Tuesday, December 7, 2021

Peri-Pandemic Liquidity Needs

Ask the CFP

Submitted Photo

“There are two times in a man’s life when he should not speculate: when he can’t afford it, and when he can.” ~ Mark Twain 

Question: With interest rates so low, how much money do you suggest I keep available in cash? 

Answer: The classic textbook answer to your question is to have a minimum of three to six months’ worth of living expenses readily available. If you’re still working, then you may face additional risks of such as disability or layoffs. These events may leave you financially vulnerable and more moola could be a comfortEither way, having ready access to liquid funds for emergencies and opportunities is essential. 


After the Crash of 2008, many individuals increased their amount of cash on hand to cover twelve to eighteen months of expensesThere is no right or wrong answer to your question. Your goals, lifestyle and fixed expenses influence what you’ll need. For instance, questions such as Will you need a new car in the foreseeable future?” or “Are there any home renovations on the horizon?” and “Do you have unique health care needs?” will guide your plan. If your answers are “Yes,” you may want to keep more than the “typical emergency fund amount available. This is why it’s crucial to map out your spending and investing program, review and revisit it periodically while making necessary adjustments.  

The Pandemic, Markets & Cash 

Many investors are in a holding pattern until they absorb and process important data and evaluate trends on manufacturing, employment, retail sales and health statistics. Plagues and pandemics have been a recurring phenomenon for centuries, but the timing is impossible to predict, as we now know. Eventually, the pandemic will be in the rearview mirror, but it may take a lot longer than previously thought. Lost jobs will be replaced with new opportunities, but that can be a painful process. Some changes such as working from home will be long lasting. Other changes will be more troublesome, especially changes to our education system. Such challenges will be overcome, but this takes time, innovation, patience and resilience. 

The last full cycle of interest rate increases was June 2004 through June 2006 when the world was a much different place. Most of us grew up as savers wish cash representing security. Childhood memories recall weekly interaction with the “Bank Lady” who handled our passbook savings deposit transactions in first grade. The thrill of having her return the passbook with interest posted and along with a higher balance was the foundation for frugality. Valuable habits of forgoing short-term desires in exchange for long-term goals began for me in elementary school on Monday mornings when the ‘Bank Lady’ visited our classroom.  

Today’s historically lowinterest rate environment presents obstacles for savers. Low savings rates and longer life expectancies make it challenging to find a place for cash as we position funds for potential growth and income.  

Bottom Line 

The attractiveness of cash still depends on attitudes rather than actual returns. Growth and income derived from other investments such as stocks and bonds may be used to replenish your cash reserve. This is why diversification and the quality of investments influence overall success. Cash is a ready source for spending and can act as a stabilizer or shock absorber in an investment portfolio plan. Meanwhile, the risk of cash is the potential loss of purchasing power as prices rise. 

It Depends 

Cash reserve amounts are as personal as fingerprints. There is no right or wrong answer. Whatever makes you comfortable and provides enough potential growth so you don’t risk outliving your money is the best place to start. Don’t hesitate to ask your financial advisor for help running the numbers and calculating your optimal level of cash.  

If the volatility of 2020 has been too much, it may be time to reconsider your liquidity needs for the short and intermediateterm. We’re not suggesting a massive shift, but rather a judicious approach to creating a comfortable cash cushion. Stay focused and plan accordingly for a healthy and prosperous New Year. 

There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices rise. Diversification and strategic asset allocation do not ensure a profit or protect against a loss. Investments are subject to market risk, including possible loss of principal. The process of rebalancing may carry tax consequences. There is no assurance that any investment strategy will be successful. The opinions expressed are those of the writer as of December 23, 2020, but not necessarily those of Raymond James and Associates, and subject to change at any time. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Expressions of opinion are as of this date and are subject to change without notice. Past performance does not guarantee future results. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. 

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.”  

This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239389-1041, email darcie.guerin@raymondjames.com. Website: www.raymondjames.com/Darcie. 



Leave a Reply

Your email address will not be published. Required fields are marked *