This is the first of a “Back to Basics” Financial Planning Series that is meant to start from the very ground floor of basic Financial Planning and build on to more advanced techniques and strategies.
The goal of this series is a course like experience in Financial Planning that will touch every step in the process in order of importance. When complete, we will be adding Video’s and making into a full planning course/workshop.
Those of you that are long time clients have likely heard much of this before but may get an occasional reminder.
If you know someone (kids, friends, relatives or the like) that may find this series useful, we ask you share, much like we did with the stimulus explanations during the pandemic, we are using our venue to give back and help as many as possible, while hopefully having fun and keeping a sometimes, boring subject matter, educational, and entertaining!
Without further ado … we begin the series with the most important primary foundation step of the Financial Planning process:
Meet the Emergency Fund
An Emergency fund is just what it sounds like, a non-investment, non-risk, extremely liquid savings account, without worry that is available at a moment’s notice. In our current environment of low interest rates, this fund is likely earning a low interest rate. That is fine, safety and liquidity are most important for this fund. Do not stretch to earn extra return on these funds, as this could lead to it not being there completely when you need it most… Return and risk are directly related and we are in a very low rate environment currently.
3-6 Months Expenses
The general rule for an emergency fund is 3 to 6 months expenses but there are many situations that may make this vary greatly on a case-by-case basis.
Here are some examples that may cause families to desire more than 6 months Emergency Fund
- Income fluctuations – such as 100% commissions, or volatile income years – you know who you are, keep extra to avoid the stress in the down years
- Occupational risk – if you are concerned about losing your job, get that emergency fund very healthy
- Large purchase on the horizon- New asset, or known large expense, larger amount may be necessary
- Sleep Well – If you need a larger than 6 months cushion to sleep better, NO PROBLEM, good is what will allow you to sleep well.
Low End Emergency Funders
On the other side of this are folks with very stable lives, possibly with multi family incomes. You may feel comfortable on the lower end of the 3 to 6 months. Other examples are those with very low overhead and stable expenses as far as the horizon can see you may error on the lower end. Lastly those with less or no dependents would also be a candidate for the smaller end of the emergency fund.
If your situation changes for some reason, prepare to increase, too low of an Emergency Fund leads to short term credit situations, stress and just a much less fun day in day out way of life!
There you have it, the General Rules of the Emergency fund, the fund itself, and examples of reasons to keep it higher or lower!
See … that was not that bad, Next Up in Part 2, Protection Planning!
Have a Great “First in Series Emergency Fund” Day!
John A. Kvale CFA, CFP
Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Management firm.
$treet-¢ents 
Why Source of Funds May Determine Entrance into Capital Markets
Before we jump into this post we know that in 5 to 10 years our starting point hardly matters.
We also know that we’re all human and we like to get off on a good start in anything that we do, especially when it’s dealing with our hard earned capital!
What follows is our belief of the best possible way to get started on good footing, and keep a positive investment allocation.
There are always outliers and unique events – this is a template, and loosely the starting point for funds entering the capital markets … but by no means a written in stone … exact map.
Let’s start with the easy
New investment dollars that came from … say the backyard … under your sofa … your overfilled emergency fund, or some other super safe and stable asset class . … almost certainly should be work into Capital Markets over time.
Depending on the situation, the amount, the time horizon … the time frame may vary from months to quarters or even longer depending on the situation to gain entrance to the Capital Markets …
A typical scenario would be to divide the time frame into equal parts and allocate over that period of time.
The goal is to take advantage of the ups and downs upon entrance into the Capital Markets ….
Funds such as 401k rollover’s, current investment portfolios that are moving from one pocket to another most certainly do not need this staggered entrance into the capital markets as they were invested already.
An accurate statement can be “If it just came out of the capital markets it can go back into the capital markets” even though it may be cash today.
Here are the gray areas
Of course there are gray areas that need judgment…
A large block of stock options sold. The funds where IN the Capital Markets but depending on the size and the situation, it may not make sense for these funds to be moved directly back into the capital markets all at once.
A sudden liquidity event such as the sale of a business – yes in essence it was in a investment that had volatility similar to the capital markets, but in most cases, risk reduction is desired and a staggered entrance along with a conservative allocation may be the best.
Inheritance..
It all depends on the form?
Some inheritance come in the form of cash … others may come in the form of investments that are already invested – again depending on the situation, it may make sense to stagger entrance, or it may be just fine to continue the allocation or even re-allocate in one swoop.
Bottom Line, there is no exact way for all situations, but there are ways to go without raising the blood pressure!
Have a Great “Good Entrance Capital Market” Day!
John A. Kvale CFA, CFP
Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Management firm.
jkfinancialinc
street-cents
-96.808100
Share this:
Like this:
Leave a comment
Posted in General Financial Planning, Investing/Financial Planning, Market Comments, Why
Tagged Dollar Cost Average, Emergency Fund, Inheritance, Source of Funds, Stock Options