If you have been watching the news lately you may be wondering if your cash is safe. Watching the country’s 16th largest bank collapse causes people to question whether the banking system is set up to ensure that funds are accessible.
On this episode of Financial Symmetry, we’ll discuss what happened to Silicon Valley Bank, examine how much cash you really need, and explore options for managing your emergency fund. Listen in to learn how to safely manage your emergency fund.
Outline of This Episode
[1:34] What happened with Silicon Valley Bank
[4:40] How much cash do you really need?
[7:50] How to manage your emergency fund
[15:31] Create your own plan
Is your cash safe?
The collapse of Silicon Valley Bank may have you asking what happened and if your money is safe.
The typical Silicon Valley Bank customers are tech companies and investors. All banks make money by investing the funds they are charged with holding. SVB invested their customers’ funds by buying long-term treasury bonds and mortgage-backed bonds. Since many tech companies are experiencing financial trouble, they began withdrawing funds rapidly. When SWB customers withdrew $42 billion in one day, the bank had to sell their bonds at a loss due to rising interest rates.
The good news is that the federal government has guaranteed the SWB deposits. The FDIC insures bank accounts up to $250,000. While it is important to understand that your cash is safe in your bank account, the same does not apply to funds invested in securities.
How much cash do you really need?
Unfortunately, the only answer is: it depends. Everyone should have an emergency fund, but the amount you should have varies depending on your income, goals, and stage of life. A good rule of thumb is to have 6 months of expenses set aside, but the specific amount that you need to have on hand depends on your financial plan.
A financial advisor can help you analyze your situation and help you come up with an appropriate financial plan and decide how much and where to stash your emergency fund.
How to manage your emergency fund
Once you decide how much you need to have set aside for emergencies you can decide where to save your money. There are four common places to store your funds.
Savings account – On the plus side, a savings account offers easy access to your funds. However, interest rates are lower, so your money may lose value over time.
CDs – CDs offer higher interest rates and they’re easy to set up. CDs are invested for a set period of time–typically 3, 6, or 12 months. On the downside, there are fees for early withdrawal and you also have to decide what to do when the time period is up.
Treasury bills – Treasury bills have better interest rates than CDs. Setting one up can be challenging to do on your own if you deal directly with the government. On the plus side, they aren’t subject to state income taxes.
Short-term bond fund – If you have a longer time frame before you need to access your emergency cash, you may want to consider a short-term bond fund. They typically mature in one or two years. Your cash may not be available immediately; it could take one to three business days to access. You may also struggle to see the values change on a daily basis.
If you have been wondering what to do with your emergency fund, let us help you. There are so many layers to work through. We can help you understand your cash flow, net worth, and even help you plan your estate. We help our customers think through all their options so that they understand how to invest for the short and long term.
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Chad Smith
Chad Smith is a Certified Financial Planner™. He is an active member of NAPFA, the Financial Planning Association, and FPA’s NexGen. He has been quoted and appeared on WSJ.com, Bloomberg.com, Businessweek.com, Msn.com, Financial Planning Magazine, Triangle Business Journal, and Investment News.
![avatar](https://www.financialsymmetry.com/wp-content/uploads/Mike-Team-ID-215672.jpg)
Mike Eklund
Mike Eklund is a CERTIFIED FINANCIAL PLANNER™ practitioner. In addition, he has an MBA in Finance and the Chartered Retirement Planning Counselor designation. He is an active member of NAPFA, is the co-host of Financial Symmetry’s podcast, and has been quoted in various industry publications.