As part of a normal financial planning process, your adviser should be confirming with you any cash reserves that you hold. These cash reserves are often referred to as your ‘emergency fund’ and often overlooked by individuals. But, these funds are part of the basic financial planning principles that we follow.
Let’s face it, having a sum of money in cash is not very exciting. It may even become depressing, seeing how little that cash is earning sat in your current account. However, when relied upon, it can be worth its weight in gold.
The last year has shown us how events can upend our plans unexpectedly. For many, having cash reserves to see them through the last 12 months has been so valuable. Of course, the pandemic was by no means an event anyone could have predicted. But, having cash savings meant that those that had saved were able to cushion the blow somewhat. Invaluable, at a time when people were facing redundancy, economies were in recession and markets were falling. Whilst the world recovered, savings became a lifeline.
Cash by its very nature is low risk. It is usually easily accessible, which is key to having an appropriate emergency fund. Although, please remember nothing is no risk! Having funds in cash over the long term is a risk as it loses value in real terms compared to inflation.
The purpose of emergency savings is not to receive growth. It’s for the funds to be there if and when you need them. This could be for all sorts of reasons like replacing income lost for a short time as a result of illness, injury or redundancy. You can use it to replace withdrawals from investments or pensions in times of market falls. Or, perhaps, to fund a one off major expense such as house repairs.
How much you should have is a question for debate. A ‘rule of thumb’ guide would be 3-6 months’ worth of your usual expenditure, as a minimum. However, some people feel comfortable with more than this. I recall one client discussing this with me many years ago, who had a great guide. He liked to keep enough in cash to replace his roof on his home if he ever had to. Having given this some thought, it’s not a bad analogy to think of. In reality, we are all different and have different needs. Part of our planning process is to work with you to establish the right amount of emergency fund for you.
Additionally, if you have debt, you should consider your debt repayments before squirrelling plenty of cash away for a rainy day. Long term, the amount you repay will be substantially more than you borrowed initially. It’s usually better to pay off debts and save less in these cases.
Of course, you need to keep your emergency savings fund under regular review. Once this has been depleted, you might find it hard to rebuild it. It takes discipline and perhaps a change of investment strategy in the short term, to rebuild these funds. We can advise on this for you.
So, please think about your own emergency savings and how this sits alongside your own financial plan. Alternatively, speak to us and we can help steer you in the right direction.
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