How much should we have in cash?

The answer to this question seems important when trying to decide what to do with money this year and what to do with extra summer salary or uncertain future DH income.  Especially since the one year’s savings on prepaying the mortgage is $425 more than the year’s interest on a termshare at our credit union (or $465 more than savings).

[Side note:  Got my raise information– it was more than they said they could give me, so we should have a little cash cushion of 4K/year even after DH leaves his position.  And this year they gave me a small kickback (~1K) from the overhead of a grant I got, which is something new.]

[Update:  I got a couple of grants… so an extra 2+ months take-home, give or take… well, I’m not 100% sure about one of them, but it sounds like if we give them what they want in terms of paperwork they will give us money?  Still waiting to hear from a couple more grants.]

I have a list of where to put our extra money in terms of priority level once DH leaves his job (and this ordering may change):

*529 payments (6K/year/kid)
*DH IRA (5K/year )
*DW IRA (5K/year)
*DW 403b (16.5K/year)
*Mortgage prepayment (up to not quite 100K)
*DW 457 (16.5K/year– we haven’t done this yet)

But before any money goes anywhere, we need to decide what “extra” means.  Extra is above and beyond our summer savings and our emergency fund.

For our first few years, I only had one month’s worth of spending in our emergency fund.  I hadn’t yet discovered that we had the option of putting money away in the separate 403b and 457 accounts, so our cash flow was more than 2x what we spent each month.  An exhausted emergency fund could be replenished right away.

When we started contributing extra to retirement, our cash flow was cut dramatically.  I doubled our emergency fund to 2 months because it took twice as long for me to save up the equivalent of one month’s spending.

Now our cash flow is being cut again.  We’re barely making more than we spend (not including the 12% mandatory to my retirement).  I can’t be fired, but we may decide to leave one of these years.  Two months worth of spending may not be enough.  Six months (the commonly recommended standard) seems like too much when I can’t be given two weeks notice.  We do have a year’s worth of spending in a regular stock account that we could sell if truly necessary.

On top of that, I need to figure out how much to save for the summer, assuming no summer funding.  I’ll need private school tuition if we want to get the prepayment bonus.  Hm, the preschool also has a prepayment bonus, but I’m not sure what infant room tuition is these days, so maybe I’ll let that come out of the emergency fund if we choose to do that.  Then I need the 3 months of summer themselves.  Goodness, that is a lot of money.

I’m still a little tempted to take extra money and just hide it from myself, perhaps in the mortgage, thus making us feel artificially poor and forcing us to cut back.  But in reality now is not a good time for cutting expenses, not if I want to keep being productive and less stressed.  Babies are expensive in many ways.

DH noted that everyone is suggesting we stop mortgage prepayment and start to save up cash because folks are convinced we’ll be moving in 2 years (and we may, but we may not).  So he suggested we think about cash needed for that outcome.  Here’s what we came up with for that (wild estimates only):

moving costs *taken care of, need float $8K
change jobs *endogenous
fix up house *lawn, carpeting, painting $10K
sell house *taken out of purchase price
rent new place *what if don’t sell before leave? $6K
daycare/public *daycare 2x, but balanced by public for dc1
travel *drive or fly $2K

So 26K all together. That is more than our 2 month emergency fund. BUT, I’m fairly confident that even if there was another major stock market crash we could get the difference from taxable stocks. And if we knew we were moving we could cut back, undrip dividends, re-amortize, etc. if necessary. Right now it looks like even if we save all 26K in savings and not just a portion there will still be 5K leftover, not including summer money (presumably if we move in May, we’ll get paychecks in June and not need that 3 months summer savings), and counting only the summer money that’s already been completely finalized.

How many months of spending do you keep in your emergency fund?  Where do you keep the money?  Any other thoughts?

43 Responses to “How much should we have in cash?”

  1. First Gen American Says:

    Just a personal observation, but for us, the extra daycare expenses going from 1 to 2 kids took a while to get used to and definitely made finances feel tight for some time. I was also way more tired so my convenience spending went way up as well. Things are better now but that’s mainly because of paying off house debt and raises.

    • nicoleandmaggie Says:

      Kids are definitely expensive. Luckily daycare for DC2 came at the same time as a slightly larger raise for me, so that should balance out. (Next year daycare costs will be lower because ze will start group daycare, but if DC2 goes to private school that will cost more as well. Also private school costs go up as DC1 gets older, but presumably ze will switch to public school eventually.)

  2. Foscavista Says:

    I have a little over 12 months of “everything” expenses (living, investing, having fun, etc), for the idea of *suddenly* cutting back to the bare minimal seems too stressful. I would rather ease into reduced expenditures. Half sits as cash while the other half is in laddered CDs with short maturity dates (2 years being the longest one). If I were able to live off the bare minimum (just living), I could stretch that for about 21 months. I don’t contribute anymore to my emergency fund, but it can keep any interest that it earns. Any excess money I have over every month just goes to my personal savings fund, which could act as an additional emergency fund if needed.

  3. Linda Says:

    My emergency fund is six months of living expenses (basically, six months of what I typically spend every month now, without any cutting back). It is with a different financial institution than where I do my regular banking because it was offering a slightly higher rate at the time (not so true any more). However, I have separate savings accounts at my main financial institution for vacation and Big Ticket Items (like replacing the roof on the house or buying a car…which I did just a few months ago) that I could tap into if I needed more cash. Those two accounts total the same amount as what I have in my 6 month EF, meaning I could live for a year on that cash without any other income. (Not that I’d want to.)

    I really need to figure out a better way to structure the cash or if I can take a leap into investing. That is a lot of capital to have sitting around in low interest savings accounts. I considered CD ladders but they seem not much better than the rates I get in savings.

  4. bogart Says:

    I/we have prioritized saving in tax-sheltered accounts over EF and as a result have darned close to $0 in the latter, *but* we have significant (a year, I guess) cash balances in our Roths (not ideal, I know, but a satisficing compromise I live with), plus DH is now to where he can pull out his 401K balance at any time, not that I am in favor of this (but meanwhile it sits there and we survive on my income + his pension).

    Meanwhile, when we have noticeable uncovered expenses I tend to use/slow downpayment of the teaser-rate balance transfer offer. Again, not ideal but … those things are SO cheap. We have $6K available to us right now at 1% for either 12 or 18 months…

    So — in your shoes I’d bump the IRAs to top priority but keep them in cash equivalents, I suppose (and pay to convert to Roths as needed, of course, if the backdoor strategy is required — maybe not in light of GrumpyDH’s job status?). But, it’s entirely possible you shouldn’t be accepting PF advice from me!

    (BTW the limits on 401K and similar are $17K this year, not $16.5…)

    • nicoleandmaggie Says:

      We did the 0% emergency check when we moved out here and were waiting for a reimbursement and a stock sale was slow to actually come to us. I think we could probably do that again.

      The IRAs are definitely high priority, but they’re already funded for 2012. Even when I think I shouldn’t fund them, I end up funding them anyway. This past year I sold some taxable stocks to buy them.

      I vaguely remember something about limits increasing. I don’t think we’re going to take advantage of that this year though.

  5. cynabee Says:

    I’m not sure what the housing market in your area is, but if it might be best to “hide” your extra cash in making improvements to your house. Doing so I think is a win-win, whether you do indeed move in a couple years or if you stay there forever you can enjoy the improvements. I would check out nearby comps and determine what amount of improvements would push you house to the top of the range of similarly sized/renovated houses (I love snooping on Redfin, if it’s in your area). I owned an teeny tiny condo in Boston and putting ~15K to the place resulted in a >50k profit and I only owned it 3 years, and sold in 2008 as the market was starting to go down. Maybe this was only possible because it was Boston, but I think home improvements (kitchens, bathrooms, and closet shelving upgrades) can be a very good place to stash your cash.

    In a somewhat unrelated question, I was wondering if you would expand on the particulars of your salary a bit? I’m new to your blog, so if you’re written this elsewhere just direct me. In particular, I’m wondering: 1) how much does each grant add to your base salary? Is there a salary cap or with each grant does your salary go up?, 2) how does summer pay work, in particular if your in the lab full time?, 3)if you don’t get a grant, what would you get paid?

    I know each institution is different, but I’m fuzzy on the general scheme of things and any info would help.

    • nicoleandmaggie Says:

      Housing isn’t worth much here and with two children, the kinds of improvements we’d need to do to sell aren’t going to last very long. What we’ll need to do is repaint, recarpet (or get rid of carpet– there should never be carpet in a child’s bathroom), and replace the entire lawn. We already own a mcmansion, so the bathrooms and closets are out of this world. (The kitchen is surprisingly not-granite, but there’s a long story why we’re not yet upgrading that.)

      Each grant gives me summer money, so generally each is worth 1-2 months of summer salary. The cap is then 3 months (additional money would go to other things like teaching buy-outs or RA salary). I don’t get paid for the summer unless I get a grant, even though I’m still working. I do get paid 9 months whether I get grants or not, since I’m hard money.

      • Debbie M Says:

        It sounds like it might make sense to get rid of the carpet in the child’s bathroom sooner, rather than later. Whatever you replace with would probably be long-lasting.

        And what are you replacing the lawn with? If it’s more grass that still won’t grow in the shade or something, yes, you should wait. But if you can figure out an affordable way to switch to low-maintenance plants, you could benefit from doing that sooner as well.

        (By the time you sell, granite counters may be “dated,” so that’s another factor you can add to your story.)

      • nicoleandmaggie Says:

        Sadly, we would LOVE to xeriscape but our house is more likely to sell with a lush green lawn, which ours used to be… We need to switch to one grass type and water the heck out of it when we’re ready to sell. We tried buying trees last year (2K worth) but many of them didn’t make it b/c of the weather.

        BTW, who on earth thinks carpet in a bathroom is a good idea? I can see the carpet they put in the MIL suite’s bathroom– that’s a tight dense weave so grandma doesn’t slip and fall, but in the children’s Jack and Jill suite?

      • Leah Says:

        I’d replace the carpet now. We had carpeting in my bathroom for a few years as a kid, and it was so nice when we switched to tile floors with bathmats. It was awesome.

      • nicoleandmaggie Says:

        Right now we have a newborn and no time, but next year when DH doesn’t have a job it’s on our mental to-do list.

  6. Debbie M Says:

    I recently upped the amount in my instantly-accessible savings account from $500 to $1000 when I switched from a full-time permanent job to part-time temp jobs. This is to take care of any cash-flow worries.

    I’ve split up my emergency savings into categories and each month, I deposit the expected value of the costs for each month. For example, I put the average amount I spend on car maintenance and repair (gas, insurance, etc.) into savings each month. The amount I actually have saved depends on whether I’ve had a lot of expensive things come up recently. Even if I haven’t, I still keep contributing. My categories are:
    * Next car fund
    * car expenses
    * house expenses
    * long-term fun (vacations, electronics, other stuff too expensive to cover in my monthly budget)
    * health expenses

    For health expenses, I’m putting in more than my average costs in the past, because these tend to rise with aging. I should probably contribute even more than that because I switched from an ordinary employee group insurance to a high-deductible individual plan.

    Notice that what’s missing is an unemployment fund. I used to think that was unnecessary because my employer doesn’t do layoffs but a) now they do and b) I might want to quit. Which I did, so c) now I’m in part-time temp jobs. So, this year I decided to sacrifice my IRA contributions, charitable contributions, and home renovation fund contributions until I got 6 months of expenses for an unemployment/underemployment fund. Turns out I did get to max my IRA contributions, and it looks like I’ll also be able to make my usual charitable contributions, so that’s nice.

    (Mortgage prepayment is also not an option for me because … I paid off my mortgage last year. Woot!)

    Six months is a lot of dough. Some of it’s going to max out my new Health Savings Account (like a Flexible Spending Account, only you don’t lose the excess that you don’t spend, plus you can use it for anything you want after age 65, but the max is only $3100 for single people). Some of it’s going to my 457 because I can get that back if I’m no longer working with my current employer. But some of it needs to stay in regular savings in case I just have one half-time job (or less!) with the same employer–not enough to live on but too much to be able to get my 457 money back. I’m still deciding how much (technically, I’m deciding how much should go to my 457).

    • nicoleandmaggie Says:

      Congrats on the mortgage!

      That’s really well-thought-out. I’m resisting hard doing too much mental accounting with our emergency fund. I just don’t think I’m very good at predicting things and I hate the way I freak out when I get an unexpected say, medical bill, or automobile expense and it’s more than what I budgeted, even if there’s plenty of emergency fund all together. I feel much happier with one big fund that covers everything that isn’t a regular bill (plus the regular bills I occasionally forget are coming due…)

      I’m torn between the 457 being a better idea for me or the 403(b)… the 403 has much better investment options, but that 457 is more liquid. And I bet I would have difficulty tapping anything that’s labeled retirement anyway, knowing me. (I could probably get over that though.)

      • Debbie M Says:

        You could always split the difference and do some 457 and some 403(b).

        My millions of savings categories is my crutch to help me realize that it’s okay to spend certain money (such as: I can afford this vacation, or this plumbing call is no big deal) by telling myself that this money is already spent. But then also if I want to spend more than is in the proper account, I can (probably) still do it, by taking money from other accounts, but this forces me to re-think my priorities.

        Also, if I just have a big pile of money all in one place (which, technically I do, but I’m pretending I don’t), I have two other problems. One is that I just want to see that pile of money get bigger and bigger–any expenditure from it feels like a failure. The other is that my eyes get big–if I’m thinking of just one category but looking at the whole pot, I might get a little too excited about the possibilities without paying enough attention to my other priorities, which I will remember about soon enough!

      • nicoleandmaggie Says:

        I tend to take extra over a certain amount and put it somewhere else, like a lump sum mortgage payment or more generally the IRAs.

        It’s funny these psychological game we play with ourselves

  7. retirebyforty (@retirebyforty) Says:

    We saved up 24 months of living expenses before I quit my job. This is a lot more than I would recommend for most people, but we wanted to be sure I can be a stay at home dad for at least 2 years. Our cash flow is very close to even right now and if everything work out, then in 2 years we will still have the same amount of EF. I know our expense is much lower than yours and that help a lot too. I took a long time to save up 24 months of living expense…

    • nicoleandmaggie Says:

      Wow, that’s a lot! I think we’ll be ok even for two years without DH earning anything even if we don’t have 2 years of expenses saved in cash (and we have somewhere between a year and two years in taxable stocks). The tenure thing is really nice. If I could get fired, and we were in this situation, I’d have a lot more saved in cash.

  8. Ewan Says:

    What’s a 457? Struggling with some of these issues right now – savings rates are SO anaemic that it’s almost a mattress plan :-/.

    • nicoleandmaggie Says:

      A 457 is like a 403(b) (which is like a 401(k) for gov’t and I think nonprofits) except only government organizations tend to have them and you can tap them without penalty upon leaving state employment. (Wikipedia says you can always tap them without penalty, but I need to look into that more.)

      • Ewan Says:

        Thanks! I guess, as a SUNY employee, I should check whether we have them.

        I empathise greatly with the DH 7-1 tenure vote, btw; that’s what I also received (my case is on the provost’s deak right now!) despite having the best teaching ratings in the department, more citations and higher h-index than anyone else, more grant money than almost anyone else, and winning the Outstanding Faculty Award this year :-). Whine, whine, whine.. very thankful that my spouse gets paid rather better than I do and is not an academic!

      • nicoleandmaggie Says:

        Oh wow, your case seems dreadfully unfair! Are you going to contest it?

      • nicoleandmaggie Says:

        Or actually, it sounds like you did contest it. Good luck! And having a good cv does make a person more mobile.

  9. Ewan Says:

    Thanks – yeah, I submitted a rebuttal letter with a lot of quantitative data and all the anger taken out by others :). My chair also submitted a very strong rebuttal letter with rather more of the anger left in – don’t want to derail your thread, but the single *most* silly item of the many produced by the CPCA was a statement that “the candidate’s writing cannot be assessed because he was not the corresponding author on several of his manuscripts” without any, y’know, actual data – in fact *every* paper has me as corresponding author, right back to the first one in grad school. [As I noted at the time, if I wanted to torpedo someone’s tenure case, I could easily do it in ways that weren’t as blatantly stupid as this..]

  10. Leigh Says:

    I have six months of expenses in my emergency fund with the first two months in my rewards checking account and the other four months in an online savings account. I’m probably going to move the online portion into a set of CDs come November/December since I haven’t touched it in ages. I also have the car, health, and condo insurance deductibles in my checking account. This number was calculated at a lower level of expenses than what I estimate now, so there is about an extra $1,500 in there than what six months of expenses actually is.

  11. MutantSupermodel Says:

    I am sadly no help here

  12. femmefrugality Says:

    I’d be so pumped if I got a larger than expected raise! Congrats! And the grant news is great, too. I’m about much help this time as I was last…

  13. bookishbiker Says:

    At the moment I have about 10 months semi-tight living expenses saved up. I could make it a year if I drained all my accounts (car fund, for example).

    However I’m thinking of buying a house, with “only” a 10% down payment and by pillaging all my (non-retirement) accounts. I’m trying not to let emotion totally rule the day, and I’m not exactly rushing into anything, but I could be dropping myself into the danger zone in a little while. My job is secure and my parents have offered to lend me 15k for the house stuff – my plan is to not borrow it but to have it as a backup emergency fund until I get my savings restocked.

    To my credit I’m only looking at mortgages that would result in a monthly outgo similar to my current rent. That’s about the only really solid part of this adventure so far. I hope not to have an epic cautionary tale of woe a year from now!

  14. bookishbiker Says:

    Oh – and so to answer your other questions: it seems to me that you’re really in a good place and all of these options are variations on that theme. I assume the IRAs are Roths so you could withdraw the contribution if deemed necessary?

  15. NoTrustFund Says:

    Congrats on the big raise!

    We have a year of expenses in an online ‘high yield’ savings account. I know it is excessive but it’s more of a combined emergency/take a hike fund. After being stuck in one job that was making me miserable that I couldn’t afford to quit, I error on the high side of cash savings.

    All your options seem like great ones although I will say, if there’s even a 50% chance of you moving in the next couple of years it doesn’t make sense in my mind to continue paying down the mortgage. Better to stay liquid!

    • nicoleandmaggie Says:

      Thanks! If only it made up for the lack of COL raises these past few years. At least we didn’t get furloughed.

      We can lower the mortgage payment by reamortizing, and the money becomes liquid if we sell. I’m fairly sure we could sell quickly if willing to take a loss on the house. Less quickly if we want its market value. (And not at all if we ask too much!) We can still save a lot over the course of two years by paying down the mortgage ($465 is not a shabby return on 10K over one year).

  16. Jacq Says:

    Zero emergency fund since I realized about a year ago that I hadn’t used it – ever – and was keeping it around for psychological comfort / out of fear of being broke only. So I put that money to work. My backup is a $50k LOC @ 5% (will get that reduced to 3.5% I think/hope) and my TFSA (sort of like a Roth I believe. You can pull it out and put it back as soon as in the next year w/o penalty – all gains tax deferred). It just got put in play by the CRA 4 years ago at $5k contribution per year, so I only have about $25k in it. That’s a year of bare-ish bones expenses – but I won’t let it come to that. All in very safe stocks that don’t fluctuate much but pay a decent 6% dividend. Once I have my rrsp fully funded for the year in the next month or so, I’ll be just stashing cash in prep for being off work and renovating / traveling next year (hopefully.) Or doing something crazy like swing trading… or both…

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