Ask the Grumpies: What to do with a windfall/how much to keep in cash/etc.

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.

How we approach diversification

A post on what to put in taxable vs. not taxable accounts

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?

    1. Pay off high interest rate debt (if any)
    2. Create an emergency fund
    3. Max out all retirement savings
    4. 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)
    5. Put money in 529 plans (if applicable)
    6. Max out an emergency fund
    7. Taxable savings and/or fun!

Grumpy readers, what did I miss?  How would you answer these questions?

15 Responses to “Ask the Grumpies: What to do with a windfall/how much to keep in cash/etc.”

  1. First Gen American Says:

    So from your post the other day, I ended up putting over half in a total market bond fund, and about 20% in stocks. I still have a chunk to invest but I couldn’t put it all in (mentally) during an time high day. I still think the market’s going to bounce around quite a bit in the next year so I’ll change my allocation up over time, plus I have other holdings in stock already.

    My emergency fund is in savings bonds and is super old so most of those I-bonds are still making 2+ to 5%. I am sure an investment type would tell me I’d have 3 times that by now if I just put it in stocks way back when. But ya know…that wasn’t investment income, it is emergency income. It was just dumb luck that we haven’t needed it.

    My car fund cd also matured and needs to make more income.They have AAA bonds that are shorter term and lower risk. They can probably make you a couple percent. The total market bonds are running at over 4% right now but 1/3 of it is mortgage debt so I wonder how that will all shake out next year. I also worry about the smaller companies. Big companies are getting bigger so that debt seems safer to me. Anyway, what I am trying to say is there are lots of different types of bonds with various risk levels so it’s not just as easy as “buy some bonds”. I didn’t and still don’t fully understand the bond market and how’s its affected by market volatility and the fed but I am trying to learn as we speak. If anyone in the feed knows more, do tell.

    • nicoleandmaggie Says:

      Yeah, that’s also true. Somewhere we have a post on that. I use some kind of bond index fund recommended by bogleheads for our bond allocation. 2-5% fixed is amazing right now.

  2. gwinne Says:

    This is timely for me, as I’m also sitting on more cash than I need at the moment and paralyzed by doing CDs vs 529 vs Roth IRA. I need to read carefully.

    • nicoleandmaggie Says:

      Roth IRA. (Unless you need it as cash in the near future.). Always do retirement before college because retirement doesn’t count for financial aid. Roth IRA principal can also be taken out in an emergency.

      • gwinne Says:

        Define “near future” please :) Mostly I need to sit down and map out carefully how much it will cost to do some home improvement and then invest…

      • nicoleandmaggie Says:

        <5 years, depending on your expectations of future additional cash. (If you know in a year you're going to have this amount in extra cash from your salary but you don't need it for 2 years, then go ahead and invest this and spend the extra cash you get a year from now instead. That is, no need to keep money if you can cash flow those expenses. But if you need *this* specific money, short-term is <5 years.)

    • First Gen American Says:

      I second the roth suggestion. It also can be used for college expenses penalty free. (But the interest is taxable unless you’re 59.5 and then you’re good.) so I think if you’re an older parent I would shovel as much as possible in a roth or backdoor roth. Then if you’re genius of a kid gets a full scholarship, you can just keep the money for yourself.

      That being said, I started saving in my 529 way too late. My kid was already a teenager before I put real money in so I think it makes more sense if you start when they are small.

      CDs are making nothing right now.

      • Leah Says:

        Our parents have gifted us $3k with the birth of each kid for their 529. I’ve put in bits here and there but not major amounts of money. I logged in the other day and was thrilled to see our 6.5 year old has over $20k in her college fund! I know it won’t pay for tons, but it is nice to have.

      • nicoleandmaggie Says:

        It still has time to grow!

      • First Gen American Says:

        I did what you did, Leah. Windfall money went in there. I tried putting birthday and gift money in but wasn’t consistent. In hindsight I should have done a token amount every paycheck from birth. I could have stomached $5/week even when money was tight and then went up to $6; etc. I am doing it now.

      • nicoleandmaggie Says:

        I actually regret funding the 529 from birth because I wasn’t maxing out retirement accounts at that time. Now we don’t have room in the retirement accounts. We’re back on my income alone which means financial aid but there’s too much cash that’s unsheltered and no way to hide it.

        (529s are definitely a great place for gift money!)

  3. Debbie M Says:

    I love that you have so many readers suddenly sitting on cash. Me, too, sort of. I worked two and half of this year’s elections (the primary runoff, the general election, and part of the resulting runoff until I chickened out about working indoors after people traveled for Thanksgiving when it was already peak covid times).

    I celebrated the day my gross pay passed 7K, which is my max Roth IRA contribution, and put 7K there. In the end, I grossed 10K (so much overtime!), but after taxes and 10% charitable contributions that put me only negative $53 ahead. So, It’s all the the Roth, which I’m poor enough to be allowed to do through the front door. And if that was a mistake, then I can always take it out again (contributions, but not interest/growth, can be taken out penalty free at any time).

    That $1200 stimulus check also counts as extra cash–I put half in non-retirement investments (only “earned” income can be put in retirement accounts, sadly, and pensions don’t count), and contributed the other half. Basically I didn’t need it or deserve it but I also wanted it all for myself, so that was my compromise.

    But yes, I love your priority order. (I have no debt and no kids, and the Roth can be used as an emergency fund if necessary.)

    And as for shortish-term places to keep money, I’m still just doing my “high-yield” online savings account. I have liked CDs and I-bonds in the past, but they are sucking even more loudly than the savings account, so I’m just keeping it simple. (I use Alliant Credit Union–they also have a 2% cash-back credit card.)

  4. bethh Says:

    I realized I have a question and I think it might be something you could post about at some point. What do you mean when you talk about keeping a windfall in cash? Literally under the mattress? In a savings account? Would a CD count? How about a money market fund?


    • nicoleandmaggie Says:

      Hahaha! Great question! The short answer is any of those, except not under the mattress (which is dangerous!). With a CD you have to be careful about when you can access the money, so if it is a lot, you might build a CD ladder. Essentially the idea is you put money in a safe place where it’s not going to lose value, or at least not lose the complete equivalent to inflation each year (many checking/savings accounts will pay less than inflation, but not *that* much less than inflation). Anything FDIC insured is especially good.

      I can do a full post the week after next but it will basically say the same thing.

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