What does "carrying too much cash" mean?

[ChristopherMD20]

Hello all and Happy Thanksgiving!

I was reading the following thread https://www.whitecoatinvestor.com/forums/topic/biggest-financial-blunders/ trying to learn from others' mistakes.

I must admit that I force myself to participate in this forum as opposed to being a passive reader in order to become an active learner. However, much of the knowledge here is above my experience and understanding. I read the WCI book so I feel like I know some of the basics. Despite this, it feels like when I was a intern in the MICU trying to figure out what the heck PRVC, PS etc meant and how to manage vents.

Therefore I will plunge ahead and ask what many likely consider a very "silly' question. What does carrying too much cash mean exactly and how does one define "too much?"

What I assume carrying too much cash is too much leftover money after expenses and investments. For example, if someone makes $200k a year and maximizes investments in pre-tax (403b/457, HSA), post tax (Roth), fully funded emergency fund and diligently pays all expenses (mortgage, insurance etc.) and has $50k extra for the year then would that be "too much cash?"

Let's assume for simplicity sake that student loans are paid off (just to avoid the invest vs. pay off loans debate). What then should one do with the extra money? Mutual funds, money market, REITs, all the above? How much extra do they keep as "cash" (which I assume means parked in a savings account getting like 1%)?

Sorry if this is a silly question.

[ENT Doc]

There are no silly questions. Except for when I was on my OB rotation and the attending stopped rounds, put down her glasses, looked at me and slowly said, "That is the dumbest question I have ever been asked." So as long as you don't ask about long term side effects of a medication you're all good.

Carrying too much cash means, in my opinion, failing to balance liquidity risk and opportunity cost. It's not what you have left over to invest after maxing out retirement funds or whatever. It has to do with what you have sitting in your checking account. Having an Emergency Fund is insurance against short term shocks, as is having some amount of money in your checking account to pay for bills, funnel money to investments, etc. If you have liquidity you have a lot of cash around such that you can cover cash flow shocks and expenses. Poor liquidity means you'll have trouble coming up with that cash in a pinch. Opportunity cost is that which you have given up - what you could have done with your cash instead of it sitting around in a checking account.

Failing to balance this is a personal decision - how much you have in your emergency fund and how much you need in your checking to fund expenses. The excess is your "too much cash" that is bearing an opportunity cost, meaning it could be earning more for you somewhere else.

[Hatton]

No it is not a silly question.  Too much cash will be different for different people in different life stages.  Cash can be physical cash, money markets, short term bond funds, or even a short term CD (with negligible penalties for early cash in).  Too much cash means leaving cash in a checking account or money market when you have an emergency fund and working capital account well funded.  You are leaving it sitting there because of inertia, analysis paralysis, or fear.  This is also referred to as an opportunity cost meaning you lost the gains you could have made if invested.  In most of my career I invested everything as it came in and kept very little in cash or equivalents.  Now at 60 I am trying to just leave it alone and build a cash position.

[Kamban]

ChristopherMD20 wrote:

Let’s assume for simplicity sake that student loans are paid off (just to avoid the invest vs. pay off loans debate). What then should one do with the extra money? Mutual funds, money market, REITs, all the above? How much extra do they keep as “cash” (which I assume means parked in a savings account getting like 1%)?

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For me that meant holding cash either in savings account or money market more than emergency fund. Which could be 6 months expenses.

The wisdom is that the rest should be invested so that returns beat inflation, and allow it to grow so that you have adequate amount in retirement.

But it also depends on what stage of life you are in.

[ajm184]

1.  If you have an emergency fund (3-6 months of cash/money market) and have an 'extra' $50k would be considered 'opportunity cost'.  Opportunity Cost according to google is 'The loss of potential gain from other alternatives when one alternative is chosen'.  Only, you can answer if it is 'too much'.  Factors to consider would be job/position stability, age, monthly/annual expenses, short term or long term goals that require money (around the world trip).

2. If truly 'extra', what should one do?  Again, the answer depends a bit on your goals, age, risk tolerance etc.  You can reduce debt, you can invest towards retirement, you can give it to causes that having meaning to you.  You tax bracket may drive some your decisions on potentially 'investing' excess cash.  For instance either municipal bonds or Exchange Traded Funds in order to reduce your current tax burden.

3.  I don't know who 'they' is; I can only state my choice(s) in a similar situation.  I at one point several years ago I had what I'll term a very large emergency fund relative to my families needs.  My approach was to keep about a third in cash, then another third in a bond fund, and the remaining third in a couple of equity mutual funds.  For me, continuing to holding too much cash was something that needed to be changed.

[ChristopherMD20]

ENTDoc- I am terrified of OBGYNs. I really liked delivering babies during my MS3 rotation, but I could not deal with the drama in that particular atmosphere. The only ones who were nice were the private attendings who did rounds in that hospital.

 

Thank you all for the input and education. The next thing I have to determine is what to actually do to put the "extra" to work to negate the opportunity costs. I have a few months left in fellowship so I will use that time to research what to do instead of burying cash in my metaphorical backyard. We will be out of student loan debt (thanks to my wife) by the end of fellowship, so the only debt we'll have left is a mortgage ~$110k at 4% (condo). My head starts to spin when I look at all the different possibilities (dx: analysis paralysis). I read things like biggerpockets which was suggested to me in another post, but I get overwhelmed. I have to educate myself more about mutual funds, ETFs and all the other acronyms that are thrown around on this site that I pretend understand.

 

I hope you all enjoy the turkey today!

[Hatton]

I get annoyed by acronyms as well.  I have learned a few by posting here like FWIW, OTOH, YOLO, etc

[q-school]

ChristopherMD20 wrote:

ENTDoc- I am terrified of OBGYNs. I really liked delivering babies during my MS3 rotation, but I could not deal with the drama in that particular atmosphere. The only ones who were nice were the private attendings who did rounds in that hospital.

 

Thank you all for the input and education. The next thing I have to determine is what to actually do to put the “extra” to work to negate the opportunity costs. I have a few months left in fellowship so I will use that time to research what to do instead of burying cash in my metaphorical backyard. We will be out of student loan debt (thanks to my wife) by the end of fellowship, so the only debt we’ll have left is a mortgage ~$110k at 4% (condo). My head starts to spin when I look at all the different possibilities (dx: analysis paralysis). I read things like biggerpockets which was suggested to me in another post, but I get overwhelmed. I have to educate myself more about mutual funds, ETFs and all the other acronyms that are thrown around on this site that I pretend understand.

 

I hope you all enjoy the turkey today!

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you don't have to become perfect in a few months.  you will make mistakes, or at a minimum, will have opportunities that were not pursued.  you don't have to become expert at something in a short time frame.  you are doing fine by slowly educating yourself.

do the obvious things.  save a lot.  max out retirement space.  other than that, you will make decisions and then have to make adjustments.   you will change your mind multiple times.   the right answer will be different at different points in your life. 

to simplify, if you don't have a better answer for what to do with money after maxing retirement space, you need two decisions (imo).

1)  are you going to buy a house in the near future (in which case) you need a lot bigger cash stash than otherwise.  you can call it emergency fund if it makes you feel better.

2) size of emergency fund.  see 1.  different answer for everyone.

3) if you have money you are not going to use for 1 or 2, then put it in the boglehead 3 fund starter system until you acquire knowledge.

as long as you save aggressively, you will be as assured as people can be of a comfortable retirement.

 

[ChristopherMD20]

@q-school That is very helpful, thank you. I just did a quick read about the Boglehead 3 fund starter system. From my understanding, it may be prudent to use my Vanguard account in the future to invest in Vanguard Total Stock Market Index Fund (VTSMX), Vanguard Total International Stock Index Fund (VGTSX) and Vanguard Total Bond Market Fund (VBMFX) as some of the sources I read suggested.

I have no problem saving money, so that part won't be a problem. I have been very frugal since I was a kid. I remember hording my birthday money and starving myself so I could pocket my lunch money. I somehow learned about CD accounts when I was 10 and put my money in there and reaped the sweet 7% interest rate the local credit union offered at that time. My wife is more frugal than me. We just have to have the fortitude to make the next step to start building wealth when the time comes. I am very debt averse because I saw my parents have consumer debts (6 figure range) which does cloud my logic and compels me to pay my mortgage off even though it is likely not mathematically adviseable in terms of opportunity cost.

[Kamban]

On may occasions I carry too much cash. Sometimes it is 30-40% of my net worth and might last 6-12 months.

Investing in commercial real estate properties means you need to have the 30% down when the loan is approved. And one never knows when the bank will do that, and which one. Sometimes you have to play once against the other for a couple of properties. Quite often all banks will deny us the loans and sometimes one approves a loan and then the other does it too ( happens when the executives switch banks like musical chairs and know our overall history of managing commercial properties and give us the loan before his former bank does it). That is not a time to be wondering if the investments in the index funds has held up and not tanked, and we whether might not have the money to pay the down payment for a loan we just got approved.

So once we know about the properties, its size and costs and think we have a good chance of buying or building it we ( my partners and I) have the money in money market funds or savings account to be used at the right moment.

PS: Not bragging but saying that carrying too much cash for one who invests in stock market is different than one who invests in commercial properties.

 

[nachos31]

ENT Doc wrote:

There are no silly questions. Except for when I was on my OB rotation and the attending stopped rounds, put down her glasses, looked at me and slowly said, “That is the dumbest question I have ever been asked.”

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Still frustrates me when I hear stories like that. How is that helpful--only discourages questions which then can lead to bad things happening.

To the question at hand: here's an example--When my wife and I were early in our dating I learned that she was not putting any money in her Roth IRA or 403b and instead was just saving it all in her savings account. Her annual income then was ~$50k and she had about $50k saved sitting in her bank. Pretty impressive for a mid-PGY-2, at the time, but that's having too much cash on hand and not deploying it towards other goals.

[ChristopherMD20]

@Kamban How did you educate yourself in the commerical investing game? Does it take away from your practice? I read biggerpockets now, but I will not be ready for that type of investing (rental properties for me personally) likely for several years becuase my wife and I have to build our own foundation first. I really do like the idea of investing in real estate, but I fear that I will not be able to do so without compromising my passion (i.e. practicing medicine).

[Donnie]

nachos31 wrote:

ENT Doc wrote:

There are no silly questions. Except for when I was on my OB rotation and the attending stopped rounds, put down her glasses, looked at me and slowly said, “That is the dumbest question I have ever been asked.”

Click to expand…

Still frustrates me when I hear stories like that. How is that helpful–only discourages questions which then can lead to bad things happening.

To the question at hand: here’s an example–When my wife and I were early in our dating I learned that she was not putting any money in her Roth IRA or 403b and instead was just saving it all in her savings account. Her annual income then was ~$50k and she had about $50k saved sitting in her bank. Pretty impressive for a mid-PGY-2, at the time, but that’s having too much cash on hand and not deploying it towards other goals.

Click to expand...

I don't know, some questions are dumb depending on the situation.  We shouldn't sugar coat everything in a professional setting where being thoughtful matters.  In this setting, I don't think there are dumb questions though and certainly allocations, emergency funds, etc. are always an active topic of discussion.

My view is that you should carry enough cash that you would avoid a panic and "stay the course" if the stock market crashes and you lose your job.  If you have so little cash that you would pull a lot of your money from the market in such a scenario, then you should probably carry a little more.  Doctors are more insulated to economic cycles than most other professions, so can probably carry little cash (i.e. 3-6 months of expenses).

If you find yourself feeling like you are carrying too much cash, but are uncomfortable bulk investing the excess all at once, invest a smaller amount over a year or so each month such that you get more and more comfortable with the idea of investing.

 

[Kamban]

ChristopherMD20 wrote:

@kamban How did you educate yourself in the commerical investing game? Does it take away from your practice? I read biggerpockets now, but I will not be ready for that type of investing (rental properties for me personally) likely for several years becuase my wife and I have to build our own foundation first. I really do like the idea of investing in real estate, but I fear that I will not be able to do so without compromising my passion (i.e. practicing medicine).

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I invest in hotel properties. I have detailed it in this thread. This is a group that formed just to invest and manage one segment of commercial real estate that is also a business as much as real estate

https://www.whitecoatinvestor.com/forums/topic/real-estate-anyone-with-hotel-investing-experience/

I would not recommend getting into real estate unless you have invested in retirement and in taxable index funds and are on road to FI and also set in your career. I know a good friend who has invested in properties that is in run down areas but is likely to appreciate due to gentrification. He learned about it about 10 years ago when his personal banker introduced him to the VP of real estate loans who gave him the info on the bank repossessions. He got the right properties and the rent paid for the mortgage until the value of the underlying land exploded. Another friend invests in land for mobile homes, another in small apartment buildings.

Not everything works out well. I have 3 town homes and two of them did not do well for quite a few years. And the hassles were unbelievable. I have gotten away from it, though many others are successful owning rental homes.

[ENT Doc]

There is a way to be constructive with criticism - professional, if you will - in that professional setting, particularly where we're referring to a question being asked and not some negligent action that could have been prevented by asking a question.  In the situation I now jokingly bring up I admit it was a bit of a stretch question, but the way her response was "not sugar coated" caused me to not ask any more questions the whole rotation, study on my own during the day instead of being more involved, and learn more than anyone else as evidenced by the final exam.  This is not to brag about my aptitudes but to criticize the quality of education everyone else received in that toxic environment where people allowed themselves to be mistreated and wasted time "sucking up" to people who didn't help their grades one iota.  Talk about opportunity costs...