I firmly believe that the stock market can still be an awesome way to build wealth over time. Driven by that belief, I put my money where my mouth is, investing in stocks via my Roth 401(k) plan with every month's paycheck and in my Roth IRA with each year's contribution.
Yet while stocks still have the potential to create great levels of wealth over time, they're a terrible source to tap for money you need right now or in the near future. As 2022 so rudely reminded us, stocks don't always go up. Your bill collectors won't wait for the market to recover from a rout in order to demand payment for things you've committed to buying. In addition, life happens, and we all face unexpected costs from time to time.
That cold, hard reality is why I'm not all-in on stocks.
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Where that nonstock money comes in incredibly handy
Within the next month, our oldest child is headed off to college. After his scholarships are accounted for, we expect we'll need somewhere in the neighborhood of $15,000 to cover his first semester's costs. That's a pretty substantial bill, and if it doesn't get paid on time, the late fees and credit card-like interest charges start piling on quickly.
On top of that, earlier this week, our home's sump pump failed during a storm, leading to water incursion into the basement. That was a completely unexpected problem, and I'm sure there'll be quite a bill on that front when all is said and done.
The college costs are largely anticipated ones. We had a fairly good idea of how much we'd need, and when we'd need it, as soon as our son picked his school. Best of all, thanks to his school's tuition guarantee program, we have a reasonably good estimate of how much we'll need throughout his college career.
A series of large, known expenses coming due within the next few years is an ideal candidate for a CD ladder or an investment-grade bond ladder, with maturities set for just before the bills are due. Because most of the money for our son's education is inside a 529 college savings plan, it's now invested in a series of CDs inside that plan, timed to mature around the time his bills are due.
Thanks to that structure, it would just about take a structural economic collapse for his college to be at risk of not getting paid. We couldn't say that if the money for his college were still invested in stocks.
As for the basement, well, we didn't expect that particular unpleasant surprise, but we have certainly been hit with other unplanned expenses that needed to get quickly paid, or else. We've had furnaces go out in the middle of winter, roofs leak, cars break down, broken bones and other medical challenges, and all sorts of other emergencies throughout our adult lives.
That's why we have an emergency fund, kept in cold, hard cash in an FDIC-insured savings account. While that money is generally losing ground to inflation over time, having cash available on fast notice when it's needed makes it worth it. After all, it's not really a question of whether something will go wrong as much as when it will go wrong.
Although we don't yet know how much the sump pump and basement repairs will cost, we certainly appreciate having cash set aside to soften (if not entirely cover) the blow.
Get started now
We first started socking money away in the 529 plan that houses the money for our son's college around the time he was born. The emergency fund has been used (and restocked) multiple times over the years. In both cases, the money is there today when it's needed because we had previously put the plans in place to get it there.
You will face expenses you can't directly cash flow from your paycheck. Some of them -- like a college education -- can be at least somewhat planned for. Others -- like a busted sump pump and the consequences it brings -- simply happen to the best of us. Either way, they represent times when it doesn't make sense to be "all-in" in stocks all the time.
The sooner you get started, the better your chances are of being able to both invest in stocks for the long haul and have money in safer investments for your nearer-term and surprise needs. So get started now, and get yourself better prepared for those large expenses that will head your way.
