Help Protect Your Ability to Save
Wednesday, February 13, 2013
What do you believe is the biggest threat to your ability to save for retirement, education funding or other big goals?
“Job loss” probably comes to mind first, but “lack of cash flow management” should rank higher — and it’s an ongoing challenge rather than a rare event.
More than just tracking your income and spending, cash flow management is about planning for cash needs, especially unexpected events.
“Without proper cash flow management, you might have to liquidate a long-term investment to meet a short-term need,” says Rick Gemberling, senior vice president, Lending & Banking Services Group at Wells Fargo Advisors. “Liquidating may meet that need, but you probably would do better keeping those assets invested to generate a long-term return — and to keep your overall strategy intact.”
Here are a few steps you can take now to help protect your cash flow:
Set up an emergency fund. Planning for the unexpected can be a real challenge. Gemberling says having an emergency fund is essential to protecting your cash flow.
“An old rule of thumb is to set aside enough to cover three to six months of expenses,” he says, “but the right amount for you will depend on your risk tolerance.”
Refinance your mortgage. Refinancing to take advantage of lower interest rates can lower your required monthly payments. You can use the difference to pay off higher-interest debt, build your emergency fund or feel more secure about meeting your savings goals for major financial priorities.
Monitor your budget. It’s a simple tactic, but it works: Keep track of your spending and update your budget regularly to reflect your current needs. You may find that certain expenses have changed, requiring you to adjust spending in other areas.
“We have a saying: If you’re not measuring and monitoring it, then you’re not managing it,” Gemberling says.
Building a Backup Plan
These three steps can help you better manage your cash flow. But it’s important to consider other sources of funds before your basement floods or your employer announces surprise layoffs.
Credit cards too often provide this supplemental liquidity, but their relatively high interest rates make them a costly choice.
“Credit cards are a great payment tool,” Gemberling points out. “But as a credit tool, they are not ideal.”
What may be a better alternative, Gemberling says, is to set up a line of credit with your bank or lender. Home equity lines of credit (HELOCs) and securities-based lines of credit both offer relatively low interest rates — often much lower than a typical credit card — but the same standby convenience.
As with a credit card, you pay interest only on the line-of-credit funds you access. But unlike credit cards, lines of credit are secured by collateral: a HELOC by a first or second mortgage on your home and a securities-based line of credit by your investments.
One important consideration: If the value of your home or portfolio drops, your lender may limit your ability to access that credit.
Even so, Gemberling recommends establishing a line of credit before you need one: “You may find it easier to qualify for favorable rates when you don't actually need the money.”
You owe it to your long-term goals to take the steps necessary to protect your cash flow. Having to forgo contributions to — or even withdraw from — your retirement account or rack up expensive credit card debt can ultimately do more harm than good.
“Being able to keep assets invested can have a huge impact on your quality of life in the future,” Gemberling says. “Proper cash flow management can protect you from having to even consider doing otherwise.”
This article was written by Wells Fargo Advisors and provided courtesy of Terry R. Campbell, Senior Vice President - Investments in Chardon at 440-286-2553.
Investments in securities and insurance products are: NOT FDIC-INSURED / NOT BANK-GUARANTEED / MAY LOSE VALUE
Wells Fargo Advisors, LLC, Member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company.