Every investor should evaluate their cash reserves before selecting an investment/s.  Integrating your cash and investments together into a financial plan can be as simple or complex as your life requires.  Let’s look at three different investors at varies life stages, all with different needs for cash.

Justine is 26 years old and graduated from Virginia Tech several years ago.  She enjoys traveling, hanging out with friends, and is considering a master’s program in two years.  Her employer provides a retirement plan and 401k match that she participates in.  How should Justine be thinking about her cash reserves?

The key to spending, investing, and savings in your 20s is avoiding debt and having plenty of cash reserves.  Justine may consider establishing an emergency savings account that she fills with three months of fixed expenses.  The number of months saved to cash is not as important as setting the money aside before it’s needed.  This is a personal preference and often based on job security.  The theme to these dollars is not using them unless it’s a true emergency.

Some of Justine’s friends are getting married, weddings are expensive, and so is the additional traveling she’d like to do.  It may be helpful for Justine to create another savings account for short term spending.  By not commingling these dollars with her emergency dollars, each account is able to serve a single purpose.  An additional short-term savings account may grow by automated transfers from Justine’s checking account after each paycheck.  This creates cash for near term travel but isn’t jeopardizing her need for liquidity as she continues to contribute to her retirement account.

By setting up two savings accounts, Justine avoids keeping excess cash in her checking account.  All investors can relate to cash often evaporating when left without direction in a checking account.

When higher education costs are factored in, it may be valuable for Justine to have saved for tuition to avoid taking on debt.  Not always a possibility, but again with a little planning and thinking ahead, Justine can be more proactive in her choices.  This also allows the income she defers in her 401k to continue compounding and not be withdrawn in the form of a loans.

Jim and Susan are married in their 40s with successful careers, a mortgage, two kids, and a busy family calendar.  Their needs for cash are significant, how should this be managed given their average $12k a month in spending?  Both are maxing out their employer retirement plans, saving to their children’s 529 accounts, and paying off the credit card in full each month.  They utilize a shared checking account for bills and choose to charge all expenses to a rewards card that assists with two family vacations a year.  An emergency fund has existed for years but needs to be updated to reflect current lifestyle choices.

The key to spending, investing, and savings in your 40s is an ongoing review of cash levels to avoid debt.  Emergency cash should be maintained at a level that each spouse feels comfortable with.  It’s common for one spouse to want more cash, while the other may choose to hold less, the key is finding a middle ground.  Some families accomplish this by utilizing a home equity line of credit in addition to various savings accounts.  Desired liquidity may also be met by leaning on sizeable, vested company stock which may be converted to cash as needed.  What matters is having the right amount of cash or cash equivalents set aside before it’s necessary.  Not confusing accounts and the purpose each serve is important as wealth expands.  This allows investments to stay invested and minimizes debt from accumulating.

When kids enter the picture, life gets more expense.  Some spouses may utilize their bonus to set dollars aside for summer camps, travel sports, or private school.  Others may fund an account from cashflow to accumulate the necessary expenses in advance.  This ensures the right dollars for the right expense are ready when needed.

A common distractor among all families is the desire to squeeze yield or return from their cash.  This can cause unnecessary problems when compared to keeping cash in liquid, boring, accessible accounts.  Investments should be directed by a financial plan so to hedge rising costs.  It’s the role of your investments to generate rates of return, not your cash.

Betty and Rich are in the 60s and preparing to repurpose their time.  After successful careers they are looking to stretch their resources spending time where they want.  With the mortgage paid off, no reoccurring debts, and over $3 million in various investment accounts and IRAs, they’re ready to create an income for essential and fun spending.

The key to spending, investing, and savings in your 60s and beyond is remaining flexible, having patience along with a good temperament.  It takes a completely different skill set to spend your wealth through retirement when compared to accumulating wealth during your working years.  When you stop earning an income, your investments may take over this responsibility.  Cash reserves at this stage in life and level of wealth are necessary too.

Often a cash reserve account is created before or at retirement to cover 12 to 15 months of future expenses.  Again, this is based on personal preference.  This reservoir will act as a buffer between various investment accounts and the self-directed cash reserves investors manage on their own.  Strategically liquidating investments with taxes in mind via a repeatable process takes the guess work out of what and when to sell for income.  Maintaining cash levels before Social Security is “turned on” helps retired couples spend what they’ve accumulated.

Moving to a spending mindset may be difficult for some investors in their 60s when they have saved and invested their entire lives.  Having cash set aside in advance may provide peace of mind.  This allows investments to contract and expand for future spending while cash is accessible for near term spending.  As cash reserves are spent down then may be refilled by systematically selling investments.  This cycle may be repeated annually to support sustainable spending and to hedge the long-term impact of inflation.

Justine, Jim & Susan, and Betty & Rich all have a need for cash reserves at different stages of their lives.  This allows each of them to avoid debt, stay invested, spend with purpose, and have room for mistakes and opportunities.  Recognizing and accepting cash reserves as part of the investing process supports spending what’s accumulated, regardless of the amount.

Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Flowerstone Financial are not affiliated.

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