Cash Reserve and Cash Investing Strategies in 2021
By Ann D. Blakey, CFP®
If there is one lesson that the pandemic taught us in 2020, it is that an unforeseen crisis can happen at any time. Even if someone tries to plan for the different potential known hazards of life, there is always the danger of unknown evens that wouldn’t cross someone’s mind.
By May 2020, as the pandemic unfolded, more than 20 million Americans found themselves suddenly unemployed, and by the end of the year, some 10 million jobs were gone, possibly forever. The financial vulnerability of many Americans with even a minor crisis proved itself real, as studies showed an alarming lack of sufficient emergency fund savings in most households.
This all reveals the importance of having in place now a cash reserve and cash investing plan, so you can be better prepared to weather the next unexpected event.
While most people are familiar with the idea of a “rainy day” fund, confusion remains about how to manage one. As the Covid-19 pandemic demonstrated, a crisis can emerge quickly and last longer than imagined. Even individuals and families that appear to be well-off can be dramatically affected if they depend too heavily on one large regular income to meet their required expenses.
So, how much should you have saved in your cash reserve? For most situations, the appropriate guideline is 3 to 9 months of expenses.
To find how much you should have in a cash reserve, examine your monthly budget items - like mortgage, electricity, food, etc. and multiply by three. That’s your baseline for a minimal cash emergency fund.
For households with reliable dual incomes, a 3-month fund may be enough to provide an adequate barrier to most sudden emergencies. But for most single-income households, a 6-month fund is more appropriate. And for people who are in higher-risk situations, like self-employed small business owners or those in the gig economy, a 9-month fund might be better for peace of mind.
Ultimately, the goal is to put yourself in a position where if the worst-case scenario hits you, you can absorb the blow and bounce back.
Now, where do you want to save your cash? Reading stories of how people find cash stashed in homes they acquire or in furniture that has been thrown out can be entertaining. But having all your emergency funds stored as cash in your house is not the best plan.
Cash on hand can easily be lost or stolen. And your cash on hand isn’t earning any interest whatsoever. As inflation grows, savings in your dresser drawer is shrinking in value. So keep enough at home for an immediate emergency only.
On the other hand, you don’t want your resources tied up in an account that is too difficult to access. Drawing early from your 401(k) or IRA can take several weeks to receive and can also cause you to be charged significant penalties.
High-Yield Savings and Short-Term Bond Funds
Typically, the best idea is to stockpile your funds into an online high-yield savings account. Online accounts offer easy access to funds from anywhere in the world. And while it won’t make you wealthy on its own, a high-yield account means that it’s doing some work for you by gaining interest growth.
Because interest rates are so low, even for high-yield savings accounts, it may be appropriate to also consider short-term bond funds.
For example, you may have your first three-months of savings in a high-yield savings account, then maybe work on the next three-month “bucket” of savings through short-term bond funds.
To make sure that you are financially prepared to weather a crisis and that your savings is working for you and your plan, you may need the support of a trusted advisor. At Washington Wealth Advisors, our CFP® professionals are ready to build a unique plan for your today and tomorrow so that unforeseen events don’t derail your path. We can support your approach for investing your cash appropriately, so you have access to it when you need it.
If you are ready to have the peace of mind that comes from being properly prepared, call our office today at 703.584.2700 or email email@example.com, or book an initial consultation with us today.
Important WASHINGTON WEALTH ADVISORS DISCLOSURES Information
Washington Wealth Advisors is a fee-only registered investment advisory firm serving busy families, executives, women building wealth, and small business owners. We provide Wealth Advisory Services—financial planning coupled with asset management—guided by a personalized investment strategy based on each client’s unique goals. Our unbiased advice, independent approach, and proactive investment management help to support our client’s overall financial peace of mind.