Submitted by random_curiosity_guy t3_zyezad in personalfinance

I know there are the flowcharts showing the best ways to maximize your savings, but outside of that, what’s a good reference point to save (i.e. HYSA, I Bonds, MMF) vs invest in a brokerage account (i.e stocks, ETFs, mutual funds, etc.).

Assuming that you made it through the flow chart and you’re left with a certain amount of cash that can be put to use, what is the best reference point of how to divide it up? Or at any point what portion of your assets should be investments vs cash?

For context: I’m 25-30, HCL, don’t have a family to support and don’t have any anticipated major purchases in the near future (1-2 years) that I need to be saving for. My investing strategy is I usually just buy index ETFs and hold (historically invested in MFs but they cost a lot and were underperforming).

I get overly concerned about finances and worry that I’m not doing everything I can to ensure financial freedom down the line.

Any advice?? TIA

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TyrconnellFL t1_j25l1oa wrote

There is no ratio. That's the wrong approach. Rather than a ratio, have what you need in savings left in savings and invest the rest.

You need an emergency fund in savings and you need any money you're saving for some next-five-years purpose in savings or similar.

Your investments may change with age as you approach retirement into something with less risk, like bonds/treasuries. In your late twenties I think that's too conservative.

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random_curiosity_guy OP t1_j25yz12 wrote

Thanks for the advice. Part of my concern/fear is not knowing what I don’t know in terms of things for the next 5-ish years.

But understood it’s not the right mentality to have a set ratio, per se.

My investment strategy is restricted due to my job. We’re prohibited from trading single name securities so ETFs/mutual funds/BDCs are the majority of what we can invest in. But I realize I could be more aggressive with what funds I choose.

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TyrconnellFL t1_j25zf09 wrote

That’s almost always a better strategy anyway. Picking stocks on average loses to investing in the whole market even for expert, full-time investors.

You don’t need to know everything for the next five years. If you expect to spend money, it makes sense to save it. If you have unexpected emergencies, that’s what an emergency fund is for. If you have an unexpected change in priorities, it’s not the end of the world to cash out investments. That’s the point of them! There’s just more short-term volatility so it might make you loads of money but also might lose money.

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Floridafreak316 t1_j25pscj wrote

6-9 months of an emergency fund and then invest the rest.

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100tnouccayawaworht t1_j25w5gy wrote

This is almost an impossible question to answer, because the ratio is going to (drastically) change based on personal circumstances.

For example, we are getting ready to buy a house, so we are overly cash heavy right now because we want to put a significant down payment on the house.

Someone who is going to retire might decide it best for them to have a heavier than normal cash position to use as a cushion.

People in certain industries and/or house owners vs renters might have different cash emergency funds based on their personal beliefs in what they will need to use it for.

All that said, I believe in a solid four legged stool for retirement.

1 - pre-tax traditional 401k

2 - after-tax roth 401k

3 - after-tax brokerage accounts

4 - cash

All of these have their pros and cons. And, those pros and cons will be different for groups of people based on their situation in retirement (not to even mention early retirement). I feel you need resources in all four buckets so that you can take advantage of those pros and cons planning for and the executing retirement.

I am no expert, but I feel a lot of people just think of the now. Taxes now. Money now. Growth now. And, that is all very important. But, you also have to plan (as best as you can) for the future and what those things will/might look like during retirement.

YMMV

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alex_o_h t1_j25glrw wrote

Assuming you have maxed out tax advantage account you can always deposit more into a taxable brokerage account. That is the simplest way.

The problem you'll have with this question is that you don't state any specific goals. Financial freedom is pretty vague. If you have goals then you can make a plan. If you have no goals then it's tough to advise. House? Kids' education? Big wedding one day? Tons of travel? Form goals then work backwards to create a plan.

If you just mean early retirement then the math is actually fairly simple. Estimate the length of retirement, estimate a safe withdrawal rate (4% is often used as a starting point), estimate required income in retirement.

So, say you need $40k/year as income. A 4% withdrawal rate means you need $1MM (40k/0.04) in retirement accounts for an approximate 30 year time horizon. That's a rough picture. You can look into specifics like tax strategies, etc.

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AdditionalAttorney t1_j28ukp5 wrote

If you’re at the end of the flowchart it should all be invested

It sounds like you’re not sure, which makes me think you need to work on step 1… understand your spending, understanding your goals and priorities. Understand what your EF is for to make sure you have the right amount.

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random_curiosity_guy OP t1_j28vt5q wrote

Thank you for the advice. I have tried doing this in the past and end up spinning my wheels or causing frustration because I can’t identify hard set financial goals for myself. But restarting at step 1 and trying to lay out just a couple of goals is the best route and work backwards.

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AdditionalAttorney t1_j28wab1 wrote

What really helped me was starting to use a budgeting tool (I swear by YNAB r/YNAB).

Bc it makes your day to day goals and priorities much more clear. Like do I value lattes or Ubers more…. How do I pay for vacations if money is tight etc…

It’s also made it really easy to understand how much my current lifestyle costs.. this includes the ebbs and flows of maintenance and emergencies (I’ve been doing it for a few years so have the days)…

Bc I know what my lifestyle costs it’s much easier to feel confident to invest more at the end of the flow chart bc I feel confident there aren’t a lot of major things I forgot abt…

And for things in X years idk about… well chances are once I decide I want it say a wedding or a downpayment… I can shift towards saving for it …. Anything 5 or more years kit isn’t worth keeping in cash. You could do a CD ladder or i series bond if you’re nervous abt putting too much in the market

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