The Need for Short Term Savings and Emergency Reserves

Consumers use bank products for a variety of needs. One of the most fundamental of these needs is a place to store short-term savings. Emergency reserves are assets you may need unexpectedly on short notice. Bank products are generally considered to be on the very low end of the risk spectrum of investing are one of the most appropriate investments types for short-term targets. In turbulent times, the returns and extra safety of bank checking, savings, money market deposit accounts and certificates of deposit can be invaluable resource in overall financial planning. In addition, everyone should have a short-term savings balance that is reasonably liquid and safe. Your savings should reflect your time horizon, financial situation, and personal feelings about risk.

Liquidity for investors is usually defined as the ability to readily access invested money. More specifically, it is a measure of the cash equivalency of an investment. Safety for investors is generally defined as the ability to preserve principal. FDIC insured accounts would are the ultra conservative end of the principal preservation spectrum.

Short-term savings are accounts usually established to cover three types of events. The fist event is for unseen or sudden financial needs. This category could include events such as sudden medical needs, unexpected home expenses or an abrupt loss of income. The second event is for a place to temporarily hold savings for short-term expected large expenses. In this category there could be events such as the planning for a large home improvement expenditure, a significant durable good purchase or even college tuition. These expenses can be planned for but the funds that re being set aside to cover the costs should be placed in accounts that are safe and liquid. The last category is to be prepared for our lifestyles and needs change over time. The marketplace changes as our economy fluctuates. Interest rates and rates of return will tend to move more dramatically as the world economies mature and the established risks will most surely need to be reevaluated. Whenever you make a major lifestyle alteration, it’s time to reassess your overall financial condition. Some broad examples of lifestyle adjustments that should trigger a review of an individual’s asset in liquid and safe investments include: having a child, retirement, career changes, starting your own business, new marriage or divorce.

Short-term needs should be evaluated more than just once as our lifestyles and needs change over time. Most of these events are likely to affect your ability to invest, your time horizon, and your overall financial picture, both short term and long-term. It’s never easy to find the time to review your investment plan when you’re in the midst of any of these life changes, but it’s worth making the effort. You don’t want to enter a new phase of your life with a plan that was designed for different circumstances. By staying on course with your asset allocations, you will help ensure that your overall portfolio continues to work effectively toward achieving your investment goals.

In addition to goals, identifying your time horizon is important because it influences how you invest your assets. Typically, a shorter time frame necessitates conservative investments, while a longer period allows you to handle more risk.

How much to set aside for short term savings needs is frequently debated by financial planners and is influenced by many factors specific to the individuals needs. One key starting point is to establish between three months to nine months of living expenses in a short-term savings account or accounts. After determining those needs, the next consideration should be your overall willingness to accept risk balanced with current risk and return of your financial investments. More conservative individuals will want funds stashed in relatively risk free accounts where those with a higher tolerance for risk would want these funds kept to the necessary minimum level. Age can play a significant role in this decision. More mature investors are more likely to be risk adverse and more heavily tilted towards capital preservation. Along with age, the amount of funds in short term safe investments should reflect the upcoming needs for large cash outlays. Younger consumers will generally have a greater need for down payment savings, college tuition costs or home improvement needs.

Saving for short-term goals is ultimately a way to save money, whether it is used to pay for unseen events or as store for financial. Evaluate the wide variety of investment options available to determine which best match your needs. For short-term savings needs, whether it is designed to cover sudden unexpected expenditures, preplanned large financial disbursements, or a safe heaven for turbulent times, bank products are certainly one of the resources available to fill these needs. With the plethora of bank products and money market instruments available, there is almost always a product or various products to meet your requirements. Consider the products rate or return, liquidity, safety and potential tax implications.

This entry was posted on Sunday, October 12th, 2008 at 11:26 am and is filed under Banking and CD Guide. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.