Our thoughts are with the folks in Manitou Springs, Colorado this morning as they dig out from a devastating flash flood. Amazing.
We are often asked how much cash and/or liquid reserves should be kept for emergencies. The short answer… it depends!
In addition to some very interesting market news last week, we examine this most basic of wealth management questions. We think you’ll enjoy the answer!
All the best,
Lee and Jeremy
PS—We’ll soon be updating our calendar on the website at http:/www.jldavis.org.
Be sure to check in. Also, our most recent new articles are there as are hundreds of brief overviews on virtually all financial topics. You’re always invited!
This Week’s Quote:
“Lack of money is the root of all evil.”
~ George Bernard Shaw
JL Davis Thoughts This Week:
Just like a fine home is built on a solid foundation, a great wealth management plan is built on solid assets. One of the most important assets is cash, as Mr. Shaw so aptly put it in this week’s quote. A pool of readily available funds to meet emergencies and urgent short term needs. But how much should you have and where, especially today, should you put it?
Like many financial professionals, we strongly suggest that you have three to six months' worth of living expenses in your cash reserve. Beyond that, the actual amount is purely a function of your particular circumstances. Are you self-employed? Do you have a mortgage? Is your disability insurance adequate, both short term and long term? How large are your insurance policy deductibles? What do your expenses look like: are you paying for your child's orthodontics, making car payments, or do you own everything outright? These questions and more are important to clarify your personal needs for cash. But one thing is certain, and does not vary: without an emergency fund, a period of crisis (e.g., unemployment, disability, property loss, etc.) can be financially devastating.
Thankfully, most of our clients have established a cash reserve. For those who haven’t there are several steps to create the funds you need:
~Save aggressively. Budget your savings as part of regular household expenses.
~Reduce “discretionary” spending, like eating out, movies, and yes, Starbucks!
~Find out if your 401(k) plan has a loan provision (we’re not fans, but….)
~You may be able to utilize non-IRA or retirement plan investments (e.g. mutual funds, managed accounts, which can often be liquid within a few days).
~Check out other resources, like cash value life insurance, savings bonds and other readily liquid holdings.
~A credit line can also be a secondary source of funds in a time of crisis—but don’t forget that it must be paid back. Our advice: don’t depend on this one long term.
In addition to making sure your cash reserves are ready when and if you need them, you need to be cautious where you choose to keep them. An FDIC-insured, low-interest bank savings account is one option, but far from the only one.
There are several excellent alternatives, each with unique advantages. Recently, on-line back purveyors such as Capital One, HSBC, Ally Bank and others began offering on-line bank accounts that can be linked to your regular checking account electronically, allowing you to transfer funds as needed. These accounts often pay higher rates of interest than short term CD’s or other bank savings accounts, with little (if any) increased risk since most of these accounts are also FDIC insured. Other types of low risk options are out there, too.
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're going to use fixed-term investments as part of your cash reserve, it’s often a good idea to ladder (stagger) maturity dates carefully in order to balance the availability of funds with your desire for a bit more interest.
Finally, don’t forget that circumstances change often. A new baby comes along, an aging parent needs care, a larger home brings increased expenses. Cash reserves are your first line of defense against financial devastation. As such including this most basic element in your regular wealth management plan review is critical.**
Market Week: August 12, 2013
The Markets
With little fresh economic data and some hawkish hints from Fed officials about September's monetary policy meeting, equities traders seemed to have decided that last week was a good time to take some profits in the wake of record highs. After five straight positive weeks, the Dow industrials took a breather, while the S&P 500, Nasdaq, and Russell 2000 all had their worst week since the Federal Reserve laid out its blueprint for reducing its economic support.
Last Week's Headlines
•U.S. service industries saw accelerating growth in July, according to the Institute for Supply Management's index, which soared to 56% from the previous month's 52.2%. Of the 18 industries that comprise the index, only mining and health care/social assistance experienced contraction.
•Lower imports and higher exports cut the U.S. trade deficit by more than 22% in June. The Bureau of Economic Analysis said the $34.2 billion trade gap was the lowest since October 2009. Because the trade deficit is subtracted from gross domestic product calculations, the reduction could prompt an upward revision to the next estimate of second-quarter GDP. That estimate will arrive in late August, three weeks before September's Federal Open Market Committee meeting, at which the Fed will once again assess the strength of the U.S. economy.
•The Bank of England said it plans to keep its key interest rate at 0.5% until the unemployment rate falls below 7% from its current 7.8%, which the BOE doesn't expect to happen before 2016. The central bank also increased its U.K. growth forecast for this year to 1.4% from 1.2%, and it now expects 2.6% growth in 2014 instead of 1.8%.
•The Securities and Exchange Commission and the Department of Justice filed civil charges of fraud against Bank of America. The charges allege that in 2008, the bank sold $855 million in residential mortgage-backed securities without disclosing to all investors that more than 70% of the underlying mortgages--allegedly termed "toxic waste" by B of A's CEO at the time--were likely to become delinquent quickly.
•Two major U.S. newspapers will soon become the property of individual owners. Amazon CEO Jeff Bezos announced he will pay $250 million of his personal fortune to buy the Washington Post newspaper from The Washington Post Co. In doing so, he joined Red Sox owner John Henry, who is buying the Boston Globe from the New York Times Co. for $70 million.
•China's Customs Administration said that both imports and exports of the world's second-largest economy rose in July. Imports (one gauge of China's domestic consumption) were up almost 11% from a year earlier, while exports rose 5.1% over the last 12 months.
Eye on the Week Ahead
Retail sales may suggest consumers' state of mind, and investors will be watching to see if housing starts rebound from the previous month's sharp decline. Though inflation data is unlikely to see a dramatic change, any strong move upward could set off fresh fears about September's Fed meeting.
Key dates and data releases: retail sales, business inventories (8/13); wholesale inflation (8/14); consumer inflation, Empire State/Philly Fed manufacturing surveys, industrial production, international capital flows (8/15); housing starts, business productivity/costs (8/16).
All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P
500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell
2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of
150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.
http://www.kiplinger.com/article/retirement/T037-C000-S002-how-much-cash-you-really-need.html
http://www.mint.com/blog/saving/emergency-fund-101-how-to-start-saving-for-a-rainy-day-0113/
http://www.bankrate.com/funnel/savings/savings-results.aspx?local=false&prods=33&ic_id=br3int_popup
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