For decades, as a financial planner, I have helped clients set up their investment portfolios with the most important part being the emergency fund. In fact, on many occasions I have written here and spoken on The Goldstein On Gelt Show about putting aside three- to six-months’ worth of spending in an easily accessible, no-risk account.
For those with an emergency fund, sleeping at night went pretty smoothly during the current crisis. For the others, though, the financially scariest part of the corona virus panic was being sent home from work without a paycheck or steady source of income. When the government mandated the closure of businesses, folks who had never thought they would lose their jobs ended up spending all day watching Netflix. How long would it last, and how would they pay their bills?
Corona’s worse than other emergencies
One push-back I often get from younger clients about creating an emergency fund is their claim that their parents could always bail them out. During corona, though, many young adults and their parents lost their jobs. Although wealthy families could indeed sell stocks to raise cash, if they did so, they would sell stocks during a market crash. They wouldn’t be able to wait for the market to recover, and would thereby lock in their losses.
Another complaint that people have about keeping money in a safe bank account or money market fund is that interest rates are low. That’s true. But there’s a price you pay for everything, and the price of liquidity and peace of mind is not getting a high-interest rate on bank deposits.
For those people who never prepared an emergency fund of three- to six-months’ of living expenses, this article might seem too late. You may have already cashed out retirement plans or sold stock in order to meet your current expenses. Start saving today… build up the emergency account to be at least three-months’ worth of spending.
Even though cash doesn’t bring growth or high interest, it may be the most important part of your portfolio since it offers liquidity during tough times.
Douglas Goldstein, CFP®, GFP®, is the director of Profile Investment Services, Ltd. www.profile-financial.com. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for a consultation on how to set up your American assets to meet your financial goals. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates. Neither PRG nor its affiliates give tax or legal advice.
Published June 25, 2020.