Are You Prepared for a Financial Emergency?
By Saghir Aslam
Rawalpindi, Pakistan
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
Mother Nature certainly has grabbed her fair share of headline the past few years. From blazing wildfires in California to devastating floods in the Midwest, from massive hurricane along the coasts to sweeping tornadoes across the Plains-millions have been effected by the recent natural disasters in the US.
Less headlines-worthy are the financial repercussions following natural disasters and the cash difficulties tens of thousands of families are dealing with as a result. These catastrophes are unavoidable-and often there’s little time to prepare before disaster strikes homes, families, and communities.
With this in mind, ask yourself this question: “What’s the biggest threat to my financially stability?” Job loss likely comes to mind, perhaps followed by a serious illness or a natural disaster. But, lack of cash flow and liquidity management should make the list too- and it’s an ongoing challenge rather than an isolated event.
Consider cash flow and liquidity management a tool, not a goal
More than just tracking your income and spending, cash flow and liquidity management is also about planning for unexpected cash needs. Without proper planning for an emergency, you might have to round up all your available cash or liquidate a long-term investment. However, liquidating could disrupt your investment (The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities) plan. For example, retirement account assets may be subject to tax penalties for taking non-qualified distributions prior to retirement. You might do better keeping those assets invested to potentially generate a long-term return-and you overall wealth strategy intact.
It’s important to keep in mind that cash flow and liquidity management planning is complementary to investment planning. Not only does cash flow and lucidity management allow you the flexibility to access money in the event of an emergency, it’s a defensive tool to help ensure your investment plan is well positioned and not disreputed.Here are the steps you should consider as part of a cash flow and liquidity management plan to help protect your loved once and keep a natural disaster from becoming finical catastrophe.
- Set up an emergency account
In addition to accounts where you currently keep cash assets (including checking, saving, certificates of deposit [CDs], money markets,or other cash alternative), fund an emergency account as part of your cash flow and liquidity strategy to help protect all your assets. Set aside enough to cover three to sixth month of expenses (the right amount for you will depend on your risk tolerance). Keep cash in hand in case your area loses power and ATMs are out of commission.
- Review your short-term payment needs.
Understanding when you will need to draw on your money is key to an effective plan. Establish a strategy to cover your day-to-day expenses. Your cash for short term expenses should be very accessible, perhaps in a checking or savings amount. For longer –term expenses that reoccur on a regular basis, such as property taxes, you may wish to consider a less liquid investment typically offers a slightly higher return than a regular checking or savings account and you can manage the payout schedule to around the same time you will need the money . Generally, CDs are may not be withdrawn prior to maturity. CDs are FDIC insured up to $250,000 per depositor per insured depository institution for each account ownership category. There are other more sophisticated solutions available where appropriate to help you meet your cash flow and liquidity needs, and we suggest you discuss these with your financial advisor.
- Establish a line of credit for ready access to cash and, if used, pay the funds back with an appropriate source when the timing is right.
Borrowing against non-retirement investments, the equity in a home, or other approaches can provide for short-term cash needs if your emergency fund does not stretch to meet all your expenses. These strategies help prevent disruption to your long-term investment plan and can help keep you on track to meet your investment goals. A line of credit can also help you avoid dipping into retirement accounts too early. Depending on your situation and the type of retirement account, it may expose you to potential tax consequences.
Be aware, costs and risks are associated with any borrowing decision, so it is important for you to seek good, objective guidance. Your financial advisor can help you being the process of determining what type of line of credit option is the most suitable for you.
Life brings expected and unexpected events-an important part of every investment plan is identifying where to access cash when you need it. Talk with your financial advisor about managing your cash flow and liquidity needs.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr. Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr. Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr. Aslam does not have anything for sale.)
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