PREPARE FOR UNEXPECTED EXPENSES WITH
We may not be able to see into the future, but we should try to prepare for it
We don’t know what’s right around the corner, but it could be a car wreck, job loss, natural disaster, or another kind of emergency with the potential to put us in a debt- crisis situation. Preparing for emergencies by ensuring we have access to “ready cash” can give us peace of mind—and the potential for a good night’s sleep.
The importance of cash may not resonate with some, given that a growing number of people seldom use it. The Pew Research Center reports that 41% of survey respondents reported that none of their purchases in a typical week are paid for using cash, compared to 29% in 1018 and 24% in 2015 (1). But when an emergency strikes, you may need cash quickly—and sometimes a lot of it. If you’ve planned well—or are lucky—you can easily tap into your ready cash, which is money you can quickly pull from a savings, checking, or money market account.
Hope for the best, but prepare for the worst
It’s not easy predicting out how much ready cash is needed for an unknown emergency that may or may not be waiting around the corner. Each situation is different, but a general rule of thumb is to have enough cash to cover three-to-six months of expenses. Knowing how much that is requires adding up your monthly expenses and also calculating any semiannual and annual charges—like estimated taxes and insurance premiums—that may be coming due. Consider which expenses are essential (food, medicine, rent, utilities, etc.) and which aren’t (entertainment, hobbies, subscriptions, and membership fees, for example) to determine the amount you should set aside as ready cash for emergencies.
Where to stash your ready cash
You should put your ready cash where it will be safe and easy to access – and where it has the potential to earn money. Splitting it up in different types of financial options may also be a good choice. Here are some ideas: (2)
Checking accounts: Yields ranged from zero to 2% in January 2023, but the biggest advantage is that cash is immediately available through a debit card or ATM. This option is good for everyday spending, but not for saving large amounts of money.
High-yield savings accounts: Yields were as high as 4.03% in January 2023. While you can easily transfer money between your high-yield savings account and your checking account, the number of free withdrawals you can make may be limited. There also may be a minimum-balance requirement.
Money market accounts: Yields were up to 4.15% in January 2023. Cash is available by check or debit card. The number of withdrawals is usually limited to about six per month, and fees may be applied if deposit minimums aren’t kept.
Certificates of deposit: In January 2023, yields were up to 4.75% on one-year CDs, and 4.39% on six-month CDs. Although rates are generally higher for CDs than savings and money market accounts, you will usually pay a penalty if you cash your CD out early.
Money market funds: Yields in January reached 4.5%. You can write checks against your balance and make electronic transfers. If short-term rates go up, your yield may rise.
Treasury bills: Yields in January ranged from 4.19% to 4.79%. Interest is exempt from state and local taxes, but not federal taxes. You can lose the yield if you sell before the bill matures.
Series 1 savings bond. Yields in January 2023 were 6.89%, higher than any other government security. Your money is “locked up” for one year, and redeeming it before five years may incur an interest penalty. Interest is free of state and local taxes, and can qualify to be free of federal taxes if used for college expenses.
Preparation is the key to success
As inventor Alexander Graham Bell said, “Before anything else, preparation is the key to success.” Once you have enough cash to cover your expenses for six months, you should be able to breathe a sigh of relief, knowing you’ve done what you can to prepare for any emergency that might be around the corner. With any luck, your preparation will hold any emergencies at bay.
An investment in a Money Market Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.
Thanks for checking out the blog.
Gregory Armstrong , CFP®
(1) Pew Research Center: More Americans are joining the ‘cashless’ economy, October 5, 2022.
(2) AARP magazine: Where to Keep Your Cash Now, February/March, 2023