@HaroldCrump: The $thousands estimate was in response to the more extreme recommendations from @james4beach who recommended building 2 years of cash =~$52,000. I figure if I aim to keep ~$10k, that's $42,000 more in cash than what I am aiming for. Keeping it in cash at 1.3% vs ~5% gain = ~$1500 lost income. Vs 8% gain = ~$2800 lost income.
@Harold, I think the thousands in lost returns he was talking about was actually based on the recommendation from James to have 2 years ($52k) sitting in cash. Even at 4% that really would be thousands lost.
@FP you've got a lot of assets right now in relation to your financial responsibilities. If your girlfriend were actually your wife and was on mat leave, then you'd want more cash on hand. Since that's in the near future I'd totally lean toward an 'invest to save' approach. Put everything into something with good yield. Make sure it's not in an RSP so you can get the yield out, then hoard the dividends into a savings account. As it stands today, that's a risk you can take. By the time you've got the mortgage and kids, you'll have built up the cash without sacrificing the earning potential.
OK, sorry, I didn't see that it referred to 2 years of cash.
Originally Posted by FinancialPanther
I can understand why it appears excessive to you.
2 years would indeed be extreme for most folks.
You can do 6 months or 1 year.
The other aspect is that you should try and reduce the number of emergencies you are self-insuring for (an emergency fund - cash or investments - is essentially self insurance).
You can transfer the emergency to an insurance company by using various types of insurance for each risk.
Such as getting $2M auto insurance for liability, disability insurance for own job, critical illness insurance, etc.
Of course, there should be a balance - don't go crazy buying all sorts of insurance either.
Decide what your key risk factors are and insure against them.
Then decide how much cash savings you need for the remaining risks (such as the difference between your annual expenses and your EI eligible amount).
You can't save for unknown and indeterminate risks, so don't sweat it.
My 2 year ($52k) cash reserve idea may also save you thousands, if the markets were to tank (as they have twice in the last 13 years). Also there have been very long periods recently where stock markets basically matched, or trailed, cash/GIC returns ... so I don't think it's as big a sacrifice as you're making it out to seem.
Originally Posted by KrissyFair
Last edited by james4beach; 2013-07-19 at 01:09 AM.
Hi everyone, I understand that 2 years of expenses in a savings accounts sounds really excessive. Maybe it's way too much, for his situation. Especially if (as mentioned) he would be eligible for employment insurance in case of job loss.
I still think 1 year of expenses is a good amount to shoot for. There is no hard rule for this kind of thing.
If you were self-employed or had highly volatile income (as I do), then I would still suggest more than 1 year.
But it's really impossible to know what will come up in life. This is why I endorse having a large savings account. Especially for young guys like me & OP, it's hard to imagine what kinds of things will happen to you (because we still think life is simple and we're invincible). For instance I had a relative come down with a serious illness, and found myself traveling a lot more to visit and provide support. Obviously this was totally unforeseen. As a result, my income suffered a bit and with the added stress I eventually had to leave my job. You can't get EI when you quit your job... so in my case, having over 1 year of expenses saved up was really great.
When you're trying to expect the unexpected, you generally need more cash than you expect you'll need
Also, while the line of credit is certainly an option in lieu of cash/savings, I don't think it's the best idea. Lines of credit are callable loans (as I recall both on secured and unsecured loans)... meaning the lender can suddenly demand their money back or reduce the credit limit. And again this is more likely to happen in bad economic times or economic crisis, the same time you're likely to lose your job and may desperately need the money. This did happen to American borrowers in 2008. It's a real danger.
If the idea of a big cash fund causes you pain, here's something nice about it: as your total wealth grows, the cash for emergencies stays relatively constant. For instance with 100k net worth, sure 26k seems like a lot. But if you're sticking with the 1 yr idea (26k) before you know it your net worth will be 200k, then 300k, and suddenly your emergency fund is less than 10% of your net worth and really a non-issue. Yet it's potent as ever to save you in case of disaster. This is all good news.
Last edited by james4beach; 2013-07-19 at 01:34 AM.
FinancialPanther: another thought on the emergency fund. As I understand it, your main hesitation is the lost returns versus stocks, due to cash sitting in a savings account at such low rates like 1.3%
The line of credit is one idea, so that you're not losing returns on that money. But it has the danger that these are callable loans, and limits can be reduced on you suddenly.
Another idea is holding a GIC, provided it has a cashable option. (This article talks a bit about this.) For instance Outlook Financial's 5 year GIC earns 2.7% and is cashable (with penalty obviously; rate goes down to 1%). Here's the logic on this one. You expect that it's very unlikely you will need to use this emergency fund at all. So maybe that penalty rate is acceptable. And if it's unused, you're earning 2.7%.
Now that 'lost performance' calculation is more favourable ... for instance stocks @ 4% versus GIC @ 2.7% for the 26k amount, you're potentially missing out on $338 a year. Not too bad. And since you're pretty confident you won't need the emergency fund anyway, you're pretty much going to earn that full 2.7% return.
@james4beach: Thanks for the posts and your POV. A 5 year GIC or something similar (bonds? I don't know much about them) may be something I will use to hedge against stock losses.
But basically, a large cash position for me is useful to hedge against stock market losses. All my investments are fairly liquid, where I can get access to my money in 1-2 days. In your example where you had a relative come down with illness, you could have just as easily cashed some stocks.
To outline my risk assessment, I feel that the chances of the market tanking + losing my job simultaneously is low. I could ride out any of these situations individually without a problem. In case of this happening, I could reduce my expenses by ~$1k/month (I wouldn't be going to the bars or vacations or eating lavish meals or driving a lot if I was broke), which would stretch that $5k to 3 months, $10k to over 6 months. I would probably get some sort of severance, which would add to my cash position. I would get all of my bank time cashed out (currently at about 60 hours or so). I would get EI which would give me some income (how much does EI give you anyway?). I have no debts to service. I could still cash out my stocks, even if the value is greatly reduced. In case of a personal accident, I have some insurance from work, and I believe the TD Credit Card has some sort of insurances also.
Considering all this, I could probably stretch $5k to 6 months, and $10k to about 1 year as is. As mentioned before, if this was prolonged, I would move back in with my parents, saving me another ~800/month.
So all in all, I think I'm covered pretty well. Of course, this will all change when I start a family and buy a house, which I totally agree I would need a larger emergency fund. But I'll do that when I get to that point.
Keep in mind that (at your current income & expenses level), it will take you several years to save $52K.
Originally Posted by FinancialPanther
Same for house down payment.
Even for a CMHC insured home, say you have to pay 10% down, that is another $50K assuming average SFH prices.
I am just confused a bit here. Isnt it better to keep cdn stocks in a tfsa because of the tax shelter, rather then keeping them in an unregistered account?
Originally Posted by My Own Advisor
If you have have room it's always better to have things tax sheltered. If , however, your RRSP and TFSA's are filled up you put all of your Canadian stuff in your non-registered account.