I currently have about $105k in my company stock that I use as an emergency fund. Currently that stock is paying about 4.1% dividend, but of course it’s stock value fluctuates with the market conditions. It is currently trading just below it’s 52wk average.
How best should I break up this amount of money so that some has a change for a longer term growth. I can buy a money market fund that is paying 5.133% currently. Would it be best to put all this money in that money market fund, or would it be better to leave some % in the current stock to take advantage of any growth the stock may have over the next few years.
Thank you for any help/guidance you can provide in how to best split this money up to be an “emergency fun”.
Well…I would say that your emergency fund should be at least 3 months of living expenses. Anything above that you can invest however you like. The objectives of an emergency fund are liquidity and capital preservation, followed by any return. A money market fund is a perfect choice for this type of scenario.
As to your other question…what % of your overall investments does the company stock make up ?
Looking at our complete investment portfolio, we carry about 23% of it in company stock from 401k match and DESPP purchases. The rest of our portfolio is invested in either SP500 index funds, total market funds, or retirement date funds. The 401k and DESPP were setup as auto purchases and just left alone, so that is why it’s never been “balanced” and now needs to be reallocated to get back in balance.
The 23% is way too high, so I am looking to bring that down. Rebalancing to the Money market fund for the 3 months of living expense will of course bring that % down, but I believe it will still be too high.
When you sell stock in order to convert to cash to put in a money market account, CD, etc. you’ll pay capital gains tax. So consider the effect on next year’s income tax return - may get an unhappy surprise tax bill and even penalties if you don’t withhold enough (or make quarterly estimated payments).
I might tend to leave the stock alone if it’s consistently paying dividends. Just don’t keep adding to it. Use additional savings for tax-advantaged retirement accounts if eligible, or a 529 if you want college money for kids or grandkids or relatives, or a simple no-cost or very-low-cost mutual fund or ETF.
Emergency funds (or cash reserves, or rainy-day money) should cover expenses for however many months you may be out of work if laid off or some health issue or circumstance where you lose your income. I have about a year saved up but it took me many years. 3-6 months is more achievable.