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Should I have more cash?
Old 02-14-2005, 07:57 AM   #1
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Should I have more cash?

Obviously, one would want as much cash as possible. 6-months of living expenses for me is $15K, which I have.

However, some of the investment vehicles (namely, real estate and small business) require more cash on hand.

I feel like $15K is not enough. Then again, if I built it up to $50K, I would probably feel like that is not enough either.

I'm making about $120K, and I'm looking to always max out my solo 401(k). That would put me at about $40K pre-tax annually. But trying to build up my liquid cash would take away from the amount I would be able to invest in my taxable account, which I am trying to build up as well. (This is my weakest area, I usually don't have enough to put away into taxable accounts b/c my 401 is taking everything.)

Am I over-worrying?
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Re: Should I have more cash?
Old 02-14-2005, 10:04 AM   #2
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Re: Should I have more cash?

LRAO,
Assuming you are in the 25% Federal tax bracket, and it looks like you are, then you should probably max the 401K. Be sure you have an available equity line or credit cards for emergencies.

The Beachbumz
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Re: Should I have more cash?
Old 02-14-2005, 10:32 AM   #3
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Re: Should I have more cash?

LRAO,

Have you started a ROTH? After maxing out your
401k up to company match I suggest maxing a
ROTH and then invest in your after tax funds with
anything left over. Your $15k emergency fund sounds
about right to me. I-bonds would be a good choice
to fill out your after tax bond allocation.

Sounds like you are well on your way to ER.

Good luck,

Charlie
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Re: Should I have more cash?
Old 02-14-2005, 10:52 AM   #4
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Re: Should I have more cash?

Sorry if I didn't clarify.

I have already maxed my Roth.

I am self-employed, so the only 401(k) match is that I make to myself.

However, I just feel like with cash requirements of some investments, $15K is not enough. Are you saying I should hold that extra liquid money is I-bonds?

Or is there another way people handle this? Perhaps they pull money out to buy more properties?
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Re: Should I have more cash?
Old 02-14-2005, 05:01 PM   #5
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Re: Should I have more cash?

LARO,

Some will object to this, but I think you should
reconsider maxing out a 401k if you are self
employed. You can achieve good tax deferral
in a taxable account by using a tax efficient
index fund like Total Stock Market and I-bonds or
tax exempt municipals for your fixed income
allocation. IMHO, there is a huge danger of
tax rates going up in the future when you start
drawing down your 401k. These withdrawals
will be taxed as ordinary income and will have
the negative effect of making up to 85% of your
SS income subject to tax as well. OTOH, tax rates
on dividends and long term capital gains will likely
be lower than ordinary income tax brackets. That
is unless the dems get their hands on the power
levers again.

As for I-bonds, they are very flexible. You can cash
them after 1 year with a 3 month penalty and no
penalty if held greater than 5 years. You also get
tax deferral until cashed in.

Cheers,

Charlie
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Re: Should I have more cash?
Old 02-15-2005, 04:48 AM   #6
 
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Re: Should I have more cash?

I don't like to have a lot of cash sitting around just in case something good comes up. Last year I invested in real estate for which I had to come up with money very quickly. I used my 401K to give myself a loan. It took 2 minutes and the interest I pay on my own loan is only 4.5%. There is no penalty unless you don't pay back.

There was a restriction that I could only take one loan per year and only have two loans at any time. I think these rules are dictated by the law. The Solo 401K should offer the same opportunities.

Vicky
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Re: Should I have more cash?
Old 02-17-2005, 03:54 PM   #7
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Re: Should I have more cash?

Quote:
Some will object to this, but I think you should reconsider maxing out a 401k if you are self employed.
Of course, it depends on the situation.

For example, if you're making $120K now, but save most of it and plan to retire very early on $20-$30K per year, then the 401K might make lots of sense. IIRC, you can save more than 25% pretax at 120K. Then, after retiring, if you are in the 0% to 15% bracket, you can roll over some of that 401K money to a Roth (via a Traditional IRA) each year, to the extent of maxing out the 15% bracket.
Until tax rates go up...

If you are saving less/expect to retire on more, the 401K might be questionable.

LRAO, you talk about cash needs for (direct?) investments, including real estate and small business... this I imagine is very different than most retirees needs for cash to live on... I guess it depends on the needs of your business(es) . If you feel $50K isnt enough, perhaps you are right. If a business needs cash to survive, it might be a bad idea to put that money in the stock market...

If I'm understanding your question correctly, maybe you could get free advice from the Small Business Administration, perhaps even from people with similar experience.

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