How Big Should My Emergency Fund Be?

Balancing Emergency Cash With Long-Term Investing

Keeping a pulse on client cash needs is one of the most important jobs I have as a financial advisor. Here is an excerpt of an email I sent to clients tonight explaining how to balance short-term cash needs with long-term investment goals.

Looking to earn more in your emergency fund?

Market Thoughts

We are in unprecedented times. As I write this it looks like the stock market is in for another strong decline tomorrow.

I am a firm believer that to grow and preserve wealth over the long-term, investors need to stay fully invested rather than trying to time the market.

From 2000 to 2019 an investor who remained fully invested in the stock market (through the dot com bust, the financial crisis, the Greek debt crisis and more) would have earned just over 6% per year over 20 years. If the investor had missed the ten best days in those 20 years, they would have earned 2% per year. Last week the S&P 500 was down 8.8%. If you missed out on the two big up days you would have been down 20% last week.

That being said, for those needing funds for living expenses or significant purchases within the next three years, we should have investments outside of the stock market. Fixed income and cash are much more prudent for those assets.

Nobody can predict how the COVID-19 pandemic will play out. There are many options available to the regulators. There has been talk of taking a market holiday – where the markets would be shut down for a couple of weeks while things settle out. This happened after 9/11 so there is precedent.

I don’t propose making any big changes to our investment strategy as I have allocated investments in full consideration of your needs.

Personalized Advice

I then offer one of the following options depending on their unique circumstance.However, I am proposing that we ensure you have enough cash to pay your living expenses and that cash is easily accessible.

  • I think it would be prudent to move some of your cash over to your checking account so in a worst case scenario you have an ample supply of funds in your local checking account. If that sounds ok to you I would propose moving making a one-time transfer from TD Ameritrade to your checking account in the amount of $X.
  • It is my understanding that you have adequate cash available outside of your accounts at Birch. If that has changed please let me know.
  • The majority/all of the investments I manage for you are held in retirement accounts. I want to ensure you have adequate cash available outside of your accounts at Birch. If you have concerns, let’s talk and come up with a strategy.

Let me know your thoughts on this.

Kind regards, Brian

If you need help balancing your short-term needs with your long-term investment goals please reach out to Birch Investments via the link below.


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