Are You Prepared for a Financial Emergency?
By Carl Trevison and Stephen Bearce
Are You Prepared for a Financial Emergency?
Mother Nature certainly has grabbed her fair share of headlines the past few years. From blazing wildfires in California to devastating floods in the Midwest, from massive hurricanes along the coasts to sweeping tornadoes across the Plains—millions have been affected by the recent natural disasters in the U.S. including the Corona Virus.
Less headline-worthy are the financial repercussions following natural disasters and the cash difficulties tens of thousands of families are dealing with as a result. These catastrophes are unavoidable—and often there’s little time to prepare before disaster strikes homes, families, and communities.
With this in mind, ask yourself this question: “What’s the biggest threat to my financial stability?” Job loss likely comes to mind, perhaps followed by a serious illness or a natural disaster. But, lack of cash flow and liquidity management should make the list too—and it’s an ongoing challenge rather than an isolated event.
Consider cash flow and liquidity management a tool, not a goal
More than just tracking your income and spending, cash flow and liquidity management is also about planning for unexpected cash needs. Without proper planning for an emergency, you might have to round up all your available cash or liquidate a long-term investment. However, liquidating could disrupt your investment plan. For example, retirement account assets may be subject to tax penalties for taking non-qualified distributions prior to retirement. You might do better keeping those assets invested to potentially generate a long-term return—and keeping your overall wealth strategy intact.
It’s important to keep in mind that cash flow and liquidity management planning is complementary to investment planning. Not only does cash flow and liquidity management allow you the flexibility to access money in the event of an emergency, it’s a defensive tool to ensure your investment plan is well positioned and not disrupted.
Here are three steps you should consider as part of a cash flow and liquidity management plan to help protect your loved ones and keep a natural disaster from becoming a financial catastrophe.
- 1. Set up an emergency account. In addition to accounts where you currently keep cash assets (including checking, savings, certificates of deposit (CDs), money markets, or other cash alternatives), fund an emergency account as part of your cash flow and liquidity strategy to help protect all your assets. Set aside enough to cover three to six months of expenses (the right amount for you will depend on your risk tolerance). Keep cash on hand in case your area loses power and ATMs are out of commission.
- 2. Review your short-term and longer-term payment needs. Understanding when you will need to draw on your money is key to an effective plan. Establish a strategy to cover your day-to-day expenses for funds you will need to access immediately, such as for food, clothing, medical, and transportation expenses. Your cash for short-term expenses should be very accessible, perhaps in a checking or savings account.
For longer-term expenses that reoccur on a regular basis, such as property taxes, you may wish to consider a less liquid investment, such as a CD. This type of investment typically offers a slightly higher return than a regular checking or savings account and you can manage the payout schedule to around the same time you will need the money. Generally, CDs may not be withdrawn prior to maturity. CDs are FDIC insured up to $250,000 per depositor per insured depository institution for each account ownership category. There are other more sophisticated solutions available where appropriate to help you meet your cash flow and liquidity needs, and we suggest you discuss these with your financial advisor.
- 3. Establish a line of credit for ready access to cash, and if used, pay the funds back with an appropriate source when the timing is right. Borrowing against non-retirement investments, the equity in a home, or other approaches can provide for short-term cash needs if your emergency fund does not stretch to meet all your expenses. These strategies prevent disruption to your long-term investment plan and can help keep you on track to meet your investment goals.
A line of credit can also help you avoid dipping into retirement accounts too early. Depending on your situation and the type of retirement account, it may expose you to potential tax consequences.
Be aware, costs and risks are associated with any borrowing decision, so it is important for you to seek good, objective guidance. Your financial advisor can help you begin the process of determining what type of line of credit option is the most suitable for you.
Life brings expected and unexpected events—an important part of every investment plan is identifying where to access cash when you need it. Talk with your financial advisor about managing your cash flow and liquidity needs.
Securities-based lending has special risks and is not suitable for everyone. If the market value of a client’s pledged securities declines below required levels, the client may be required to pay down his or her line of credit or pledge additional eligible securities in order to maintain it, or the lender may require the sale of some or all of the client’s pledged securities. Wells Fargo Advisors will attempt to notify clients of maintenance calls but is not required to do so. Clients are not entitled to choose which securities in their accounts are sold. The sale of their pledged securities may cause clients to suffer adverse tax consequences. Clients should discuss the tax implications of pledging securities as collateral with their tax advisors. An increase in interest rates will affect the overall cost of borrowing. Wells Fargo Advisors and its affiliates are not tax or legal advisors. All securities and accounts are subject to eligibility requirements. Clients should read all lines of credit documents carefully. The proceeds from securities-based lines of credit may not be used to purchase additional securities, pay down margin, or for insurance products offered by Wells Fargo and any of its affiliates. Securities held in a retirement account cannot be used as collateral to obtain a loan. Securities purchased in the pledge account must meet collateral eligibility requirements.
Lending and other banking services available through Wells Fargo Advisors (NMLS UI 2234) are offered by banking and non-banking subsidiaries of Wells Fargo & Company, including, but not limited to Wells Fargo Bank, N.A. (NMLSR ID 399801), Member FDIC, and Wells Fargo Home Mortgage, a division of Wells Fargo Bank, N.A. Certain restrictions apply. Programs, rates, terms, and conditions are subject to change without advance notice. Products are not available in all states. Wells Fargo Advisors is licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act and the Arizona Department of Financial Institutions (NMLS ID 0906158). Wells Fargo Clearing Services, LLC, holds a residential mortgage broker license in Georgia and is licensed as a residential mortgage broker (license number MB2234) in Massachusetts.
This article was written by/for Wells Fargo Advisors and provided courtesy of Carl M. Trevisan, Managing Director-Investments and Stephen M. Bearce, First Vice President- Investments in Alexandria, VA at 800-247-8602.
Investments in securities and insurance products are: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE
Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC, Member SIPC, a registered broker-dealer and non-bank affiliate of Wells Fargo & Company.
© 2019 Wells Fargo Clearing Services, LLC. All rights reserved.