Is an emergency fund enough cash on hand?

Investing
#1

Hi Community

I have been debt free for quite some time minus my mortgage (bought a house in March 2020). I have a $37k emergency fund. Max out my 401k and also max out my IRA each yr and also have a small managed investment account. Last yr I moved about $100k from a saving account to a preferred deposit account which was giving me an almost 3% interest rate and is now down to a .05% interest rate which essentially puts me back at square one. What advice do you have for someone who’s is a little nervous to take the leap and throw that $100k into investing? Is my $37k enough cash at hand. Should I save part of the $100k and add it to my emergency fund and invest the rest? The huge drip in the markets that happened back when Covid first hit has got me a little hesitant. I lost around $45k which it has almost bounced back.

Also, I have my IRA and a separate investment, both managed accounts through Merrill Edge. I see Merrill is barely mentioned compared to Vanguard, fidelity, schwab, wealthfront etc. Would you recommend the others over Merrill?

Thanks
Daniel

#2

Daniel,
My recommendation is to do a couple of things:

  1. What number of months does $37K cover in your expenses? 3-6?
  2. The 100K is for emergencies? That seems very high, but would move some to emergency savings if $37K isn’t 6 months worth. (less months if you have a very secure job)
  3. If you aren’t real comfortable in the market right now, have you thought about investing a portion or all of the 100K in an investment property?
  4. Read the other articles and posts on this community about Managed Accounts. There are a lot of hidden fees and if you are as interested in the markets and investing as you sound, you probably could do the investing on your own and keep more of your money.
    Good luck!
#3

Hi Daniel,

Well, broad strokes you’re obviously killing it. Maxing out your IRA and 401k will make you a ton of money over your career. My thoughts:

  • I’d be concerned you’re taking “too little risk” if you leave a lot of money in cash (even at a 3% rate) you’re going to look back in 10-20 years and realized you missed out on hundreds of thousands of dollars of growth.
  • Common wisdom for an emergency fund is 3-6 months of living expenses. Any more than that and you’re leaving too much cash out of the game. 6 months is a long time to figure out what to do about your income if you have an emergency. Also, it’s not like the other money is gone. You can certainly take money back out of your investments if you want/need to.
  • As @Shaystr mentioned, I would definitely be concerned about the fees you’re paying on those managed accounts. Over the course of a career a 2% annual fee will erode about HALF of an investment’s potential value. Dumping that nice big income of yours into buying and holding low-fee index funds is the way to optimally build wealth! :slight_smile:
#4

@Jeremy @Shaystr Thank you both for your replies. Right now the $37k is outside of the additional $100k and the $37k covers about 7 months of expenses so it sounds like that’s a good amount or maybe even a little too much. I opened the managed accounts less than 2 yrs ago only because I wanted to get my foot in the door and start somewhere while I educated myself. Though I still have a lot to learn, it seems like this is something fairly simple that I can do on my own based on the date index strategy (which by default I chose for my 401k without really understanding the benefits) and I’ve had little to no communication with and don’t really know what Merrill’s strategy is so I’m essentially paying a fee that I’m not sure I’m receiving any benefit from.

@Shaystr as far an investment property goes, I’ll be honest I have no clue what that entails but I’m intrigued to learn more as I expand my knowledge on how I can make my money work for me.

Thanks
Daniel

#5

@DanT327 Have you looked into the FIRE community? Not sure how old you are, but if you are saving 50% of your income, you may want to look into FIRE (Financial Independence, Retire Early).
Sound like you are interested in financial learning, so that’s great!
Also, think about charitable giving. That’s always a wonderful place to be in if you have the ability in your life to help others.

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#6

@Shaystr thanks! I’m 34, I’ll definitely look into the FIRE community. Always looking to learn. I already give to charity, so I’m covered there :smile:

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