Emergency savings matter, and why cash in your portfolio is essential for investment.
“Hope for the best, prepare for the worst,” goes the old proverb. But as a nation, less than half of us take it to heart. According to the most recent Me Bank HFC report, a third of households have less than $1,000 in savings for an emergency, and “almost two-thirds (63%) of households could ‘not easily raise $3,000 for an emergency’.”
This adds to the mindset of using credit as a convenient backup, rather than building cash savings as an emergency fund. Australians owe $52.4 billion on credit cards, and more than half of this is accruing interest ($32.2 billion.) When it comes to financial planning, we know savings aren’t sexy, and they don’t have a high level of return due to the relatively low risk of sticking money in a bank. But they are important!
While there is a certain level of security afforded by an investment portfolio, accessing a portion of their value at short notice can prove costly. You don’t want to be selling shares or equity at a low point to make ends meet, so keeping a percentage of your wealth accessible in liquid form in case of emergency is vital.
While insurances may cover you for much of the cost of something like medicals bills, there can still be a hefty out of pocket expenses to consider. So it’s worth having an emergency fund that, if the worst should occur, won’t affect your long-term investment goals.
It’s worth checking your income protection insurance policy, too. In the case of disability, some policies will pay out until you’re able to regain work in your profession, while others only until you get any job.
As a general rule, families should be aiming for enough savings to carry them through 6-months, in the case of unemployment or serious injury. That’s not half your annual income aside, by the way. We mean enough to cover your minimum living expenses such as mortgage repayments, groceries and utilities.
Setting up a separate account where you can deposit even $100 a month, will help ensure you have a cushion for an engine overhaul in your SUV, or copping a cricket ball in the teeth at Saturday practice.
What about the cash in my portfolio?
While it’s certainly accessible in a pinch, the cash component of your investment serves another purpose.
The cash allocation of a small percentage of your portfolio is to cover your immediate needs, for example, real-world rebalancing issues. More often than not, you can’t get the exact number of shares to round off your allocation. So, that means using some cash to bridge the gap.
Also, a percentage of what is held in cash may be from dividend and interest payments, which will build up across a quarter. If it’s a long-term investment, such as for children or grandchildren, this might be reinvested at your request.
Lastly, it’s important to have room to move if an investment opportunity comes along. For example, if you were fully invested in 2008 before the GFC, you’d have missed out on the chance to take up some supremely undervalued stocks. At that time, Mastercard was trading close to $20/share, or you could have picked up an index fund at pennies on the dollar for substantial returns.
Don’t hesitate to make contact with us should you have any specific queries relating to your savings, portfolio or financial plan.