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Building Financial Resilience: Determining Emergency Cash Reserves

Christina Shockley, JD, CFP®

Partner, Chief Planning Officer & Wealth Advisor


INTRODUCTION

 

At Gatewood Wealth Solutions, we prioritize empowering our clients with robust financial strategies, including effective cash management to weather market uncertainties. Understanding the importance of maintaining liquidity during bear markets while remaining confidently invested for the long-term, we review and update cash needs regularly. Here's how we determine appropriate emergency reserves tailored to different life stages using our GWS Rules-of-Thumb:

 

CASH MANAGEMENT: PURSUING STABILITY AMID MARKET FLUCTUATIONS

 

The primary strategy is to maintain sufficient cash reserves for liquidity needs, especially during bear markets. By holding targeted cash reserves during one’s financial journey, individuals can mitigate the risk of selling investments during down markets and remain confidently invested for the long-term.

 

DETERMINING EMERGENCY RESERVES BY LIFE PHASE

 

Emergency reserve targets are based upon an individual's life phase and total monthly expenses.

 

We follow the GWS Rules-of-Thumb below for the number on months’ worth of total household expenses one should keep in cash:

 

o   Life Phase 1 – Early-Career Accumulation (3-6)

o   Life Phase 2 – Mid-Career Accumulation (6-18)

o   Life Phase 3 – Late-Career Nearing Retirement (12-24)

o   Life Phase 4 – Retirement Income Distribution (18 - 30)

 

We then determine one’s near-term lump sum expense needs. These include significant financial commitments, such as making a down payment on a new house, buying a new car, funding a home renovation project, or covering tuition fees for a child's education.

 

 

CALCULATING THE TOTAL CASH TARGET

 

To determine the total cash target, we assess:

 

                    Emergency Reserves (3-30 Months’ Expenses – Life Phase Based)

+                  Near-Term Lump Sum Expense Need (0-24 Months from Now)

=                  TOTAL CASH TARGET

 

CONCLUSION

 

By targeting emergency cash reserves according to your life stage and financial needs, we aim to provide investor confidence during economic uncertainties. Contact Gatewood Wealth Solutions today to explore how we can tailor a cash management plan to align with your specific financial goals and aspirations.

 

 

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

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