As my different investment/cash accounts have built value over the years, along with managing some of my parents' stuff, something has really bothered me regarding cash balances.
Often, a cash balance is in what I have to assume to be in a MM fund that has the double-whammy of paying little/no interest as it sits in a typical IRA or HSA broker account waiting to be invested. This is obviously a poor choice, but it got me thinking that every cash balance should have a streamed line to some sort of emergency or need for "dry powder." If it's not in a position to do so, I don't think you can call it "dry powder."
Rarely does the PP itself provide massive opportunities that cash has to come into the picture to take advantage of... yes, we'll use the cash portion to rebalance, but for the most part the other 3 assets run a pretty smooth machine. It's more often in our daily lives that we need that "dry powder"... whether it's that medical bill, the great Craigslist camper steal, the new tranny you have to get put into your car, the car your uncle is selling "right now" at a bargain, etc. Most of this could be temporarily serviced by a line of credit, but 9%-15% interest isn't ideal... we like to keep a cash-cushion.
This is why I'm getting more and more annoyed with "dry powder" that appears to have an inaccessability, or a "wet blanket" around it.
I think for all of our cash accounts, not only shoud we be looking at whether or not it's safe enough (physical vs treasury vs FDIC vs MM) to hold its nominal balance, but what real flexibility we have to use it in a pinch?! A treasury MM account holed up in a 401(k) with really poor investing options is about the worst place I can imagine having "dry powder," even if interest rates get high enough where the tax-efficiency starts to become a more important factor again. What are you going to do with it? Withdraw it and pay taxes and penalty? Reinvest in some crappy high-expense stock mutual fund (we KNOW they won't have gold or LTT's)? Wait until your 59.5 to use your "dry powder?" It's like pulling a square peg out of a round hole.
Psychologically, the random "cash balances" my parents have that are in IRA's we're trying to roll over or in the form of "cash soon-to-be" loans they have to my sister and family are more of a headache than anything... meanwhile, the $5k I have sitting in my safe feels really good to have. It feels so liquid... like such dry powder ready to explode the second I need it to. It's not even that much but it makes me feel 10x better about the rest of the money I have out there in riskier assets and in retirement accounts.
I think we have to make sure that we're actually keeping our dry powder dry. It's amazing how long a couple weeks can feel like when trying to get random accounts liquidated or rolled-over.
Dry Powder in a Wet Blanket
Moderator: Global Moderator
Dry Powder in a Wet Blanket
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: Dry Powder in a Wet Blanket
Moda--
I'm sure you're already aware of this, but you can borrow money from your 401k, so cash held in a retirement can serve as dry powder to an extent (to the limits of what you can borrow).
I'm sure you're already aware of this, but you can borrow money from your 401k, so cash held in a retirement can serve as dry powder to an extent (to the limits of what you can borrow).
"All men's miseries derive from not being able to sit in a quiet room alone."
Pascal
Pascal
Re: Dry Powder in a Wet Blanket
Adam,
Borrowing from your 401(k) can't be a super-quick process, especially if you've never done it.
I'd almost think dipping into a LOC would be more feasable if the cash could be quickly paid back.
I just don't like getting 0% return unless I know the stuff is offering me some great liquidity. Cash in a 401(k) is a bit of a PITA, in my opinion.
Borrowing from your 401(k) can't be a super-quick process, especially if you've never done it.
I'd almost think dipping into a LOC would be more feasable if the cash could be quickly paid back.
I just don't like getting 0% return unless I know the stuff is offering me some great liquidity. Cash in a 401(k) is a bit of a PITA, in my opinion.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: Dry Powder in a Wet Blanket
Yeah, I choose to keep an emergency fund-sized chunk of PP cash in a taxable account for this reason. This is suboptimal with regards to tax efficiency, but I think it's necessary for the reasons you discussed.
Re: Dry Powder in a Wet Blanket
Tax efficiency is much more important in moderate-to-high rate environments. The tax load on $10,000 at 1% at a 25% rate is $25.
A stock fund w/ a 2% dividend at 15% would be $30, not to mention the build up in future tax-liability associated with the gain.
That said, I'm buying decent-sized chunks of I bonds and ee bonds in $100 denominations at the end of each month so I have a pile of interest-bearing liquid cash at future dates at rates that could be preferable to the rest of the market.
When you redeem them you are only releasing the interest associated with the small $100 bond you sold.
A stock fund w/ a 2% dividend at 15% would be $30, not to mention the build up in future tax-liability associated with the gain.
That said, I'm buying decent-sized chunks of I bonds and ee bonds in $100 denominations at the end of each month so I have a pile of interest-bearing liquid cash at future dates at rates that could be preferable to the rest of the market.
When you redeem them you are only releasing the interest associated with the small $100 bond you sold.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: Dry Powder in a Wet Blanket
I consider the tax on the liquid cash as a cost of doing business, and don't dwell on it. IMO having a five-figure pile of liquid cash around is a "must," so I just do my best to minimize expenses and taxes, and leave it at that.
Re: Dry Powder in a Wet Blanket
Good way to think about it.
I will say that cash around the house (and even $40-60 in my wallet) makes me feel a lot better about things too, especially when rates are so low.
There's something about knowing you have a cushion that is there no matter what, even a bank-crisis or some kind of financial system shutdown, however temporary.
I just want my Die Hard bearer bonds and I'll really be a happy camper.
I will say that cash around the house (and even $40-60 in my wallet) makes me feel a lot better about things too, especially when rates are so low.
There's something about knowing you have a cushion that is there no matter what, even a bank-crisis or some kind of financial system shutdown, however temporary.
I just want my Die Hard bearer bonds and I'll really be a happy camper.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: Dry Powder in a Wet Blanket
I have the TSP, so it may be a bit different for me.moda0306 wrote: Adam,
Borrowing from your 401(k) can't be a super-quick process, especially if you've never done it.
I'd almost think dipping into a LOC would be more feasable if the cash could be quickly paid back.
I just don't like getting 0% return unless I know the stuff is offering me some great liquidity. Cash in a 401(k) is a bit of a PITA, in my opinion.
I borrowed once. It only took about a week to get the check.
Is it different with other retirement plans?
"All men's miseries derive from not being able to sit in a quiet room alone."
Pascal
Pascal
Re: Dry Powder in a Wet Blanket
I imagined mine would be a PITA given the amount of hassle it was to get money out for a first-time homebuyer distribution.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: Dry Powder in a Wet Blanket
The Permanent Portfolio is for investment, which is a deliberative long-term process.
I realize that some advocate using the cash in the PP as an emergency fund, but at some point it might be useful to keep an emergency fund (for true emergencies like unanticipated medical bills, busted transmissions, etc.) separate from the PP, and to establish a savings fund that can be used to make big purchases (cars, vacations, Uncle's great discount, furniture, other great deals you just gotta have). Some of these emergencies/major purchases can be covered from the regular income you bring in without the need for dipping into the separate funds.
Keep the emergency fund in a bank or credit union--even at 0.001% interest an emergency fund is not where you want to chase yields. Or you can buy Savings Bonds for longer-term goals (5+ years).
I realize that some advocate using the cash in the PP as an emergency fund, but at some point it might be useful to keep an emergency fund (for true emergencies like unanticipated medical bills, busted transmissions, etc.) separate from the PP, and to establish a savings fund that can be used to make big purchases (cars, vacations, Uncle's great discount, furniture, other great deals you just gotta have). Some of these emergencies/major purchases can be covered from the regular income you bring in without the need for dipping into the separate funds.
Keep the emergency fund in a bank or credit union--even at 0.001% interest an emergency fund is not where you want to chase yields. Or you can buy Savings Bonds for longer-term goals (5+ years).