“Every ten years or so the world falls apart… How can I remain standing, when the world breaks”.
I’m not suggesting the world is currently breaking, but there will always be financial uncertainty in the world – pandemics, wars, financial crisis, real estate crisis – just to name the most recent.
So how do you weather these storms and stay invested and committed to achieving your long term goals while protecting your short term needs as you continue to grow your wealth?
One of the foundations and initial items to design for a rock solid financial plan is your cash and emergency savings strategy. Start with how much money you should hold in cash or cash equivalent accounts for emergency purposes them move to where to best allocate those savings.
We will highlight fundamental planning, move to more advanced planning strategies, and finish with a client case scenario.
Using the household factors guidelines below, a fundamental plan can include designating specific account(s) with enough cash allocated to cover non-discretionary expenses for the applicable number of months based on your individual family and income structure.
- Investment Factors:
- Underlying assets should be insulated from market fluctuations
- Stability and accessibility of these accounts are the goal, not growth
- Accessibility Factors:
- Funds should be liquid
- Able to access money quickly
- Best accounts to house emergency funds:
- Checking Account
- Savings Account
- Money Market Account
- Certificates of Deposits
Build on the fundamental factors above with an additional layer of protection and tax efficiency.
These additional advanced levels include protecting larger bank deposits through:
- Layering FDIC insurance and use of ownership categories
- Diversifying cash holdings through multiple institutions (bank and brokerage firm – adding SIPC coverage)
- Proper account titling
- Different levels of cash investments vehicles
Advanced Client Case Scenario
A corporate executive with $9,900,000 in investments and whose compensation is mostly incentive and bonus based likes to hold an additional $1,500,000 in cash for emergency and contingency purposes.
In order to help maximize his specific liquidity, protection, and growth goals of this cash, we implemented the following strategy:
- $250k in money market savings account at his bank in his name
- $350k in money market savings account at his bank in a joint account
Each account holder of the joint account receives $250k in FDIC insurance. This amount is in addition to the $250k he or she receives in an individual account due to “ownership category”.(2)
Additional levels of FDIC insurance also apply to Revocable and Irrevocable Trusts. We’ll address these fundamental and advanced strategies in our Estate Planning and Asset Protection Case.
- $250k in a money market savings account in his brokerage account.
SIPC protects against the loss of cash and securities – such as stocks and bonds – held by a customer at a financially troubled SIPC member brokerage firm. The limit of SIPC protection is $500,000, which includes a $250,000 limit for cash.(3)
- $650k in a Municipal Money Market Fund providing a prefered tax equivalent yield. Although these investments are not FDIC insured, their value is tied to the underlying holdings and not to the specific brokerage institutions ability to cover its deposits.
We can either reinvest the interest earned to purchase additional shares of the MMMF, or allocate that interest via dollar cost averaging into this target allocation investment portfolio.
Additional advanced strategies can include:
- Ultra Short Bond/ETF
- Brokered Certificates of Deposits: Investors can spread their money among brokered CDs from various banks, with a $250,000 FDIC insurance limit for each bank. This strategy is much more practical than opening accounts at several banks and often more profitable than buying U.S. Treasury bonds.
We give up some liquidity with each level of cash placement but gain higher yields and tax efficiency.
It is important to emphasize that these strategies are specific to this individual clients emotional, financial, and personal needs and goals. Another client with similar financials yet different emotional and personal goals will have a variation of this cash plan. This is why it is so important to consult with your independent CFP® to design a personalized emergency cash plan, or contact us to guide you through how we can apply these fundamental and advanced planning strategies for your specific needs and goals.
For informational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Individuals should speak with qualified professionals based on their unique circumstances
1.Morgan Housel, Author of The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness.” Crazy Money podcast with Paul Ollinger Oct. 6, 2020. https://podcasts.apple.com/us/podcast/crazy-money-with-paul-ollinger/id1452395408?i=1000493742352
2FDIC – https://www.fdic.gov/resources/deposit-insurance/understanding-deposit-insurance/index.html
3.SIPC – https://www.sipc.org/for-investors/what-sipc-protects#:~:text=SIPC%20protects%20against%20the%20loss,a%20%24250%2C000%20limit%20for%20cash.