The Beauty of Cash

I have long admitted my love affair with a much-maligned asset class: cash and cash equivalents. No, not the physical stuff, though I am old enough to still cling to a few dollar bills, but a boring account which provides the utmost security when bad times arrive.

A spring survey released by the National Endowment for Financial Education (NEFE) found that 88 percent of Americans said the pandemic is causing stress on their personal finances. Top among those stressors was not having enough saved for emergencies. That’s not surprising, considering that pre-Covid 19, an alarming number of people lived perilously close to the financial edge. A Federal Reserve report found that 4 in 10 adults would have difficulty covering a $400 unexpected expense.

The sudden onslaught of the pandemic and its ripple effect throughout the economy has underscored fragilities in our financial lives. Chief among those is the inability for many Americans to adequately fund an emergency reserve account. While some live paycheck to paycheck, others have the wherewithal to save, but for some reason, the boring old rainy day fund never gets the love that it deserves, especially when the economy is in a good place.

Establishing an emergency fund is the most important step Americans can take to prepare for a recession according to CPA financial planners. In a May Survey conducted by the American Institute of CPAs (AICPA), 84 percent of CPA financial planners put establishing and building an emergency fund in their top three priorities to prepare for the worst.

I have heard from many of you, wondering if my advice has changed regarding the emergency reserve funds, the answer is, it has not. I recommend that workers keep 6 to 12 months of living expenses (1-2 years if you are already retired), in a liquid, accessible cash-equivalent account, like a savings, checking, money market or a short-term (less than a year) certificate of deposit. I do not consider access to a home equity line of credit or loan as an emergency fund, nor do I believe that a taxable brokerage account that is fully invested in stocks, bonds or other financial assets, can serve this purpose. I am talking about plain vanilla, folks!

Early in the crisis, many of you wrote in to ask whether emergency reserve funds at various financial institutions were safe. Now that your rational brain is ready, here’s a primer/reminder about the Federal Deposit Insurance Corporation (“FDIC”), every saver’s favorite backstop. The FDIC is an independent agency of the government, which protects assets, including savings, checking, money market deposit accounts and CDs, up to $250,000 per depositor, per insured bank, in the unlikely event of a failure. The agency proudly boasts: “Since the FDIC began operations in 1934, no depositor has ever lost a penny of FDIC-insured deposits.”

For more on how FDIC coverage is applied to individual, joint, retirement, and business accounts, go to fdic.gov and to determine if your bank is FDIC-insured, use the FDIC's BankFind tool, which provides detailed information about all FDIC-insured institutions, including branch locations, the bank's official website address, the current operating status of your bank, and the regulator to contact for additional information and assistance. One important note: The FDIC does not cover investments or life insurance products, even if they are sold through an arm of an FDIC insured bank.

Credit unions provide similar FDIC-like coverage through the National Credit Union Share Insurance Fund, but a different entity backs up money in a brokerage account: the Securities Investor Protection Corporation (SIPC) provides limited coverage in the event that the firm goes broke. SIPC covers up to $500,000, including up to $250,000 for cash equivalents. However, SIPC does not cover unregistered investment contracts, unregistered limited partnerships, fixed annuity contracts, currency, and interests in gold, silver, or other commodity futures contracts or commodity options.

I love my emergency reserve fund and want you to love yours too, even when the economy is seemingly strong and it feels like a “waste” to have the money earning rotten interest. When the next crisis comes, either systemic or personal, you will be happy to reacquaint yourself with the beauty of cash.