Sudden emergencies, such as medical bills, home repairs, or layoffs, can quickly constrain your cash flow. If work in tech, such as being an Apple employee, your industry’s volatility and reliance on company stock value may put your finances at further risk. In these cases, having cash reserves or an emergency fund is a fundamental financial planning principle that helps you avoid stress during tough times.
What are Cash Reserves?
Cash reserves, also known as an emergency fund, are liquid and easily accessible funds. You can withdraw them immediately when necessary without incurring additional costs or delays. Cash reserves are often stored in vehicles such as money market accounts or other high-yield savings accounts.
How Much Should You Have in an Emergency Fund?
The amount you have saved in your cash reserves is unique to you, and should match your expenses, desired lifestyle, and other needs. As a starting point, it’s recommended you have a minimum of three months of living expenses if you’re in a dual-income household. Single-income households should aim for at least six months of living expenses to help cover all financial obligations.
Can You Use Retirement Accounts and Stock as an Emergency Fund?
The purpose of an emergency fund is to access funds immediately while avoiding additional costs. While stocks can help cover expenses, the transaction of selling shares can take a few days to settle and deliver funds to you. Additionally, you may face potential capital gains or losses depending on market movements. Similarly, withdrawing from a retirement account also has tax implications. For these reasons, we strongly recommend having separate savings for your cash reserves in an easily accessible account.
Prepare for the Unexpected with Cash Reserves
While we hope for the best, we should always plan for the unexpected. An emergency fund can help provide breathing room while not derailing your entire financial strategy. If you’d like to learn more about where to store your cash reserves or how to budget for them, please contact us. We can help you forecast various hypothetical scenarios so you and your family feel more secure if or when the unexpected arises
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Ann TImoney (00:00 – 01:40)
So are your cash reserves all set up for emergencies? Are you sure? I’m Ann Timoney with Opus Wealth management. I’ll help you with that question.
It’s ideal to have cash reserves established for yourself in the event of some financial emergency or a job loss or medical issue that comes up suddenly. What? Our cash reserves. It’s immediately available and accessible cash funds that you can get to without any cost or extra time to do so. The recommended amount of cash reserves to have minimally is three months of living expenses for a two income household and six months of expenses for a single income household.
This is so that you can cover what you need to cover when the time comes. Sometimes people ask me, well, gosh, I’ve got a brokerage investment account with a bunch of stock in it, or, deferred retirement account. Can’t those be my reserve accounts? And ideally, yes, you’re covered. However, if you have to sell a stock, it takes a few days for that money.
The sale to settle and get the cash. You also might end up with a capital gains tax, or even take a loss in a down market on an investment sale. If it’s a retirement account and you take a withdrawal, you’ll have income taxes to pay on that. So you want to avoid cost to you, when you need cash in a pinch. And that’s why it makes huge sense to set up your cash reserves.
Written by: Ann TImoney
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