anonymous in the midwest asks:
My husband and I are also sitting on too much cash, and I’m trying to get over my fear of putting it in the market now. We had $30K in a 3% CD at our local credit union, but that matured and now we’ve got $50K earning nothing in our savings account. We (especially my husband) want to get some kind of return, but we also want to spend a good chunk of it on a new minivan and/or a bigger house in the next 5 years or so. I’m also wary of complicating our tax situation – we’ve never had non-tax-sheltered investments before. We’re considering bonds, but I don’t know if that’s a good idea.
A minivan has a well-defined price, but a bigger house doesn’t, so I don’t really know how much we’ll want to spend on these big things (and we might decide not to do either one). I guess the questions I’d like to see answered are more along the lines of:
-how do you decide how much $$ to keep in cash?
-how do you (and readers) think about which investments to put in tax-sheltered versus taxable accounts? Do tax implications play a role in those decisions?
Jenny F. Scientist says:
My mother decided to give each of us (3 daughters) $100,000 so I, too, need to figure out what to do with too much cash!
First disclaimer: We are not professional financial planners. See an actual fee-only financial planner with fiduciary responsibility or do your own research before making any important financial decisions.
Second disclaimer: I keep WAY too much money in cash. Especially now that Trump is not going to be president soon and it becomes less and less likely we will need to flee the country or worry about having some of our assets being seized illegally.
Here’s some earlier posts:
What to do with a windfall (we put it in the mortgage)
Do I see a financial planner about a 300K inheritance? This one has some commentary on college savings.
What we did with an extra 40K.
What does a 20 year old do with 600k?
How much should we have in cash?
How your cash emergency fund can change as your net worth grows.
How to account for large purchases in your budget/cash flow.
You already know the heuristic to not put any money into the stock market that you will need in the next five years. I’m not Suze Orman (and don’t have all your financial details) so I can’t tell you how much to spend on a mini-van or house vs. not.
In terms of how much to keep in cash: Every year when the new academic year starts for me, I take a spreadsheet that has an estimate of how much we spent the previous year, then tinker with known changed costs (ex. childcare going away, health insurance prices going up, etc.), to get an idea of about how much we spend each month. Then, since my summers are unpaid, I make sure I have 3 months of summer spending (this will probably not be the case for you), then add a month in case of emergency, and call that the minimum amount we’re allowed to have in savings by May. Now, I can’t be fired without several years of warning, so I don’t need more than 3 months in savings. If I could be fired, I would probably want at least 6 months of money in cash, just because people tend to lose jobs about the same time the stock market is tanking and I’d want to not feel terrible selling stocks when I was already stressed out about money and work. Back when we had less income, we necessarily only had about 1 month in cash, and we just knew we’d have to get loans if there was an emergency that couldn’t cover things.
So, to sum: Have 3-6 months of spending in your account in case of job-loss (less if you are just starting on saving and need to start saving for retirement– the principal in an IRA Roth can be used as an emergency fund). Have up to a year if a year of spending is only a small part of your net worth or you work in an especially volatile industry. Add more if you have any expected large expenses coming up like replacing your heating/a/c unit or buying a new car and so on. Or if you’re saving for a downpayment for a new house. Remember that money is fungible, so if you have 3-6 months of spending and your hvac goes out unexpectedly, you can replace the hvac and then rebuild the emergency fund.
Disclaimer redux: I have a little over a year of $ in cash right now, spread out over 3 different banks. This is ridiculous and I was going to move some to taxable stocks, but then DH found out about his job going away and isn’t sure he wants to even get unemployment (since he’s not sure he wants to job search), so I just kept it in cash, figuring maybe we’ll want to spend it. I do plan to put some of it in IRAs in January, and it will get chipped away into DC2’s 529 plan every month unless our financial picture changes.
In terms of what investments to put where: We only recently hit the point where we ran out of tax sheltered places to put new money (we had some money in taxable stocks back when we didn’t have work retirement accounts and the IRA limits were much smaller). So… max out your work retirement accounts. Do Backdoor Roths every year that you can if your income is too high for a regular IRA. If you work at a company with a mega backdoor Roth 401k, look into putting money there. If you have kids, consider 529 plans. We talk in much more detail about what kinds of money to put in what kinds of accounts given tax implications in this post. Remember, perfect is the enemy of the good– it is better to have a money allocation that is non-optimal than it is to do nothing (unless, of course, you decide you want to keep the 30K in cash!).
Re: what to do with a huge windfall?
- Pay off high interest rate debt (if any)
- Create an emergency fund
- Max out all retirement savings
- Pay off lower interest rate debt (though you may want to wait a couple years on any student loans– there is a non-zero chance some portion of them will be forgiven in the next year, but who knows)
- Put money in 529 plans (if applicable)
- Max out an emergency fund
- Taxable savings and/or fun!
Grumpy readers, what did I miss? How would you answer these questions?