Stocks and bonds seem to draw the most attention in an investment portfolio.
After all, these investment vehicles, and others derived from them, provide potential growth and income opportunities — which is why you invest in the first place.
Yet, you also may find significant value in a more humble financial asset: cash. You might be surprised by the various ways that cash, and cash equivalents, can help complete your financial picture.
Consider cash's uses:
• Unexpected expenses and emergencies: You’ll need sufficient cash for situations such as a job loss, a home repair or an unplanned medical expense.
During your working years, keep three to six months’ living expenses in a cash account designed to meet unexpected expenses. Once retired, you may be able to get by on a smaller emergency fund — up to three months’ living expenses, although you will need more for everyday spending.
• Specific short-term savings goal: Are you anticipating a big expense —a wedding, vacation or down payment on a new home — within the next few years? If so, set aside sufficient cash, with the exact amount depending on your specific short-term goal.
• Everyday spending: You’ll need adequate cash for everyday spending needs such as groceries, utilities, entertainment and mortgage or debt payments. While working, you will probably handle most of these costs with paychecks, but you may still need to set aside one or two months’ living expenses.
Once retired, though, it’s a somewhat different story.
While your expenses may go down in some areas (such as costs associated with employment), they are likely to go up in others (such as health care). So your overall cost of living may not drop much, if at all.
It may be a good idea to set aside 12 months’ living expenses, after incorporating other sources of income, such as Social Security and outside employment.
In addition, decide on the most efficient way of drawing other income sources, including Social Security and investment accounts such as an IRA, a 401(k), etc.
It’s especially important to create a sustainable withdrawal strategy for your investment portfolio because you don’t want to run the risk of outliving your money.
• Source of investment: You’ll want to have some cash available in your portfolio — perhaps 2-3 percent of the portfolio’s value — to take advantage of investment opportunities as they arise. Having even a small percentage of your portfolio devoted to cash can modestly improve overall diversification — and a diversified portfolio is your best defense against market volatility. (Remember, though: Diversification can’t guarantee a profit or protect against loss.)
So, there you have it: four key uses of cash. They provide some good reasons to keep at least a modest “stream” of liquid assets in your portfolio.
Joe Faulk is a Crestview financial adviser.
This article originally appeared on Crestview News Bulletin: FINANCIAL FOCUS: Here are cash's 4 key uses