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Discussion Starter #1
Need some thoughts on what to do with a larger 'emergency fund'. Over the years, I had been planning to go fully independent and start consulting full time instead regular employment. My spouse does this, and I do it part time in my spare time on top of my regular job. I have been planning this for years as I do get offers frequently to consult. One of the criteria in my planning was before I the plunge I wanted at least two years of the equivalent of my take home saved. The intent of this amount was to replace my income and give me lots of time to ramp up in the full time consulting world. I have always been the very stable income earner in our family, my spouse moves between consulting and employment world, so we have always had a higher amount of savings to offset his instability.

So I have been saving into a HISA (under 2%), and realized that I have surpassed my target amount of savings. 6- figure cash is just sitting there. This amount is in addition to the normal emergency fund we carry. I do not see this is a good time to jump into consulting, and based on all the demands from my gaining parents, and teenage kids, I don't see myself jumping in to this venture for a couple of years more (at least).

With the markets the way they are I thought this was a good time to invest the money. All registered accounts are full. I don't know when I will need this money. We could technically use some (up to 50%) of it for renovations next year. I really don't know what to with this money. It's been like a security blanket for us, but I think I need to take some more risks (but not too much) with it.

Any ideas on a relative safe investment for a 2-5 year time frame that is flexible? I say 5 years because, if I haven't gotten off the pot to jump in at that time, I will probably just be an employee until retirement.
 

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I pulled the trigger on something similar. I left my regular job a year ago and have been consulting since then.

A key part of my plan is to have a large enough cash reserve to cover 3 years of living expenses. But I also assume I'll receive some dividends & interest from my investments each year, with conservative estimates. For example if my annual living expenses are 40K but I expect to receive 20K in dividends and interest, then the required cash reserve = (40 - 20) x 3 = 60K

As you can see, this doesn't add up to an enormous amount of cash. Could it be that you are overestimating your cash requirement by thinking of it in terms of "take home" pay saved? I thought about this a lot, and decided that my annual expenses are the critical metric.

What I describe above also includes my emergency fund. In comparison, it sounds like you have a separate emergency fund, and also are counting years of take-home pay which I assume is higher than your annual expenses.

I think GICs would be a good fit in your case, either non-registered or TFSA (so that you can withdraw). You could stagger them such that quite a bit matures every 6 months. I would go with the standard 5 year GIC ladder. If you haven't gone independent yet, or don't need the cash, then keep reinvesting maturing amounts all the way to 5 years.

But, if you do start working independently and need cash on hand, then you let the amounts mature and store them into high interest savings. I've even thought to myself that I could reduce my cash reserve further and use GICs to do all of this, because as long as GICs are maturing often enough (every 3 or 6 months) it's really pretty similar liquidity to cash.
 

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Discussion Starter #3
Thanks James for your input. I responded in the PM partially, but may keep the information here for various views.

Our yearly cash spend is much more. For ease of planning, we based it on my take home salary. We could probably cut if needed, but we found it easier to just keep our spending down to one take home and save the other one, it gives us a some additional breathing room.

Yes, we kind of have two emergency funds. We don't really need emergency funds as some do, for us we treat them as a cash reserve. We always want one year of take home salary in cash. Then we factor in any planned large purchases (large defined as more than $10K). This could be a for a big family vacation, vehicles, renovations, etc. They are always saved for first then done. This money sits goes into the cash reserve. Sometimes we plan up to two years out on some really large expenditures (right now, we are saving for a complete house reno next year). On top of that, we have been planning for me to go independent. So we have another amount which was to be another years salary (gross). With us not going out right now, and this years major vacations cancelled (we had two large trips planned), we will have more cash sitting than I would like.

I considered a GIC ladder, but feel it's a bit conservative (mind you the cash reserves aren't doing much). My income needs are a little different than yours as my spouse and I both bring in relatively equal amounts and we would just live off the other income. All of my other investments are in registered accounts for our retirement, which I do not want to touch, private investments - essentially non income generating investments. I don't count those as I don't ever want to withdraw. I did factor in our rentals though. We would only have to draw on our savings if my spouse also was not longer working. In his case, he would not get EI. He is currently is working on a small start up so there is a lot of risk there, but he is able to draw a salary. The other time we withdraw is when we finally make that major purchase which is a large lump sum.

I guess I am try to figure out how get the best return for the large lump sum amounts. I think GICs may be the right answer, as it's only max 2 years out. For the larger secondary fund (my independent fund) I would like to invest it better.
 

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One thing I'm noticing here is some conflicting forces on your investment risk choice. On one hand, you're saying you have a rather aggressive investment position, maybe high equities. On the other hand, your income uncertainty is forcing you to hold a lot of cash.

Perhaps one thing to calculate is your current % equity % fixed income split, once you count all that cash as fixed income. I say this because you already have been forced to keep that cash around due to the need for fixed income. What % equity and % fixed income (cash & bonds) does this result in?

My own solution to this has been a conservative asset allocation with only 30% equities. With more conservative asset allocations, you don't have to worry about the cash levels so much because you can always withdraw money from the portfolio.
 

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And if you'll allow a brief aside (but is relevant here) here's my line of thinking.

Instead of thinking about my capital as (A) high performing high risk stuff and (B) a separate mountain of cash, I've chosen instead: (A) moderately performing investments and (B) minimal cash.

This isn't necessarily a better way to do it, but it sure does simplify my life because I don't have to wonder how much I have to keep in the huge cash account. Instead I can simply invest everything except (B) minimal cash. And since virtually all capital is invested, it's performing pretty well.

The allocation is something like Vanguard's VCIP. Here's a link to how a VCIP-like allocation would have performed historically over 48 years (this uses only the S&P 500 because of available data so don't take it too literally).

This ^ has performed quite well over the long term. This chart of the annual returns shows why it's feasible to rely on the investments for when you need money.

Admittedly there have been some bad years, like -6% in 1994 but at least historically this has provided pretty steady positive returns.

20235
 

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Discussion Starter #6
I appreciate response. I did send you a PM with my allocations. However, now that I have done that. I think all of that other stuff is noise.

If I take the time to reframe my question, don't worry about the other allocations, here are my questions or problem:
- I have a large amount of cash that is set aside as an emergency fund that earns very little interests. The question is where to invest the non minimum cash amount that needs to be liquid enough to draw upon.

Perhaps the answer is reduce my cash reserve and just invest the money I currently putting into my reserves like I normally would. My cash reserves will still be pretty healthy, so I can just put the rest in MAW104 for my non registered.
 

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I think a good 60-40 BAL or 40-60 CON fund, depending on your risk tolerance, is a great place to put your "kinda sorta future emergency fund but also maybe long term savings".

Look at how these funds performed during this big down turn, very resilient with low volatility. I would feel reasonably OK with selling a CON fund (less so a BAL fund) during a market downturn to use as emergency money.

Also though, the downturn has made me realize just how much emergency CASH is unbeatable. You can have 2 years worth of living expenses saved during normal times and think: "yes this is way more than adequate, too much really". But when things are bad, and jobs are drying up (especially if you're both contracting later) all of a sudden you're thinking - holy crap all I have is 2 year's worth of emergency fund? I might need 5... or 10!
 

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I think a good 60-40 BAL or 40-60 CON fund, depending on your risk tolerance, is a great place to put your "kinda sorta future emergency fund but also maybe long term savings".
. . .
Also though, the downturn has made me realize just how much emergency CASH is unbeatable.
I agree with everything @peterk says here. The pure cash is unbeatable and X years of living expenses should always be kept as pure cash.

But yes I do think a moderate risk fund like perhaps VCNS or VCIP would also be suitable for storing larger amounts of money that are "kinda sorta" emergency funds, and long term savings. Take a look at the annual return chart I posted above; if you're invested in that kind of thing, it's probably OK to withdraw from it at your leisure. At the same time, they perform better than cash.

Personally I think that a 60/40 balanced fund may be too much risk for that kind of purpose as it's strongly tied to equity returns. And equities are correlated with consulting income, at least for me.

One reason I avoid the high equity allocation (including 60/40) is that the last thing I need is my income and capital to plummet together.
 

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- I have a large amount of cash that is set aside as an emergency fund that earns very little interests. The question is where to invest the non minimum cash amount that needs to be liquid enough to draw upon.
I would keep the emergency fund in a HISA or cashable GIC. There is not much returns to be had anywhere in the fixed income world, particularly on an after-tax basis. Instead think of it as your spare tire. My spare tire has been doing nothing (in the physical sense), but it provides valuable support for me to go anywhere with my car and not worrying about a flat tire in the middle of nowhere. It is sort of an insurance.

Perhaps the answer is reduce my cash reserve and just invest the money I currently putting into my reserves like I normally would. My cash reserves will still be pretty healthy, so I can just put the rest in MAW104 for my non registered.
Any cash beyond your emergency fund and near term liabilities (buying a car, etc) could be invested for longer term goals (such as retirement). The fundamental questions are when are you going to need the money and when would you know about it. In the case of retirement for example, you know that you will need it years or decades in the future and usually you will know years in advance that you plan to retire.
 

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I would keep the emergency fund in a HISA or cashable GIC. There is not much returns to be had anywhere in the fixed income world, particularly on an after-tax basis. Instead think of it as your spare tire. My spare tire has been doing nothing (in the physical sense), but it provides valuable support for me to go anywhere with my car and not worrying about a flat tire in the middle of nowhere. It is sort of an insurance.



Any cash beyond your emergency fund and near term liabilities (buying a car, etc) could be invested for longer term goals (such as retirement). The fundamental questions are when are you going to need the money and when would you know about it. In the case of retirement for example, you know that you will need it years or decades in the future and usually you will know years in advance that you plan to retire.
I like the comparison of having a minimal amount of funds put away to a spare tire, makes perfect visual sense to newbies - this is how I'm going to explain it now to my financially illiterate friends :LOL:
 

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I agree with everything @peterk says here. The pure cash is unbeatable and X years of living expenses should always be kept as pure cash.

But yes I do think a moderate risk fund like perhaps VCNS or VCIP would also be suitable for storing larger amounts of money that are "kinda sorta" emergency funds, and long term savings. Take a look at the annual return chart I posted above; if you're invested in that kind of thing, it's probably OK to withdraw from it at your leisure. At the same time, they perform better than cash.

Personally I think that a 60/40 balanced fund may be too much risk for that kind of purpose as it's strongly tied to equity returns. And equities are correlated with consulting income, at least for me.

One reason I avoid the high equity allocation (including 60/40) is that the last thing I need is my income and capital to plummet together.
Ya, after seeing how the BAL and the CON funds performed (I think BAL was quite decent in terms of capital preservation, and especially in smoothing of daily volatility compared to stocks) I'd almost consider them a completely separate asset class, your whole "greater than the sum of their parts" mantra (as long as you don't look too closely :) )

VCNS is a great answer to "I have too much cash I don't know what to do with"
VBAL is a great answer to "I want to keep investing more but my large stock portfolio is too volatile"

Even better, imo, would be to hold these types in a different account (or broker) than your other "cash" or "stock" accounts. You then have a completely separate middle-ground option for either adding (more likely) or withdrawing during times in your life or in the economy or in the job market where you are "frozen" for whatever reason, and making either large decisions about cash or large decisions about stocks is just a stressful, unthinkable option.

Have money? need money? scared? confident? don't know? don't want to know? emergency fund? retirement? downpayment? house burns down? college fund? start a business? VCNS (or VBAL to a lesser extent) is almost always a good answer for any situation.
 

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Ya, after seeing how the BAL and the CON funds performed (I think BAL was quite decent in terms of capital preservation, and especially in smoothing of daily volatility compared to stocks) I'd almost consider them a completely separate asset class, your whole "greater than the sum of their parts" mantra (as long as you don't look too closely :) )

VCNS is a great answer to "I have too much cash I don't know what to do with"
VBAL is a great answer to "I want to keep investing more but my large stock portfolio is too volatile"
I agree. When constructing diversified portfolios, the whole is greater than the sum of its parts. We had some lively CMF debates on this over the years and I know that some people disagree with me, but I still think that if you take the portfolio and put it inside "a box" (which is what VBAL is), you end up with something which looks and acts very differently than its parts.

This upsets some people, though, because they look inside the portfolio and say 'but I don't want to be in emerging markets' or more commonly 'bonds are a horrible investment and I don't want so many damned bonds!'.

If you're able to convince yourself to look at the whole portfolio, and accept that you may not always love the individual holdings, then you start to see something new and unique. An example is the allocation shown in my post #5

Even better, imo, would be to hold these types in a different account (or broker) than your other "cash" or "stock" accounts. You then have a completely separate middle-ground option for either adding (more likely) or withdrawing during times in your life or in the economy or in the job market where you are "frozen" for whatever reason, and making either large decisions about cash or large decisions about stocks is just a stressful, unthinkable option.

Have money? need money? scared? confident? don't know? don't want to know? emergency fund? retirement? downpayment? house burns down? college fund? start a business? VCNS (or VBAL to a lesser extent) is almost always a good answer for any situation.
That sounds like a good idea, though I'd also add VCIP as another alternative.
 

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Discussion Starter #13
I would keep the emergency fund in a HISA or cashable GIC. There is not much returns to be had anywhere in the fixed income world, particularly on an after-tax basis. Instead think of it as your spare tire. My spare tire has been doing nothing (in the physical sense), but it provides valuable support for me to go anywhere with my car and not worrying about a flat tire in the middle of nowhere. It is sort of an insurance.

Any cash beyond your emergency fund and near term liabilities (buying a car, etc) could be invested for longer term goals (such as retirement). The fundamental questions are when are you going to need the money and when would you know about it. In the case of retirement for example, you know that you will need it years or decades in the future and usually you will know years in advance that you plan to retire.
This the point of my post. I already keep a large cash/GIC reserve with covers my emergencies and large foreseeable purchases. We already cover over a year expenses, and a few large items (reno's and international trip we won't be taking) This is cover job loss for both of us. In that case, we would not be doing our major purchase. So would have already 2-3 years of expenses already. To me that more than a full size spare tire. That's almost another set. Then on top of that, I have been planning to go independent, so saved for that, but it's not looking like I will in this economy I would like to keep that option for the next 5 years or so. Curently, the amounts I have is more than a full set of spare tires. It doesn't make sense that it all sit in cash, the first chunk does, but the second with the 5 year horizon is what I was asking about.

I may be partially retired in less than 9 (optimistically) but based on the markets and family more likely 15 (with a mid size pension) if I don't go independent. So if I don't go independent, then I will just move the second chunk into my longer term investments which would technically only be 4-10 more years. So I could either invest for 5 year chunks, or invest for the longer time frame.

VCNS is a great answer to "I have too much cash I don't know what to do with"
VBAL is a great answer to "I want to keep investing more but my large stock portfolio is too volatile"
Great explanation, this is along the line of what I am looking for
I am more in the VCNS, but still think that is a little conservative. I am leaning towards VBAL. How would this differ from MAW104. I like to keep it really simple.
 

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I am more in the VCNS, but still think that is a little conservative. I am leaning towards VBAL. How would this differ from MAW104. I like to keep it really simple.
I think VBAL and MAW104 are about the same thing: diversified portfolios with 60% stocks 40% bonds. The Mawer one is more actively managed.
 

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Discussion Starter #15
I think VBAL and MAW104 are about the same thing: diversified portfolios with 60% stocks 40% bonds. The Mawer one is more actively managed.
Do you see an advantage for one over the other in a non registered account? I had been looking at MAW104 for my other investments.
 
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