The Cash Problem

This topic has come up in conversation many times, but the gist is, what do you do with a large sum of cash that you may or may not need soon (ie. emergency fund)?  Next year, we’re going to put aside almost $1000/mth towards our Roth IRAs – except we won’t know until March/April 2016 if we can contribute to our Roths or not (due to income limits).  There’s a really good chance we will be able to based on our deductions, but it’s not a 100% chance, so I don’t want to put money into a Roth to have to pull it back out again at tax time because we made too much.

$1000/mth is a lot of money to not have working for us.  Our best interest rate is 0.79% at CapitalOne360 (to give you an idea, we’re getting $45/mth on the 85k waiting for our house purchase).  If we put the money into our taxable investment account, I’m not sure that I’d go through the effort of taking it out as I’d pay a short term trading fee on at least $3k of that (I’m a buy and hold investor).  I need to research if Fidelity will let me transfer in-kind between the taxable and Roth accounts – then I can just move over $5500 of FSTMX and be done with it.  If we can’t contribute to a Roth for the previous year, it’ll just end up in our taxable account anyway.

The Roths are only going to have a max of 11k annually (unless we get another limit bump from the IRS), but our emergency fund will have almost 60k in it.  That’s a lot of unemployed little green workers.  I’m tempted to split how we deal with it and put 5-6 months in actual cash, and the rest in a taxable investment account with a relatively low risk.  I know we don’t want to be losing it all in a market crash, but at the same time, I feel bad for not putting it to work for us.

What do you do with your “cash” buffers/emergency funds?  Do you just leave them in a checking/savings/money market account or invest them more conservatively? 

6 thoughts on “The Cash Problem

  1. donebyforty

    That’s a tough one. We keep our emergency fund in a Capital One 360 savings account (.75% currently). There are opportunity costs but we find them to be fairly minimal. I mean, we are going to have some money in cash, so what delta are we really talking about? Maybe $5k? No investment of that size is going to earn so much that we really freak out about the lost opportunity. And cash isn’t all bad, you know?

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    1. Mom Post author

      With 60k put aside and 4% annually, we’re looking at $200/mth vs about $40/mth at .75% (assuming simple interest). My nature still wants to minimize the known opportunity costs!

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  2. Leigh

    I would just leave it in a savings account personally. That seems the simplest. In between jobs, I’ve been leaving all of my savings from my paychecks and bonuses in a savings account and I’ll reorganize once I start a new job.

    You could always invest it in a taxable account and then when you know what you can do, sell the funds and move them into your Roth IRAs. You would have to pay taxes on them if they go up, but that’s better than leaving the money out of the stock market for a year if you plan to put it in later. Or maybe you should just make your emergency fund slightly smaller and then it’ll build up more throughout the year to the amount you actually want.

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    1. Mom Post author

      I think I’ll follow Mr ans Mrs PoP down the path of splitting my money into cahs and investment. 6mths cash, 6mths invested and let the Roth money sit in cash until the following year. Have to save the 6mths now!

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  3. Mrs PoP

    We are in the same boat where we’re never sure about Roth $ until we get our final W2s… so we use it to balance out the amount we keep in cash. Starting the year with $20K in cash – Ally money market mostly, ending with $31K. (Mr PoP would love the cash amount to be a tad higher and I’d prefer it a bit lower, so this is a good way for us to compromise.) The rest goes into the taxable Vanguard account which we can access really easily.

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    1. Mom Post author

      That sounds like a plan. We’re really close this year since I didn’t max out my 401k/403b all year long. But I think next year will almost be 99.9% sure thanks to the new limits, but we’ll just have to wait and see. I like your idea of using it as a bit of a buffer on your cash throughout the year. Dad and I are still in the ‘baby’ efund mode of only 5k put aside (plus the ungodly amount of cash waiting until closing). By the end of next year, we hope it’ll be a fully funded 6mths or more of expenses. I think I’ll invest (relatively conservatively) the remaining 6 mths as it grows and just let our Roth kitty make up the rest of the cash.

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