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I blog about emergency fund from time to time.
I have mentioned having a float at times too but not as often as my talks to myself on emergency fund because I didn't think it was as important.
Why?
Well, know it or not, all of us have a float.
Just like an emergency fund, it just varies in size for each of us.
Not everyone has an emergency fund and I suspect most don't have one or an adequate one.
However, I suspect that, unless extremely financially constrained, all of us have a float.
Now, I am not using the word "float" very strictly like a finance professional would.
In finance terms, a "float" is money that appears in two accounts at the same time as the money is being transferred from one account to another.
What I refer to as my float has a similar flavor but with a larger temporal window.
My float is money which I have on hand which is farther away than "convenience cash" which is money I keep at home and, therefore, nearest to me.
However, money in my float is nearer than money in fixed deposits.
Yes, it is money in my savings and current accounts.
My float is really a form of convenience cash but just not as convenient.
Although not as large a sum as my emergency fund, the float is still around $100K at any one time.
The float exists so that I have ready funds to make routine monthly and quarterly online payments or whenever they are required.
The float also exists to honor monthly and yearly GIRO payments which I have in place.
So, the money in my float is money which has been earmarked for various payments to be made in the future.
Yes, the float is to fund consumption.
Admittedly, my float could be smaller as I am not excessive by most standards when it comes to consumption.
However, I was serious when I said I was mental on multiple occasions.
Buffers allow me to sleep better at night.
Having a larger float gives me another buffer.
What this also means is that in case of an urgent need for a relatively large sum of money in my family, I have money which can be deployed immediately.
However, my float alone isn't sufficient as an emergency fund which must be able to cover many months (and in my case, it is 24 months) of expenses for my whole family in case our cash flow goes negative.
Anyway, to be used in an emergency is not the primary purpose of my float but it could be used to plug sudden one off financial gaps.
My float is really wearing many hats.
So, the term "float" is pretty apt as the money can go wherever it is needed especially when it has a comfortable buffer.
Why am I blogging about this if I thought it wasn't important before?
I was thinking about random stuff and quite suddenly felt like doing it.
I just thought "why not?"
If anyone should ask me what I meant by having a "float" in future, I would have a blog to point them to.
I hope I am right when I assume most people have a float just like me and that I am not being more mental than usual.
Do you have a float, oppa AK style?
References:
1. Emergency fund.
2. Convenience cash.
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12 comments:
Hi AK,
When deciding how much to allocate to your float, apart from monthly expenditure, do you factor in the passive income (e.g. dividends, maturing FDs, etc) you will be receiving in the future?
If we will be receiving a sizeable portion of our passive income in coming months, such as April / May, will it be wise to allocate less to one's float, putting the cash in current FD promotions instead? FDs are relatively liquid since most banks allow us to withdraw it before maturity, although usually forfeiting the promotional interest.
with high interest, holding cash in savings account has a much higher opportunity cost than in the past, so will allocating a portion of one's float to short term FDs be better?
Thanks.
Hi AK, latest T-bill rate 3.93% p.a.😃
Hi SN,
I don't like the idea of having to forfeit FD interest income.
So, I will only break a FD if I really don't have a choice.
With a float of around $100K, the probability of me having to break a FD is very low.
Most of my float is now in UOB ONE account which pays me about 2.7% p.a.
This means I lose "only" about $750 in interest income for a $75,000 deposit by not locking up the money in a UOB FD.
For a mental patient to have greater peace of mind, not making $750 a year is probably worth it. ;p
Of course, you are right about the greater opportunity cost of holding cash in regular savings accounts now which is why I have very little money left in my POSB and OCBC savings accounts.
I have not felt so "poor" in many years! ;p
I have a bit more money in my CIMB account but that makes sense to me as it is my current account and it pays 1.5% p.a. which is more than what POSB and OCBC pay.
Like you have pointed out, we will see sizeable dividends only in 2Q 2023.
1Q 2023 is not going to be as bountiful which means less money for FD and T-bills in March.
Sadness. (TmT)
Hi Sandra,
Thanks for being so on the ball! :D
3.93% p.a. isn't too bad.
I suspect yields for T-bills in March might go higher as yields of short term U.S. treasuries have been rising, all else being equal.
Hi SN,
Oops. I made a mistake.
I just checked and I am getting $187.91 in interest income each month from UOB ONE.
This is with $75,000 in the account.
So, the annualized interest rate is about 3% or a bit more if we take into consideration that the interest is being paid monthly throughout the year.
Not losing that much interest income compared to locking up the money in a UOB FD. :)
Related to this discussion would be a recent blog:
SSB, T-bill, CPF, UOB ONE. My plan.
Dear AK
The most important factor in deciding how much of instant cash that you should have at your disposal, in my opinion, depends on what you think it will be required for at instant notice
Apart from bills and regular payments, an amount of up to 10000 in good enough for one person and maybe 30-40 K for a family
The next callable money should be either FD or safe boring low beta equities, this depends upon the risk profile of the individual
For an actively working person, the latter is doable whilst for a retiree, this is better of in short term FD
The second fallback option, can be construed as part of emergency expenses and in general, for someone who is employable and willing to work, a 12-18 months living costs equivalent should suffice
This would be roughly around 200-300 K for a family at most in today’s circumstances
Regards
Garudadri
Hi Garudadri,
Oh, I am sure I am paranoid.
This is also why I admitted in the blog that my float is probably larger than is necessary.
I have always been a worrier and I need bigger buffers to set my mind at ease.
My float might be excessive but I hope it is not too badly excessive. ;p
Fortunately, I am getting paid 3% p.a. for the money in my UOB ONE account which means the cost of a larger than necessary float isn't crippling. :)
Hi AK,
I used to have a large float like you. mainly because I was planning a home purchase and FDs rates were sad. Now that murdering my mortgage is my top priority. I've been operating with a much smaller float. I'm missing the old days with large float, hope to get there again soon :)
Hi Zhenling,
Just conquered Japan in an online game of RISK.
Didn't look at the time and checked for comments in my blog.
I should be sleeping! OMG! ;p
RISK takes too long sometimes.
Anyway, I know how you feel.
Like I told another reader, I have not felt so "poor" in many years. ;p
I am not sure that we should be murdering mortgages especially if we can still get higher returns from investing our money in equities.
Even by saving our money for 4% p.a. interest income, we would probably be doing OK even if we have to pay 5% p.a. interest for home loans.
That 1% difference is like keeping a line of credit open and if there should be an investment opportunity, we have the money to deploy.
It is late for me and my brain is working at half capacity.
So, don't mind me. ;p
Hi AK,
yea I think about opportunity cost from lack of investing myself also. It depends on how large a loan one is comfortable carrying. How secure one feels in his/her job probably plays a large factor too. It's a delicate balance only one can figure out for oneself.
Having less money for investing is not too terrible imo, I've been more picky and careful about how to deploy the money. so it's not all bad :) Am I afraid of missing out on investment opportunities? Nobody can see the future, I've resigned to the fact that my decisions are destined to be sub-optimal. I only aim to be right slightly more than half the time :p
Hi Zhenling,
Lack of investing in myself.
Ouch. Guilt, I am feeling. (TmT)
I agree with all that you have said. :)
Personally, I was not comfortable with having any debt at all but upon achieving financial freedom, I thought debt used judiciously wasn't a bad thing.
However, as a retiree, I must not be too adventurous, financially free though I may be.
So, a debt to asset ratio of 0.1x is probably comfortable. ;p
I would use that ratio more stringently too by saying that the assets should be mostly productive assets which means our homes should be discounted.
Oh, for sure, I am pretty sub-optimal too when it comes to investing.
Slightly more than half the time right is good enough, Peter Lynch says.
Are we right 6 times out of 10?
We good. :D
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