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Rich Girl Liz H. wanted to know: "How do I know if I'm too 'liquid?'"

Chances are, you probably do have too much in your emergency fund—Katie and Henah chat through mental blocks and reframes to consider, when you might want to save more, and what Katie personally keeps in her own accounts.

Reminder: This is not financial advice; we are not certified financial professionals—please do your own due diligence.

Welcome back to #RichGirlRoundup, Money with Katie's weekly segment where Katie and MWK's Executive Producer Henah answer your burning money questions. Each month, we'll put out a call for questions on her Instagram (@moneywithkatie). New episodes every week.

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Our show is a production of Morning Brew and is produced by Henah Velez and Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Devin Emery is our Chief Content Officer and additional fact checking comes from Kate Brandt.

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Mentioned in the Episode

• “Why You Probably Have Too Much in Your Emergency Fund”

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Katie:

Welcome back, Rich Girls and Boys to Rich Girl Roundup, the weekly casual discussion segment of The Money with Katie Show. I'm your host, Katie Gatti Tassin, and here is a quick message from the sponsors of the segment.

Before we get into it, this week's upcoming main episode is about the easiest way to build wealth, featuring the godfather of financial independence, JL Collins. He is the bestselling author behind The Simple Path to Wealth, and he just published a new book called Pathfinders, both of which are excellent. So I get to pepper him with questions all about his own story, the power of index funds, his approach to investing solely in VTSAX and more. I also asked him if he thinks that America is going to #ReignSupreme forever, which is basically the theory that underpins his VTSAX purchases. And he said something that I was not expecting him to say, so check it out. I thought it was a really insightful and compelling conversation. JL is awesome. Alright, onto the roundup. Henah, how are we doing today?

Henah:

I'm good. I'm really excited for that interview to come out because I thought it was fantastic. I think it was really engaging. So this week's question came from Liz H. and I felt attacked reading it: “How do you know when you're quote unquote too liquid?” So in other words, how do you know if you're sitting on too much liquid cash versus investing, whether that's in brokerage accounts, pre-tax funds, housing, et cetera. And so to be fair, I chose this question because this is something you and I have talked a lot about and I'm going to let you take the lead here.

Katie:

Well, Henah, let's start by talking about why you felt attacked,

Henah:

Why I felt attacked…

Katie:

Why you were like, oh boy, been there, sister.

Henah:

Well, do you want me to tell the people what you have yelled at me for? Okay.

Well, as many of you have heard over the years, Katie has helped me with my finances ever since joining Money with Katie, which is a free perk and why you should all apply for jobs here.

The first year or so I was here, Katie was like, okay, I could see you're getting up to speed, you're getting all your finances together, whatever. And then when we entered the second year, she was sort of like, Henah, why do you have so much cash? And I was like, because I might need it. And she was like, in what world would you realistically need all of this cash? And to be fair, I'm not talking like 20 grand. I was talking a couple magnitudes about that and I kept being like, I don't know what if I lose my, so I've talked about this in the show as well.

My husband and I have been laid off several times between the two of us. And so we have had to tap into liquid cash through our emergency funds repeatedly. And so I think there was this kind of trauma of going through that situation and then being like, well, now I have to hoard everything in case something happens. But then I think the most recent time we talked, you were like, okay, walk me through what you really actually think would happen. And I was like, okay, so the car breaks down and then we need to buy a new car and then I get laid off because I work in media and then I don't have a job for six months, et cetera, et cetera. I think you sat me down and you were like, okay, fair. The likelihood of all these things happening is very rare, but would you actually need all of that cash at one time all at the same moment?

That's when the kind of light bulb went off for me where I was like, oh yeah, I don't think I would. And so that's kind of where I'm at now, where I feel like needing the emergency fund is not, it's something that's there, but it's not something I'm relying on anymore. And now I'm more inclined to act and move over to investing. But yeah, that's kind of where we're at now.

Katie:

So I love the part of this story where we hone in on the fact that there was something that happened to you and your husband multiple times in the form of a layoff where you have been in that precarious situation where you know what it feels like to be like the income spigot has been turned off and now I have to go and draw down on these savings and there's this finite amount that I am able to access. And so let me make sure that that amount is always high and growing in order to feel like if something ever happened, I'd be okay, which I think is eminently reasonable and makes so much sense. When you described that mental framework that you had, I was like, oh, totally understand. But I think that that exercise we did where we said, okay, so we're afraid of a worst case scenario.

Let's talk about the worst case scenario. Let's put some numbers to the worst case scenario and we can work backward and go, alright, it's probably unlikely that we would need anything more than $20k or $25k. So do we need 50, 60, 70, 80, 90, a hundred? Probably not.

But I think what's so important here is that this is super common, right? I wrote about this a couple years ago. I wrote about it because I was still helping people one-on-one at that time, and it was one of the most common trends that I noticed where these women in their twenties and thirties with 30% to 50% of their net worth in cash, sometimes more amounting to $80,000, $100,000, $150,000 in cash.

And they were often childless. They were often renters. There was often no ostensible reason why they would need so much cash on hand. And so I think it's just very natural to kind of seek, I think about it like the weighted blanket, the weighted security blanket that's kind of dragging you down.

But it can be helpful to think about what the point of an emergency fund really is, and it's to provide you with enough cash in the event of an unexpected loss of income or a big unexpected expense that you would not need to go into debt to cover it. That's it. That's really the only reason you need one.

So you can use your imagination, think about what are the most expensive accidents or situations you might find yourself in that would require you to produce tens of thousands of dollars on short notice, but it's not a super long list. We can start talking about the ranges, but beyond a couple months’ worth of expenses, I've found in the past that these bloated cash cushions often just serve to create a drag on your performance and meaningfully slow down your financial growth because it's not growing in the same way that it would be if it were invested or even though you're exposing it to more volatility when it's invested in the long term, if your philosophy is that line goes up just sitting on the sidelines.

Henah:

You and I have talked about this is, so right now I'm trying to be better about investing the leftover cash. And recently I said I'm investing thousands of dollars per month, whether through it's my 401k or whatever, and when I don't see my savings account go up, then I have perceived it as I have failed or lost money this month.

And then you were like, but aren't those account balances in other places going up? And I was like, yeah. And you were like, okay, so you're not, and there was such a disconnect for my brain to realize that even though the cash in my pocket is not the same as it was last month, the actual net worth I have has gone up tremendously more probably than the extra thousand or $2,000 that it didn't go up in the savings account.

So I think that's an interesting piece too. One part of this too is that you also kind of said at one point you're missing out on this compounding growth, and right now there's a phenomenon with interest rates where a high yield savings account can net you 5% or 5.5%, which at least feels like the money's not just sitting there and getting still. I obviously realize that that's not investing growth, but what do you think about at least having the money in that kind of account?

Katie:

I would say in a case like that, and again, not talking about money, you're saving for a specific thing. I think if you're investing or saving for a down payment in a way that's not compounding for the long term, well that's okay because it's not really for the long term. But if we're talking about money that has no earmarked purpose beyond your freedom in the future, you can get 5% in a savings account, which is great. It's better than nothing, but the S&P 500 is up four times that this year. So you could be four times farther ahead. Now granted, you're also, when you take that path, exposing yourself to being just as far down too, but that's where the purpose of the money of being for your future freedom is so crucial to think about is what is this really for and why am I saving it?

Is it I want to spend it later this year or next year? Okay, great. Then the 5% in the savings account is fantastic. But if it's like, no, this is just kind of my future fu money fund, then you're doing your future disservice by not investing it. But again, I get it. I say that now on the other side of it as like, oh yeah, I've been there. I know how that feels, and now I understand why those feelings were lying to me.

But when I started investing, I didn't know the threshold beyond which it was wise to start growing versus just hoarding for safekeeping. And so despite putting money into my 401(k), I didn't really think about that investing at the time. I kind of just thought of that as something I did with my paychecks. I didn't really understand what was happening in that account.

Henah:

Oh, I just realized that too. I guess I've been investing since I was 22. It never occurred to me that I was until you said it right now.

Katie:

Yeah, but I mean, I think once I had around 20 grand in cash, I started to feel this tug to put incremental dollars toward more productive use. I think once I saw $20,000, I was like, man, I feel like I'm starting to have money ass money. $20,000. That's like money, money.

Henah:

Money ass money.

Katie:

Then I settled on $15k as my cash cushion at the time because I was only spending between $2k-$3k a month. So $15,000, 5 months of expenses. I was like, that's great. And then I felt that anything I earned above that should be invested in something more aggressive. And at the time, high yield savings accounts and CDs were paying 2%. So that was though that transition period, which admittedly did feel like ripping off a bandaid though. Now I don't think twice about it, but I think there's this mental reframing that has to happen of what is this emergency fund really for? What are these other cash savings for? If I can't really answer those questions, and I know objectively speaking that the emergency fund is big enough, anything beyond that, I'm probably too liquid. And I have to work through where that inclination is coming from to play it unnaturally safe or unnecessarily safe, because I think it's a little bit like long-term risk versus short-term risk. And the short-term, putting money in the stock market is riskier than putting it in a savings account in the long-term, keeping it into savings account is riskier because you're now all but guaranteeing that money is not really going to grow meaningfully.

Henah:

I want to tattoo that on my forehead.

Katie:

Yeah! Fast risk versus slow risk.

Henah:

You wrote this piece that we referred to a moment ago, which I think you actually wrote it before I even started here, and I remember reading it and you said that three to six months might even be too much for expenses. And then when you and I were doing the exercise, I know your net worth, you literally pulled up your checking account and you were like, I have less than $10,000 in here that I keep. And I remember being what I was like, how would you feel this comfortable?

Katie:

Interesting. I didn't know that.

Henah:

I want to hear about now, you know, have a much more stable secure fund than you did in at the time that you were writing about this. But how do you approach it now?

Katie:

So I checked this morning, I knew we were going to record this. We have $25,000 roughly in joint checking.

Henah:

You and your husband together?

Katie:

Yeah, together in joint checking.

And then I have two individual accounts that I had from before we were married that I'm not adding more money to. I'm not actively adding more money to them. They were just kind of like my emergency funds pre-marriage when I started putting my money in the joint account instead. And they each have about $10,000 in them. So $10,000 in checking, $10,000 in savings in my individual accounts.

Henah:

So about 45 grand.

Katie:

Yeah, about $45,000 in cash liquid access to, and then Thomas also has his individual savings account from, again, before we were married that he has an emergency fund in, so we could come up with the money if we needed it.

But I think mentally now that wall has been so torn down for me where I see cash now as a liability, where I'm like, if I go into my checking account and we've been paid a time or two and we haven't moved money into investments, I'm like, oh God, it's just sitting there. I need it to go do something and I'm frantically trying to shovel it into a brokerage account or go do something, go earn some money for me, don't just sit there and look at me.

So I think beyond having roughly four months-ish of expenses in cash, the rest is invested. And so it's 20% of it is in qualified accounts just because we have only been working for what, seven or eight years. And so there are contribution limits that kind of limit how fast those can grow. And then the other 80% is in taxable brokerage accounts that are also earmarked for eventual early retirement. But I know that if I needed that money, I could just sell those stocks and access it. So I don't feel like I don't have access to it. I just feel like it's just going and being productive.

Henah:

Well, so that's kind of what I would say for someone who's worried that they have too much is you can kind of test the waters by putting it in a taxable brokerage account so that you can access it if need be and just see how you feel. And that's something that I've been trying to do where it's like I am going to shovel maybe $1,000 or $2,000 at a time instead of being like, here's 10 grand.

Katie:

Yeah, dip the toe in.

Henah:

I have two challenges to what you've shared.

Katie:

Okay, goodie.

Henah:

The first is when you wrote that piece…

Katie:

I’m scared.

Henah:

I laughed because there was a line where you said you would spend $3,000 in a fat month that your monthly spend, I think at the time was only $2,200, and now you spend far more than that. And you've talked about this on the show, so I'm curious how you feel like lifestyle creep and the emergency fund go hand in hand.

Katie:

Good question. Yeah, you got to scale up. Well, what I would say is that when I think about this particular example in my own life, the scaling up happened in both places very naturally because I was only able to scale up my lifestyle. I had more money coming in. And so as more money came in, it just kind of that buffer threshold in the checking account went up.

So okay, where I used to spend $2,500, we'll call it to find an average $2,500 a month on just me now, my half of our expenses might be twice that. So in order to support that level of spending that happened in lockstep with my income rising over time. And so I would probably be keeping a proportional amount in checking really, because my checking account is kind of my emergency fund. I don't really keep it somewhere separate, if that makes sense. This is the bucket where all the money comes in. We always have a, there's a low moderate watermark that we don't want to get below.

And once it fills up to that point, anything above it is considered fair game. So the low watermark just kind of rose as the income and the spending rose, and then we didn't allow it to get below around $20k. I think that's kind of the general buffer.

Henah:

Yeah, I kind of figured that the proportionality was the key here, but I wanted to make sure that we address that because I think sometimes that's…

Katie:

Good question for sure.

Henah:

Whatever my emergency fund needed to be six years ago is different than what I need it to be today. And on that note, you kind of talked about this, neither of us have kids, neither of us own a home, so we don't necessarily have a need for a fat emergency fund in the same way. What do you recommend for people who are in those boats? Is it 12 months? Is it a number that they have to calculate differently? What is your recommendation there?

Katie:

Excellent guidance. That is such a good question, and the way that I personally think about this is that your emergency fund is kind of like a spectrum. So you place yourself on the spectrum based on a few different qualities. Do you have kids or other liabilities? They might not be kids. You might have dependents that are not your own children.

Henah:

Dependents.

Katie:

Do you have dependents who rely on you for things? Do you own property where you might be compensated by insurance down the line, but it's coming out of your pocket first and you got to pay for it right now?

Henah:

Do you think also it's do you own property that also has a mortgage, people who own property that's paid off, but they still have to pay for things like repairs and taxes and maintenance.

Katie:

Yeah, I think property, regardless of its status as owned or mortgage regardless, if you need a new roof, you need a new roof. So I think—

Henah:

I guess what I'm saying is that if it's paid off, then your emergency fund is probably a little bit less than if it's not paid off and you would need a roof.

Katie:

Oh, I see. Because you would need to make sure you could continue to service the debt if you lost income. Yeah, good point. Good point.

So maybe it's fully owned versus mortgaged. That could be a distinction. But I think about this, once you start introducing large assets that require upkeep and where unpredictable things can happen to them, I definitely start to think you start moving up that spectrum of how much you need from maybe three months if you're the childless renter with no other pendants and you have a very low cost of living to, I have six kids, three houses and a boat. Okay, well now we're talking probably closer to 12.

The other criterion for the spectrum would be self-employment versus W-2 employment. Now, that's not to say that W-2 employment is perfectly stable. Most of us are employed at will, so we could be fired at any time because our CEO woke up and had a belly ache.

But I think there is something about self-employment that also urges you in that direction where you want to have enough cash on hand that if for some reason you're having a slow couple of months, you are not suddenly in a position where you have to go seek other employment and give up on the business because you're not making a ton of money in the moment. So I think employment is also another, and maybe the type of employment, even if you are employed, are you employed by a crypto startup or by the federal government? Those jobs also have very different levels of stability.

Henah:

Basically as usual, the answer is it depends. Good luck.

Katie:

But even with “it depends,” I still have a hard time seeing how it can get far beyond 12 months, assuming with the qualification that you are carrying the correct insurance policies, as in long-term disability insurance.

Henah:

Yeah, I was going to say that.

Katie:

Your umbrella policies, assuming you are properly insured, I would have a hard time seeing why you would need more than 12 months in all but the most fringe of cases. And I think that that might be the qualification I would make. What do you think? It sounds like you were kind of going to go in the same direction.

Henah:

Yeah, I think so. I think your point about disability insurance was the part I was going to say is that anybody can become disabled at any time, and that obviously can affect your ability to work and your ability to survive off of said work. So that would be the thing where it's like maybe part of that liquid cash can go towards getting the right kind of policy or premium or whatever for yourself, and then you can feel a little bit more letting go of excess cash if you're past that 12 month or whatever it is for your situation. I was going to say, I think there are certain instances where I could see more than a year, but it's usually around disability or I mean, I guess the pandemic, if you're in a high stakes job that especially if you know you're in a temp or contracted role, maybe you want to hold onto that.

Katie:

I think where I still draw the line at a year is only because after that point, if we're talking about needing money beyond the year mark, you now have a very long runway to start divesting from stocks and pulling more money out of investments such that you don't actually need it to be cash the entire time. It's kind of the way FI works if you think about it. You're not going to reach FI and then go, alright, I need this money to last me for the next 40 years, so I'm going to take it all out of the stock market right now and put it all in liquid cash. You pull it out little by little as you need it, so it will continue to grow in the meantime.

And I wonder if that's kind of the same principle here of the suggestion is not, oh, once you have 12 months of savings, feel free to spend the rest of it and don't worry about investing for the future. It's just feel empowered to invest for the future because you still will have access to that money too, should you need it. In the worst of worst case scenarios where even 12 months of cash cushion is not enough, because now we have introduced such a long timeline that you can start selling.

Henah:

Just be mindful of the kinds of investments you have as well and what feels easy to get in a liquid sense and is not as volatile as say, crypto or…

Katie:

Fine wines….

Henah:

I don't even, certain types of art, NFTS…

Katie:

Yeah, yeah, yeah, yeah. It's like we're talking index funds, not Beanie Babies.

Henah:

Which is a great note to close us out on that we are not licensed financial professionals. We do not have credentials, so please talk to your CPA.

Katie:

Don't listen to what we say! Sorry. You'll never get the last 25 minutes of your life back. No, just kidding.

That was all for Rich Girl Roundup, but we will see you right back here, same time, same place with the godfather of FI himself, JL Collins, who if you're feeling on the fence about investing more aggressively, he's the right guy to talk to.

Henah:

Very compelling, I will say.