Hi everyone,
I am in my late 20s working as an assistant, making around 70k a year. When I began this job, I was living at home for a couple years, allowing me to save up around 50k. At the time, I put all of this money into the stock market in a combination of growth stocks and etfs, was thinking in terms of the highest return over time. Now I live on my own and my expenses take up nearly all of my income every month so it is much harder to put aside anything.
I realize now that I should have set aside a portion of that money as an emergency fund. My question is, is it worth selling some of the stock to convert it back to liquid? I am worried about the taxes I will owe and unsure if I should just leave it in the market and try to cut monthly expenses to slowly build an emergency fund that way. If anyone has any advice about this I would appreciate it!
Nearly all my savings are in stocks, realizing now I should have some liquid set aside for emergencies, how to proceed?
byu/turntbacon inpersonalfinance
Posted by turntbacon
15 Comments
I think cutting expenses and just saving it up would better than selling
You can always sell the stocks if something big happens, just start saving now
Also make sure when you invest again your prioritize retirement over brokerages, contributing to 401k and IRA
You can calculate the loss to taxes and decide if you’d rather risk it by keeping the money in the market
The benefit of keeping the money in the market (since it’s already there) is that if you get laid off, you could save on capital gains taxes when selling the stock to cover expenses
I would lean toward cutting expenses and not touching the investments
Cutting expenses (or raising income) are generally recommended (if able) over draining existing assets
If selling investments is your only way to build cash, then do that. You’ll owe tax on gains, which you would anyway.
If you’re contributing to a retirement plan, reducing those contributions is also option.
PS: Read the post, people. It’s short. OP said they don’t have free cash flow. It doesn’t help to just assume it into existence. Investments are not a substitute for an emergency fund.
Start building an emergency fund and leave the investments be. If you really have an emergency and absolutely need to touch it you can sell it then, but as a last resort.
I’d try my best not to sell the stocks. I would try to cut monthly expenses first and build an emergency fund. If you’re gonna have to sell stocks either way, mine as well wait it out and hope you don’t need it. I would open a credit card just in case of small emergencies also. I trust myself not to go crazy with it and I’d sell stock to pay it off if needed. Everyone is different though. I would do all this and try to save up as much as possible on the side. Food in fridge, bills paid, gas in my tank, otherwise I’m keeping it simple. That’s what I did when I was younger.
If you have investments, the point of an emergency fund is to be able cover unexpected short term expenses without having to pull money out of your investments.
Pulling money to build your emergency fund seems counter productive *if* you have other options available.
If cutting expenses for a while to save more is on the table, I would go that route first.
It is up to your risk tolerance. How long would it take to save up the necessary amount if you tightened up your budget and diverted to savings for while? If you can live with going that much longer without an emergency fund then just do that. If you don’t like that timeline then sell some stocks, pay the taxes, and use the remaining cash to establish the emergency fund. Keep in mind that you can always sell those stocks for cash in an emergency, it might just take a little longer to access it, and you may have less available than you expect if the emergency happens during a market downturn.
When it comes to taxes in this situation it may be helpful to keep in mind that you *will* be paying those taxes someday, it is not optional unless you die before you can cash out. If you pay some now then you aren’t paying additional taxes, you are actually reducing your future tax burden by a bit. There isn’t one weird trick to avoid taxes; don’t let the tail wag the dog when it comes to this kind of stuff.
Your real problem is that your expenses take up nearly all of your income each month. That’s not sustainable as you’ll have unexpected expenses in the future and while it’s good to have that $50k you need to be slowly building up your savings and net work not moving them down each time you get hit with something random. You can sell some to get a bit of an emergency fund but I would fix the underlying issue and reduce your expenses so you can save a good portion of your income and build up your savings, be able to invest etc.
How much can you save to build up an emergency fund?
The most financially beneficial thing would be to keep the investments growing, but if you have had them long enough you could sell some of them to get some cash to keep for an emergency fund. No need to sell all of them, and depending on how it grew you could just be locking in some gains.
Leave the money in the market and save some
of the money into an emergency fund. If you actually have an emergency before then you can sell some stock to cover it. After you have your emergency fund you should look into a tax advantaged retirement account.
Put 3 months in a high yield… aside from that you need to make more money and cut back on expenses.
What do you do for work?
I’m a huge believer in having 3-6 months of monthly expense tucked away in a cash savings account that is liquid and easily accessible. I agree that emergency fund savings should not be thought of as an investment. Once that cash cushion is established, then prioritize investing.
Stocks are pretty liquid. There may be tax consequences for liquidating but is there a reason to hold literal cash over stocks now if the knly way to get that cash is by selling stocks for the guaranteed tax impact v. waiting until you need it?