This is a guest post by Dave, who is also looking to retire no later than 45, but unlike Tim has no kids and doesn’t want any. Dave is from Ontario and is working towards his CGA certification.
I may be committing a significant personal finance faux pas – I am (knowingly) leaving money on the table. Some people will argue that the opportunity cost is just too high, that there are several ways I could be earning more money….but I’m okay with what I’m doing – leaving a significant (half a year’s expenses) sitting in a savings account.
As an alternative to my current “strategy” I could be earning several percentage points more in interest per year, investing in a fairly conservative bond fund (as an example). I prefer to keep the money earning 1.35% in an ING account and more importantly (to me anyways) close – as close as theoretical money can get. In “olden” times, I would be the guy with too much money stuffed under my mattress, or buried in a coffee can in my backyard.
I wouldn’t call myself paranoid by nature (I’m not that crazy), I just like the security of having a bunch of money within a 2-day transfer in a secure account rather than at risk in any way. This way of thinking is contrary to most of my financial plans, which are somewhat risky – the largest risk being my plan to leave the workforce 20 years early.
As an alternative to a largish “war-fund” I could tap into my line of credit, or use a credit card short-term that I could pay off with invested dollars once the stocks/bonds/other investment has been cashed out. I think that psychologically, I just like having a buffer of cash.
The weird thing about this savings account is that I’m not even really sure what it would be for. I can’t really foresee any wild economic disaster that would cause me to need this amount of money all at once. On an annual basis, my household expenses are low enough that my wife or I could support 100% of our needs – there really just isn’t a need to have the money sitting there.
I keep it as a “get out of jail free” card. I keep this money un-invested because it allows a certain amount of freedom…for me and my wife it is somewhat comforting to have this money here. My job is as stable as you can get these days, while my wife’s is probably a little precarious (working in a retail business). Even though I currently enjoy the work I am doing, I like that I could decide to quit tomorrow and really have no problem (for 6 months or so).
So, that is my story about my large emergency fund – large in comparison to my expenses, and the risk that it will need to be tapped. How do you approach your savings? Do you have a bank account full of money, or are you fully invested?