August 2024
Modearn™ Advisors Kevin Rex and Thao Truong discuss smart ways to help you balance investments and liquidity, the best accounts where you can store your cash, and how much you should save in your emergency fund for those unexpected situations.
Here are some key takeaways from their conversation:
• If you’re in your wealth building years, it’s important to have your investments grow through compound interest while ensuring you have access to liquidity for emergencies.
• Kevin shares his perspective on having “access” to cash by using a Home Equity Line of Credit (HELOC) while still maximizing the growth potential of his investments.
• A general rule of thumb for emergency funds is they should cover 3 to 6 months of expenses. Thao says it is important to understand your individual needs, circumstances (like job stability) and monthly expenses when determining the size of your emergency fund.
• For short-term needs, Thao and Kevin suggest high-yield savings accounts, which offer immediate access to cash while earning interest.
• For funds that won’t be needed for some time, CDs can be a good option as they offer higher interest rates but come with a lockup period. Investment accounts (stocks, bonds, mutual funds) are also a good option for funds that won’t be needed for several years; however, they come with volatility risk.
• Treasuries can be more flexible than CDs as they can be sold before maturity before penalties and offer competitive interest rates without state income tax. However, their value can fluctuate with market conditions.
Watch previous episodes:
Invest in Your Career: How to Maximize Your Benefits
Buying a Home vs. Investing in Property
Hi there, and welcome to Modearn by Morton's Couchside Conversations. I'm Kevin Rex, and I have my colleague talking wrong here. We're going to talk about cash management emergency funds really all things cash. I'm excited to have this conversation with you today.
Thank you Kevin, thanks for having me.
It's going to be fun.
So, Kevin, if I am a new wealth builder between having a large investment account and have little cash flow emergency versus having a lot of cash on the side for emergency and having a little small investment account, which of the two ways that you would prefer.
So where you're at in your life matters. And so the question of if you're a wealth builder, you want to have as much invested as possible. You want to have your investment accounts growing because as we know the compounding effect, it only is powerful if you have time. And so for those young people out there that are building their wealth, having as much invested is the key.
Today we're talking about cash management. So what we need to understand though is what about having access to capital. Because if you have a large investment account and small emergency savings, what happens if something goes wrong? And so for me it's about having access not so much just cash but access to liquidity.
Right. So there are a lot of people out there would recommend any new starter to save up for us for emergency fund here. We're talking about it a little bit different. Can you please explain a little bit more about what does it mean to you for having access?
Yeah, I think the book will tell you you need 3 to 6 months of an emergency fund. And I think there's so many factors that go into it. But for me personally and for a lot of my my younger clients, it's not emergency funds as in cash sitting on the sidelines. It's against access. So where do you go if you lose your job?
If you have an emergency like a water leak in your house, or you need access to capital, and that can be different than just a savings account. So personally we use a HELOC. We have a key lock on our home. And that's part of our liquidity access.
So can you explain a little bit more about what is a HELOC?
Yeah. So HELOC stands for home equity line of credit. It's a mortgage. The equity of our home that we can tap into. And my philosophy behind that is rather than having money sitting in a bank, I would rather have that money invested in knowing that I have 3 to 6 months of equity that I can tap into from this line of credit, the people will argue oh a line of credit, they have a huge, you know, interest rate. It's going to be expensive. We have the capital. But rather than have it sitting there, we would rather use the line of credit for a short term bridge. Again, fix a water leak, buy a new car, something that you know, maybe not buy a new car. Not so much an emergency, but something where we need to access capital quickly and then have time to sell different assets that are earning more to pay that off.
So rather than sitting in cash earning, you know, even now in today's environment, we're earning 5%. So it's not bad. It's not like it was a couple of years ago. But being able to have access- credit cards are another big one. I don't recommend people just, you know, spending on credit cards as needed, but that is an ability to access capital if you need to put something on a credit card short term, that's a way to do it.
So I'd rather use a credit card short term and have my money working for me long term.
I see. I think there is a misconception out there that people thinking that having a HELOC, meaning you will have to pay an interest rate on it. And I know that is not true. Right. Because it basically looks like having an extra credit card on your side. And it depends on the term. You will have to do the research.
Some of them may have like a cost to it, an annual fee to it, but a lot of time if you don't need to tap into it like, you don't have to really paying anything. But if you do, you have to also do the research to make sure that, you can keep up with the interest rates because the rates on these HELOCs, most of the time they are variable rate.
And then one other thing to access that I benefited from is having the ability to tap in to the bank of mom and dad. Right. It's a safety net. It was never something that we want to do. But in the back of my mind, I could be more aggressive knowing if anything ever went wrong.
Yeah, we can have my parents bail us out over a short term period. Again, not a strategy, but having that allowed me to make different decisions. And I know your situation is different where, you know, not only have mom and dad to bail you out, but you actually are supporting your family. So what does that look like for you?
Yeah, exactly. So for me, I cannot really think of my mom and dad as my second plan, plan B, so I do really have to account for the monthly expenses that I give to them as my necessity expense. And when I talk about a needs bucket is, you know, what we talk about building up an emergency fund of 3 to 6 months by the book, or something along that idea.
You know, you have to kind of step back and assess what are some of the monthly bills that you have to keep up with, regardless of the income level that you're bringing in? You will still have to meet those.
The bills. Exactly. So I have to call my parents' gifts as the necessity because they wait for me on that monthly paycheck. Right. So knowing what you need is super important because if you have a pay cut or you lost your job or some things go wrong, it's very easy for you to cut back on the Disneyland trip.
Extra shopping, extra dining out. But it's a lot harder for you to cut back on your rent payment, your electricity payments.
Exactly, exactly. So knowing what is your needs? What is your want is super important for you to scale back and think of how much cash you have to put aside for the emergency.
Yeah. And I think one other point to that is how stable is your profession. So I think one of the biggest risk is us losing our job. And you and I are very fortunate. Morton. We have a stable career. We have a stable company, but not everybody has that. If you know that at any point you could get fired.
Or maybe you're a sole proprietor, you own your own business and things can change pretty quickly. Your whole family depends on your income. If that's the case, having a larger emergency fund or having a larger access to capital is more important in that situation than in our situation.
Right. And I think also to people who are closer to retirement age, who now is depending on that paycheck from your own personal fund, then it may make them feel safer to have a larger emergency fund than people like us who are still making money and things are more stabilized.
So I think the first point of understanding how much you need in an emergency fund, or at least access to capital based off of your spending, based off of job stability and other life circumstances. So I think that's the first step. Let's talk a little bit about okay, I need 3 to 6 months. What do I do with that cash.
What are some of the best strategies or options that you're recommending. Where to save that money, invest that money over a short period of time or even a longer period of time.
Right. So right now, for the first time in a very long time, that cash actually paying back. But I guess you have to also know the market a little bit because cash always pay so high like this. Right. So now just putting the money sitting in a bank saving account, you can still earn five plus interest rates.
Yeah. I know some people their savings accounts are still 1 to 2%. So I think it's important for people to take a look at that because just because it's in a savings account doesn't mean it's a high earning savings account or a money market account. So I've had a couple clients like, yeah, I'm earning, you know, 5%.
And they go look. And they're actually not so exactly important to know what you're earning on that savings account.
So make sure you talk to your bank and make sure that you, talk to them. And knowing that account exactly is earning an interest rate because otherwise a lot of bank they want you to open a new savings account, move the money over into that high yield savings so that you can earn that extra money. Yeah. So back to the previous point where we talk about how well we can put our cash, right.
So I think knowing what purpose you need, what purpose you have for those money. Right. Whether you're saving for a house down payment, or you're saving for a new car or you're going to need that money in one, two, three months, each of those, you can put it into a different buckets. And the liquidity for each of those bucket can varies.
Right. So for example, if you say that you going to need that money in three months for a car payment, then I would not really I'm not going to invest that money. I'm just going to put it in like a saving account, right? Separate saving and checking so that it's less easy access. You can touch it. Yeah, exactly.
But let's say that if I know that I have five years before I touch this money, that five year is how much time I need to save up for my downpayment, then maybe I can consider a CD, something with a longer term.
One mistake I see a lot of people do is they put their emergency fund in a CD without knowing that usually there is a lock up period for a CD, right? So if you take the money out before that one year locked up, you will have to pay for a penalty. So it's kind of wash out your interest.
You know that they promise you. So be really careful on that.
Yeah. And I think it's important if you're spending the money every single day- checking account. Yeah. If you don't need it for the next couple of days, you know, maybe a savings account if you have 3 to 6 months, something like a treasury, you know, maybe a CD, depending on where rates are and whatnot. And then as for me personally, as you get more than kind of nine months a year and beyond, you can take on a little bit more risk.
So it's important to understand the lock up and the risk has to go with the time frame. Right. I think timing is the most important thing. And kind of coupling that point with my first point in this conversation, if I don't need to pull the money in 3 to 6 months because I have other access, I can have those funds invested with a little bit more risk and a little bit longer-term time horizon, because I can float my needs with a credit card or, you know, my HELOC or some form of, you know, maybe mom and dad and if they're still going to give it to you.
But that way those funds can be making eight, nine, 10% rather than just 5% in a savings account. And so I think it's important for us to work with our clients and talk to our family and friends about maximizing as much return as we can, because as you talked about it from the beginning, we're in a growth accumulation phase.
As you get older, you know, maybe you have a little bit more in cash, a little bit more available to you. Because honestly, that time horizon gets shorter. But understanding the need, understanding the time horizon and then picking an investment vehicle, whether it be cash, treasuries.
You got to know the liquidity. How easy is it to get out of those investment? Or how is it easy to get out those savings or CD or treasury or whatsoever? The more time you have is, the more chance, like it's easier for you to take on more risk. Right? And if you tap into your parents' bank account, then make sure you have a conversation with them as well.
Yeah. So again, I think it's really important for us to maximize everything we can and our emergency fund savings is a part of our investment strategy and a part of our protection strategy for us and our clients.
Thao. Thank you so much. That was a great conversation and thank you for joining us. We'd like to finish up the episode by playing a fun little game called This or That. Thao and I have both prepared a question that we don't know, and we're going to try to put each other on the spot and see what we answer.
Okay, so the one I thought of is you get $5,000 from like a tax refund. Where do you put that money? Do you put it towards debt? Do you put it into your emergency fund or do you invest it?
Good question. I guess you got to step back and ask yourself what is the interest rate on your debts? Because if you have a low interest rate, for example, you get into a mortgage 2 or 3 years ago where your interest rate only 2% versus now just cash sitting in your savings account can pay 5%. That I would not pay down my debts, I would just leave it there.
I've put it into my savings account or investment account where I can earn higher return because of the disparity. The difference there I can have more than enough to pay back my debt, right? So however, if you have a large debt like a credit card debt of, let's say 26%, then I rather just pay that off because I know my investment not going to be able to bring me back.
So question for youm CD or Treasury bonds?
So I am actually pretty passionate about that. I would go with treasuries all day long. And in this environment right now treasuries are actually paying more than CDs. They're more flexible than CDs. And one of the benefits that I don't think a lot of people know is treasuries don't pay state income tax. And so when you think about higher interest, the flexibility being CDs, you talked about this in the episode where if you surrender them or you cancel them before they meet their maturity, you could lose all of your interest.
You could pay a penalty where treasuries, you can sell at any point. There is flexibility in pricing, but you can make money, you can lose money, but you don't ever pay that penalty, and you get that interest that you've accrued. So for me, I really believe in treasuries right now. I think they're the right place for cash.
Good point. A lot of flexibility I agree. So Kevin, I'm going to put you on the spot. I have a bonus question for you. Let's say that your group of friends is planning to go on a vacation to the favorite place that you would love to go to, or going to a concert, and you don't have the money for that.
Would you tap into your emergency fund?
Well, the honest answer. I would figure out a way to not miss out because my wife and I have complete FOMO. So we are going, would I tap into my emergency fund? My answer would be hopefully not, but I would finagle it to where I could use the money without it being into my emergency fund, so I'd find a way to not miss out and also feel good about my decision.
But I do not recommend that for anybody else.
Probably the credit card is the way to go.
For the credit card. Exactly. Or work harder and figure that out. But well, thank you for putting me on the spot. That was fun. I really enjoyed our conversation. Thank you for joining us. Hopefully you learned something about your cash management. We appreciate it and hopefully we'll see you again in future episodes. Wow.
