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Bon(d) Voyage!

October 1st, 2014 at 04:36 am

Out of laziness and expedience, I handle almost all of my money management passively. All bills that stay constant month-to-month are on auto-pay, and investments are either on payroll deduction or auto-drafted on a weekly basis. To avoid accidental overdrafts, I keep my checking balance very high, and my cashflows are generally positive. As a result of this setup, I can go for a fairly long time without looking at my bank accounts.

A side effect of this passive approach is that a lot of cash accumulates in my checking account when I'm not paying attention. Every once in a while, I'll pop in and transfer a few grand out into savings and/or bump up my investments, but those actions weren't aggressive enough to prevent my cash holdings from topping $75K in recent months.

I know that $75K is too much to hold in cash. Following the standard advice of keeping 6 to 12 months of expenses in liquid assets, I should only be holding around $15K (+/- $5K). After my car purchase in 2012, which was my biggest anticipated expense, there's been no need to hold additional cash on hand.

So if I'm committed to holding no more than $15K in cash, where should I put the remaining $60K? The lowest hanging fruit by far was to pay off my student loans, so I did that. Boom, that took care of $7K, and Sallie Mae is out of my hair for good. But that still leaves $50K or so that still needs a good home.

One obvious option is to sink it all into equities, and that is a reasonable suggestion, given my long timelines and high(ish) risk tolerance. But I'm hesitating on taking this course of action for a few reasons. The first is that I don't feel like I'm underexposed to stocks. In my (half-hearted) attempts to drain my checking balance, I've already increased my automatic investments to $400 per week, to the point where my cashflow is now pushed into the negative. (I should be fine after my year-end bonus/raise, though.) Combine that with my maxed out 401(k) and IRA contributions, and I'm sitting at $43,800 worth of stock purchases per year. That's half of my base (gross!) salary, so I can hardly be accused of not investing enough.

A slightly more tangible objection to the lump sum stock investment idea is that I am in the process of researching and planning what to do with all of my stock options. I'm looking into this because I've already vested into quite a large number of shares, but action is not necessarily imminent because I've still got a few more years to go in terms of vesting into the rest. However, if I'm interested in a buy-and-hold cash exercise, I will need a considerable amount of cash up front (tens of thousands, easily). I'm concerned that if I tie up all my money in equities right now, I may not be able to pull it out in the next few years if I wanted to do a cash exercise. But the time horizon is still long enough that it seems a shame to not invest at all.

So I've decided to compromise. I bought some bonds instead! Specifically, I got the Vanguard Intermediate-Term Investment-Grade Fund Admiral Sha..., which (coincidentally!) has a minimum balance of $50K. This fund holds, according to its description, "diversified exposure to medium- and high-quality investment-grade bonds with an average maturity of five to ten years" by investing in "corporate bonds, pooled consumer loans, and U.S. government bonds within that maturity range". That seems consistent with both my time scale and risk tolerance. I do understand how bond prices work in conjunction with today's insanely low interest rates, but bonds are designed to provide steady income and returns, and it's got to beat the return on my savings account.

In conclusion: I've successfully ditched my cash! I am not buying more stock, but I am still investing. I suspect I'm be done with direct bond purchases for the time being, and may even allocate any returns back towards equities, but at least I don't have $50K burning a hole in my pocket any more.

Bon(d) voyage!

4 Responses to “Bon(d) Voyage!”

  1. creditcardfree Says:

    Good that you have a plan that is right for you!

  2. CB in the City Says:

    What a good problem to have!

  3. PatientSaver Says:

    It's a lousy time for fixed income investments, and bank savings rates are abysmal. Still, if you have considerable cash on hand, it's a good idea to make the effort to investigate how to make your money work for you.

    The bonds you bought sound like a great choice. I did recently buy about $18,000 worth of State Farm Bank 5-year CDs and at least I'm earning 2.15% as opposed to the .60% or so that I was getting from my Vanguard money market fund.

    I won't dump anymore in the CDs as I'm pretty sure the Fed will finally let interest rates rise again so retired folks and others can enjoy some earnings too.

    $15K still seems like an awful lot to hold in a no-interest checking account. I have about $7K currently in mine, and I feel that's too high. But i guess you have to consider your monthly inflows/outflows.

  4. amberfocus Says:

    Yeah, I didn't even consider CDs this time around. I didn't want my money tied up. I might've thought about it if the rate were better than my mortgage, but 2.15% doesn't cut it.

    I don't have $15K in my checking account (anymore!). Checking is down to under $4K (for now, heh; we'll see how long that lasts). The rest of the emergency fund (~$14K) is parked in a Vanguard Money Market Fund -- not that this is any better than checking/savings.

    Do I need that much liquidity? Probably not. None of our emergencies ever cost more than a few grand. But to give you an idea of what I'm up against, the SO is holding more than $60K of his own in savings, so my dropping down to $15K nearly gave him a heart attack. I'm hoping that once he sees the sky's not falling, he'll follow suit and stop holding so much cash as well.

    But in the meantime… If the furnace blows up in the dead of winter, the roof collapses, the cat needs a kidney transplant, AND there's a zombie apocalypse, all in the same week, we'll be ready!!

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