Nearly all investors should hold some level of cash and similar short-term investments (sometimes called cash equivalents) such as CDs, money market funds, and short-term treasuries. This should include an emergency level of cash equivalents over-and-above the dedicated allocation assigned within a long term investment plan.
The logic is simple: If an emergency pops up that requires funding, you don’t want to have to disrupt an investment strategy intended to fund a comfortable retirement or other long-term goals.
A variety of factors should be weighed in deciding how much to save for a rainy day. Some of the most important questions to consider are:
• How secure is your job? For people with less job security, a higher emergency savings fund may be warranted.
• Does your household have one or two incomes? One-earner households should consider keeping a larger emergency stash.
• How is your health? People with potential health concerns may consider setting more aside.
• Do your health, auto, home owner/rental insurance policies entail a high level of self-insurance (i.e., high deductibles)?
• Who relies on your income? Children and parents that may need help could justify keeping more in a safety fund.
Clearly, individual circumstances will determine the “right” amount of emergency cash to hold. One approach is to maintain a nest egg adequate to cover six months of household expenditures. Another is to calculate a level of total liquid assets based on your total current debts.
For example, suppose your mortgage, car, and student loans require outlays of $25,000 over the next year. A rule of thumb is to maintain somewhere between one and two times as much ($25,000 to $50,000) in liquid assets.
In articles that follow we explain pending regulatory changes pertaining to money market mutual funds, which are a primary vehicle for holding cash equivalent assets for many household investors.
Also in This Issue:
Behavioral Economics and the Rational Man
Money Market Changes Afoot
Money Markets: An Important Distinction
Will Funds Be Forced to “Float”?
Reminder: Social Security “File and Suspend” Deadline Looms
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield
Asset Class Investment Vehicles
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