Greetings Wela Family,
We hope everyone has stayed cool during the recent heatwave and we wish you a fruitful summer as we enter the new season! In this month’s Financial Planning Newsletter, we are focusing on cash management, establishing an emergency fund, creating savings goals, and exploring investment vehicles for savings accounts. If you’d like to discuss any of the topics mentioned in this newsletter, please reach out to your dedicated Wela Financial Advisor—we’d be happy to have a more detailed conversation.
Many people have heard the term "Emergency Fund" but often wonder what the appropriate amount to have at all times is. Common questions we hear from our clients are, “Do I have enough cash set aside in case of an unexpected event?” or “Do I have too much cash set aside?” These questions are crucial to address as a clearly defined emergency fund will hedge against unexpected financial events while ensuring you don't hold too much cash, which could lose value due to inflation. A commonly accepted rule of thumb for emergency funds is to allocate 3-6 months of nondiscretionary expenses into a liquid account, such as a High-Yield Savings Account. Nondiscretionary expenses are those that do not go away if you lose your job, such as mortgage payments, utilities, food, auto loans, property taxes, etc. We may recommend higher emergency funds, up to 12 months, if a household has only one income or if the occupation has a historically high track record of being first in job lay-offs. Ultimately, emergency funds are preferential, and recommendations vary from household to household. Some prefer the peace of mind from setting aside more cash than recommended, while others maintain a lean cash position.
Once you've determined an appropriate emergency fund amount, the next step is to decide where to hold the account and what vehicles to use within the account. Many households opt for a High-Yield Savings Account given the current interest rate environment. When choosing a High-Yield Savings Account, we recommend looking for accounts with a competitive Annual Percentage Yield (APY), low or no fees, and flexible deposits and withdrawals. Another option is a brokerage account. If you choose this route, remember that emergency funds are only considered liquid if invested in “current assets.” Current assets include cash, checking accounts, savings accounts, money market accounts, short-term CDs (maturing in less than a year), US T-Bills, and money market mutual funds. If a brokerage account is used for emergency funds and includes growth mutual funds and ETFs along with money market mutual funds, only the balance of the money market mutual fund should be considered when determining the current emergency fund balance.
Another common question we get revolves around making significant purchases. Should you buy that car you've been wanting or expedite your house search since you have adequate cash on hand? The answer almost always is no. We don’t recommend depleting your emergency fund to purchase a lifestyle asset since the future is uncertain. Purchasing a vehicle or home and then losing your job could leave you powerless if your emergency fund has been depleted. Instead, we recommend segmenting accounts and establishing a “sinking fund.” A sinking fund's primary objective is to save directly for big-ticket items like a vehicle or a house down payment. By establishing a sinking fund, you minimize exposure to risk since you aren’t relying on your emergency fund for major purchases.
We've discussed how to determine an appropriate emergency fund amount, the options available for allocating those funds, and whether depleting your emergency fund for big purchases makes sense. If you feel we should revisit any of these topics, please call our firm—we’d be happy to schedule a follow-up meeting to go into further detail. We wish everyone an exciting summer and look forward to continuing to empower you through these monthly newsletters!
Warm regards,
The Wela Team
Brent Forrest & Associates, LLC. dba Wela Financial Advisory (Wela) is a registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. This article and images may have been enhanced with the assistance of artificial intelligence (AI). Brent Forrest & Associates, LLC dba Wela Financial Advisory( Wela) is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance. Wela may discuss and display, charts, graphs, formulas which are not intended to be used by themselves to determine which securities to buy or sell, or when to buy or sell them. Such charts and graph offer limited information and should not be used on their own to make investment decisions.
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