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Tuesday, March 28, 2017

Change in Savings Plan

Posted by Dave on July 29, 2014

In order to pay off our mortgage at the end of May, my wife and I had to almost zero out our entire cash savings we had. I will be the first to admit that the amount we had sitting in a 1.3% ING (or Tangerine account now) was probably too much. There were relatively safe alternatives to the interest rate we were getting that were just as liquid to access, for example iShares XBB is yielding almost 3x my Tangerine account right now, at 3.2% (previous year trailing yield).

I have what could possibly be described as an irrational angst towards running out of money. As of this April, I’ve worked for the same employer for over 10 years and have no real concerns for my prospects in long-term employment – whether I continue working where I’m at or with a different firm in the city I live in. With no mortgage payments, our monthly bills have been reduced by around 50%, leaving less of a reason to have a significant amount of money set aside.

My largest concern is a significant expense that I can’t pay – something like a furnace breaking, a major car repair or a pipe bursting somewhere in my house. Going forward I think we will still keep some cash on hand in a savings account, but we will lose a majority of the previous “buffer” we had prior to the mortgage being paid off in exchange for hopefully higher returns on our savings account.

The question comes down to how much money is a reasonable amount to keep in cash savings. Is $1,000 enough? Should we even bother keeping any savings in cash, or just invest 100%? I currently have an unsecured line of credit along with a pretty good limit on my credit card. Between the two options, I should be able to manage any significant expenses. I could turn the unsecured line of credit into a secured, reducing the interest rate and monthly insurance requirements prescribed in the agreement.

A couple of years ago, I was very comfortable having a bunch of money sitting around. With no debt, I think I am willing to be a little more risky with my finances. This type of change will initially take me out of my comfort zone, but I have to remember that I’ve kept a bunch of cash sitting around and it’s essentially been losing me money over the past decade or so.

Is there a particular expense that you keep money around for “just in case?” Are you comfortable borrowing to cover emergencies?

 

Comments

10 Responses to “Change in Savings Plan”
  1. jon_snow says:

    We try to keep between 50k and 100k available in cash – not necessarily for emergencies, but for stock buying opportunities.

    When good companies get unfairly whacked (like BCE did when a rumour emerged about Verizon coming to Canada) I have the cash to swoop in and buy. Did the same with Potash of Sask. (break up of Russian cartel) and quite a few others.

    Now that I’m soon to be ER’d, I’m not sure this cash stash will continue to be this large.

  2. I keep $2k in my chequing as it avoids bank fees. I also keep at least 5K in my high interest savings, because I only get interest if above 5K, and that forms part of my emergency fund. Rest of e-fund is in TFSA in mutual fund investment.

  3. deegee says:

    In my local bank’s chcking account, I keep about $750 over the minimum amount to avoid monthly fees. This is enough to cover any small, unforeseen expenses which may arise from month to month. I tap into this buffer or cushion fairly often, even if it is for only one or two hundred dollars. This is my first-tier emergency fund.

    My second-tier EF consists of about $40k in an intermediate-term muni bond fund. I don’t like to have large amounts money earning zilch so at least this fund earns 2%-2.5% (annualized) monthly dividends (about $100 per month) and most of it is tax-free. I also have checkwriting privileges on this account which makes it more liquid and accessible in a pinch.

    I don’t tap into this fund often, on average less than once a year for the last 20 years. I am willing to risk selling at a loss in exchange for the montly earnings andthe possibility of selling a a gain. This fund is part of the bond portion of my portfolio.

  4. Tawcan says:

    We keep the minimum balance in our TD chequing account to avoid bank fee. We do majority of our banking with a local credit union where there’s no minimum balance.

    I think if you don’t have any consumer debt, having about $2-5k cash in the bank should be sufficient as long as your job is secured and you’re living below your means. If you have investments in non-registered accounts or TSFAs, worse case scenario would be selling the securities and use that cash amount to cover the large expenses.

  5. George says:

    I’m in the same boat – no mortgage or other debt, and working on building investments. We keep 3 months of expenses in a high-interest savings account. The funds haven’t been needed, but they’re there to cover any unexpected house or car repairs, or just to cover living expenses if we face an unexpected bout of unemployment or illness.

    I’m really not a fan of having a LOC or credit card as an “emergency” fund. If there’s an emergency that impacts income-earning potential, the last thing that you’d want to do is to borrow money. At the point of re-employment, there’s a huge mess to clean up. I’d rather have cash on hand.

    The opportunity cost of keeping a few thousand dollars in a savings account (versus being invested somewhere) is negligible compared to the peace of mind that it brings.

  6. James Brown says:

    As with many folks here, we keep enough in our bank account to zero out the service fees. Otherwise, we just have our LOC (secured against our paid-off house) for emergency funds. It’s absurdly low interest, and if the emergency isn’t income-affecting, we’ll pay it back down rapidly. If it is income-affecting, it gives us a few months (or years, though I wouldn’t want to use it that long) of leeway so that we aren’t needing to panic, and can free up assets advantageously instead of Must Sell Now!.

  7. greg says:

    sometimes I have buyer’s remorse, but looking at long-run trends will show you how insignificant that 5% drop is. It’s hard to hold the line, but knowing your strategy, outlook, risk tolerance, and target asset allocation can help rationalize once as policy without second-guessing every decision.

    worried about your exposure to interest rate risk? consider simply redirecting *future* purchases to slowly change the balance of your portfolio (you’re still earlier on, so contributions will be a bigger percentage than otherwise).

    also, it’s more abstract, but realizing the absurd diversification in a few standard index funds is quite interesting — each diversification smooths the ride, but likely loses out on a more optimal option.

  8. George says:

    It’s actually a complete guarantee that diversification in an index fund will cause you to “lose out” on the more optimal (higher-return) option. The problem, of course, is figuring out in advance what that higher-return option actually is.

  9. Tina says:

    I used to keep $6-10k in an emergency fund earning squat. I decided to invest it in Vanguard this year and now its earning $ while sitting there doing nothing. I have $100 cushion in my checking account in case I forget to account for something in the checkbook but I can’t imagine having hundreds or thousands for this purpose- are bank fees that much more in Canada? A few minutes a month reconciling your bank statement each month would free up that money to earn more $. It’s a hard thing to let go of the notion of giant emergency funds ( much like the motion that you need 80% of pre-retirement income to retire on) but once that $ starts making more $ for you, you are open to seeing other options for handling emergencies. I would consider a HELOC for worst case scenario issues and then keep the line of credit open and untouched ( ie don’t remodel the kitchen with it).

  10. James Brown says:

    We have a chequing account from TD which has unlimited transactions for a $14.95 monthly fee. If your balance is greater than $3500 for the month, the fee is waived. This works out to a roughly 5% return in exchange for having that cash parked in chequing. We did the math, and then said “$4000 is the new zero.”

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