During a recent liquidity crunch, I kept thinking how nice it would be to have more cash sitting in my bank account. Once I received a $106,000 real estate capital distribution, I felt a tremendous relief. But then I was faced with the somewhat stressful decision of how to reinvest it.
My private real estate fund invested $47,000 of my capital in a deal seven years ago. It earned roughly a 12.2% internal rate of return, leading to the $106,000 capital distribution. For seven years, I didn't think about my $47,000 investment at all until the surprise distribution came. It was nice, which is one of the main reasons why I enjoy investing up to 20% of my capital in private funds.
However, let's talk about how having cash could make you poorer if you're not careful. It's a little ironic with so much talk about cash being king.
Why You Don't Want To Have Too Much Cash
There are essentially three reasons why you want cash to be a tiny minority percentage of your net worth. Let's discuss each in detail.
1) Cash is a Long-Term Loser
If you review my net worth allocation models, I suggest having no more than 5% – 10% of your net worth in cash, depending on the economic cycle and your financial situation. The reason is that cash has historically underperformed the majority of assets. Cash only tends to outperform when we're in an economic downturn.
Fortunately for investors in stocks, real estate, and other risk assets, they tend to go up most of the time. We're talking about a roughly 70% probability for stocks in any given year, and even higher for real estate, given it is a more stable asset class.
Hence, if you have too much of your net worth in cash, over time, you will likely fall behind others who invest more of their cash in risk assets.
There might be periods when money market funds, where you can safely store your cash, provide high interest rates. However, rates for money market funds reflect the interest rate and inflationary environment. When holding cash in a money market fund, it's important to calculate the real interest rate (nominal interest rate minus inflation).
2) Too Much Temptation to Spend Cash Frivolously on Things You Don't Need
If you suddenly come into a $100,000+ windfall, you might be tempted to buy a lot of stuff that doesn't boost your wealth.
You might buy an $80,000 luxury automobile when a $25,000 one would do. Maybe you'll be tempted to buy a $22,000 Rolex Stainless Steel Daytona when your iPhone will suffice. Or perhaps you'll violate my vacation spending guide and splurge on a two-week $30,000 family vacation to Hawaii when you should have just spent $10,000.
It's easy to say you'll save or invest the financial windfall, but doing so is much harder than saying so.
There's a reason why people regularly spend their tax refunds on whatever they want—they see the money as a bonus rather than their own to begin with!
There’s also a reason why the average net worth of a homeowner is much larger than the average net worth of a renter. Forced savings saves homeowners from poor spending habits.
The Buddha said, “Desire is the cause of all suffering.” Once you have a lot of cash, you get to fulfill many desires that may make you poorer rather than richer.
3) It Can Be Extremely Difficult to Invest a Large Amount of Cash
Dollar-cost averaging is one of the best ways to invest for the long term. No matter where the stock market is, you just continue to invest a fixed sum of money at regular intervals. Dollar-cost averaging takes the guesswork out of investment timing.
However, if you come into a large sum of cash, you may have a much harder time investing it than your usual monthly cash flow. This may be especially true if the new cash injection comes from a long-term investment that has done well. The last thing you want to do is reinvest the proceeds and wipe away all your gains from the previous investment!
Since starting Financial Samurai in 2009, I've come across and consulted with many individuals who have enormous cash balances—sometimes 30% to 70% of their net worth. When I ask them why they haven't been investing their cash, they mostly say they don't know what to invest in. The reality is, they are too fearful of losing their hard-earned money.
I'm used to investing between $5,000 – $20,000 a month for the past 20 years. Hence, investing the $106,000 real estate distribution windfall is more than 5X my normal amount.
Given that the real estate investment was for seven years, I feared giving up the gains quickly in one poor investment. Everything from the stock market to real estate had rebounded from their lows. As a result, I ended up carefully investing between $1,000 – $10,000 on each trade over the next two months.
Some Stock Purchases with My Financial Windfall
Here's a spreadsheet I downloaded from Fidelity that shows some of the stock purchases I made with the real estate capital distribution. I essentially bought the Vanguard Total Stock Market Index Fund ETF and growth stocks like Amazon, Apple, Nvidia over three months. The last two columns are the number of shares purchased and the share price.
This wasn’t a machine inputting my orders based on some algorithm. It was me, multiple times a week, buying stocks when I thought the timing was opportune. It was both fun and exhausting. Managing your family's finances can sometimes feel like a full-time job.
If I hadn't been fearful of losing my money, I would have reinvested the entire $106,000 within a week. However, in investing, you never have full certainty about anything. Instead, you develop an asset allocation framework and an investment thesis. Then, you must have the courage to take action and invest accordingly.
Thoughts On Why I Purchased These Stocks
VTI is my default stock investment in this taxable portfolio when I can’t think of anything else to buy. I use VTI to build public stock exposure, which declined post house purchase.
Apple is a stock I’ve held for more than 12 years, and I keep on buying it. I bought more before their developer's conference given I believe Apple will be a big winner in artificial intelligence. I believe the upgrade cycle for its iPhone 16 will be stronger-than-expected given the 16 is required to run Apple Intelligence on mobile.
I’ve also owned Amazon for more than 12 years and accumulated more shares because it has been lagging its other big tech competitors this year. Funny enough, I actually just met their CEO, Andy Jassy at a party the other week and thanked him for his service.
I’ve held Tesla since 2016, but sold a lot in 2023 to help buy my house. So, I’m just rebuilding the position after the sell-off. EV competition is fierce, but I think Tesla will come out with successful new models and get re-rated for its other businesses.
IWM is an investment in small-cap companies that have not participated in this recent bull market. I expect this laggard sector to catch up.
Gradually Building More AI Exposure
For the past two years, I’ve also been building more exposure to public artificial intelligence companies, hence why I purchased Nvidia. I’m also building a significant position in private AI companies because companies are staying private for longer, thereby more gains accrue to the private investor.
The easiest way I'm building more direct private AI company exposure is through the Fundrise venture product. So far, I have invested $143,000 in the product with a target allocation of $200,000. It’s easy to dollar-cost average in because the minimum is only $10.
Now I’ve just got a hope that these investments do well over the long term. Surely, there will be corrections ahead. However, I plan to hold these latest investments for years. I also plan to buy the dips.
As always, there are no guarantees when it comes to investing in risk assets. Please do your due diligence, and only invest in what you can afford to lose. These are my investment decisions based on my financial situation and risk tolerance, not recommendations for you.
Without Much Cash, You Must Focus on Your Finances
One of the most important implications of having less passive income is that I am forced to keep track of all our household's finances more carefully. This largely means monitoring our cash flow, reducing expenses, anticipating future capital calls, investing more intentionally, and assessing our risk exposure.
Without a large amount of cash sitting in my checking account or money market fund, I’m also much more motivated to make more money actively and through investments. As a result, being cash-strapped can actually make you wealthier. You can’t afford to be lazy or miss something without a large financial buffer.
During my liquidity crunch, I checked my Empower account at least twice a day, compared to once a week in the past. In retrospect, this was a good thing, as my net worth composition changed significantly after the house purchase.
As your cash pile increases, that motivation to work hard and invest wisely tends to dissipate. Because, why bother when you don’t have to, right? If you are parent, it may be detrimental to your child’s self motivation to give them a lot of money.
Make Your Cash Harder to Spend
If you want to protect yourself from yourself and increase your chances of growing your wealth, keep the least amount of cash possible in your main checking account. Adopt the broke mindset! Have just enough to cover your regularly expenses.
Transfer as much of your cash as possible to your brokerage account and invest it. This way, it’s a little harder to access for unnecessary spending. You can also diversify your cash into other investments like private real estate and venture capital, which makes accessing your cash even harder.
My private real estate investment from 2017 saved me in 2024. I expect my many other private real estate investments from the past will save me in the future as well because I’ve continuously invested most of our free cash flow each year.
Having cash is nice. But after having about six months of living expenses in cash, you should seriously consider investing it. Your future self will thank you.
Reader Questions
Ever spend a large cash windfall on frivolous things? If so, what did you end up buying? How else can having a lot of cash potentially make you poorer? What is your ideal average cash balance?
Diversify your investments with Fundrise, my favorite platform for private real estate investing. Managing over $3.3 billion, Fundrise focuses on the Sunbelt region where valuations are lower and yields are higher. Invest your cash if you believe mortgage rates will drop and there's a long-term shift toward lower-cost areas.
As always, past performance is no guarantee of future results. Invest only what you can afford to lose and won't need. Fundrise is a sponsor of Financial Samurai, and Financial Samurai is an investor in Fundrise. Our views on both real estate and AI are aligned.
I have run into a bigger conundrum. Earlier this year i had invested closer to IM in treasury bills and brokered CDs at ~5.6%. Most CDs were callable so am back with cash. Not sure how to proceed. For now i have it parked in Treasury bills at 4.54. What should be strategy going into 2025? Thanks!
But I want a Daytona… lol.
Sam,
Great content! I’m a long time reader by this is my comment post. I read through the article and the comments and I don’t think this was addressed. You mentioned the 106k capital distribution and I’ve always wondered its better to Dollar Cost Avg (DCA) the amount (which is what I think you kinda did), or just invest it all in one lumpsum at once.
Naturally there is a fear in all of us that the 100 grand can turn into 90 the very next day with a sudden market downturn, so DCA gives us peace of mind! However taking the emotional aspect out of it, which one has historically proven to be the better approach? From what I recall reading, you’re often better off investing it once, rather than DCAing, wonder what your thoughts are?
I respect your work and clear explanations on things….. thanks again for the great content!
By the nature of the probability that stocks go up overtime, it is better to invest it all in one lump sum.
But the fear of losing money quickly deters me and I’m assuming others from investing lump sum.
If I made the $106,000 windfall within one week, it would be much easier for me to invest $106,000 immediately. But because the investment took seven years, I wasn’t about to lose it overnight.
How would you have invested $106,000?
This is sort of random, but I’d love to see an article about your take on the pros and cons of going solar. After all, this is something else one could “invest” in with a pile of cash.
Your IWM is shining in the last couple days! I think the rotation is back on with realistic expectations of Fed fund rate cuts soon.
Hah, yeah. Wish I had bought more as, as always the case when positions go up. Let’s see if it stays.
Honestly, this article helped me reassure some of my recent decisions. I had a lump some of cash tucked away and it was just sitting there losing its value. I reinvested a large portion of it and it’s already returned 10%! I can’t say I’m a genius given the recent bull market but it’s still something!
I have a large portion vested in my brokerages and at some point want to invest it in a more tangible asset but truthfully, I have some reservations and thoughts to explore. I read the passive income article and it was good but I am struggling to execute something. I work long hours and make good money. Truly, I am thankful but I don’t want to be dependent on that. Seems daunting but I think I’ll just ask myself how I can make an extra 1k a month and go from there. Would love to hear input/advice if anyone cares to share their thoughts!
HI Sam,
I think cash position as a percentage of one’s portfolio is highly dependent on individual circumstances. It’s generally not a good idea for an early career 25-year-old to have a large cash position beyond emergency funds, but one can argue it’s a very good idea for an 85-year-old with more money than they need (ie. won the game) to have a lot of cash, even if it’s earning only 5-6% returns, due to SORR considerations.
I’m in between – in my early 50’s – with a roughly $6M cash positions between my retirement accounts, brokerage, HYSA. That’s 70% of my liquid investments currently, earning 5-6% returns. However, I am a business owner, and also own several million dollars in real estate, putting my cash position at about 25-30% of net worth, which is actually not unusual for relatively wealthy people. Today I see the markets and especially technology as in a bubble but appreciate the bubble can still potentially expand for years to come, hence a 10% correction would likely be enough for me to expand market positions barring a black swan event. One can call that timing, but another can call that mitigation of unneeded risk. I do get fearful when others are greedy.
It’s not that I’m afraid to invest it rather I don’t need unnecessary risk with more money than I can spend, and it’s available as dry powder for the next 1999, 2008 or 2020 at a lower risk (P/E) entry point. If this was a 2008 scenario, I would not have so much in cash equivalents. I do get greedy when others are fearful. Also, I have tapped my liquid funds most recently to acquire a few hundred thousand dollars in real estate so that I am always debt free/no closing costs, etc. Cash positions are in reality not fluid, not static.
Another consideration for the cash position is that my primary business provides for a 7-figure annual income (the dividend), with expenses of about $1.5M/year to run it. While I fared quite well during Covid shutdowns as an essential business, reserves for a rough patch mitigates risk of losing that healthy business income and business expensing/valuation benefits. If I wasn’t a business owner, I would most certainly need lower cash reserves.
Another benefit of a large portfolio of guaranteed returns is the ability to self-insure where others are more likely to pay for insurance. Think about life insurance, property insurance (outrageous in California and my home state of Florida), collision coverage for older vehicles), etc. I can also afford a high deductible health plan and invest annually into the coveted HSA for years to come. If all my investments assets are at risk in the markets and real estate, it puts my family at unnecessary risk at this point in my situation, IMO. I appreciate this is not a vehicle for the masses as in my case a $10k collision or health expense is not so bad, for others it may be life altering. As we all know, financial decisions are nuanced to personal circumstances.
Bucket strategies. It is also part of my tax plan. Income from market returns is taxed same year of sale in brokerage accounts, and upon withdrawal from tax deferred brokerage accounts (ie. RMD’s). In contrast wealth created by asset appreciation is not only inflation protected, but appreciation is never taxed to me if passed on to heirs (assuming you’re below the nearly $26M estate threshold) due to step-up-basis upon passing, or 1031 exchanges while living. So, there is a whole science to growing wealth but legally appearing poorer on paper, by putting the safe positions in the taxable bucket and growing positions in the never taxed bucket if done correctly. These are reasons why our good friend Robert Kiyosaki says to work for assets, not income. Billionaires have pressured congress to enact certain laws to benefit them, it’s nice to be able to take advantage of such wealth enhancing rules as a millionaire.
But I certainly agree for the masses earning lower- and middle-class income, a cash drag will slow the progression to FI and may actually put one’s retirement at unnecessary risk. They should however start with an emergency fund of 3-6 months of living expenses in cash equivalents before taking on the risk of investing minimum 15-20% of income, except maybe accept the 3-4% 401k match as free money, IMO.
So, there is probably a place for cash equivalents in every portfolio, the question is how much makes sense in each different scenario. Generally, less when you’re younger with lower expenses and your income is expected to grow over time. More if you’re older, have more financial responsibilities (ie. family, business/asset maintenance), have wone the game, and your income is expected to slow or stop (retirement/semi-retirement, SORR).
Fascinating stuff. Thanks for sharing! How many years of expenses is $6 million?
I’m going to equate revenue to what you call expenses, since covering all expenses depends on the viability of the revenues.
If China and Russia attack the US, and if I were to lose all the business revenue, real estate revenue, interest income (Fed would probably cut funds rate back to 0), I would lose about $3M/year in revenues (after subtracting taxes as I would not have the taxable income), excluding unrealized asset value/stock market losses for simplicity. Such a scenario is probably where cash would be considered “king”.
So that would be 2 years in the unusual loss all streams of revenue, passive and active. In a more likely scenario of just misfortune, it would probably cover 4-6 years (33-50% revenue losses), hopefully increasing the odds of covering expenses until full recovery.
I have 100% equity in about 30k sq ft of real estate that can be sold in a worst-case scenario as a back-up, I guess. Rough time seem to speak to the value of asset diversification and risk management principles so much more clearly than good times. I think I obsess about risk more than Jamie Dimon.
I have never actually had to tap reserves other than accumulating more assets to enhance revenue generation. Hoping I never have to.
A question. The economy has gone better than most expected. What is your view of the outcome of the November election? Do you see any political risks? Or do you think it makes no difference who is elected as to how the economy performs in 2025 and 2025?
I have a post on how the stock market performs, depending on the president’s political affiliation. The bottom line is that it doesn’t really matter to much who gets elected for the overall stock market.
Here it is: https://www.financialsamurai.com/stock-market-performance-under-a-democrat-or-a-republican-president/
There is another thing though. It is called peace-of-mind. And cash gives you that. If you are retired, as I am, in your late 50’s as I am, with your portfolio already throwing off cash flow that is 2.5 times what you spend, as in my case, I am reminded of what Buffet says – which is – don’t go risking what you have and need for what you don’t have and don’t need. With this in mind, my portfolio as of 30 June 2024 was 38% in cash. When I say cash that means cash-like – instruments such as T-bills, high-yield savings accounts and the like. Hopefully having read that I have not made you “fall off your chair” or choke-on-your-coffee of anything, given that I am holding 4 times the cash-like investments that you would recommend. But I sleep really well EVERY night.
Good point about a peace of mind as a retiree. That’s the most important thing.
What percentage of your investment portfolio makes up your net worth?
For me, my public investment portfolio only makes up about 20% of my net worth. But it was as high as about 33% in the past.
I consider that portfolio=networth. In my view all assets are part of our net worth and should be managed as an overall portfolio. So when I say I have 38% in cash, or cash-like products, that means 38% of my net worth.
Gosh! I initially thought the cash you referred to was the bills and coins!
Plenty of my immigrant friends’ parents avoided depositing cash earned from their businesses in the bank. They might lack trust in the bank due to past experiences in their home country. They might hide their actual income from the government (IRS in the US) so that they pay less tax. Some preferred hiding cash stashes in some odd places such as the freezer rather than investing the money elsewhere.
Their children followed how their parents treated the money. Suddenly, they did not qualify for a mortgage because they could not provide evidence of sufficient income. The tax saved from conducting cash transactions throughout their lives may cause them opportunities.
(A friend’s grandparents’ business was seized by the bank with the cash stashes throughout the store. Story for another day…)
HI Sam – great article. What happened to deaccumulation? It seemed like your idea of deaccumulation coincided with a depressed stock market. Deaccumulation requires raising cash or maintaining a significant cash balance if you are going to “Spend down”, which does seem harder when SPY going up every day.
It’s a good question. I feel I decumulated by buying a nicer house I did not need. And this nicer house comes with a much higher property tax bill for as long as I own it. So that is my way of decumulating with this current house.
Because I have a ~$75,000 gross investment income deficit to cover our household’s desired expenses, I’m back on a mission to accumulate ~$1.875 million by Dec 31, 2027. Once I get back to my old passive income #, then it’s just maintenance and keeping up with inflation.
So there is a cycle of decumulation and accumulation I’ve discovered! It’s weird and also fun. Maybe I’ll write about it.
Hi Sam! Love posts like these where you share where you invested and the rationale for doing so. Quick questions. Why a total stock index like VTI over an S&P Index like VOO? Is it because a lot of S&P large cap growth stocks were purchased individually or do you feel like it’s time for small & mid cap to have their turn?
Also, do you feel like Nvidia still has a lot of short to intermediate term upside left in it after the crazy run up?
Small and midcap stocks have severely lagged the broader market. So I do believe they will play catch-up. So far, they have not, hence my buying of IWM.
I’ve had a S&P 500+ investing strategy for a while now (20+ years). I essentially invest about 70% of my investable capital in the S&P 500 and then the remaining in individual stocks that I think will outperform.
Sometimes it works, sometimes it doesn’t (2022). But my mindset has always been to try to outperform the masses and the index. Because if you don’t outperform, then you’re not getting wealthier. And I’m not just talking about outperforming the masses who do not regularly invest. That’s easy. I’m talking about trying to outperform regular investors.
This is probably not a healthy mindset to have at my age. But it’s also a fun challenge.
I’m not selling my Nvidia shares, so I do believe the stock has more room to run. These bull runs have a tendency to surprise Investors on duration and upside.
But I think more from an asset allocation perspective. I’m willing to allocate a certain minority percentage to expensive and speculative stocks that could easily go down 20 to 50%.
Nvidia is trading at supposedly 37 times forward earnings. That’s expensive, but if they grow faster than expected, maybe it’s not so bad.
My excitement actually is in investing in private growth companies that have not yet raised a new round of funding at a much higher valuation. I believe there is an arbitrage opportunity now, because private companies are valued in a step function. So, based on how well the public markets have done, it stands to reason that the private market valuations will go in the same direction.
As a result, I am investing in an open-ended venture capital funds, which have holdings that I believe our undervalued on their books.
Of course, what it comes to investing and risk assets, there are no guarantees. So everybody needs to invest according to their own risk tolerance and objectives. When it comes for these private growth companies to get acquired or go public, the market will re-rate them once again.
Sam, what kind of Asian are you, not liking cash? I’ve to constantly battle my husband re giving me money to invest. He’d be thrilled to have all his extra income in cash, losing money because of inflation. He even payed off our mortgage at 2.9%, even though I was getting 20% returns on the extra money. Do you keep a 3-6 months cash emergency fund? Re AI investments, since they are mostly private, can you offer your readers a conduit in investing in them or it’s best to find ones own? I know when I invested in space z and a few other private ventures, it was thru someone who knows someone and the minimum is 100k or higher. I was making a joke with the Asian thing as we tend to have a diff mind set.
In a bull market, Cash is trash. But not really. After 3 to 6 months of living expenses in cash, you just don’t need that much anymore because you can always sell your public investments and get the cash after three days if necessary.
Yeah, I wouldn’t pay off my 2.9% mortgage. But that’s fine as well since there is greater financial security and peace of mind as a result.
I like the Fundrise venture capital product, which is why I partnered with them and why I’m meeting with the CEO for dinner next week. It’s nice that I get to see what the product invest in before making an investment decision. This is unlike the several closed in private funds that I currently am a limited partner in. I commit capital and they invest however they see fit.
Part of investing is not having to constantly think about your investments. As a result, I like to invest in funds with people looking out for my investments for me. The legwork is me doing the research about the people investing and reviewing their investment philosophy, and then making a capital allocation decision.
I definitely don’t want the stress of managing other people’s money. Otherwise, I would’ve gone into the money management business along time ago.
Feeling poor may ironically be one of the greatest motivators for getting rich because we are all rational actors in the long run.
Cash is making 5%, inflation is now down to 3%. Your hubby may not be so much of a dummy making positive returns risk free on the cash. This market is on a great run but it will pause or decline. Its also nice to see your wealth growing while all those around or declining. Of course its a balance. I have 50% of my capital in stocks. But I do have over 1 million in cash reserves, but making 5%. Once the fed starts cutting I will shift 400-500k of that back into stocks. Expect a nice buying opp on the “sell the news” when the fed starts cutting – likely late this year.
Yes, excellent point about cash paying 5%+ and inflation around 3.3%, making cash a good positive real interest rate.
1 million is a lot of cash. Must feel nice! How long have you had that much cash?
The stock market may move higher in anticipation of imminent Fed rate cuts though. But if there is a dip, I will be right there with you buying.
my view is that the market has gone from 3500 to 5500 on anticipation of lower rates. market typically ahead of the
curve. i would be a bit careful buying here. i want to see the market react to that initial rate cut. fundamentally, it should mean cracks in economy. so look for sell the news. 1 mill is a lot of cash, but it isn’t traditional cash we lived with for 15 years of no return. 5% is 50k in passive income. again it is only 15% of net worth. i have over 4 mill in stocks and 1.5 mill in restricted stock in my business. paid off home. no debt. but i’m also 59 and done taking major risks. only need to build decent wealth once! seems like and ideal mix for me now.
I think the anticipation of lower rates is maybe 30% of the reason. Earnings growth is the majority of the reason. The economy and earnings are doing better than expected.
Surely there will eventually be another correction or bear market. 15% of your net worth in cash is not bad.
I’m retired from the State Department like your parents but a bit younger (I’m 63). I have made the mistake of holding too much cash over the years, mostly because I watched my IRA that I invested in a tech mutual fund in 2000 take over 15 years to recover. It is hard to get over the fear of possible losing again like that at my age.
I would be curious to know if you make the same recommendations in this article to your parents and others like them in a similar situation and age group.
Furthermore, my pension and social security are enough for daily expenses but I have seen the price of travel (prior to covid I would travel for 6 to 9 months per year (this year I have traveled about 3 months and plan on another 2 to 3) explode due to inflation. The days of one way tickets to China and/from the West Coast for around $200 seem long gone (I took the last one in November of 2019). Thus while the pension easily covers daily living costs, it no longer provides for the same level of travel as pre-covid.
So cash is bad…
Inflation is much higher than what is being printed by the government.
Everyone knows that it’s obvious.
I’m buying silver and gold dollar cost averaging $40,000 a month into it. Every month.
Also buying gold and silver mining stocks up to 5% of my net worth.
Lastly, I would like to find out where anybody else is investing their money outside the United States? I’m looking at Puerto Rico and Portugal. Like to know if you had to get outside the United States where would you put all your money? I wish Sam would do an article about investing your money outside the United States if you had to?
100 percent agree that inflation is much higher than what is being printed by the government. We all know the government wants to look as good as possible and inflation numbers are the best the government can come up with to look as good as they can.
This is a timely article for me.
I have an upcoming $32k capex project for one of my rentals this fall but I typically only keep about 1 month’s worth of cash available and invest the rest. So I had to choose how to fund this project, increase my leverage with a 7.24% HELOC or use a 401k loan and take advantage of the 8% YTD gain and de-lever while losing the ability to deduct the interest and diverting cash flow to pay myself interest in after-tax money. (I was in the 10% tax bracket for 2023 due to business expenses and will likely be at 10% for 2024’s)
I went with the 401k loan option because from my perspective the funds for the project were no longer mine to risk in the market once I signed the builder’s contract and I didn’t want to take on any more revolving debt by using my HELOC.
Well, apparently, selling $36k of SCHG on 5/14/24 unburdened it because it has promptly gained about 13% since I sold. However, had I been holding that $36k as cash for a 6 month emergency fund (which is prudent), then it would have only earned about 5% annually.
I also had to ask myself if I afford a 35% market correction in growth stocks like we experienced from 1/2021-12/2023 while simultaneously using cash flow to pay off a $32k capex project since I’m working a normal schedule again.
“ Well, apparently, selling $36k of SCHG on 5/14/24 unburdened it because it has promptly gained about 13% since I sold.”
Ugh, funny how this tends to always happen doesn’t it? The only stock I sold in 2023 that continued to go down a lot after was Tesla. Everything else kept on going up.
What kind of Capex did you do? I’m assuming the money spell improved the value of your property as well.
I don’t blame you for selling Tesla, but I do respect that Elon created a manufacturing and technology company in a highly competitive market and it outsells more established brands….for now.
I’m replacing a rotted deck and staircase. I use a local home builder so he’s probably a bit pricier than a smaller contractor, but I can trust his work and the value added to the equity is likely about 100% of the project’s costs.
There’s a lot of C quality 70’s and 80’s multi-family in my market and, right now, it’s only well-maintained properties that seem to sell quickly and at a premium. I have seen several iffy properties go in and then out of contract.
Cash management is really important and so many of us make avoidable mistakes. There was a time period a while ago when I was waiting for the markets to come down before deploying my extra cash. My mistake back then was leaving my cash to sit in my bank account and not my investment account. My bank pays practically zero interest even in the recent ~year of better rates. Fortunately I learned the err in my ways and started moving my excess cash into my investment account quickly on a regular basis. Nowadays, even if I’m not ready to deploy cash into the market, my investment account has an insured daily cash sweep at competitive rates. So it’s basically like no-risk investing my excess savings until I’m ready to put my cash to work on an investment.
I also totally agree with your note on tax refunds and how many people “see the money as a bonus rather than their own to begin with”. It’s definitely not splurge money! My goal each year is to have as close to zero tax due or refunded because that would mean I optimized my estimated tax payments throughout the year and also optimized my cash management and investment opportunities throughout the tax year. It’s easier said than done in some years, but it’s my goal nevertheless.
There are savings accounts and CD’s that pay at least 5%.
Yes! Or even owe some taxes without penalties. And ideal situation.
I am forcing myself to incrementally invest in, and sell out holdings now. It is mainly for peace of mind because there is no “woulda, coulda, shoulda” questioning myself. In the long run it probably makes little difference to my portfolio returns, and also I can change my mind about the choices I make. Big stock traders call this managing a trading position. Why not be like them?
Sam, been reading your posts since 2016. Your blog set me on the road to learning personal finance.
I just purchased a house with a 2.5% assumable va loan and harvested 700k from equity investments to have a cushion to supplement my monthly payments as I transition to retirement.
I am considering a CD ladder or multi year treasury bonds to keep ahead of inflation, hedge against rates falling and give me 10 years plus peace of mind. Can you see any other options ?
Thanks for your hard work over the years.
Chris