Ms. Freedom 40 and I are at odds with one another.
Well, not really. But, we do have an issue we can’t seem to agree on.
As you can see from my last monthly net worth update, we have $142k sitting in cash. Most of this is earning a piddly 0.75% in our “high yield” CapitalOne360 savings accounts (formerly ING Direct). The situation has been like this for months now. Maybe even a couple years.
It wasn’t always the case though. We took great efforts to build up our cash savings over the years. We both agreed that having an emergency fund was super important. Depending on the financial adviser you listen to, you might hear advise telling people to stash away anywhere from 3 to 12 months of expenses in an emergency fund. In the past, I think we’ve leaned towards the conservative (safe) end of that range, looking to have a year of expenses covered by our savings. That said, I’m beginning to reconsider this logic due to a couple of reasons.
1. Low likelihood. The likelihood of a big emergency where we would need to tap into this much cash is pretty low. If something really bad did happen, we have plenty of liquid cash on hand. We also have access to credit, families who would be willing to help, and numerous assets that could be sold if needed.
2. The opportunity cost. This is the biggest reason for me. By keeping all this cash in savings we are missing out on lots of opportunities to invest it in ways that would help us work towards financial independence much quicker. If I had my druthers, we’d spread some of this cash across a variety of investments. Stocks, bonds, Lending Club, CDs?
But alas, Ms. Freedom 40’s current position is that she really likes having that money there and knowing that it is available at a moments notice. “What if I decide to quit my job?” This is the “F-You Money” thinking in the equation. I get it. In some respects, I feel the same way. However, I think I consider my “F-You Money” a bit more broadly, to include taxed investments as well.
That said, I do believe that stock valuations are high right now, and it’d be great to do some bargain shopping in the event of a correction/crash. In 2008 I was wishing I had the money to invest in what was clearly the buying opportunity of a life time, but alas, I just didn’t have the cash.
Based on the recent cash flow analysis I did, our annual expenses are right around $110k. This is based on our current spending though. In the event of a big emergency, like losing a job, we would obviously cut back on our expenses considerably.
So, even by a very conservative measure it seems to me we should seek to get our cash holdings down to about $110k. So, that’d mean moving about $30k. I think I might be able to convince Ms. Freedom 40, but it’ll require some more conversations…
Perhaps we could do something like this –
$5,500 Backdoor Roth contribution
$5,000 Lending Club
$10,000 Taxed Investment Account (S&P 500 Index)
$10,000 Taxed Investment Account (Tax Exempt Muni Fund)