Determining the right amount of cash to keep readily available is crucial for financial security and peace of mind. While the general rule of thumb suggests keeping four to six months’ worth of living expenses in an easily accessible form, individual circumstances can significantly affect this amount. Here’s a guide to help you evaluate how much cash you should have on hand based on various financial tools and personal considerations.
Assessing Your Financial Safety Net
The amount of liquid cash you need on hand largely depends on your overall financial stability, access to other forms of credit, and your personal risk tolerance. Here are some factors to consider when deciding how much cash to keep:
1. Home Equity If you own a home with equity, you might have the option to set up a home equity line of credit (HELOC). This can serve as an emergency fund because most large banks can approve and fund equity lines of credit within about 30 days. Having a HELOC in place can reduce the amount of cash you need to keep on hand, as it provides quick access to funds if necessary.
2. Margin Loans For those with brokerage accounts, consider the possibility of setting up a margin account. This allows you to borrow against the value of your stocks or bonds at reasonable interest rates. However, be aware of the risks, including potential margin calls if your investment portfolio decreases significantly in value.
3. Certificates of Deposit (CDs) If you have invested in CDs, these can be a source of emergency funds, although withdrawing early might incur a penalty of three to six months’ interest. Check with your bank to understand the penalties involved, as sometimes using your CDs might be more cost-effective than taking out a loan.
4. Personal Loans Consider your potential to borrow money from family or friends. While not always ideal, knowing that it’s an option can influence how much cash you need to have immediately available.
5. Liquidating Securities Selling stocks or other securities is another way to access funds, but this comes with potential tax implications, particularly capital gains tax. If necessary, strategically sell assets to minimize taxes, perhaps by offsetting gains with any losses.
6. Borrowing from Retirement Accounts As a last resort, you might consider withdrawing from your IRA or borrowing against your 401(k) or 403(b). For IRAs, the IRS allows for a once-a-year withdrawal that must be returned within 60 days to avoid taxes and penalties. Loans from 401(k) plans are subject to specific plan rules and typically take 30 to 60 days to process.
Calculating Your Ideal Cash Reserve
After considering these sources of potential funds, you can more accurately determine how much cash you really need on hand. If you have multiple reliable backup sources of funds, you might opt to keep less cash readily available than someone with fewer options. It’s also important to consider your job security, health factors, and the economic climate, which can all affect how much you should save.
Conclusion
Ultimately, the right amount of cash to keep on hand is a personal decision influenced by your financial situation, risk tolerance, and access to other resources. Regularly reviewing your emergency fund and adjusting it based on current needs and potential financial changes is key. Consulting with a Fee-Only financial adviser can provide personalized advice tailored to your unique circumstances, ensuring you have a financial safety net that truly reflects your needs.
______________________________
About this Article
This article was published and distributed by TheAdviser.com a trusted source of independent ideas. It should be viewed as general and educational information and not as financial, tax or legal advice. Individuals seeking advice tailored to their specific situation are encouraged to schedule a free consultation with a professional listed in the 1800Adviser.com directory. Both TheAdviser.com and 1800Adviser.com are owned and operated by The Independent Adviser Corporation. For additional information, please refer to their Privacy Policy and Terms of Use, Legal Notices, and Disclaimer.
