How much cash to keep on hand?

This is a question that I’ve been really struggling with recently. As I’ve been strongly considering leaving my job in the last few months, I started being a little anxious about how much cash I had around and wanted to stockpile more cash, but then every month, I’ve also wanted to throw the extra money from my paycheck at the mortgage.

What do my liquid funds look like right now?

  1. $19,551.10 in savings ($300 at Chase and the rest at Ally)
  2. $10,172.00 in Series I Savings Bonds that are redeemable (if I redeem them in early September)
  3. just under $17,000 in taxable index funds at Vanguard
  4. total: ~$46,723.10

That is approximately one year’s expenses, maybe a little more or a little less depending on which twelve month period you look at. Yes, I can’t rely on the stock index funds being worth more than 50% of their current value, but that’s still a decent chunk of change. And I should stop forgetting about the Series I Savings Bonds because they were meant to be potentially long-term cash.

So then why, as I contemplate taking some time off between jobs, do I want to stockpile all of my extra money as cash over the next few months? I guess it would help, to a certain extent, to not have to replenish my savings after starting a new job, but especially if I get my second bonus for this year, I don’t need to stockpile all of the extra money as cash. Based on my current budget for the remainder of the year (October, November, and December since September’s spending is more than covered with my August paycheck), I should set aside an additional $9,381.65, or about three months’ spending. That seems much more reasonable to me than simply attempting to hoard all of my money, which was my going plan… And then, once I start a new job, if there is any extra money left in my savings account, I will throw the rest at the mortgage.

Readers, what strange financial habits do you have in times of stress?


22 thoughts on “How much cash to keep on hand?

  1. Are you planning more to quit your current job and just take time off?? It sounds like you banking up to have your expenses covered for the next 6 mo to a year then be able to search for a job during that time… ??

    Personally, I could avoid that stress by finding a new job before quitting my current job.

    • I’m planning to line up a new job before quitting, but to take about a month off between jobs. That’s why I think I’m overreacting a bit, since I will have a job lined up.

  2. I stockpile. It’s ridiculous how much cash we have in savings right now. Absolutely ridiculous. (Why? Because we’re slowly doing a bunch of home repairs and I’m considering going on unpaid leave next year so I can get some work done. So… uncertainty.) Not what I would recommend someone doing if they were asking for advice. Fortunately I’m not asking myself for advice!

    • I was wondering if anyone else had a tendency to stockpile too! I probably don’t need to stockpile since I will quit with a job lined up, like Tim said, but it is so hard not to!

      • And in the grand scheme of things, I’m losing a few hundred dollars doing it, maybe, and not losing transaction costs, hassle factors, or (if put in the stock market) stock market upsets. When your networth is high, safety and lack of hassle can be priced higher.

        • Basically what I said– losing a few hundred dollars in exchange for more security and less hassle isn’t a big deal when your net worth is high. Suze Orman, in fact, keeps most of her assets in safe investments because she has a low risk tolerance and she can afford to indulge it. Yes, she’s losing money, but she has so much money it’s not going to make much of a difference to her quality of life not getting those gains. (And she recommends that other people put a larger percentage of their income in stocks than she does because they can’t afford to indulge that kind of risk aversion.)

          Here’s a picture of the marginal utility curve:

          I’m willing to pay a few hundred dollars not to deal with the hassle of capital gains tax and the regret if the market drops when I need cash. If I had a lot less money, then I couldn’t put that large a price on the hassle, and I might choose not to do the optional thing I was saving money for with the money in the stock market if it dropped. With my high wealth, I can do it anyway even if there’s a loss in stocks, but it’ll make me sad that I had to sell at a loss.

        • Reminds me of MIke Piper of Oblivious Investor’s talk of how you need to evaluate how much risk you need to take and how much risk you are willing to take. If you have more money saved, you don’t need to take as much risk and if you have less saved, you need to take more. That’s why I add another percentage point to bonds in my target asset allocation for every $100,000 I have saved because I’m saving so much so early.

          Yup, I would totally sell stocks at a loss if I need the money. I’m not really concerned about whether they’re up or down.

  3. I’d say you really only have 30k in cash. You could easily break the I bonds and that wouldn’t be a huge deal since they’re earning so little. The stocks I would only sell if they were up. So maybe 6-12 months expenses.

    I don’t think there’s anything wrong with holding a lot of cash. I would rather hold cash and have the flexibility than to pay down a mortgage. Especially when you take into account the tax deduction on your marginal interest bracket. But at the same time you want to have a goal for that cash.

    I think your goal is simple – to use the cash to provide as a buffer if/when you switch jobs. And on that note, I am 100% for quitting your job without having another one lined up. Obviously it is ideal to have one lined up but if you don’t who cares? You have money saved up, you have a buffer, etc. What’s the point of saving so hard if you can’t take advantage of an opportunity like this?

    Companies list new openings when they need people asap – not for 1-2 months from now. That is why so many people have to go right from one job to the next. I quit and people were shocked that I didn’t have another job lined up. Who cares? I had 50k in cash as an EF, multiple streams of income and I know how to make money. As you know, I took 3 awesome months off and got a new job at a great company :)

    • Oh the stock index funds are definitely up! Only about 80% of the ~$17k is money I contributed. The rest is gains and 99% of the gains are long-term. Stock index funds are interesting because they are liquid (easily redeemable), but not safe (principal can disappear).

      One pro of quitting your job without another one lined up is that you also have more time to prepare for interviews. Most larger companies I’ve talked to are totally okay with setting a start date out a month or three. Maybe the smaller ones aren’t as much, which is logical.

      I would say that I have ~37,723.10 in cash right now, if you only count half of the stocks as cash and I think my goal should be to get that back up to 12 months of expenses, which if you look at August 2013 through July 2014, that would be $49,666.70 and if you look at September 2013 through August 2014, that would be around $47,650, so I should set aside at most another $9,926.90 in cash.

  4. I would tend toward hoarding as well, even though it’s not very rational since you’ll have your other job lined up before you leave. But if the other choice is to put it toward the mortgage, you’re not losing much to keep the flexibility right? We are hoarding now as well in advance of our underemployment/job transitions, but I think we’ll still max out our 2014 Roths by April even if we’re still in transition because I don’t want to accept that downside.

    • So much of personal finance is not very rational though! I irrationally maxed out my 401(k) contribution when I thought I might want to leave (in July). I did the same thing last year, in October. So I think I need to revise my method of maxing out my 401(k) ;) Nope, I’m not losing much to keep the flexibility, so I probably should. This anxiety also makes me feel like I need to keep a bit more cash on hand.

  5. I feel like I am keeping too much cash. I pay higher interest on my car and my condo than I receive on the cash, but I don’t want to invest the cash. I should either pay down the debt or invest it – not sit on it. It’s stupid, but I do it anyway.

    • Does keeping that much cash help you sleep better at night? If so, it can be worth it. It’s not stupid if it helps you sleep better at night.

      • No, I don’t think it has any effect on my sleep habits. I’ve always had trouble sleeping regardless of the portfolio size or how it was invested. ;-)

        I’ve actually have had zero bonds for the past year and a half or so and most of that was spent unemployed. Looking back that’s actually super risky – I just got lucky. :)

        Though I guess if I kept it all invested and sold what is currently in cash now, I’d be up a bit more.

  6. My finances are very similar to yours on pretty much all levels. I keep 18 mos expenses accessible, but I throw an extra $1000 each month at the mortgage and make quarterly lump sum payments on top of that. At my low fixed mortgage rate, offset by accruing interest and deductible mortgage interest, that seems to me like a low price to pay for the additional security that comes from increased liquidity.

    • Cool! I think I should move to keeping about 12 months expenses in accessible. I don’t really want to go below $10,000 accessible at any time because all of my appliances are old enough that they could break at any time.

  7. We have about $27 in cash reserves (my new name for my emergency fund, money I never plan to spend). We probably should bump that to $30k. T probably has $15k in his checking (why???) that won’t be spent, then we have another $10k in accounts that will be spent on various home stuff. (Aside from projects, we pay insurance & taxes ourselves rather than as part of the mortgage payment.)

    What I thought this post was about was literal cash on hand in dollar bills, for emergencies. It is the one thing missing from my earthquake emergency kit!

    • Oh yeah I’ve never called it an “emergency fund”. At first, it was just “savings” and then when I started other savings accounts “general savings” or “reserves”. I pay the insurance and taxes myself too – so much better in my books. Your taxes must be expensive enough that you can earn some interest on the float!

      I should probably keep more actual cash in bills on hand than I tend to… I managed to run myself out of cash completely today.

  8. I tend to stockpile cash too much and was just looking at that recently. I’ve got over 70K in savings that I don’t intend to touch unless it’s for a down payment (not likely in the next two years) so was just considering where I should park it to earn a bit more than the barely 1% it currently earns. I might bump up the earnings to a whopping 1.25% if I put a large portion of it in a CD for a couple years, the fact that I haven’t yet is entirely irrational.

    Prepping for being out of a job involves more hoarding but only if I didn’t have one lined up already. That’s only happened once recently thank goodness.

    • That extra 0.25% will earn you $350 over the course of two years on 70K. That’s not completely chump change!

      The job hunting process has taken much longer than I thought it would and I’ve become much more zen about how the transition will go at this point. Sometimes I tend to focus on the numbers when other things are stressing me out!

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