How Much Do I Need in Savings?
One common theme of anxiety we hear about investing is clients who want to know what the magic number they need to keep in savings is, so that afterwards, they can begin investing excess cash flow. If you’ve read any self-help financial books by authors who shall remain nameless (help is a very loose word to describe these books), they almost all have an amount you should sit on. The main problem with this, while I don’t know these authors’ intentions, it is at the very least intellectually dishonest to pretend that everyone is similar, let alone so exact that a blanket statement like “if you’re 27 and make $75,000 a year, you need to have at least $25,000 in the bank, and absolutely always pay cash” fits every person reading the book.
There are plenty of things to stress about in 2021, your finances shouldn’t be one of them. For this reason, the answer to this question is however much you feel comfortable with. For some of my clients, this may be $50,000 in savings, for any situation that could arise, however, for some of my younger clients this is entirely too much, unless they just feel the need to have that added sense of security. If $20,000 is enough to give you peace of mind, then keep $20,000.
Another question that often arises, should I pay cash for large purchases, or should I pay cash? For example, a 30 year old couple, wanting to buy their first house. Assuming they have decent credit and get a 3.0% mortgage, the opportunity cost on equities is roughly 7%. If the couple pays cash, rather than taking out the mortgage to avoid debt and interest, they miss out on the annualized 10% return the stock market has averaged over the last 100 years. (10%-3%=7%). You are essentially losing money, so smart financial advice would be to put a solid down payment down, and take the mortgage, because at 30, it’s extremely unlikely this is the only house you will ever own. The same advice can be taken for buying a vehicle. We should always think of our bank account the same way we would think about running a business and avoid blanket statements about your finances. The most rewarding thing about my job is that every family I have the privilege of serving is vastly different from the next, and every day is different. We are all incredibly unique and have different goals, so we should always treat our finances that way.
-Colin Feller, President