Where to park short-term excess cash?


S

spoca2005

For the past 10 years, I have maintaned an emergency fund in the range
of 15K to 20K (my mortgage, the only debt, is 1.5K per month; other
expenses vary between 1.5K and 3K, so I consider this level
reasonable). About 5K to 8K is in various CD forms, and the rest in
savings account.

All the rest of the money from each month is invested in 401k (self &
spouse, both maxing), 4-5 separate stock DRIPs, and a couple of mutual
funds.

During 2006, I have been fortunate enough to have a significant large
wage (actually, more like a beginningof the year bonus, and a regular
end of the year bonus). This has increased my cash position to about
90K. About 20K of this will be gone to uncle sam on 4/15, but I will
still have about 50K, over and above the usual emergency fund and tas
due amount.

Right now this is invested as follows:
Emigrant direct 40K @ 5.05% interest
Local credit union: 20K @ 5.0%
Treasuru Direct: 26 week treasury bonds, 15K @ about 5.25% yield (3
issues of 5K)
CDs: about 15K in 6 month to 1 year CDs @ 5% and 5.25%.

My goal is to use up the excess cash by opening 1 or 2 new mutual
funds, and dollar cost averaging (rather than investing all of it at
once), over the next 12 to 18 months. Or perhaps 2 new drips. Anyway,
all the money would be invested in long term instruments within the
next 12 to 18 months, at most. This year I am in 31% federal and 9.3%
California tax bracket. Next year, I will be in 27% federal, and 9.3%
California tax bracket.

Given the above, I am looking for suggestions that would yield better
after-tax yield, that what I am getting at Emigrant Direct. The
treasury direct yield: that's California tax free, right?

Thanks.

Son of Spoca
 
Ad

Advertisements

J

John A. Weeks III

For the past 10 years, I have maintaned an emergency fund in the range
of 15K to 20K (my mortgage, the only debt, is 1.5K per month; other
expenses vary between 1.5K and 3K, so I consider this level
reasonable). About 5K to 8K is in various CD forms, and the rest in
savings account.
I advocate that an emergency fund is not needed these days.
I'd suggest fully investing your money to make it work as hard
as it can. For emergencies, first, try to avoid them. But since
not all are avoidable, have a credit card or a home equity line
of credit available (ie, in place before it is needed). Then
use your earning power to rapidly pay it back in the event it
is ever used. If you are one of those folks who misbehave with
credit, then this would be a bad idea, and the cash emergency
fund is the best way to go.

-john-
 
J

Jose Bailen

For cash: this FDIC-insured account yields 5.38% (highest yield in the
market right now): https://www.eloan.com/savings

If you want steady income and don't worry much about short term changes
in the value of your investment, there are some good dividend stocks,
which yield at least 4 percent a year. Unlike bonds or money market
accounts, these stocks provide capital appreciation and further
dividend appreciation. An ETF tracking high-dividend yield stocks is
this one: http://www.wisdomtree.com/etfs/fund-details.asp?etfid=40,
but if you wish to pick the best dividend stocks among this list, you
can check their list of holdings:
http://www.wisdomtree.com/etfs/fund-holdings.asp?etfid=40.
 
J

joetaxpayer

John said:
I advocate that an emergency fund is not needed these days.
I'd suggest fully investing your money to make it work as hard
as it can. For emergencies, first, try to avoid them. But since
not all are avoidable, have a credit card or a home equity line
of credit available (ie, in place before it is needed). Then
use your earning power to rapidly pay it back in the event it
is ever used. If you are one of those folks who misbehave with
credit, then this would be a bad idea, and the cash emergency
fund is the best way to go.

-john-
I tend to agree, John. If one has credit card debt they pay interest on,
the 'emergency fund' is costing them up to 15%/yr. (differ between
high interest card and current CD).
I've advised people who are sitting on $5K, but with that kind of debt
to just pay it off. They can always take a cash withdrawal if a true
emergency came up. And by making the same monthly payment before the big
pay-down, they can quickly become debt free altogether.
And for debt-free savers, the use of the 401(k) capturing any match, can
serve as emergency more, as the loans are low interest and easy to get.
JOE
 
E

Elle

snip for conciseness
I tend to agree, John. If one has credit card debt they
pay interest on, the 'emergency fund' is costing them up
to 15%/yr. (differ between high interest card and current
CD).
I've advised people who are sitting on $5K, but with that
kind of debt to just pay it off. They can always take a
cash withdrawal if a true emergency came up. And by making
the same monthly payment before the big pay-down, they can
quickly become debt free altogether.
Joe, your site http://www.joetaxpayer.com/suze.html
prioritizes having an emergency fund over paying off debt:
"The first rule is to protect yourself from ruin," etc. You
have also indicated that people should not necessarily
invest in a 401(k) beyond the matching, whereas the OP says
he's maxing out his 401(k).

Does your post above mean you have changed your mind on
these two points?
 
J

joetaxpayer

Elle said:
Joe, your site http://www.joetaxpayer.com/suze.html
prioritizes having an emergency fund over paying off debt:
"The first rule is to protect yourself from ruin," etc. You
have also indicated that people should not necessarily
invest in a 401(k) beyond the matching, whereas the OP says
he's maxing out his 401(k).

Does your post above mean you have changed your mind on
these two points?
You caught me a bit out of context. On my Suze comment, she was advising
a caller to pay off a car loan. My remarks there were strictly to offer
the choice between (a) pay off loan, no money in bank or (b) maintain
the loan and have cash on hand. The car loan was low interest and not
something the caller could just get back if the cash were needed. I did
say there was limited information regarding the caller, if I knew she
had a 401(k) with a good balance, or other available credit, my comments
would have changed.

Investing in one's 401(k) beyond the match comes down to three variables:
1) Expense within the 401(k) (of course, compared to expenses outside)
2) Possible large shifts in tax bracket from pre to post retirement.
3) Amount of high interest debt, or other needs for external liquidity.
(I miss anything else here?)

I am running spreadsheets and planned to post a page discussing the
401(k) expenses and impact on savings in my January blog. As always, I
appreciate your advice and attempts to keep me honest.
JOE
 
Ad

Advertisements

R

rick++

John said:
I advocate that an emergency fund is not needed these days.
I'd suggest fully investing your money to make it work as hard
as it can.
For beginning savers with lots of debt, living paycheck to paycheck,
an emergency could mean an expensive late charge, payday loan,
or credit card interest. On top of that the mean time to find a new
job can be several months at low end and more at the high end.
Then a couple months of living expenses saved can be very useful.

For people who have a lot savings- more than a year of income,
a few months expenses in a highly liquid bank account is more
of a "convenience account" to accomplish the same things-
avoid late charges, avoid paying any interest, avoid causing a
taxable event by selling an gain investment. The amount of return
on the convenience fund is not that super important to bottom
line when all savings and investments are totalled.
 
E

Elle

joetaxpayer said:
You caught me a bit out of context. On my Suze comment,
she was advising a caller to pay off a car loan. My
remarks there were strictly to offer the choice between
(a) pay off loan, no money in bank or (b) maintain the
loan and have cash on hand. The car loan was low interest
and not something the caller could just get back if the
cash were needed.
You said in your previous post to just let one's credit card
be one's emergency fund. AFAIC, this differs significantly
from the counsel you give at your site. I do not think
there's anything out of context at all. Or, if there is,
then maybe you should consider showing the same generosity
towards other financial advisors that you imply I should
show towards your posts and web site in this thread. Namely,
there are limits as to how much one can say in a sound bite
medium. Instead, one should read all of what the financial
advisor (amateur or professional) has to say on a subject.
 
R

Ron Peterson

joetaxpayer said:
Investing in one's 401(k) beyond the match comes down to three variables:
1) Expense within the 401(k) (of course, compared to expenses outside)
2) Possible large shifts in tax bracket from pre to post retirement.
3) Amount of high interest debt, or other needs for external liquidity.
(I miss anything else here?)
It's also important to have good investment options in the 401(k).

There is also a need to protect one's wealth from legal liabilities.
 
J

joetaxpayer

Ron said:
joetaxpayer wrote:




It's also important to have good investment options in the 401(k).

There is also a need to protect one's wealth from legal liabilities.
Yes, thanks. I made a bad assumption, that low expenses were enough. The
fund choices better be good as well. And the protection aspect is noted.
I am told that the protection may apply to annuities as well, but
haven't found solid information in that regard. If so, I may consider
that the 0.25% (for the low cost annuities) or an incremental cost of
0.25% within a 401(k) can have that value.
JOE
 
B

BreadWithSpam

Ron Peterson said:
...
There is also a need to protect one's wealth from legal liabilities.
One more thing - putting money into a 401k reduces one's AGI - which
can help make one eligible for other things - including Roth IRAs -
for folks who are creeping up at some of those cutoffs. There are
other deductions which come out *after* the AGI calculation and
which therefore don't help in this regard (ie. mortgage interest,
charitable contributions, etc).
 
Ad

Advertisements

J

joetaxpayer

Elle said:
You said in your previous post to just let one's credit card
be one's emergency fund.
I said; If one has credit card debt they pay interest on, the
'emergency fund' is costing them up to 15%/yr. (difference between high
interest card and current CD).

In the strict context of knowing the OP had the 401(k) all set, I stick
with above. This is in the interest of brevity, otherwise I'd have
disclaimer after caveat, after question.

AFAIC, this differs significantly
from the counsel you give at your site. I do not think
there's anything out of context at all. Or, if there is,
then maybe you should consider showing the same generosity
towards other financial advisors that you imply I should
show towards your posts and web site in this thread. Namely,
there are limits as to how much one can say in a sound bite
medium. Instead, one should read all of what the financial
advisor (amateur or professional) has to say on a subject.
The point is taken, mostly. The difference to me is that here, it's
understood there's a chance for follow up questions and clarification. I
am considering taking down the remarks on others' advice which I
consider unsound, as it's becoming a distraction of late.
 
J

Jose Bailen

I fully agree that it is better to have some cash -even at the cost of
holding some debt, which is more costly- than no cash at all and little
debt. The self-insurance benefit derived from holding cash balances is
higher than the opportunity cost of cash over debt. It is a well-known
fact that most company bankruptcies come from short-term liquidity
constraints, not because of a solvency problem (although, of course,
solvency and liquidity problems are closely correlated).

The optimal size of the emergency fund is closely correlated to how
stable your income and expenses. If you have a steady job -or another
source of regular income- and relatively stable expenses, then you
don't need an emergency fund to cover -say- 12 months of expenses,
probably just 3 months would be enough (and then you can allocate the
rest to higher-yield investments). This also happens with companies and
even countries: when a country has an economy which is relatively
stable and low debt, they don't need to hold too many international
reserves (the equivalent to cash for a country). On the other hand, if
you have very irregular income and expenses that may go up unexpectedly
-for instance, because interest rates on debt are higher- then you need
a relatively large emergency fund.
joetaxpayer said:
You caught me a bit out of context. On my Suze comment, she was advising
a caller to pay off a car loan. My remarks there were strictly to offer
the choice between (a) pay off loan, no money in bank or (b) maintain
the loan and have cash on hand. The car loan was low interest and not
something the caller could just get back if the cash were needed. I did
say there was limited information regarding the caller, if I knew she
had a 401(k) with a good balance, or other available credit, my comments
would have changed.

Investing in one's 401(k) beyond the match comes down to three variables:
1) Expense within the 401(k) (of course, compared to expenses outside)
2) Possible large shifts in tax bracket from pre to post retirement.
3) Amount of high interest debt, or other needs for external liquidity.
(I miss anything else here?)

I am running spreadsheets and planned to post a page discussing the
401(k) expenses and impact on savings in my January blog. As always, I
appreciate your advice and attempts to keep me honest.
JOE

======================================= MODERATOR'S COMMENT:
Please trim the post to which you are responding. "Trim" means that except for a FEW lines to add context, the previous post is deleted.
 
A

Andy

John said:
I advocate that an emergency fund is not needed these days.
I'd suggest fully investing your money to make it work as hard
as it can. For emergencies, first, try to avoid them. But since
not all are avoidable, have a credit card or a home equity line
of credit available (ie, in place before it is needed). Then
use your earning power to rapidly pay it back in the event it
is ever used. If you are one of those folks who misbehave with
credit, then this would be a bad idea, and the cash emergency
fund is the best way to go.
What happens under your no emergency fund strategy if the emergency is
one or all household wage earner's losing their job or becoming
disabled? Then there is not necessarily enough earning power to rapidly
pay back the amounts borrowed on credit cards.

Also, many credit cards now have universal default provisions, and in
the event of disability or losing a job a household could find
themselves missing some bills and then having the credit cards they are
depending on increase their rates.

Andy
 
J

John A. Weeks III

Andy said:
What happens under your no emergency fund strategy if the emergency is
one or all household wage earner's losing their job or becoming
disabled? Then there is not necessarily enough earning power to rapidly
pay back the amounts borrowed on credit cards.
This is where my plan really shines. You simply cash out the
investments, and use that money to repay the loans. Since you
invested the money in good funds rather than stuffing it in a
mattress, you should have far more money in those investments now
than had you kept it in a mattress. It leaves you in a better
financial position when you get layed off. Since you are using
credit for the emergency fund, you are not under pressure to cash
out on a given day, so you can time the market or wait out a down
turn, which helps avoid the risks of an investment downturn.
Also, many credit cards now have universal default provisions, and in
the event of disability or losing a job a household could find
themselves missing some bills and then having the credit cards they are
depending on increase their rates.
The lesson is to not miss any bills. That is why you want some
quick credit available, and the investments to pay off the credit
balance. The trick is to get the credit account established before
you need it, so you get a good rate based on your good job, not a
high risk rate based on being unemployed.

-john-
 
Ad

Advertisements

J

joetaxpayer

What happens under your no emergency fund strategy if the emergency is
one or all household wage earner's losing their job or becoming
disabled? Then there is not necessarily enough earning power to rapidly
pay back the amounts borrowed on credit cards.

Also, many credit cards now have universal default provisions, and in
the event of disability or losing a job a household could find
themselves missing some bills and then having the credit cards they are
depending on increase their rates.

Andy
Andy, since, as with most questions here, the answer would often differ
based on information we know about the OP, but change for a different
poster, I have a question in turn. Do you (and others) feel that the
emergency fund is always indicated?
I can tell you when I think it is, so that even though I agreed with
John's remark that it's not, of course there are those that should have
one. [I took John's 'not' to be a generalization good for 80%, not an
absolute good for 100%]. Someone who for whatever reason has no source
of tappable cash they could raise at a reasonable rate in a reasonable
amount of time.

Someone at the lower end of income would be better served by making
401(k) deposits to capture the match, if this is an option. The perhaps
$5000 they maintain in an emergency fund can morph into $8800 between
the tax effect at 15% marginal rate and a 50% match. Now, I view this as
$8800 they can borrow if the transmission goes, or some other unexpected
expense hits them. If they lose their job, and fall into the zero
percent bracket, they owe $880 in early withdrawal penalty, and are
still ahead.

In the middle, someone with a 20% interest credit card would save 15%,
the difference between the card rate and the saving rate. $750 in
interest charges isn't a small amount for them. Yes, I need to be
sensitive to the risk they'd have to borrow it back, yet I still don't
see how if they lost their job a year hence that they'd be worse off
borrowing back that same money.

At the high end, the OP of this thread is max'ing his and the missus
401(k) so it seems that they have that to borrow against. The thread
quickly turned to 'no emergency fund needed' so we never asked how high
the mortgage interest rate is. Maybe paying some principal and pulling
in the term as well should be advised. I think that as one's income and
assets go up, the desire for emergency funds would diminish. I do think
that for others it's a bit counter-intuitive.

About 4 years ago, I came to this conclusion, and proceeded to take the
liquid/emergency savings, then earning barely 1%, refinanced the
mortgage, reducing the rate to 5.25% and the term from 20 years to 15.
At the same time, I opened up an equity line. I felt the risk of having
to borrow against it was low enough, and the interest saved was money in
our pocket that I was comfortable doing this. I know that this approach
is not for everyone.

JOE
 
Ad

Advertisements


Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Top