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July 23, 2022 9:00 am
Having an emergency fund is always important, and considering how volatile the markets have been this year, @Peter with @RichonPlanning explains to @erinkennedy precisely how much cash you should have on hand right now.
As you know, your emergency fund should be able to cover 3-6 months of living expenses. Having cash on hand will ensure you don't have to dip into #retirement savings to cover living expenses. And if you're worried about having too much cash on hand right now, considering the rate of #inflation, there are investment products that still allow for high returns while offering liquidity.
If you have any questions about your retirement or your savings, please reach out to Peter for a complimentary consultation by calling (919)300-5886 or by visiting www.RichonPlanning.com.
146 planning matters when you are really important question today how much passion I have on hand in emergency plan is always important. We know that considering how volatile the market going to outline precisely how much cash you should have on hand and retirement. General rule of some your help with our emergency fund should be well. Having cash is important. The old saying is cash is king. But cash is convenience and cash can eliminate emergencies and I got an issue that comes up and I can solve it by stroking your check or just paying it off immediately. That's not really an emergency is an inconvenience and I think that we need enough cash on hand to minimize the potential for emergencies or having to go in that or liquidating our investment portfolio to cover unexpected surprises that come up, especially as we've seen this down market. I think people are realizing more and more that having some cash is appropriate, but the general rule of thumb aired is 3 to 6 months worth of living expenses and I'm in a number of different retirement discussion groups. I hear a lot of people saying well I'm keeping two years in cash to weather those economic downturns.
My question always is. Well what that downturn doesn't happen. Aren't you losing out on the potential for growth during that time. Keep in two years worth of expenses and cash is a lot of excess liquidity where you could be doing more with your money during that period where your weight) talk about some of those other options. In a second here, but I just want to underscore the obvious here on hand is important that we are not dipping into our retirement savings to cover living expenses. That's right now, especially during down markets right because that is the premise of having that retirement savings is that we get to live off of it eventually. So it's not that we don't want to dig into it at all, but we don't want to dip into it when values are down and there is probably a whole follow-up discussion to be had aired about sequence of returns risk and dollar cost ravaging. I mean, most people are familiar with dollar cost averaging where were making regular contributions over time in the down times in the market are actually our best time to invest new dollars. Those of the dollars that are going to grow the most. Over time, but there's dollar cost averaging. There's riding the market. If we got an existing lump sum and just buy and hold and let it ride. And then there is reverse dollar cost averaging, or dollar cost ravaging and it's an equal and opposite reaction.
Like physics and Newton's laws right if we are doing something that is the opposite behavior were going to get the opposite results and if we are pulling money out when markets are down. That can really be catastrophic to our long-term financial stability and and certainly our projections for where we should be in the future. So should we have more cash on hand, though in moments like these, when the markets are really volatile. So let's back up and's and sort of defined cash when you say cash. I think that we need to have 3 to 6 months worth of living expenses really at any and all times and depending on how confident you are in your sources and streams of income.
It could be anywhere reasonably within that range. But cash is literally like storage, cold storage of your bills that you can go and get at any point in time and you're not earning a whole heck of a lot of interest on cash even in this rising interest rate environment. So let's say you had six months worth of living expenses.
Sitting in cash.
Well why would you need to get more than six months worth of regular living expenses at any one point in time in there and really, really think about that right. What could potentially come up that would cause you to within a 24 to 48. Our period of time have the absolute necessity to get more than about six months worth of living expenses probably can't think of any fantastically awful example of when you would need to get that much money all at once and other positions can be liquidated with in a relative short period of time. Maybe at 72 hours to a week, but it also allows you the opportunity to think about where you want to liquidate those funds from so if you got your growth bucket over here and that's down 20 or 25% probably don't want to liquidate from that. But there's plenty of middle ground there. Maybe it's a six month CD that by the end of the six months worth of living expenses that you haven't cash now we can get to the money that we've gotten the six month CD and maybe that's burning a little bit more interest.
Maybe it's in these fantastic bonds that are available. Paying 9.62% right now. Maybe it's in one year structured notes or buffered notes these things that are liquid within about a year's period of time that don't have the same type of volatility that your growth bucket might have. Maybe fixed product like a fixed annuity or fixed indexed annuity that is 1 to 3 to 5 years out in maturity. There are middle ground type of places that you can store money that will give you a little bit more growth in upside potential than simply sitting in cash so it's just it's it's kind of splitting hairs in in the vernacular, but I want a clear definition of what sitting in cash is and what cash means versus some of the other alternatives where we can reasonably have expectations for growth on our money and some accessibility to some of those products then the answer to the next question which is a lot of people's concern for having a lot of cash on hand right now because inflation is so high CPI I Gina recently had 9.1%. So our money is just losing buying power. The longer that it just stay stuffed in our mattress yeah yeah I mean think about it. If you have $1 million right and it's sitting in cash or earning 1% and then inflation is 9%. You have just lost $80,000 in purchasing power that seems like an awful large cost for keeping money liquid and accessible right money can do for things to be safe. It can provide an income it can grow where it can be liquid, but it's a terrible multitasker and you have to choose which ones are important to you. With each and every dollar, and so yes Aaron. That's why having excess cash can be detrimental you're losing money safely. You are have lazy money and excess liquidity.
Therefore, you are reducing the likelihood that your total overall financial picture is keeping up with the cost of living in inflation, especially when it is I guess to some surprisingly high. According to the government. There try to get it under control. They were expected to come down II think if you're out there in the real world, spending money. This was no surprise that inflation continues to be a little higher than what their advertising nine. I think you called it Peter back in April when it dipped for a second then you're like no then go back out things that Peter Myers and that are out there renegotiating the terms of their contracts of their shipments of their storage right now and those contracts are being renegotiated at these now higher much higher prices compared to 2 to 5 years ago when those prices were set initially, so I don't unfortunately see that going anywhere downward anytime soon and lumbar advice and what our savings exceed $250,000 because nothing of the FDIC on the insured is up to 250 yeah well that is also per individual per institution and and so we've already had our discussion about how much cash somebody reasonably needs and and should appropriately be keeping but if for some reason you're planning on you know seizing on the opportunity to buy $1 million piece of real estate sometime in the next 6 to 12 months and you feel like you just absolutely making that much money in cash.
You can split it across various institutions because that is a limit per individual per institution, so if I am keeping more than that for whatever reason, then if you split across different institutions, you can still stay under those levels. But once again I don't think that that is a bit dirty wise utilization and deployment of capital because that million dollars is going to be worth significantly less. As far as purchasing power in a year or two, right right right well this doesn't get tough love talking. I really like it if somebody asked them questions about what we covered today with the best way to retail you get in touch we can look over the total financial picture. We can talk about those things that money can do and try to figure out which dollars are doing what and how much is appropriate for each one so that you're really optimizing your overall plan.
You got money. It's accessible for emergencies. You got midterm money for income you got growth money long-term as part of the optimize retirement plan and to get that put together pick up the phone ever shone planning to call 919-300-5886 919-300-5886.
You can email me with any questions you have about this or any of our other conversations or any questions that are on your mind firstname.lastname@example.org Peter Rochon planning.com visit us online. If you'd like to get the conversation started or learn a little bit more about us there. It looks like Rich on planning.com is my last name Rochon Rochon.com Rich.com and I always think you like to see if this is been planning matters radio the content of this radio show is provided for and of any investment strategy you were encouraging investment tax or legal advice from an independent professional advisor in any investment and/or investment strategies mentioned involve risk by jury. Services offered through virtual capital management is a registered investment advisor. Duty extends only to investment advisory advice but does not extend to other activities such as insurance or broker-dealer services advisory clients are charged a quarterly fever as a product of a commission which may result in a conflict of interest regarding