381: 5 Tips for Emergency Cash Management

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Learn 5 tips for emergency cash management.

Yesterday, one of my Be Wealthy & Smart VIP Experience members mentioned that her bank had experienced a DDOS computer attack and that the ATM machines were not working.

Here’s what she said:

Hey Linda! If you weren’t aware, a “technical issue” took down almost all of XYZ bank yesterday. More than 24 hours later, they’re still only partially back up.

Millions of customers (me included) have been unable to access their accounts. Debit and prepaid cards aren’t working and paychecks and tax refunds are missing. It’s a huge mess…and a big wake up call to many.

I’m actually ok. My paycheck hit early Thursday morning before the outage and my debit card seems to be working. I have some groceries and about $300 cash on hand. So I’m actually fine. Not happy, but fine. Any further suggestions on how to prepare for things like this in future? I know you’ve talked about it, just don’t remember where…

I have their accounts, plus another account at a completely different virtual bank (for emergency funds). But the only way to access the funds is via transfer to my XYZ accounts. Maybe open an account at another local bank and link the virtual bank account there too? And clearly, I need more than $300 cash on hand…please help!

Yes you do! Those are good questions and I’m sorry that happened to you, but I’m glad you’re being proactive to plan for a possible longer interruption of service.

I believe it is important to have a good amount of cash in your possession. Now you’ll want to know how much. That’s not easy to answer because it depends on how much you make and how much you spend on items like groceries, gas, medicines and other necessities (for example if you have babies, diapers are a necessity for you). I’d say have about 20% of a month’s income if you can. I also recommend having it in low denominations, not 50’s and 100’s, but 20’s, 10’s, 5’s and 1’s because it may be difficult to get change for purchases if there’s a cash shortage.

For example, a few years ago I went to Greece and it was during a banking crisis. They were limiting how much cash you could get per day from the ATM’s and cash was hard to come by. None of the restaurants would give us any change back for our purchases! They just claimed they didn’t have any cash and we were out of luck getting any money back. A $22 lunch ended up cost $40 because they wouldn’t make change.

You never know if someday we could have a problem with electronics either by hack, natural disaster, a bank holiday or some other reason. Don’t get me wrong, I’m not predicting the end of the world. I just think it’s part of smart planning to have cash on hand.

I also think it’s smart to diversify by account. Having a brokerage account is a good complement to a bank account because you have access to a money market, which you can use for savings, in addition to your investment accounts. It’s very easy to wire the money to your bank from a brokerage if you need to transfer funds.

Not having all of your money in one institution is a good idea. You never know what can happen. Remember during the financial crisis in 2008, banks like Washington Mutual were fine one day and in need of a bailout the next.

Remember, the Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250k per depositor.

A single deposit account is insured up to $250,000. Joint accounts are 50/50 ownership and insured up to $250,000 for each individual named on the account, totaling $500,000.

It’s Linda here. Just wanted to pause for a moment and ask if you knew Betterment is the largest independent online financial advisor with more than $10 billion in assets under management with more than 300,000 customers?

Their service helps to improve long-term returns and lower taxes for retirement planning, building wealth, and other financial goals.

Betterment’s tax coordinated portfolio can increase a portfolio’s value by an estimated 15% over 30 years.

Their annual advisory fee is only .25%, with unlimited messaging access to their team of licensed financial experts through a mobile app.

Of course, investing involves risk. For listeners of Be Wealthy & Smart, you can get up to 1 year managed free, visit Betterment.com/bewealthy.

Now that we’ve established opening a brokerage account in addition to your bank account, let’s talk about why people switch brokerages. According to IBD and Technometrica, 25% of investors have switched their online broker in the past 5 years, vs. 18% five years ago.

The main reason for switching is:

1. Cost – 39%. Clients are sensitive to fees and commissions.
2. Other – 21%. Not sure what that is, but we’ll come back to this.
3. Convenience – 16%. Ease of use.
4. Bad experience – 9%. Customers had bad service or a complaint with a representative.
5. Execution – 9%. Trades aren’t executed at the price expected.

Other – 21%. Not sure what that is, but I suspect it’s a catch all for everything else not mentioned above and could be research quality, etc.

Changes favored in the next year include:

Lower fees – 40%
Better research – 28%
Better buy lists – 26%

Wherever you decide to keep your money:

1. Diversify savings accounts by institution
2. Consider having an account at a brokerage firm in the mix
3. Keep a healthy amount of cash on hand
4. Keep a mix of lower denominations
5. Calculate how much you’ll need by thinking of how much you spend on groceries, gas, medicines, and necessities in a month or two.

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