hathaway that I have for like sentimental reasons.
But that’s it. That’s all of our finances. And back to what we’re talking about earlier, I — our allocation might look for someone our age and our income, our net worth might look conservative. It’s — there’s various ways to measure this but cash is a percentage of our stocks let’s say. It’s something like 20 percent, something like that, which few financial advisers would say that’s necessary.
But for me, it’s important because I just want to make sure like my goal as an investor is to make sure that the stocks that I do own can remain untouched for 30 or 40 or 50 years. That’s my goal. And I’m going to achieve that goal if I can make damn sure that I can be hit with a category five financial storm and maintain it without having to sell my stocks for whatever reason whether that is a job loss or I have a change in expectations that I want to go out and buy a boat or a bigger house or send my kids to private school.
I want to be able to handle all of that without ever having to touch my stocks because if I can do that, if I can leave my stocks untouched for the next 20 or 30 or 40 years, that’s when the big gains are going to happen, that’s when there’s going to be extraordinary return.
So, it looks like I’m not taking a lot of risk in the short run but the reason I’m doing that is specifically so I can take the most amount of risk and gave the most amount of leverage in the long run. To me, it’s this idea of saving like a pessimist and investing like an optimist. I want to be really pessimistic about the short run so that I have the opportunity to take advantage of the optimist long run.
Re: Psychology behind TOO much emergency fund
That's another name for market timing. In the meantime, you're missing out on the dividends (yes, they're low) as well as any capital appreciation.KingAAAA3 wrote: ↑Sat Jul 24, 2021 6:28 pmBeing able to jam the market with a bulk purchase with the cash that you don't have invested if and when we do get a pullback is a pretty good reason not to be fully invested.grouponde2000 wrote: ↑Sat Jul 24, 2021 11:51 am I own a house (brought for 290,000 - now appreciated to 350,000) and have 210,000 left in mortgage (2.5% for 15 years; monthly ~2300 including HOA). My monthly spending is ~$3500 (more like $3000 - but then one will call me frugal).
My assets (investable stock + 401k) is $600,000. I have cash worth 150,000 (investable) sitting in a bank. I am putting cash to work regularly and after everything, will still have $100,000 in the bank (after taxes in April' 2021).
I automatically put in ~58,000 (little more with match, etc) in my 401k every year (including after-tax automatic roth conversion). Some ask - why roth; why not more taxable account...do the math and check - the taxable account will be better especially if you want to retire early. I have done the math. I know taxable is better (after putting the ~19,500 in pre-tax 401k). Why do I still do the ~$58,000 then? My psychology - I just cannot seem to put in money by myself...so I prefer the biweekly "automatic" 401k.
I understand economics, markets (at a somewhat deep level).
I am 40 - a PhD (from ivy league), work for reputable pharma.
What keeps me from being able to invest more freely? Why do I have such a huge emergency fund?
Re: Psychology behind TOO much emergency fund
You are missing the part that “most” would not suggest 100% equities in the non-EF accounts. You could reframe your current position as a 6 month emergency fund plus a 85/15 or so asset allocation. This would still be more aggressive than the standard rule of thumb recommendations. Also, your typical spending is minimal for your income. So an EF based on monthly spend will not cover much in the way of a large unexpected expense.grouponde2000 wrote: ↑Sat Jul 24, 2021 6:55 pm "And if having little cash/fixed income was guaranteed to get one to their goals faster, more people would do/recommend it" - Most do recommend less cash (3-6 months), no? Am I missing something?
Anyway, “most” does not matter. You do you. It seems like you are saving and investing aggressively. You are comfortable with the level of risk. You might just be getting caught up in some FOMO that seems to be contagious lately, presumably related to the recent, probably unsustainable, amazing stock market returns.
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Re: Psychology behind TOO much emergency fund
Your answer is very helpful. I think I have a much better handle on my thinking now. I think I am indeed getting caught up in "some FOMO that seems to be contagious lately, presumably related to the recent, probably unsustainable, amazing stock market returns."Katietsu wrote: ↑Sat Jul 24, 2021 7:12 pmYou are missing the part that “most” would not suggest 100% equities in the non-EF accounts. You could reframe your current position as a 6 month emergency fund plus a 85/15 or so asset allocation. This would still be more aggressive than the standard rule of thumb recommendations. Also, your typical spending is minimal for your income. So an EF based on monthly spend will not cover much in the way of a large unexpected expense.grouponde2000 wrote: ↑Sat Jul 24, 2021 6:55 pm "And if having little cash/fixed income was guaranteed to get one to their goals faster, more people would do/recommend it" - Most do recommend less cash (3-6 months), no? Am I missing something?
Anyway, “most” does not matter. You do you. It seems like you are saving and investing aggressively. You are comfortable with the level of risk. You might just be getting caught up in some FOMO that seems to be contagious lately, presumably related to the recent, probably unsustainable, amazing stock market returns.
Re: Psychology behind TOO much emergency fund
Unfortunately, whether an emergency fund is "too much" is only know after the fact. No one knows what types of emergencies one may encounter in life. There are some where 12 months of expenses may not be enough (for example, extended job loss from a high paying job), yet most people would think 12 months emergency fund is conservative.
I don't subscribe to most of his advice but I do agree with Dave Ramsey that an emergency fund is like an insurance policy. Lack of returns/not keeping up with inflation is to some degree the cost of liquidity. How much one keeps to sleep at night is a personal decision.
If you are meeting other financial goals (e.g., saving enough to have a comfortable retirement), I would not be bothered by the opportunity costs of a large emergency fund.
I don't subscribe to most of his advice but I do agree with Dave Ramsey that an emergency fund is like an insurance policy. Lack of returns/not keeping up with inflation is to some degree the cost of liquidity. How much one keeps to sleep at night is a personal decision.
If you are meeting other financial goals (e.g., saving enough to have a comfortable retirement), I would not be bothered by the opportunity costs of a large emergency fund.
Re: Psychology behind TOO much emergency fund
For a $770k combined portfolio that would be about 71% stocks and 29% cash and 0% bonds. The 71% stock asset allocation would be reasonable for a 40 year old. Using cash instead of bonds is unconvential but with with interest rates being so low that likely does not really matter that much.grouponde2000 wrote: ↑Sat Jul 24, 2021 11:51 am I have cash worth 150,000 (investable) sitting in a bank
.....
A) 100% stock (~620,000 spread between retirement/investment account).
.....
and have 210,000 left in mortgage
There are lots of threads about looking at a mortage as being a negative bond that you can look up.
https://www.google.com/search?sitesearc ... ative+bond
It is not exact but there is a lot of truth in that. Looking at it that way it would give you;
Stocks: $620K
Cash and bonds(with mortgage) combined: $150K - $210K= -$70K
Total portfolio $550K
That would give you an asset allocation of 113% stocks and -13% Cash and bonds(with mortgage) combined.
I do not know where they draw the official like but at 40 you are just about to enter middle age so it would be good to be a bit more concervative with your asset allocation.
When you look at it this way paying down your mortgage is in effect buying a bond so keep that in mind.
Last edited by Watty on Sat Jul 24, 2021 8:08 pm, edited 1 time in total.
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Re: Psychology behind TOO much emergency fund
It is recommended picking an AA (include cash in Fixed Income) and stick with it. This way, you don't have to second guess carrying too much cash or too little. The AA determines the amount at any given time.grouponde2000 wrote: ↑Sat Jul 24, 2021 6:30 pmThank you. This is very useful 80:20..hmm!Marseille07 wrote: ↑Sat Jul 24, 2021 12:37 pm Another way to look at it is to include cash in your Fixed Income allocation, determine your AA and keep the allocation.
I don't know what are in your assets, but if 600K is all equities then your AA is currently 80/20 (600K/150K). If you're comfortable with this allocation then you actually don't have too much EF.
Re: Psychology behind TOO much emergency fund
1. In a 2008 scenario, if you lost your employment, would your $3500/month include the cost of health insurance?grouponde2000 wrote: ↑Sat Jul 24, 2021 11:51 am I own a house (brought for 290,000 - now appreciated to 350,000) and have 210,000 left in mortgage (2.5% for 15 years; monthly ~2300 including HOA). My monthly spending is ~$3500 (more like $3000 - but then one will call me frugal).
2. If your family had an emergency, would being able to assist them instantly (without having to incur high credit card debt) be important to you?
3. Is your emergency fund also your slush fund for home or car repairs?
Ipsa scientia potestas est. Bacon F.
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Re: Psychology behind TOO much emergency fund
You need to fall in love with bonds and blended funds too....and perhaps just after-tax investing in general! The ideal portfolio would provide enough stock/bond dividends to cover living expenses....so I say the larger you can grow the portfolio the better for any emergency...
I think of my money in tiers and it helps:
--Salary to come
--Severance expected (at least 6 months in my role, what's yours?)
--Cash
--Short term bonds
--Medium/Longer-term bonds (muni)
--50/50 stock total bonds funds (VTMFX)
--Dividends (in after-tax)
There is a pretty interesting spectrum of assets you can own between cash and a total stock fund and LOTS of creative ways of paying for an emergency.
I personally use VTEB as a sort of cash. It's quick and easy to trade at all of my banks. Sometimes it trades up or down but anything over $20k tends to go into it. Yes sometimes I may need it when its slightly down but over the long term its 2% tax-free dividend yield is worth the wiggle for me.
Then I have my monthly VCLAX municipal bond dividend check which I could use for some expenses or sell some of it worst case if needed.
Finally, I keep a buffer of VTMFX 50/50 fund for any large purchases I might need to make in the next 2-5 years.
I personally never have more than $20k in cash and I feel great about it.
I think of my money in tiers and it helps:
--Salary to come
--Severance expected (at least 6 months in my role, what's yours?)
--Cash
--Short term bonds
--Medium/Longer-term bonds (muni)
--50/50 stock total bonds funds (VTMFX)
--Dividends (in after-tax)
There is a pretty interesting spectrum of assets you can own between cash and a total stock fund and LOTS of creative ways of paying for an emergency.
I personally use VTEB as a sort of cash. It's quick and easy to trade at all of my banks. Sometimes it trades up or down but anything over $20k tends to go into it. Yes sometimes I may need it when its slightly down but over the long term its 2% tax-free dividend yield is worth the wiggle for me.
Then I have my monthly VCLAX municipal bond dividend check which I could use for some expenses or sell some of it worst case if needed.
Finally, I keep a buffer of VTMFX 50/50 fund for any large purchases I might need to make in the next 2-5 years.
I personally never have more than $20k in cash and I feel great about it.
VTI is a modern marvel
Re: Psychology behind TOO much emergency fund
1) No. You do not have a problem with too much CASH. You have a problem of too much STOCK.grouponde2000 wrote: ↑Sat Jul 24, 2021 6:23 pmThank you KlangFool. Much respect for you and your sage post. Made some changes to original post - salary/asset allocation, etc.KlangFool wrote: ↑Sat Jul 24, 2021 12:14 pmgrouponde2000,grouponde2000 wrote: ↑Sat Jul 24, 2021 11:51 am
My assets (investable stock + 401k) is $600,000. I have cash worth 150,000 (investable) sitting in a bank. I am putting cash to work regularly and after everything, will still have $100,000 in the bank (after taxes in April' 2021).
A) What is your asset allocation? 100% stock plus CASH? If that is the answer, your problem is not too much CASH. It is too much STOCK.
B) Economic is not personal finance.
C) Can you reach your current pace with your current saving rate? That is the KEY QUESTION. Whether you invest this 100K CASH will not make a difference.
KlangFool
A) 100% stock (~620,000 spread between retirement/investment account).
B) "Economic is not personal finance." - 100% agree.
C) "Can you reach your current pace with your current saving rate? That is the KEY QUESTION. Whether you invest this 100K CASH will not make a difference." Yes, I can reach my goal with current saving rate. But I want to get their faster so to enable early financial independence. And keeping 100k cash sounds extreme and crazy to me - but I cannot do anything about it. Am I missing something here?
<<Yes, I can reach my goal with current saving rate. But I want to get their faster so to enable early financial independence.>>
2) Show me the calculation! It won't matter a bit. In fact, your AA allocation is TOO AGGRESSIVE.
3) Tell me exactly how much faster that you THINK you can get there by investing MORE CASH.
<<B) "Economic is not personal finance." - 100% agree.>>
4) Then show me why investing this 100K of CASH matters.
5) What is your annual savings?
6) What is your annual expense?
7) What is your FI number?
8) When can you reach FI if you DO NOT INVEST this 100K?
9) When can you reach FI if you INVEST this 100K?
https://investor.vanguard.com/investing ... allocation
10) The average annual return difference between 100/0 and 70/30 is less than 1% per year.
KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Re: Psychology behind TOO much emergency fund
1. Don't pay down a 2.5% mortgage. Hold on to it, occasionally check rates, you may be able to refi to a lower rate.
2. Take at least $10k per year of your cash and buy ibonds via treasury direct. Overpay your taxes and get another $5k of paper ibonds each year.
3. Take a look at EE bonds that double every 20 years. But you have to hold them 20 years. They may or may not be for you. You can put $10k per year there.
4. Put the balance in high yield savings or checking accounts. After a number of years your emergency fund will be mostly treasury bonds and will serve as your bond allocation.
5. If you want to stay 100% stocks in retirement accounts for now, that's OK. However make sure you are OK with that allocation risk and you will likely want to ramp that down as you grow older.
2. Take at least $10k per year of your cash and buy ibonds via treasury direct. Overpay your taxes and get another $5k of paper ibonds each year.
3. Take a look at EE bonds that double every 20 years. But you have to hold them 20 years. They may or may not be for you. You can put $10k per year there.
4. Put the balance in high yield savings or checking accounts. After a number of years your emergency fund will be mostly treasury bonds and will serve as your bond allocation.
5. If you want to stay 100% stocks in retirement accounts for now, that's OK. However make sure you are OK with that allocation risk and you will likely want to ramp that down as you grow older.