Cash is King! Why does the king have so much cash, you ask? So he always has enough liquid $$$ in case of an emergency or opportunity. When implementing a properly designed financial plan, one of the first steps is to ensure you have an emergency fund. This liquid account can be accessed without penalty and should have little or no volatility. The account should be held separately from your main checking account and only be accessed when an unanticipated event forces us to stretch beyond our normal budget. Traditionally, financial planners call this short term bucket an “Emergency Fund.” However I like to label it as an “Emergency/Opportunity Fund” since it is not only for the “uh oh” scenarios, but also the “I can’t pass this up” scenario. When we are liquid, we have the flexibility to take advantage when opportunities present themselves. Liquidity also prevents us from making financially foolish moves to cover unexpected debts that come our way.
The car needs repair. The furnace is broken. A trip to the emergency room. My company is downsizing. We all know the things that pop up throughout the year that throw us off track from our savings goals. These events inevitably need to get paid. Ignoring or postponing payment will end up costing interest and penalty or can even lead to collections or bankruptcy. This is exactly why we set up an emergency/opportunity fund. Your alternative is to run up credit card debt, liquidate long-term accounts, or borrow money. Obviously these are not financially prudent strategies so having an emergency/opportunity fund to tap into allows you to side step these potential pitfalls.
A business opportunity presents itself. Your child gets into a prestigious private school. A piece of real estate goes on sale way below market value. These are all opportunities that maybe unexpected. Here is another perfect use for your emergency/opportunity fund. Instead of moving your illiquid or long-term assets around to scrounge up enough money to take advantage of these opportunities, use your emergency/opportunity fund and remember to refill your short-term bucket.
Like all custom financial plans, a proper emergency/opportunity fund is different for everyone. The first step is to have a good understanding of your monthly budget. Make sure you take some time and are honest when mapping out your monthly fixed and discretionary expenses. If you are in an extremely stable job with predictable income and a low threat of termination, your emergency fund needs to be 3-6 months of total monthly living expenses. If you are self-employed, commissioned, or have variable income with a higher threat of future unemployment, then your emergency fund needs to be 6-12 months of living expenses.
Your emergency/opportunity fund needs to be liquid. Liquidity refers the degree in which your money can be accessed with the least amount of fees and penalties in the timeliest manner. The focus should be on preservation of principal since you never know when you are going to tap into this account. Your local bank should have savings and money market accounts. Generally, money markets yields are slightly higher than savings accounts. They are variable since the bank is technically lending out your money as very short term loans. However, they are considered a cash equivalent since they are liquid and focus on capital preservation. Those looking for more yield and willing to assume slightly more risk can look to a no-load short term bond fund.
The emergency/opportunity fund is the anchor of your financial plan. This should be a primary focus even before funding retirement, education, and other long term goals. A properly funded and designed emergency/opportunity fund allows you to stay on track with all of your other planning strategies no matter what life throws at you. So make it a focus to be a cash king and fill up your emergency/opportunity fund.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Money Market Fund: An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.
Daniel Aguanno is a CERTIFIED FINANCIAL PLANNER™ (CFP®) professional and holds his series 7, 66 registrations through both LPL Financial and Private Advisor Group along with his life and health insurance licenses. He works at the Bleakley Financial Group and can be reached at 973-575-4180 or firstname.lastname@example.org.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Private Advisor Group a registered investment advisor. Private Advisor Group and Bleakley Financial Group are separate entities from LPL Financial.