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Do You Have a Plan for Your Emergency Cash?

A smart cash strategy is as important as a smart investment strategy. Here’s how you can develop one.

MANY OF US THINK LONG AND HARD about how to invest the money we put away for our future, working with an advisor to develop personalized strategies that can help us pursue our long-term financial goals. But few of us also stop to think about how we’re managing the money we need to keep on hand to cover emergency expenses—like an unexpected lay off or illness in the family.

Nothing has highlighted the importance of having an emergency fund more clearly than the financial effects of the pandemic on so many people’s lives this year.

Nothing has highlighted the importance of having an emergency fund more clearly than the financial effects of the pandemic on so many people’s lives this year. But there are plenty of reasons, besides emergencies, to keep a reserve of cash on hand, says Rachel Scholl, director of Wealth Management Lending Strategy Execution at Bank of America. “You may need to pay for private school or college tuition, or a wedding, for instance, or to buy a second home or even cover a large tax bill. Having a thoughtful strategy for managing the cash you can tap for short-term and intermediate needs like these can play a crucial role in preserving the value of your long-term investments—and even save you money in the long run.”

Your financial advisor can help you develop a cash strategy that’s every bit as personalized as your investment strategy, one that allows the cash you keep on hand for emergencies and unexpected expenses to earn as much as possible—a key concern in a low-interest environment. And in the event that you don’t have enough cash on hand, your advisor can suggest alternatives that limit the costs and fees that you might otherwise be charged. To get started on your own emergency cash management plan, Scholl suggests asking your advisor the following three questions.

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To preserve your finances against a crisis such as a job loss or unexpected expense, you should always have several months’ worth of cash on hand—or easily accessible assets that can be quickly converted to cash if needed.

To figure out how much you need to set aside, review several months’ worth of expenses and income with your advisor.

You’ll want to keep enough to cover three to six months’ worth of everyday expenses, or even more, depending on your industry and whether you’re the sole wage earner in the family, says Scholl. That’s in addition to the money you might need to pay any big expenses that could come up during that time period—for instance, a large tax bill. These assets should be held in cash or cash equivalents such as CDs or money market accounts, Scholl adds, so that their value won’t be affected during a market decline. “You want to avoid disrupting your investment strategy by selling equities to meet your short-term needs. Doing so could trigger capital gains taxes, as well as disrupt your investment strategy,” Scholl explains.

To figure out how much you need to set aside, review several months’ worth of expenses and income with your advisor, making sure you’re accounting for additional income streams like, for instance, Social Security. (Merrill clients have access to a handy Spending & Budgeting calculator that can help you streamline the process by automatically capturing and categorizing expenses. Ask your advisor where to locate it.)

TIP: If you have college tuition expenses coming up, or you’re nearing or already in retirement, you may want to consider an even larger cash cushion, so that you won’t be forced to take large withdrawals from your retirement savings during a market downturn.

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The portion of your cash earmarked for emergencies should be in an account that offers little or no investing risk, says Scholl. Talk to your advisor about a money market or preferred deposit account, both of which are FDIC-insured up to $250,000 and may offer a higher interest rate than a regular checking or savings account.

Like savings accounts, CDs are also FDIC-insured up to $250,000.

Your advisor may also recommend moving a portion of your assets reserved for intermediate or longer-term cash needs into conservative investments such as short-term bonds, money market mutual funds, or certificates of deposit (CDs). “You could create a CD or bond ladder—in other words, invest in CDs or bonds with different maturity dates in order to take advantage of the progressively higher interest rates that longer term accounts offer,” notes Scholl. Like savings accounts, CDs are also FDIC-insured up to $250,000.

TIP: Understand your risk and decide what trade-offs you’re comfortable making. While bond and money market mutual funds do carry a small amount of market risk and they’re not FDIC insured, they may offer higher yields than CDs and money market or savings accounts. 

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If you need a short-term cash infusion—say, because you’re faced with a large unexpected expense or you’re considering buying a home—you may need access to more cash than your emergency fund would provide. In that case, your advisor might recommend a Loan Management Account® (LMA® account), which allows you to borrow against the value of your investment securities.

A home equity line of credit can provide a good solution to a short-term cash need so that you don’t have to sell investments.

“We had a client who wanted to make an all-cash offer for a home in a very competitive, fast-moving market,” recalls Scholl. “She used an LMA to access the funds. Then, after closing on the home, she secured permanent cash recapture mortgage financing and repaid the LMA loan. That way, she was able to keep her savings invested in the market, and she avoided paying capital gains taxes that would have been triggered by selling investments.” As with any loan, Scholl points out, it’s worth remembering that you pay interest on an LMA account, and if the value of your investments falls below a certain amount, you’ll need to repay a certain amount right away.

A home equity line of credit (HELOC) can also provide a good solution to a short-term cash need so that you don’t have to sell investments, says Marie Imundo, director, Mortgage Strategy and Execution, Global Wealth and Investment Management, at Bank of America. “One client, for instance, drew on his home equity line of credit to cover his daughter’s $50,000 college tuition bill. He’d been planning to sell his home and was able to pay off the loan when the sale closed several months later, which was well before the interest rate adjusted.” While variable-rate HELOCs carry some interest-rate risk, you may be able to convert your outstanding balance to a fixed rate until you’re able to repay, notes Imundo.

TIP: Keep in mind that a new HELOC requires some advance planning, since you’ll usually need to get a home appraisal first. Once the line is established, however, you’ll have cash available if and when you need it throughout the draw period of the loan.

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The Loan Management Account (LMA account) is a demand line of credit provided by Bank of America, N.A., Member FDIC. Equal Opportunity Lender. The LMA account requires a brokerage account at Merrill Lynch, Pierce, Fenner & Smith Incorporated and sufficient eligible collateral to support a minimum credit facility size of $100,000. All securities are subject to credit approval and Bank of America, N.A. may change its collateral maintenance requirements at any time. Securities-based financing involves special risks and is not for everyone. When considering a securities-based loan, consideration should be given to individual requirements, portfolio composition and risk tolerance, as well as capital gains, portfolio performance expectations and investment time horizon. The securities or other assets in any collateral account may be sold to meet a collateral call without notice to the client, the client is not entitled to an extension of time on the collateral call and the client is not entitled to choose which securities or other assets will be sold. The client can lose more funds than deposited in such collateral account. The LMA account is uncommitted and Bank of America, N.A. may demand full repayment at any time. A complete description of the loan terms can be found within the LMA account agreement. Clients should consult their own independent tax and legal advisors. Some restrictions may apply to purpose loans and not all managed accounts are eligible as collateral. All applications for LMA accounts are subject to approval by Bank of America, N.A.

Before taking out any mortgage or line of credit, borrowers should consult their tax advisor to understand the implications of each of their options.

Banking, mortgage and home equity products offered by Bank of America, N.A., and affiliated banks, Members FDIC and wholly owned subsidiaries of Bank of America Corporation. Equal Housing Lender. Credit and collateral are subject to approval. Terms and conditions apply. This is not a commitment to lend. Programs, rates, terms and conditions are subject to change without notice.

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