Vail Daily column: What are the key USES of cash?
As an investor, you may find that the elements of your portfolio that seem to draw most of your attention are stocks and bonds. After all, these investment vehicles provide you with potential growth and income opportunities — which is why you invest in the first place. Yet, you also may find significant value in a more humble asset: cash. In fact, you might be surprised at the various ways in which the cash in your portfolio can help you complete your financial picture.
One way to understand this is to look at the acronym USES:
Unexpected expenses and emergencies: You’ll need sufficient cash for situations such as a job loss, a home repair or an unplanned medical expense. During your working years, you should keep three to six months’ worth of living expenses in a cash account for this purpose. Once you’re retired, you may be able to get by on a smaller emergency fund — up to three months’ worth of living expenses.
Specific short-term savings goal: Are you anticipating a big expense —a wedding, a big vacation, a down payment on a new home, etc. — sometime in the next few years? If so, you’ll want to set aside sufficient cash.
Everyday spending: It goes without saying that you’ll need cash for your everyday spending needs — groceries, utilities, entertainment, mortgage payments and so on. Of course, while you’re working, you will probably handle most of these costs with your paychecks, but you may still need to set aside one or two months’ worth of expenses. Once you’re retired, though, it’s a somewhat different story.
While your expenses may go down in some areas (such as costs associated with employment), they are likely to go up in others (such as health care). Consequently, it may be a good idea to set aside 12 months’ worth of expenses, after incorporating other sources of income, such as Social Security. In addition, you’ll have to decide on the most efficient way of drawing on your other sources of income, including Social Security and investment accounts such as an IRA, a 401(k), etc. It’s especially important to create a sustainable withdrawal strategy for your investment portfolio because you don’t want to run the risk of out-living your money.
Source of investment: You’ll want to have some cash available in your portfolio to take advantage of investment opportunities as they arise. Also, having even a small percentage of your portfolio devoted to cash can modestly improve your diversification.
So, there you have it: four key USES of cash. Taken together, they provide some good reasons to keep at least a modest “stream” of liquid assets in your portfolio.
This article was written by Edward Jones for use by your local Edward Jones financial advisers. Edward Jones and its advisers do not provide tax or legal advice. Tina DeWitt, Cassie Alimonos, Charlie Wick, Kevin Brubeck, Dolly Schaub and Chris Murray are financial advisers with Edward Jones Investments. They can be reached in Edwards at 970-926-1728 or in Eagle at 970-328-4959 or 970-328-0361.
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