2020 puts emergency funds on the front burner

Without saying “I told you so,” some financial advisers are gently leveraging the global pandemic to remind clients of the virtues of setting aside some emergency cash.

While the financial planning industry has generally recommended holding three to six months’ worth of living expenses in cash or liquid equivalents, the reality of a year like 2020 has triggered a fresh look at how, when and where to build emergency cash positions.

“The industry standard is three to six months for reasons like what’s happening right now,” said Stacy Miller, partner and wealth adviser at Bright Investments.

With the pandemic pushing into the ninth month, unemployment above 8% and a contentious presidential election less than two months away, Miller admits even six months’ worth of emergency cash starts to look inadequate.

“It depends on your style of living, but even some wealthy people can live paycheck to paycheck,” she said. “I’ve had clients tell me they wish they had followed my advice more closely in regard to this.”

Advising clients to build up emergency cash funds is among the purest examples of acting as a fiduciary, when you consider that advisers rarely charge clients a fee for the often sizable amount of money held in those accounts.

Most advisers tell clients to put the cash somewhere safe and readily accessible, and not to worry too much about the income earned because it will be low.

“I tell clients to put it in a bank or money market account, because the purpose is not yield. It is to have your funds in something that does not go down in value,” said Vince Clanton, principal and founder at Chancellor Wealth Management.

“People have picked up on the idea of emergency funds because things break, and if you don’t have an emergency fund for something like a new furnace, that purchase goes on a credit card and starts the ball rolling toward a financial cancer,” Clanton said. “There’s nothing that pays you the kind of interest that a credit card takes, and it all has to be paid off with after-tax money.”

Liz Windisch, financial planner at Aspen Wealth Management, is advising many of her clients to expand their emergency funds toward 12 months’ worth of living expenses as a reflection of the current economic environment.

“The possibility that entire industries can close down has made me rethink how much emergency cash is necessary,” Windisch said. “This pandemic has really made me realize that you can’t count on the rule of thumb, because things can change quickly. In the arts right now, there are no jobs anywhere in any city.”

Michael Whitman, managing partner at Millennium Planning Group, is among the advisers recommending that clients start extending the period their emergency fund could cover to up to a year.

“If you have a one-income household, 12 months sounds reasonable, but if you have two incomes, six months is still pretty good,” he said. “People are getting nervous and more concerned.”

With most of the year already overshadowed by a pandemic that has dragged down the economy and driven up unemployment, advisers are now bracing for the uncertainty of a presidential election that could end up being contested due to unprecedented voting procedures.

“The worst case that I envision is a scenario where we have election results that drag on in a quasi-2000 fashion where it becomes a lawsuit instead of an election and then we see a pickup by the pandemic at the same time,” said Matthew Ricks, financial planner at Ameriprise Financial.

To help ensure the emergency fund is reserved for actual emergency situations, Ricks tells clients to keep the money at a separate bank or at least in a separate bank account to avoid any temptation to tap into it.

“It’s an out of sight, out of mind thing,” he said. “If the money is in a regular checking account, they might think they have more money to spend.”

Dennis Nolte, vice president at Seacoast Investment Services, said that where you keep the emergency cash is as important as establishing such a fund. And on that note, he said there are more creative ways than just holding it in a low-yielding bank or money market account.

“The yield curve is so flat, there’s no sense in locking up the money,” he said.

While laddered certificates of deposit can be used for emergency funds, assuming the entire balance isn’t needed at once, Nolte said he tells some clients to take advantage of the record-low interest rates by establishing home equity lines of credit to cover potential emergencies.

He also suggests using a Roth IRA as an emergency fund, since the principal can be withdrawn without a penalty. The caveat is to make sure the money isn’t invested too aggressively inside the Roth.

“An emergency never happens at a good time, and you don’t want to have to pull money out of the market when it’s down,” Nolte said.

The bottom line on where to hold emergency cash is anywhere safe and liquid. Or as Miller of Bright Investments put it, “Just don’t keep it under your mattress.”

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