How Much to Leave Out of the Market

[mtgordon]

So I have money saved up and most of it is in the market. However, there is (obviously) some money that I have in my savings account to pay for monthly expenses. My questions is how much I should have in there. I am invested in Index Funds through Zecco so if I wreck my car and need money I don’t have to worry about paying fees to sell the ETFs.

I’ve heard people say that you should keep money out so that you’re not forced to sell in a ‘down market.’ However, I don’t really understand this. I don’t try and time the market so I don’t know when it is a ‘down market.’ If I don’t try and time when I put my money in why should I try and time taking it out?

Here are what I think are the important things I need to consider:
Buy/Ask spread (which is a fraction of a percent)
How stable my income is (right now is very stable)

Assuming the market will go up 12% (makes math easy) then that’s 1% a month. Therefore if your money is in the market 1 month before you having to pull it out for some reason (taxes, car/house repairs, etc.)

According to these things I would think that I would need to have very little money in a savings account and I could just sell when I need to buy something more expensive (like pay car insurance for 6 months, etc). This seems to go against what I believe to be the common consensus so please let me know how incredibly wrong I am.