How much cash should you keep?
Oct 27, 2016 11:00AM ● Published by Neighbors Magazines
by Steve Ciaccio, MBA, CPA, CERTIFIED FINANCIAL PLANNER™
How much cash should you keep in your bank account as an emergency fund? Although there are rules of thumb, you might be better prepared if you consider your individual circumstances and adjust accordingly. A good first step is to consider the number of income producers who support your household. A two income producing household will often have less risk of a total loss of income than a single provider. Another factor to consider is the dollar amount of your monthly living expenses. Consider not only what your expenses are now, but what they would be if your income was reduced or eliminated for a period of time. In other words, if you lost your job today, would you be able to reduce your expenses until you find a new job?
You should consider how long it would take to find a job that fully replaces your income. You should keep at least enough living expenses to bridge to your next job, plus some for other contingencies that might occur. Even those with strong job security should keep an emergency fund. The reason is that medical or other factors can sometimes unexpectedly limit your ability to work.
Bear in mind that there are reasons to keep an emergency fund that are not related to employment or income. For example, you might be happy that you have cash available if you unexpectedly need to purchase a car, make significant home repairs, or have some other large expense. You should consider the benefits of being prepared for such contingencies.
Also consider alternate sources of cash or income that you can tap when needed. If you have equity in your home, it might be of benefit to open a home equity line of credit (in addition to keeping an emergency fund) as a second line of defense. Having the ability to use that equity might be less costly than withdrawing funds from a retirement account or using credit cards.
It is important to find a good balance between keeping cash in a bank account and investing for potential growth. There are other issues that you should consider as well. If you are unsure of how large of an emergency fund you should keep, consult with a trusted and qualified financial planner to help you with this decision process.
So what should you do if your emergency fund is not large enough? If you have money invested in risky assets, you might want to partially liquidate and set some of that money aside to ensure that it is available when you need it. Also, although it is easy to say and not always easy to do, you might also want to begin saving. Reducing expenses or taking on additional work to build your savings might not seem very fun at first. However, seeing your nest egg grow can be very satisfying.
All the best to you!
Steve Ciaccio, MBA, CPA, CERTIFIED FINANCIAL PLANNER™ is the founder of Ciaccio Wealth Management, located at 232 S. Batavia Ave., Batavia. He can be reached at630-454-4599, Steve.Ciaccio@LPL.com. The opinions voiced in this article are for general information only and are not intended to provide specific investment, college planning, or tax advice or recommendations for any individual.
Ciaccio Wealth Management, Ltd. and LPL Financial do not provide tax advice or services. Please consult your local tax advisor regarding your specific situation.
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
Copyright © Steve Ciaccio 2016