By now, you have created a plan for yourself. As our Live Secure approach demonstrates, the trick to planning is to make your plan simple enough so that you can keep track of it and update it easily.
It is critical to monitor your plan. Life events have a way of happening to us when we least expect them. Plan for the unexpected, by ensuring you always have cash on hand. Here are some basic financial planning concepts that will help you build and monitor your Live Secure financial plans:
Mum’s Cookie Jar
The cookie jar concept is a good one, taken one step further. The idea that you have a stash of cash somewhere for emergency purposes is a basic in financial planning. But, the amount cannot be the $20 (Canadian!) that my mother put away. This amount is something you’ll need to figure out. Estimate that you will be laid off from your job and it will take six months to find another. Having set aside six months of earnings to cover this contingency gives you the emotional breathing room you need to survive a bad period. So, the first step is to figure out from your personal balance sheet the amount you will need to put away to cover six months’ living expenses.
Jane figures she will need at least $3,400 per month for six months to cover her living expenses if she loses her job. This means her cookie jar must contain $20,400. This seems like a lot of money, but Jane knows that if any emergency occurs, she will not have sufficient income to continue living the way she does without this amount in savings.
Jane revises her plan. Her first step is to ensure she is protected in the event of an emergency. Jane will take her disposable income and put it away in a money market mutual fund until she reaches her cookie jar goal. She decides that paying off her credit cards and saving in an emergency fund are the two goals she has over the next year.
Where are your savings when they’re in this cookie jar? Well, you want available cash for emergencies. This means you want maximum “liquidity.”
Liquid investments are those that can be sold quickly for cash. You will trade off interest for liquidity, meaning that liquid investments of high quality will pay lower interest rates. In this case, it is the freedom that comes with liquidity that you want for your stash of cash. Liquidity doesn’t come with certificates of deposit since they require that you make your loan of cash to a bank over time — three months to several years, and that you pay a penalty for early withdrawal of the cash. Instead, consider putting your cash into a money market mutual fund. This type of fund is composed of high quality investments (by law) and these investments are liquid, meaning you will have access to your cash.
You will never get rich putting all your money in money market funds since the interest they pay is related to the high quality and liquidity of the investments in the portfolios. However, because they are easily accessible, money market funds are a desired ingredient in your cookie jar.
About the Author: Lyn Striegel is an attorney in private practice in Chesapeake Beach and Annapolis. Lyn has over thirty years experience in the fields of estate and financial planning and is the author of “Live Secure: Estate and Financial Planning for Women and the Men Who Love Them (2011 ed.).” Nothing in this article constitutes specific legal or financial advice and readers are advised to consult their own counsel.