Keep cash at hand for emergency and unexpected expenses
By Marisa Otto
Marisa Otto
It’s important to have cash available for your everyday spending and the inevitable rainy day. However, Morgan Hill residents also need to develop a cash strategy that can contribute to your long-term financial success. But just how much cash do you need? And in what form?
To answer these questions, it’s useful to look at four main uses of cash:
- Everyday spending — This includes the cash you use for your mortgage, utilities, groceries, etc. As a general guideline, you should have one to two months of living expenses available during your working years, and perhaps a year’s worth of living expenses when you’re retired. You’ll need instant access to this money, and you need to know your principal is protected.
- Unexpected expenses and emergencies — If you need a major car repair or a new furnace, or if you incur a big bill from a doctor or dentist, would you be able to handle the cost? You could — with an established an emergency fund. During your working years, this fund should be big enough to cover three to six months of living expenses; when you’re retired, you may be able to get by with one to three months’ worth of expenses, assuming you have additional sources of available cash. You’ll want your emergency fund to be held in liquid vehicles that protect your principal.
- Specific short-term savings goal(s) — At various points in your life, you may have a specific goal — a new car, vacation, wedding, etc. — that you’d like to reach within a year or two. Your first step is to identify how much money you’ll need. Next, you’ll need to choose an appropriate savings vehicle. You could simply put more money in the accounts you use for everyday cash, or even in your emergency fund, but you would run the risk of dipping into either of these pools. Instead, consider opening a separate account.
- Source of investment — You can use cash in two ways as part of your overall investment strategy. First, cash can be considered part of the fixed-income allocation of your portfolio (i.e., bonds and CDs). Because cash behaves differently from other asset classes — such as stocks and bonds — it can help diversify your holdings, and the more diversified you are, the less impact market volatility may have on your portfolio. The second benefit, is it’s there for you to purchase a new investment or to add more shares in an existing one. In any case, you don’t want to be too cash heavy, so you might want to keep no more than 10 percent of your fixed-income assets in cash.
Cash can be valuable. Use it wisely.
