Why would you keep any cash beyond an emergency fund?
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Hard to say without knowing what those translate to in dollars and what your planned expenditures are. But when I imagine you as a real-life person based on your posts, I think of you as not having kids going to college in the near future and already owning a home (obviously). So I’m having trouble coming up with a scenario where your cash balance isn’t much, much higher than I would ever choose in your scenario. Just to throw a random number out there, I’d say $50k plus 5% of your house value (for home maintenance) is probably the max I’d keep in cash. And you obviously don’t have to share, but I suspect your number is higher.
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I think you’ve gotten good advice so far. I’ll add my thoughts…
If you’re trying to grow your net worth, holding a big chunk of cash is problematic for at least a couple reasons:
- In the current environment of super-low interest rates for cash savings, you’re actually losing money in “real” (i.e., inflation-adjusted) terms. Just to use rough numbers, if you think of inflation as being 3%/year over the long haul, getting less than 1% on your cash savings is the same as losing over 2%/year of your principal.
- Interest on your cash savings account at your bank are taxable at your marginal income tax rate. So if you’re getting like 0.5% (which is on the high side from what I can find) on your cash savings, it’s really actually only like 0.4% or 0.35%, depending on your tax bracket.
So, if you have enough cash on hand to feel comfortable (like 6, 8, or 12 months of expenses, or enough to cover a major house repair, or the like), and your cash savings keep heading up, you should work on redirecting it toward investments that a) have higher growth, and b) are tax-advantaged in some way.
If you’re thinking of cash as being diversification in terms of the stock market taking a huge shit, there are still better (i.e., higher growth and tax advantaged) ways to protect yourself from that. Primarily by adjusting your asset allocation in your 401k and IRAs to have some mix of stocks (less stable, higher growth over the long haul) and bonds (more stable, lower growth over the long haul) that is appropriate for your risk tolerance and life situation.
At least that’s kind of the canonical wisdom that I’ve received from a few books I’ve read, along with various internet sources.
Speaking of books, my grandfather was a Certified Financial Planner and got me started with this stuff. He gave me this book and I thought it was super informative:
I don’t mean to say it’s the only thing you should read and follow or that it’s 100% correct, but I thought it was a really good introduction to a lot of important concepts.
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Reading your post here I should say that you’re in territory I’m not really qualified to give advice about net-worth and income wise, because I’ve never had to learn enough about it to make the “correct” decisions for myself.
If you’re really in the spot where you’re maxing out your tax-advantaged opportunities and trying to figure out what to do with the rest of your income, it might be worth it for you to pay someone to work with you on creating a financial plan. Note that I’m talking about paying someone a fee to make a plan with you that you then go ahead and execute, not hiring someone on an ongoing basis to “manage” (aka siphon off) your money.
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You might consider asking for advice on Bogleheads.org before paying an advisor
It’s a really great resource that has posters in all age groups from a wide range of occupations and income levels, and it’s entirely free
Nearly all of my own personal finance decisions are informed by input from that forum
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Yeah, I’ve seen that forum come up a lot, mostly in favorable terms. I’ve never really looked at it though.
I will say that the author of the book I linked above preached Boglehead dogma, at least in terms of the supremacy of non-managed index funds over other investment strategies. I pretty much followed it to the letter and have done pretty well with it. (Note that past performance isn’t a guarantee of future performance, etc. lol.)
Again I’m no expert by any means but extra cash I have I just put into my mortgage (4%, unfortunately), that should paid off in 2 years, and after that more and more into VTSAX I think.
Oh yeah, pay off debt! Duh I forgot about that. Good call.
We keep about 3 months expenses in cash, but our incomes are very stable and we have a pretty conservative asset allocation relative to conventional wisdom and could therefore draw down from treasuries/bonds for a long time in a catastrophe.
The general idea in my opinion is to keep enough in cash and treasuries to ride out multiple years of income disruption. The goal is to never have to sell equities at the bottom, and obviously most people are more likely to be unemployed when the market is down.
Since this thread just got bumped; I don’t know how the hell I’m ever going to be able to afford a house that I want. I have 0 urge to buy a house in the suburbs so that puts my minimum purchase point at like $350k with $550k being something I like. Houses are selling instantly right now to people offering over asking price. I’m not going to have $100k cash for 20% down for years so I assume I should just put down the most I comfortably can and pay the PMI? I guess my goal should be to just keeping saving and maliciously hope the housing market slows down eventually?
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Keep the mortgage. You are easily going to outperform 3% in the market; even conservative investments. 3% is chump change if you aren’t close to retirement age. 5-10% in the market > 3% interest payments.
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Plus you get to deduct the interest!
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Why do you want to buy so bad?
What are you currently paying on rent? You can use this to get an idea of the mortgage that you can afford - just make sure you factor in all the additional expenses of owning a home.
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Again I’m not an authority but…
Think of your mortgage as paying 3% for the ability to direct money that could go toward paying off the house to something else. If you think that “something else” can earn you more than 3% (remember to factor in any tax implications) then I think “conventional wisdom” is that you should go ahead and carry the mortgage.
There’s the mortgage interest tax deduction too, although I think maybe that maxes out at a certain point, and/or isn’t available to high income earners, I’m not sure. (Again, not an area I’ve had to know about, so do your homework on that.)
One thing I would respectfully suggest is trying to adjust your perspective to a longer-term time horizon. If you’re 30 years out from retirement, you should probably never be thinking you might pull money out of the stock market if it goes down. Similarly, I don’t have a crystal ball, but I’d be pretty confident the probability of Bay Area real estate values being down 10 years or more from now is very small.
I agree that this is key. Goofy you didn’t mention what the asset allocation of your index funds/retirement accounts is, but there should be a way to get that cash invested in a way that keeps the risk level appropriate.
Going back to your original question, the problem with cash is that in a world with inflation above zero, that cash is losing value (i.e., purchasing power) every day.
$2200 rent total. I don’t really have an urge to buy right now but I’m probably going to have a kid in the next 2 - 3 years in which I definitely want a house.
Hard truth - if you’re paying $2,200 in rent and aren’t saving a ton right now, you can’t afford to buy a $500,000 home, especially if you’re about to add an expensive kid. $500,000 mortgage at 3.5% (not sure you can get that with PMI) is $2,245 a month.
Even a $350k mortgage is going to be tough with the kid as it’s $1,572 a month. Add in property taxes and you’re not going to have much room for maintenance/repairs. Unless you’re buying a new-built home, you should make sure you’ve got room to pay $10-25k in repairs if needed (never know when the roof is going to fail, or you have to replace the A/C, etc.).
Even if you can’t save full 20%, I’d try to cut back some expenses (unless you can somehow increase income) and put together a decent amount before buying. Also make sure you have a good budget so you’re confident you can afford home and kid.
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Good points. I am saving a ton of money though it’a just going towards Roth’s, 401ks, and HSAs. Hard to add on down payment savings to that especially when I still want enjoy myself. Maybe I’ll just bink a poker tournament :). Should I reduce my retirement savings and increase my down payment savings?
It really depends how important it is to you to buy a home. From a purely financial aspect, pretty sure you’re better off continuing to save for retirement due to the tax advantages. Personally, I’d try to hold off buying a home for as long as people (we stayed in an apartment till our daughter was almost 3 to save more and only when she got older did we feel we really needed more room).
However, if you really want to buy soon, then you probably do want to save up a bit for the down-payment even if that means cutting down on your retirement savings. Not sure exactly how PMI works (e.g. are there thresh-holds where it costs more). I’d figure out exactly how much you want for the down-payment and how long you can wait to buy the home, and only cut retirement savings by that much (unless this would cost you any employer match as I think you’d be better off taking the match and then withdrawing early even with the penalty).
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This post in Jan 2020 didn’t age well, oops
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