Creating a Safety Net to Bridge Times of Financial Crisis
January 22, 2021
Throughout the pandemic we have seen that in times of crisis, we are forced to shake pennies out of a piggy bank. There are ways we can be overly prepared to be ready if we see another financial crisis or pandemic in your lifetime. Having a financial safety net in place can ensure that you are protected when a financial emergency arises. One way to accomplish this is to Plan Well by setting up a cash reserve, a pool of readily available funds that can help you meet emergency or highly urgent short-term needs.
How much is enough?
Most financial professionals suggest that you have three to six months' worth of living expenses in your cash reserve. The actual amount, however, should be based on your particular circumstances. Do you have a mortgage? Do you have short-term and long-term disability protection? Are you paying for your child's orthodontics? Are you making car payments? Other factors you need to consider include your job security, health, and income. The bottom line: Without an emergency fund, a period of crisis (e.g., unemployment, disability) could be financially devastating.
Building your cash reserve
If you haven't established a cash reserve, or if the one you have is inadequate, you can take several steps to eliminate the shortfall:
- Save aggressively: If available, use payroll deduction at work; budget your savings as part of regular household expenses
- Reduce your discretionary spending (e.g., eating out, movies, lottery tickets)
- Use current or liquid assets (those that are cash or are convertible to cash within a year, such as a short-term certificate of deposit)
- Use earnings from other investments (e.g.,stocks, bonds, or mutual funds)
- Check out other resources (e.g., do you have a cash value insurance policy that you can borrow from?)
A final note: Your credit line can be a secondary source of funds in a time of crisis. Borrowed money, however, must be paid back (often at high interest rates). As a result, you should not consider lenders as a primary source for your cash reserve.
Where to keep your cash reserve
You will want to make sure that your cash reserve is readily available when you need it. However, an FDIC-insured, low-interest savings account is not your only option. There are several excellent alternatives, each with unique advantages. For example, money market accounts and short-term CDs typically offer higher interest rates than savings accounts, with little (if any) increased risk.
Note: Don't confuse a money market mutual fund with a money market deposit account. An investment in a money market mutual fund is not insured or guaranteed by the FDIC. Although the mutual fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund.
When considering a money market mutual fund, be sure to obtain and read the fund's prospectus, which is available from the fund or your financial advisor, and outlines the fund's investment objectives, risks, fees, expenses. Carefully consider those factors before investing.
It's important to note that certain fixed-term investment vehicles (i.e., those that pledge to return your principal plus interest on a given date), such as CDs, impose a significant penalty for early withdrawals. So, if you are going to use fixed-term investments as part of your cash reserve, you will want to be sure to ladder (stagger) their maturity dates over a brief period of time (e.g., two to five months). This will ensure the availability of funds, without penalty, to meet sudden financial needs.
Review your cash reserve periodically
Your personal and financial circumstances change often—a pandemic, a new child comes along, an aging parent becomes more dependent, or a larger home brings increased expenses. Because your cash reserve is the first line of protection against financial crisis, you should review it annually to make sure that it fits your current needs. If you need further assistance working towards achieving your long-term financial life goals, please do not hesitate to reach out to our office at 860-928-2341 or email us at [email protected]. Our team is here to help you live financially fearless, whatever that means to you.
Presented by Principal/Managing Partner, James Zahansky, AWMA®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials were sourced from Broadridge Investor Communications and are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259, 860-928-2341. http://www.whzwealth.com.
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This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate