Too much in bank accounts/too little invested?
Hello! We've been using YNAB for nearly a decade and have been fortunate to gradually build up big savings categories, which translates to big liquid savings balances, around $80k total. Our biggest YNAB category balances:
- $40k in emergency fund (roughly 6 months of expenses)
- $19k in new car fund (saving for minivan in the next year or two - current cars are from around 2010 and one may be on its last legs/wheels)
- $3k in home maintenance (about to become $2k after some upcoming work)
- $2k in auto maintenance (may need much of this soon)
- $2k in new computer fund (may need in the next year or two)
- $1k in phone replacement (may need in next year or two)
- The rest of the $80k balance mainly comes from lots of categories in the $50-$200 range that we're regularly using, plus bigger ones like groceries, mortgage, daycare, taxes, utilities, home/auto/term life insurance, etc.
These big categories are all for good reasonable causes, I feel, and I know it's not smart to invest money that one may need within 5-10 years...so maybe that answers by own question 🤔 ....but it still feels wrong to have all this cash sitting in savings accounts earning at most .4% interest, when it could be compounding in the stock market. Can any good arguments be made for investing some of it? If so, how does that mesh with the YNAB budget, as the value in the stock market would be fluctuating?
Or maybe I'm just looking for reassurance that it's okay to have around $80k sitting in our checking and savings accounts, barely making any interest! Other details about us:
- We're debt free except our mortgage
- Household income before taxes is about $135k
- Current combined investments (almost all retirement) are around $125k
- We're in our mid thirties with a 2-year-old and possibly one more on the way
- Average daycare cost around us is $20-$25k/year
- Don't have much extra money at end of the month, but are investing extra into retirement, a 529 plan, and HSA
Thanks for any input!! 🍻
I would reconsider the emergency fund. The goal is to weather all unexpected expenses but as a long term YNAB user, you probably have close to zero unexpected expenses. Also, the emergency fund alone is costing you on average $3200 per year, not even accounting for compound interest.
I would recommend watching this to get a different perspective: MMM vs. The Emergency Fund - MMM Show Episode 9
I've had this issue and made a thread about it a couple years ago (albeit when interest amounts were vastly different) https://support.youneedabudget.com/t/y7ay7a/what-do-i-do-with-all-this-cash.
My opinion, leave your cash where it is right now. You have a healthy income and expenses to match. I've been YNABbing for over a decade too, and I'm very careful about what cash I subject to major market fluctuations (Hello, 2020). Personally, I keep a certain range of cash in an Ally Savings account, and when it gets to the high end (from bonuses, lowering of expenses, etc.) I transfer money to a Schwab conservative/income based Intelligent Portfolio. I keep it on budget, but only record the dividend transactions and ignore market fluctuations. A year ago the actual balance dropped BELOW the YNAB balance and I needed to draw from an offset category to make up the difference. That was a big eye-opener.
Other experienced YNAB investors and savers can chime in. Great job in getting to where you are though! Another long-term YNAB success :).
ETA: I have about $80k in checking and savings accounts on budget right now too. And I need it there. It gets moved around for spending, and then replenished regularly. So there's some reassurance :).
I wrote a post for the YNAB Blog recently about this topic exactly:
The answer is no, but also...
Are you familiar with US series I savings bonds? There's a maximum contribution of $10,000 annually per person, but the interest rate starting next month will be 3.54%. It adjusts every six months but will never be lower than the prevailing inflation rate.
I keep some of my I-bonds in my budget, and consider them part of my emergency fund.
That's not all that much cash. 😉
Matthew makes a great suggestion with I Bonds, as they are inflation protected and tax deferred.
I also have an alternative solution involving, but to minimize budget risk it requires a taxable account that has a reasonable amount of money in it that has no purpose other than to be invested. I've written about my technique here and on r/ynab at reddit on several occasions.
The premise is that at least 50% of invested money in high volatile investments needs to be earmarked as "invest only" money in an isolated category and not tied to a normal spending/savings category. This protects your actual budget from losses in all but the most sever downturns while still getting the exposure to the expected higher return. Beyond that you target an amount of cash you want to have and if you exceed that amount each month, sweep the excess. if you have an expensive month, don't sweep until your cash builds back up.
My cash target is 6 months take home pay + a few categories that I expect to be spent in the short term (we're close to getting the next car, and my daughter has a lifecycle event coming up in 18 months so we'll be spending that money soon). Thanks to the YNAB API, I pull the numbers into Google Sheets and let that crunch the numbers in real time for me.
For example, right now it looks like about half of my last paycheck will be investable (we bought some outdoor furniture and it wasn't cheap). But at the same time we have plenty of excess this month due to a tax refund, so the amount we can add to the invest-only category is actually more than we will be able to invest based on cash flow. So this actually reduces our budget investing risk.
The taxable account (broad market US and international stock funds) + I Bonds are invested as part of our overall asset allocation for a long-term portfolio.
I think the "no emergency funds at all" is a bit of a misnomer. I don't have an "emergency fund" because that is too generic. But I do have separate categories for loss of income fund that would cover 6-8 months and that gets added to , annual medical out of pocket max funded at the beginning of the year with a goal of being able to fund "this year" and "next year", home repair fund, auto repair fund and so forth. All of that is on budget. I also invest on a regular basis, but that's addressed through funding my Investment category every month. I have enough to buy a new car in cash (well, I'll have enough tomorrow when a wire payment comes through) and since I don't plan on buying a new car until 2030 (I buy new and drive until they die on the side of the road), I might consider investing those funds because the horizon is so far in the future. That is unless I get in a car accident on my way to the grocery store that totals the car. So maybe I'll just dump it in an HM Bradley account that earns 3%.
Silver Guitar said:
The only exceptions might be major things like our heat system breaking or the roof falling apart, for which we won't be keeping $10-$30k laying around
Just a reminder that each of these items have a finite useful life and will need replacement at some point, so you should be saving up for those. In 2015 during one of my seasonal inspections, my HVAC servicer told me that I had maybe 3 years left in the system. So I saved up money and had it replaced in 2018. I had actually saved up enough to do it in spring of 2017 but I ended up on a 13 week business trip and missed the window of when I wanted to do it (in either spring or fall).
Phillip Rt said:
How high is your "Burn rate", the bills you cannot cancel? I think most people cut there spending to the bare bones in case of unemployment.
This is a good point. I can drop my expenses to 1/3 and I am don't have a ton of excess... except travel :). I did this for 8 months in 2019 while taking time of to transition and first part of the pandemic. Timing was pretty good too.