The Right Amount of Cash to Keep at Home for Emergencies. Hint: Not $480,000 (From The Wall Street Journal) [5 Articles]
~ Wednesday, September 27, 2023 Blog Post ~
By Anne Tergesen and Jeremy Olshan, September 26, 2023
Credit cards and mobile apps won’t pay for much in a power outage
So, just how much cash should people keep at home in case of an emergency?
When the question was put to more than a dozen advisers and disaster-preparation experts, the answers ranged from $200 to more than two weeks’ worth of expenses. Though it is personal-finance gospel to save an emergency fund of three to six months of expenses, advisers say money should be collecting interest, not dust at the back of your sock drawer.
There was some consensus: Few, if any, Americans need to stash anything near the $480,000 in cash investigators found in the home of Sen. Bob Menendez (D., N.J.), which he said was for emergencies.
Those who live in areas prone to hurricanes, wildfires, snowstorms and power outages might need to hold on to more cash than others, said Paul Auslander, a financial adviser based in Clearwater, Fla.
“Here in Florida, you tend to keep enough cash on hand to get through two to four weeks of no ATMs and electrical power failure sufficient to keep your credit card from working at a grocery store,” Auslander said.
How much cash will you need
To prepare for a natural disaster or other emergency, the Department of Homeland Security tells Americans to stash water, food, flashlights and batteries at home. Cash is optional.
William Bernstein of Efficient Frontier Advisors, who wrote books on investing, disagrees.
“After a disaster damages your house or appliances, the repair person is likely to give priority to customers who can pay in cash,” he said.
John Ramey, founder of The Prepared site, which offers courses on emergency preparation, recommends people keep enough money on hand to survive for at least two weeks without cards and access to bank accounts, and to build up a stockpile from there.
“That means two weeks of hotel and food, or two weeks of rent,” he said.
People shouldn’t hoard cash at the expense of paying down debt and getting their finances in order, Ramey added.
How to protect your cash
Though a few hundred dollars might be kept in a wallet or desk drawer, those storing thousands of dollars in cash should protect their money from theft, fire and flooding.
This typically means putting the money in plastic bags in a safe rated for fire resistance.
Ramey suggests applying a portfolio approach to securing one’s cash. “I wouldn’t want all my cash in one safe,” he said. “Have a safe, sure, but also something hidden in plain sight — a Barbasol can with a fake bottom or a decoy wallet.”
Keeping too much cash at home could raise the interest of thieves and authorities, said Joshua Escalante Troesh, a financial adviser in Rancho Cucamonga, Calif.
“As the senator is finding out, when you have that large amount of money, there is a huge question about why you have that amount of money,” he said.
Aside from the risk of theft, stashing cash in a variety of places around the home can create the need for a treasure map of sorts, and some way to communicate the locations to friends or relatives.
“If you have cash lying around in different locations of your home, how do you keep track of all those amounts?” said Avani Ramnani, financial planner in New York City.
And depending on the nature of the disaster, cash might diminish in importance, said Ramey.
“In ‘The Walking Dead’ scenario, you are going to be trafficking beans, not gold bullion,” he said.
Veronica Dagher contributed to this article.
Sources:
https://www.wsj.com/personal-finance/emergency-fund-cash-on-hand-b04136d1
Article #2: Don’t load up on cash, says money expert, even though some accounts now pay over 5% interest (From CNBC)
By Ryan Ermey, September 22, 2023
The Federal Reserve on Wednesday declined to hike interest rates further, but after months of aggressive increases, one thing remains certain among investors: Cash is back.
With interest rates hovering near zero for much of the last decade, savers couldn’t expect to earn much in interest when they stashed their money. But with rates near 22-year highs, there may be reason to get your bills out of the mattress.
Online banks are offering high-yield savings accounts paying interest in the neighborhood of 5%. Rates on one-year certificates of deposit — a popular cash equivalent — pay over 5%. (Check out CNBC Select’s lists of the best high-yield savings accounts here and of the best CDs here.)
All of that may have you wondering: Should my portfolio include some green stuff?
Yes and no, says Amy Arnott, a portfolio strategist at Morningstar Research Services. “I think a lot of people have been tempted to load up on cash, but there’s still a pretty big opportunity cost in terms of long-term growth,” she says.
“Instead of loading up, people should think about using cash appropriately, for emergency funds and short-term spending goals.”
The advantages of holding (some) cash
As an investment, cash has a couple of advantages over things like stocks and bonds.
For one, it’s more liquid than just about anything else you can own. You can use your cash to buy goods and services. If you want to purchase something using anything else, chances are you’re going to have to convert it to cash first.
For another, it doesn’t decrease in value. And although the dollar is no longer pegged to a physical asset, such as gold, it’s backed by the full faith and credit of the U.S. government. That means your $5 bill is going to be worth $5 for as long as you own it.
But there’s a reason you don’t just keep bills in a safe: inflation, which gradually erodes the spending power of your dollar. That’s why it’s generally advisable to park your cash in a vehicle that maintains liquidity and safety, but also gives you a chance to keep up with inflation.
At today’s rates, you may actually be able to do better than that.
“The yields are definitely more attractive and rewarding than they’ve been in a long time,” Arnott says. “You’re actually staying ahead of inflation as long as inflation continues to moderate.”
Different ways to hold cash
Different cash equivalents come with varying levels of liquidity, safety and potential yield. Here’s a look at a few popular options.
1. High-yield savings accounts
High-yield savings accounts and money market accounts are both insured, up to $250,000, by the Federal Deposit Insurance Corporation. These offer the most liquidity this side of carrying cash around in your wallet, and are currently paying rates of around 4.50% to 5%.
2. Certificates of deposit
Certificates of deposit — commonly referred to as CDs — are accounts offered by banks and credit unions which come with higher yields than savings accounts, but have a term that ranges from three months to five years.
When the term ends, you get your money back, plus interest at a rate you locked in when you opened the account. Take out the money before the term ends, and you’ll face an early withdrawal penalty. Banks set their own terms for these penalties, but they’re often worth 90 or 180 days of interest.
These are FDIC insured and currently often come with yields at 5% or higher.
3. Money market funds
Money market funds are mutual funds that invest in short-term low-risk debt. They can be purchased through your brokerage account or directly from a mutual fund firm. There is a very small risk of losing money with these, and they generally pay attractive interest rates and can be quickly liquidated.
Versions offered by Vanguard, J.P. Morgan and Charles Schwab all pay more than 5.2% in interest.
4. Treasurys
Like CDs, Treasury bills come with different maturities, from one month to 30 years. Treasurys, like cash, are backed by the full faith and credit of the U.S. government, which has never defaulted on its debt.
You can buy these bonds directly from the Treasury’s website or from your brokerage firm, but you’ll have to sell them to raise cash in the event that you need money to spend.
A 4-month T-bill currently yields 5.61%.
When to hold cash — and when not to
How much cash to hold and what vehicle to use will depend on your personal situation.
As a rule of thumb, financial advisors generally recommend holding three- to six-months’ worth of living expenses in a cash account that’s easy to access. By keeping your emergency fund in cash, you avoid the risk of having to sell other assets you own, such as stocks, at a potential loss when something comes up.
“It’s usually recessions when people tend to lose their job, which is also the worst time to try to sell a stock to raise cash to live off of,” says Sam Stovall, chief investment strategist at CFRA. “Having some cash on the sidelines at all times is prudent.”
Arnott says money market mutual funds and high-yield savings accounts both offer liquidity and competitive yields for those looking to build an emergency fund. “There’s also the convenience factor, where you’re easily able to transfer assets into different accounts.”
Cash is also the way to go for short-term goals, such as saving for a wedding or a down payment on a home. If you have decent idea of when you need the money, it’s not a bad idea to match the timeframe to the maturity on a T-bill or CD, especially since many financial experts think the Fed may stop hiking rates or even lower them — sending rates down across the board.
“You can get a 3.4% rate on a CD and lock it in for 10 years. That’s pretty good,” says Stovall. “You’re only a loser if inflation continues to rise.”
Were inflation to heat back up, the Fed could continue raising rates, but “I think the risk of that happening right now is pretty low,” says Arnott.
As for your long-term money, you’re likely better off in assets, such as stocks, that fluctuate more than cash, but that tend to deliver higher returns over time. That’s because even though cash looks attractive now, it’s historically done a lousy job keeping up with inflation.
“If you’re looking at, say, your 401(k) or retirement portfolio, I don’t think it makes sense to hold any type of cash in that type of account,” says Arnott.
Sources:
https://www.cnbc.com/2023/09/22/money-expert-dont-load-up-on-cash.html
Article #3: Most Americans learn their №1 most valuable money lesson by age 22, survey finds (From CNBC)
By Kamaron McNair, August 24, 2023
You learn a lot of financial lessons as you grow up. Some come the hard way, like losing money to a scammer, while others are more exciting, like using your first credit card.
But 53% of Americans say learning how to budget and track expenses is the most valuable money lesson they’ve learned, according to a recent survey of over 1,000 Americans from financial services company Empower. Having an emergency fund and avoiding excessive debt followed closely, each with 50% or more of respondents naming them as valuable lessons.
Tracking your income and expenses is foundational for many aspects of wealth building, from paying off debt to saving for retirement. The good news is, Americans are learning this lesson early — by age 22, on average, Empower found.
But knowing you need a budget and sticking to one are two different things. Around 84% of people who say they have a monthly budget also report exceeding it, a recent NerdWallet survey found.
Here’s why it’s so difficult to track your spending, and tips for making and sticking to your own money plan.
To stay motivated, you need a ‘why’
If you want to start budgeting and tracking your cash flow, there are numerous tools available to help, including apps, downloadable worksheets and financial professionals. (Check out this list of the best budgeting apps from CNBC Select.)
But at their core, these actions are habits. And like eating healthy or working out, it takes time and effort to start, and consistency to make it habitual.
“Even with tools like a budget tracker or net worth calculator, all good habits require dedication and time,” Courtney Burrell, a financial advisor with Empower, tells CNBC Make It.
“Just like with starting any new practice, there must be a good ‘why’ or purpose behind it to help you stay motivated and accountable,” she says. “Without one, it’s easy to give up.”
If you want to start budgeting, “the most important thing is to understand your financial goals first,” Burrell adds.
Additionally, it may be difficult to start good money habits if you have subconscious negative beliefs or feelings around money that you haven’t addressed.
“Oftentimes our relationship with our finances is rooted in something deeper than we realize,” Aja Evans, a licensed mental health counselor who specializes in financial therapy at Laurel Road, tells CNBC Make It. “Avoiding your money or having trouble starting the process of tracking your expenses can feel like you are protecting yourself from a daunting task.”
Taking a critical look at your cash flow can feel intimidating, but it’s critical for achieving your financial goals.
3 tips to keep track of your money
While budgeting is important, it doesn’t have to look a certain way.
“People are often fixated on a one-size-fits-all approach to budgeting, making them hesitant to begin if they don’t meet certain parameters,” Evans says. “It’s important to break this barrier and come to terms with your unique situation without comparing it to other peoples’.”
You don’t have to track every single dollar you spend, Evans previously told CNBC Make It. But having a plan and a general understanding of how much money you have and what you want to do with it helps tremendously.
Here are three tips to get started.
1. Adjust your mindset
Many people think of budgeting as restricting, which is part of what makes it so unappealing. But viewing it as a way to reach your goals can help you stay motivated.
“It’s often easier to plan and stick to a budget every month when you reframe the choice as investing in a better financial future, rather than a sacrifice,” Burrell says.
Don’t think of it as “skipping drinks with friends to save money.” Consider it an investment in the house you’re going to buy or a meal you’ll have on the vacation you’re saving up for. It goes back to the premise of finding your “why.”
“Doing the foundational work of understanding what you’re saving for will help make budgeting feel more productive and intuitive,” Burrell says.
2. Take control
Thinking about tracking your expenses might make you feel anxious and overwhelmed. But actually creating a budget or other financial plan is one way to take some power back. While there will always be expenses that are mostly outside of your control, like your rent or insurance premiums, you can control how well you’re prepared to deal with them.
“Having a [financial] plan in place can help balance those months you feel like splurging on a vacation or the days you don’t feel like cooking and want to indulge in DoorDash,” Burrell says. “You’ll be able to handle the little things when you have the big things mapped out.”
As you track your spending, figure out how much of it should go to set costs and how much is left for discretionary purchases. Once you know how much you need to spend on necessities, the rest is up to you.
3. Leave room for error, and celebrate the small wins
The moments when an expensive emergency comes up or you lose income and have to skip a contribution or two to your savings goal have the potential to completely derail your motivation.
But part of making your financial plan is knowing setbacks will happen, and planning ahead. Your budget can offer you a sense of stability that helps you get back on track after a slip-up, Evans says.
On the flip side, make sure you congratulate yourself when you make progress toward a goal. Even small wins, like putting an extra $20 in your emergency fund or cutting an under-used streaming subscription, can help encourage you to keep going.
“Celebrate any financial wins, no matter how big or small,” she says. “Remembering every step counts will help instill a sense of achievement and confidence.”
Sources:
https://www.cnbc.com/buffett-whitepaper/
Article #4: A ‘financial vortex’ of competing priorities may reduce retirement savings by up to 37%, Goldman Sachs finds (From CNBC)
By Lorie Konish, September 20, 2023
KEY POINTS
- Unexpected life events may put a dent in your retirement savings, according to new research from Goldman Sachs.
- Top financial advisors say consistently living below your means may help adjust for those shortfalls.
Life goals and other financial priorities can get in the way of saving for retirement.
Over the long term, those competing priorities — dubbed the “financial vortex” — may reduce U.S. workers’ retirement savings by up to 37%, according to new research from Goldman Sachs Asset Management.
That’s even as more U.S. workers — 65% — say they are confident in their ability to meet their retirement savings goals, up from 57% last year, the firm’s July survey of 5,261 U.S. individuals found.
Yet even for the most diligent savers, life events can get in the way of retirement preparedness.
Having to retire earlier than expected at age 62 may reduce total retirement savings by 25%, Goldman Sachs’ research found.
Meanwhile, student loans may result in a 19% reduction in total retirement savings; caregiving may cause an 18% shortfall; early career cash outs pointed to a 16% decline; salary increases that didn’t coincide with proportional retirement savings increases resulted in a 13% reduction; and financial hardships resulted in a 5% decrease.
For savers who experience multiple such events or factors, it’s “easy to see” how they may suffer a 37% decline in their retirement savings, Chris Cedar, senior retirement strategist at Goldman Sachs said during a presentation on the research.
“The reality for retirement savers is that they’re going to have to figure out how to balance some of these real-life impacts more than they’ve had to do so in the past,” Cedar said.
Living better now vs. living better later
With salary increases, the model forecasted for ongoing 3% adjustments as well as seven growth events over the course of a career. That includes 10% for early career increases and 6% for late career ones.
The potential for a shortfall even with those increases points to the challenge all workers face of accumulating wealth for retirement while also funding their lifestyles today.
“There’s a balance between living better now and living better later,” said John Merrill, president and founder of Tanglewood Total Wealth Management in Houston, which is №58 on the CNBC FA 100 list this year.
While events like a divorce, which Merrill calls a “financial wrecker,” may crop up unexpectedly even planned life milestones like the birth of a child can increase financial pressure.
“The main thing is discipline,” Merrill said. “People who are disciplined with their money, disciplined with their life, really are going to go so much further.”
The best approach is to pay yourself first — including at least 10% of your salary toward retirement and 5% toward an emergency fund — and then spend the rest, he said.
Other experts caution that increasing overall spending as salary and wealth goes up, known as lifestyle creep, should be avoided.
Having a higher-cost lifestyle creates two problems, according to Stephen Cohn, a certified financial planner and co-president of Sage Financial Group in West Conshohocken, Pennsylvania, which is №22 on the CNBC FA 100 list.
First, it makes it more difficult to save for long-term goals including retirement. Then at retirement, savers may find their nest egg falls short of their needs while they’re challenged with making up the income they need to sustain their lifestyle.
Retirement age uncertainty
Some people may be willing to forgo having more saved toward retirement in favor of other nearer-term goals.
“There are people who say, ‘Me putting my children through college is more important to me than retiring at age 65,’” Cohn said.
Yet Goldman Sachs’ research points to many savers not having control of when they will retire.
The firm found that 21% of respondents said they believe they will have to delay retirement by four or more years due to the competing financial pressures they face, which may include credit card debt, saving for college and providing support to family members.
Yet among retirees, 50% retired earlier than expected, Goldman Sachs found.
Some individuals reach age 60 and are worn out and want to retire but unfortunately haven’t saved enough to make it work, noted Patrick McGinn, president of Retirement Resources Investment Corp. in Peabody, Massachusetts, which is №29 on the CNBC FA 100 list.
They may be faced with reduced Social Security benefits for claiming early. Plus, they also have to figure out how to cover their health care between age 62 and the Medicare eligibility age of 65, McGinn noted.
“Combined, it really makes that math very challenging,” he said.
The best way to prepare, he said, is to focus on the things you can control and try to find balance in your current lifestyle.
“Try to live below your means pretty consistently and that should result generally in a pretty good success rate,” McGinn said.
Sources:
Article #5: How to weather the ups and downs of an unpredictable income (From MarketWatch)
By Chanelle Bessette, September 26, 2023
Advice for budgeting and saving when money fluctuates
If you’ve ever lived off of tips or commissions, you may be familiar with the up-and-down paychecks common in certain industries. Service jobs, sales jobs, creative careers and project-based work can all have fluctuating income, where seasonality, events or the general economy might affect your earnings.
When you can’t depend on a regular paycheck amount or paycheck timing, it can be hard to know how you’ll make ends meet when money isn’t as abundant. With some planning, budgeting and creativity, however, it can become easier to weather a varying income.
Create a budgeting plan
Lawrence Sprung, a certified financial planner and author of the book “Financial Planning Made Personal,” works with several financial clients who are romance novelists. These authors live off of book deals and royalties and often have to budget differently depending on their publication cycle. Sprung and his firm help these clients determine their expenses so they can figure out how much they need to save, he says. Even without the help of a CFP, there are steps you can take on your own to get your budget on the right track.
“One of the key components of an unpredictable income stream is having an emergency fund set up,” Sprung says. “We usually recommend six to 12 months’ worth of income so that when work lightens up they have income to live on.”
A six-to-12 month emergency fund can seem like a daunting goal, but you can start small, and something is better than nothing. When you’ve figured out your essential expenses, you’ll want to start setting aside separate accounts for retirement and other long-term savings goals, such as saving for your child’s college education. And of course, to determine what you’ll be able to and need to save, you’ll have to figure out how much you spend.
Track your spending for a set period
As the adage says, “What gets measured gets managed.” Track your spending to see how much money you need for essential expenses and what you could cut if necessary. This can be particularly valuable for people with irregular incomes because some seasons, nights of the week, months or projects might bring in a lot more money than others. Most people can benefit from this budgeting practice.
“Budgeting is important for everyone, no matter what kind of income you have,” Sprung says. “It’s worthwhile to at least annually look at where your money is going so that you can make adjustments. You don’t have to make it complicated. In fact, the more simplistic it is, the better off you are.”
Tracking your spending each month may be a good way to start if you’re new to budgeting. Once you know what you’re spending, you can usually find categories to cut back on — such as dining out — so that you can divert more money toward other goals like debt repayment and savings, especially for things such as retirement or a house. Keep in mind that if taxes aren’t already taken out of your pay, you’ll need to set aside money from every paycheck for when tax season rolls around.
Get creative to reduce expenses and increase income
Barbara Sloan, a personal finance coach and author of the book “Tipped: The Life-Changing Guide to Financial Freedom for Waitresses, Bartenders, Strippers and All Other Service Industry Professionals,” has worked in and written about the service industry. As in most career paths, Sloan says, the amount you save as a service worker depends on growing the gap between what you make and what you spend. When it comes to cutting spending, Sloan says people can start by looking at what she calls the big three: housing, transportation and food. Reducing spending can only go so far, however, so Sloan encourages service workers to look at the other side of the equation and get creative in how they can earn more money.
“In an employee market, one of the easiest ways to make more money is to hold multiple jobs or find a new job within the industry,” Sloan says. “You can find lots of different opportunities to earn more money depending on the area you live in, what your role is and what establishment you work for.”
Whether or not you decide to take on an additional gig, Sloan says one of the best things you can do is use the resources you have, such as collaborating with your manager for more training on points of service, tips on upselling or resources they can offer to help you make more meaningful guest experiences. She says you could also make more money at work by picking up more shifts, and that your relationships with your coworkers are also a resource.
With these tips — and by tracking and maximizing income and being conscientious about spending and saving — people with fluctuating incomes can create better financial security for themselves.
“If hard work was all it took, every waitress would be wealthy,” Sloan says. “It takes understanding the financial systems and managing your money accordingly.”
Chanelle Bessette writes for NerdWallet. Email: cbessette@nerdwallet.com.
Sources:
