Thought Process Series: Where to Keep Your Savings

May 17, 2020

Thought Process Series: Where to Keep Your Savings

This series is intended to give you a little "Food for Thought" regarding every day topics.  The topic today, where to keep your savings.

I tend to put funds into buckets and give funds a purpose.

First - Emergency Funds

Third - Other Areas to Build Your Net Worth

Second - Retirement Funds

Purpose: Not your $, unless you have an emergency. 

Rule: If you use it, replenish it after the emergency.

Purpose: Build a pool of intermediate money that is yours and that you can use for future large purchases or for another source in retirement.

Rule: Consider long-term and short-term capital gains as well as intent before you use this money.  Work with your CPA and your Financial Advisor.

Purpose: Utilize tax advantaged tools to help you save toward retirement.

Rule: Once the contribution is made, it’s not your $.  Taking from your retirement accounts is robbing your future self.

 

Emergency Funds:

Emergency funds should often be 3 to 6 months of what you spend and when you're keeping that much in "savings", it's helpful to put some of those dollars into a vehicle that earns something, like a money market, liquid CD or high yield savings account.

Traditional checking or savings account typically yield little to no interest.  However, I do recommend that my clients always keep a cushion on the bank for “working capital” to cushion ups and downs with the timing of when pay checks come in and when bills go out.  Keeping a portion of your emergency fund in a Money Market account or other high yield savings account will give your money the ability to earn at a higher rate than a traditional bank account, without exposing that money to the ups and downs of the stock market.  A money market fund can have less liquidity than what you need for a true emergency, it can take 4-7 days to get funds back from some institutions, so please keep that in mind when considering a product that is not at a local bank.

Long-Term Savings (beyond Emergency Funds):

Once my clients have a healthy emergency fund (amount is unique to each person’s situation) and their financial plan shows that retirement contributions are sufficient based on their individual goals and spending habits, we often start building them a pool of money that they can use or continue to save for the future.  The goal with this money is to having higher earning potential with part of their savings beyond what they could earn in a traditional bank account or high yield savings.  However, investments are not without risk, so investors should consider when they might want the money and whether other sources of funds would be available if the market has a downturn close to when the client anticipates using the funds. 

Risk tolerance of investments should also be appropriate based on the goals and time frame for the money.  Putting funds into the stock market at a high risk tolerance and knowing that you will need all of those funds in 1-2 years, is risky business.  Without a crystal ball, there is no way of knowing exactly where the market will be in a short period of time.  Again, food for thought.

However, let’s say that in 5-10 years a client wants to buy a larger or more expensive home.  If it were appropriate for his/her situation, I might start a Transfer On Death (taxable investment account) for him/her with a portion in money market and a portion in investments.  By making monthly contributions over that 5-10 year period, the client could benefit from Dollar Cost Averaging.  Dollar Cost Averaging means that by consistently putting money into the market over a period of time, the average cost per share will likely be lower than if you just periodically put all of the funds in at a specified date.  Sometimes when your monthly contribution hits the account the market will be up, other times the market will be down and the goal is that on average your purchase price is lower. 

Food for Thought

While each blog post in this series is focused on helping you consider other ways of managing your financial life, each person has a unique life situation and I would love to visit with you about yours!  While I firmly believe that everyone can benefit from financial guidance by a third party professional who has no emotional ties to your money, I also firmly believe that blanket guidance for the masses is dangerous because each of us has a unique life situation.  So, with that…before applying principles noted above, please give me a call and let’s figure out what a suitable approach is for you!

 

This is meant for educational purposes only.  It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions. Dollar cost averaging does not ensure a profit nor guarantee against loss. Investors should consider their financial ability to continue their purchases through periods of low price levels. Investing involves risk, including the potential loss of principal. (05/20)