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I CAN'T bring myself to use my cash reserves!!
Old 02-26-2008, 11:25 AM   #1
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I CAN'T bring myself to use my cash reserves!!

SO....here's my story. I'm 25 y/o, 1 child and one coming, self employed with 2 rentals, wife stays home and works under the table. I've only begun working toward FIRE in the last 2 years. Before that, I amassed a whopping $10k in cash savings.

Since then, I've opened a Roth that I max out, a rollover IRA from my old 9-5 job, and a Simple IRA that I contribute $70 to weekly. I also save about $400 month for my cash 'reserves'.

My PROBLEM is that I cant bring myself to touch those reserves. Right now its about $25k. To me, this equals about one full year that I could not work and still survive. The last time I WITHDREW money from this account was 10 years ago for my first car...I wiped out the whole $1200!!

I am currently experiencing a lot of setbacks financially,in quick succession, coupled with a slow season for my line of work. $1500 work van repair, $150 surprise city inspection at rental, $1800 property tax payments (expected, but never easy), excessive federal income taxes due as a result of poor planning ($4k more than expected), $500 roof repair at home due to storms PLUS lots of labor,$1200 roof repair at rental due to old age and storms...insurance wont cover, $200 roof repair plus my labor for shed roof damaged in same storm..... ALL WITHIN THE LAST 2 MONTHS


I've been able to handle most expenses but I have about $2500 left to dole out and my IMMEDIATE month-to-month cash reserves are at an all time low of $1500...I keep $3k to cover one months expenses. Mortgage is coming due, rental heloc's due,etc etc

So....do I take 3-4k from my long term cash reserves and set myself back to 2007 levels...OR write a check from my HELOC (5.5% now, can lock at 6%)and 'pay myself back'? The obvious answer is to use the cash. BUT...I always worry about IF my HELOC disappears (bank choice, depreciation, credit issues...whatever) and I already began tapping cash reserves....I'm screwed! I also have an issue (ego?fear?obsession?) with the $$ amount of cash I have on hand. It is one of the only things financially that helps me sleep at night....and once I pass a benchmark(lately $5k increments) I promise myself I will never go back....

Work has been getting better each year, but as a business owner I'm always VERY leary unless I'm BOOKED SOLID. I think that's normal to be apprehensive and not totally secure as a small business owner relying on the business put food on the table. I spend all my free time on improving the businesses, so the income side of the equation is as good as it is going to get for now


Any input, suggestions, advice?
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Old 02-26-2008, 11:29 AM   #2
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Use your cash reserves. It's really that simple.
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Old 02-26-2008, 12:42 PM   #3
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Use your cash reserves. It's really that simple.
Yes, go ahead and use your cash reserves. That's what you saved that money for.

Then when things calm down and you don't have any unusual expenses for a while, you can work hard on building them back up again. Or, how about this. You could build up an even bigger cash reserve, call that pot of money your "pseudo-HELOC", and cancel your real HELOC.
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Old 02-26-2008, 12:50 PM   #4
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I don't think there are any wrong answers. Some things to consider:

- Will you take a tax "hit" or other penalties for dipping in to your cash reserves (i.e. are they in a checking/M account, or in a CD (withdrawal penalty) or stocks/bonds (cap gains taxes).)

- The HELOC rates now are very low on a historic basis. With inflation threatening, rates are likely to climb (my guess). And, as you point out, some banks are tightening up lending criteria and limits, so the HELOC money might not be available forever, and (almost) certainly not at this rate.

- Would you gain a tax benefit from deducting HELOC interest?

I don't think it will make a big difference at the end of the day-the $$ will likely be close to a "wash." You'd probably come out slightly ahead by using your own money, but the cost is a reduced reserve if things realy do take an unexpectedly bad turn.

The real issue might be to get this taken care of so you aren't thinking about it so much and can turn your mind t constructive pursuits: Life, finding new customers, whatever.
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Old 02-26-2008, 01:22 PM   #5
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Do you have a budget setup? $1800 property tax payment should be cake if you are budgeted for it.

Are you dumping all your extra money into cash reserves? Do you put $150/month somewhere for the tax pmt before your $400 cash reserve dep?

Some of your other unexpected expenses might be a little hard to budget for. However, I do have budgeted money for home and car repairs.

You've had a little bad luck with everything hitting you at once so I would use the cash reserves and review your budget.
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Old 02-26-2008, 11:43 PM   #6
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Originally Posted by LOL! View Post
Use your cash reserves. It's really that simple.
I agree....

But it seems like you have (or potentially have) the same problem my BIL had... he would look at his 'cash' but not his debt....

And since he died, he left my sister in a small bind.... he had mortgaged the house, had a boat payment, bought a few boat slips as investments, etc. etc... and was floating CC debt of over $150K.... but kept looking at all his cash and saying how great he was doing...

The cash reserve is there for..... guess what.... an unexpected expense... that is what you have... so use it for what it was intended...





BUT, going on a trip, or buying a big screen TV or etc etc are NOT unexpected expenses... but you know that...

Keep up your savings plan... and the money will be back to what it was soon and then keep going...
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Old 02-27-2008, 07:45 AM   #7
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Yep. Use your cash. It's what I had to do in Jan. when the Xmas bills were piling up at the same time as a $2k car maint./repair bill popped up. It was tough to see that 5 figure cash reserve slip to a 4 figure reserve.

I think it's called mental accounting, from Why Smart People Make Big Money Mistakes -- and How to Correct Them. Good book.

-CC
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Old 02-27-2008, 08:37 AM   #8
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Do you have a budget setup? $1800 property tax payment should be cake if you are budgeted for it.

Are you dumping all your extra money into cash reserves? Do you put $150/month somewhere for the tax pmt before your $400 cash reserve dep?

Some of your other unexpected expenses might be a little hard to budget for. However, I do have budgeted money for home and car repairs.

You've had a little bad luck with everything hitting you at once so I would use the cash reserves and review your budget.
Yes I have a budget,and thus know my needs, but I don't separate$$ or anything. Basically all $$ goes into checking, where I TRY to keep a $3k balance. I used to skim off the top each time I hit $4k or $5k, but now I set up a very aggressive automatic savings plan (90 weekly to $$ reserves, $40 weekly to the "I want a big bad truck fund", $160 bi-weeklyto Roth,$70 weekly to Simple IRA, $100 bi-weekly to income tax reserves).

BUT, for all expenses,whether they are monthly or semi-annual (prop tax),I just pay it from checking and work on getting that balance back to $3k ASAP.


What I've decided to do is empty the "I wanna new truck fund" of its $1300, and....drumroll please......I'm selling my car!

Not only will I be able to get $4500 or more, but there will be no more insurance or upkeep. My wife just bought a minivan (100% separate finances), so I am welcome to her old car...which I love (96 avalon,).

CCDace- I'm going to check out that book, looks good for me!

Thanks for all the input! i know/knew the answer but it helps to hear it
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Old 02-27-2008, 08:57 AM   #9
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Keep in mind this is all personal preference, but once my cash res got to 3-6 months of living expenses, I would stop contributing to it. I would start taxable retirement investment account.

Not sure if it's different for the self employed, or how it relates to a Simple IRA, but I believe the 2008 max for a Roth IRA is 5k. So that would be $208 bi weekly.
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Old 02-27-2008, 06:16 PM   #10
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Keep in mind this is all personal preference, but once my cash res got to 3-6 months of living expenses, I would stop contributing to it. I would start taxable retirement investment account.

Not sure if it's different for the self employed, or how it relates to a Simple IRA, but I believe the 2008 max for a Roth IRA is 5k. So that would be $208 bi weekly.

Oh yeah! The limit went up this year to 5k for the Roth....I will be adding some $$ to my bi-weekly amount once things turn around
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Old 02-27-2008, 09:11 PM   #11
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Cash Reserves = Emergency Fund

Use it for what it was created for...
Although your downsizing vehicles is also a good strategy.

DD
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Old 02-27-2008, 09:15 PM   #12
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Cash Reserves = Emergency Fund
To me, an "emergency fund" is just a necessary component of overall "cash reserves." I think total cash reserves should include an accumulation of cash toward expected big-ticket purchases in the future. Now that we have our emergency fund where we want it, we're continuing to add to the cash accounts to the tune of about $300 a month in order to pay cash for our next car (hopefully) a few years down the road. If all we had was the emergency fund in terms of saved, liquid cash, we'd have to go into debt for it which we'd rather not do.
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Old 02-27-2008, 09:16 PM   #13
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Cash Reserves = Emergency Fund

Use it for what it was created for...
Although your downsizing vehicles is also a good strategy.

DD

Well, up until the recent rate cuts I was earning 5+% guaranteed, which is fine for my investing tolerance....and I liked knowing I'd receive xx dollars of interest each month...now though savings rates are dropping and much under 5% cant keep up with inflation

I'd prefer that my EMERGENCY FUND never be touched and eventually becomes RETIREMENT FUND
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Old 02-27-2008, 09:19 PM   #14
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Well, up until the recent rate cuts I was earning 5+% guaranteed, which is fine for my investing tolerance....and I liked knowing I'd receive xx dollars of interest each month...now though savings rates are dropping and much under 5% cant keep up with inflation

I'd prefer that my EMERGENCY FUND never be touched and eventually becomes RETIREMENT FUND
Well then screw the bills and let them come after you. Then your retirement account will be intact
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Old 02-27-2008, 09:25 PM   #15
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Well then screw the bills and let them come after you. Then your retirement account will be intact
that's the plan!! lol

i have a twisted way of 'mental accounting' as mentioned earlier and I dont think its advantageous. im a smart guy, see the flaws, but continue on . its wierd
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Old 02-27-2008, 10:03 PM   #16
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I'd prefer that my EMERGENCY FUND never be touched and eventually becomes RETIREMENT FUND
But see, then it's really not an emergency fund. As others have pointed out (and I'm sure you know), saving money isn't an end in and of itself. You save that money, especially in an emergency fund, because you might have to use it one day.
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Old 02-28-2008, 08:40 AM   #17
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But see, then it's really not an emergency fund. As others have pointed out (and I'm sure you know), saving money isn't an end in and of itself. You save that money, especially in an emergency fund, because you might have to use it one day.
And probably WILL have to use it. Have you ever heard of anybody who didn't have emergencies or unexpected replacement costs pop up in their lives? Something always happens.

Like last week. A freak windstorm blew a couple of doors to exterior closets off my house, that had been previously half shredded and weakened by Katrina. Coincidently but at the same time, my water heater (in a closet inside one of the doors) bit the dust in a major way. These things happen to everyone, as far as I can tell, and if you have a decent sized deductible (as is required in Louisiana) then you are already saving money on your insurance premium which can help if set aside in your emergency fund. So, you pay and then redouble your efforts to replace that money as soon as you can.
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Old 02-28-2008, 02:46 PM   #18
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SO....here's my story. I'm 25 y/o, 1 child and one coming, self employed with 2 rentals, wife stays home and works under the table.... Any input, suggestions, advice?
Start declaring your wife's income. She may have to pay taxes but will enjoy some social security benefits. More to the point, she will be contributing something to society.

Possibly not what you wanted to hear ... but you asked.
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Old 02-28-2008, 06:51 PM   #19
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Use your cash instead of the HELOC...your emergency fund is there for this type of thing.
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