At Certus Wealth Management, we partner with our clients in managing cash reserves and optimizing cash to effectively meet their unique goals. Understanding the nuances of cash reserves, the risks associated with having insufficient or excessive amounts, and implementing strategies to allocate surplus cash are crucial steps toward achieving financial well-being.
Determining an Appropriate Cash Reserve:
The question often arises: what is the right amount of cash to maintain? While there's no one-size-fits-all answer, having three to six months' worth of expenses in a liquid cash reserve is a common recommendation. This reserve acts as a safety net during emergencies or unexpected financial setbacks.
Risks of Insufficient and Excessive Cash:
Having an insufficient cash reserve can leave you at risk of being ill-prepared for emergencies, which could result in debt accumulation or forced liquidation of investments. On the other hand, holding too much cash could result in missed investment opportunities and potential loss of purchasing power due to inflation.
Effective Allocation of Excess Cash:
For those with a surplus of cash on hand, it is important to decide how to best invest it. One school of thought calls for immediate investment, with historical data showing that markets have grown around 75% of the time since 1945. This statistic implies a high likelihood that your investment would start growing right away. However, the remaining 25% probability is that the market might contract within the first year. Both strategies have inherent pros and cons which must be weighed based on each individual’s goals and level of risk tolerance. Investing all at once may allow you to capitalize on market growth trends, but it also carries the risk of immediate market downturns. Dollar-cost averaging offers risk mitigation against market fluctuations, but might miss out on potential gains during upward trends.
Leveraging Cash Flow for Financial Goals:
To maximize cash flow toward your goals, proactively harnessing future income adjustments can be remarkably effective. This strategy involves making gradual adjustments without drastically changing your lifestyle, paving the way for substantial progress towards your financial goals over time. Imagine you receive a 3% cost-of-living raise every November. Channeling this extra income directly into your retirement savings can significantly shape your financial future. For instance, if you were contributing 10% previously, redirecting the 3% raise means you're now contributing 13%. By consistently adding this annual 3% raise to your 401(k) contribution, you'll substantially increase your retirement savings. Though it might seem like a small adjustment, it results in a substantial 30% boost in your retirement savings rate. Think of doing this for the next three years – you could almost double your savings rate. Depending on how close you are to retiring, this could have an exponential impact on your future nest egg.
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Cash planning is a strategic way to help secure your financial future. With the right balance of cash reserves, thoughtful allocation strategies, and leveraging income increases, you can work to effectively navigate the ebbs and flows of your financial journey.
At Certus, we're here to guide you through these strategies and help you align your finances with your life goals. To discuss your unique goals and objectives, contact us today.
This content is provided for educational purposes only, represents only a summary of topics discussed, does not constitute any personalized investment advice or recommendation, and represents only the views and opinions of the speakers which are subject to change without notice. Investing involves risk including the potential loss of all amounts invested.
This material prepared by Certus Wealth Management, LLC (“Certus Wealth”) is for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Opinions expressed by Certus Wealth are based on economic or market conditions at the time this material was written. Economies and markets fluctuate. Actual economic or market events may turn out differently than anticipated. Facts presented have been obtained from sources believed to be reliable. Certus Wealth, however, cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Certus Wealth does not provide tax or legal advice, and nothing contained in these materials should be taken as tax or legal advice.
