There is a very important topic nearly all clients hear me talk about: a financial safety net.
No, we are not talking about walking on the high-wire or performing on a trapeze. We are talking about having a sufficient reserve of cash to handle life’s unexpected turns, and strategically placing these funds for liquidity and ease of access. This gives you something to fall back on that could break your fall and help you land safely on your feet like the safety net that a high-wire or trapeze artist would use.
During the COVID-19 pandemic and the Financial Crisis of 2007-2009, many found themselves temporarily, or permanently, out of work or taking involuntary pay cuts. Economic recessions can cause similar effects. We never plan to become sick and be unable to work. There are many unexpected events that could happen, which can knock you off your feet if you are not prepared or are lacking a safety net. Some of these events can be minor, temporary, and manageable. Others may cut deep and be long lasting.
A financial safety net is having a strategically placed allotment of cash. In the base form, you would want to consider having one month of your current living expenses in your checking account, anything above this amount should go into your savings account. The base amount for consideration in your savings account should be two months’ worth of your current living expenses. These amounts should be reviewed annually. Keep increasing the amounts kept here as your living expenses grow and replenish these accounts when they drop below your required dollar amount.
Once you have a solid foundation in your savings and checking accounts, it may be is time to build a ladder upon your foundation to reach greater heights of financial security. A ladder strategy involves layering CDs, Treasuries, or other cash equivalents.
How much money should be in the ladder portion of your safety net? This depends on your unique situation. Factors include job stability, annual income, health condition, age and proximity to retirement, lifestyle expenses and more. Typically, this amount is 2 to 4 times what you would keep as a combined total in your savings and checking accounts under this strategy. This could give you 9 to 15 months of a safety net. Determining the appropriate amount is part of the financial planning conversation you should have with your CERTIFIED FINANCIAL PLANNER TM professional.
Perhaps one day you will need to fall onto your safety net and use it to help you meet your essential living expenses. You will be glad it is there, and when you land on your feet – work on the strategy to repair the portion that you had to use. Using the safety net is not buying a new set of golf clubs because they are on sale, or those fancy red shoes on the clearance rack at your favorite store. You will know that moment and expense. Let’s hope it never comes.
The rate of return you get on this money is not as important as having the safety net strategy in-place. Interest rates will rise, and fall, safety and liquidity are what you are after here. Set-it and forget-it until next year when you review the size of your safety net and consider getting a larger one, but never a smaller one.
Some might call this an emergency cash reserve strategy. A financial safety net goes beyond your typical cash reserve strategy potentially providing a greater peace of mind and confidence in your financial situation.
Strategies like the financial safety net and others are part of the experience clients get here at Creative Retirement Solutions Group. As a client you will receive sound financial planning and insightful investment advice so that you may focus on yourself, your family, your career and enjoy retirement. Would you like to discuss this strategy further?
Let’s talk.
Chris Balcerowiak, CFP®, AAMS®, is a CERTIFIED FINANCIAL PLANNERTM practitioner with Creative Retirement Solutions Group, a member firm of The Fiduciary Alliance, LLC, in Sterling Heights, MI (13854 Lakeside Circle, Suite 216, Sterling Heights, MI 48313). He specializes in financial planning and wealth management strategies and has been in practice for 36 years. Visit his website at: www.CreativeRetirementSolutionsGroup.com. Contact him by email chris@crsgfamily.com, or by phone toll-free 877.907.8625.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
The information provided in this presentation should not be considered a recommendation to purchase or sell any particular security. Creative Retirement Solutions Group reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable. Investing involves the risk of loss of principal. There is no assurance that any securities, sectors, or industries discussed herein will be included in all portfolios invested in the strategy. Clients have the ability to impose reasonable restrictions on the management of their account. You should contact Creative Retirement Solutions Group should your investment objective, time horizon or general financial situation change, or if you would like to have a meeting to discuss your account. Past performance is no guarantee of future results. Creative Retirement Solutions Group is a member firm of The Fiduciary Alliance, LLC. The Fiduciary Alliance’s business operations, services, and fees is available at the SEC’s investment adviser public information website www.adviserinfo.sec.gov or from The Fiduciary Alliance upon request.
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