How to Brace for Uncertain Times

By: Sarah Hughes, Senior Vice President, Private Client Advisor

During these challenging economic times, people are certainly spending more time at home—carving out work spaces rather than commuting to offices, preparing and eating meals in rather than dining out at restaurants, and creating new sources of indoor and outdoor entertainment rather than taking family vacations. 

Brace for Uncertain Times
Most people would agree that the uncertainty surrounding their careers and current lifestyle choices is still a cause of daily concern and the primary reason for cutbacks on their personal spending. But if there’s a silver lining to be found in these unprecedented times, it’s that many Americans are saving money in record amounts for the unknowns that may lie ahead. 

Perhaps you find yourself thrust into a “forced savings” situation too—one where you have more disposable income because there’s less to spend money on right now. Or perhaps you’re being conservative with your spending because of the unknown. Either way, sidelining your excess cash isn’t necessarily a bad thing.

However, cash that isn’t working for you could be working against you when you consider the effects of inflation. It helps to have a cash strategy to get you through the good times and the bad—but unfortunately there’s no “one size fits all.” Having a cash flow plan in place helps define your goals, manage your cash, and protect your finances. Hopefully, the following tips can serve as a guide.

The first step in creating (or updating) a cash flow plan is to review your monthly budget—then stick to it. Many individuals at all income levels are maneuvering job uncertainty right now. The income, bonus, and raise you plan on today could be downsized or eliminated with little or no notice. A budget that tracks annual spending helps you separate essential expenses from discretionary ones. Should you find yourself with less disposable income at some point, you can more easily see the discretionary areas where you can cut back if needed. 

Next, make sure you have an emergency savings account built up to cover job loss, an emergency, or shortfall in expected income. “It’s important to set aside three to six months in cash for a salaried worker and six to twelve months or more for a self-employed worker or business owner,” recommends Koji Watanabe, Vice President and Senior Financial Planner at Commerce Trust. Do not combine these emergency funds with existing checking, savings, certificates of deposit (CDs), and money market assets. 

Deposit enough cash in the emergency account to cover your day-to-day expenses such as food, clothing, medical, and transportation. Put in adequate funds to cover regular monthly payments such as your mortgage and utilities. Also, you might want to have ample cash in the account to cover deductibles for insurance—car, health, and homeowners—should you need to file a claim. The amount of cash in the emergency account should be tailored to your needs—and your family’s—based on your lifestyle. 

Investors should consider keeping their emergency fund cash separate from the cash kept in their portfolio to take advantage of new investment opportunities without having to sell existing investments and potentially create a taxable event.2 

For example, this might be a good opportunity to use extra funds to replace 401(k) contributions that may have been reduced or cut by your employer because of the economic downturn. With the extra cash on hand, you could increase or maximize your contributions to your IRAs and other retirement and investment accounts. 

Rather than using funds in your savings account for a large purchase, you may want to establish a line of credit instead. It’s one way to access cash and continue to enjoy low interest rates when you want or need to buy a big-ticket item. Borrowing against the equity in your home or non-retirement investments can provide for short-term cash needs if you choose to put your extra cash to work in other ways. 

Paying off debt vs. investing extra cash is a personal choice based on your unique situation. If you’re debt averse, it may give you peace of mind to reduce debt even when your finances could benefit more from investing the cash. However, if you can earn more by investing the money than you would pay in interest on the debt, it’s better to invest. Likewise, if the interest on your debt is more than you would earn through investing, you should consider paying off the debt. 

Houzz, an online home remodeling platform, reported a 58% annual increase in project leads for home professionals in June 2020. You may want to consider a remodeling or home improvement project that will add equity to your house in the long term and provide enjoyment for your family now.

If so, consider this: The old adage that “cash is king” may not hold true in a low interest rate environment. If you’re able to invest your cash and earn 8% while borrowing for a home loan at a lower percentage rate, it’s more advantageous to borrow for the purchase and invest the cash, earning a higher interest rate. Even a small difference between borrowing rates and interest on earnings can benefit your portfolio. 

As we mentioned earlier, many people are navigating difficult, challenging employment issues these days. If your employer is scaling back with pay and benefits, it might be a sign that job loss is not far behind. Keep an open mind, a positive attitude, and consider looking for other career opportunities while you still have a job.

These considerations are just a few of the many ways to maximize and manage your excess cash within a cash flow plan. Contact Commerce Trust today. Together we can explore a variety of options for cash management solutions and help you make educated decisions based on your goals and unique financial situation.

1 Maggie Fitzgerald, “U.S. savings rate hits record 33% as coronavirus causes Americans to stockpile cash, curb spending,”
2 Consult your tax advisor

The opinions and other information in the commentary are provided as of October 20, 2020. This summary is intended to provide general information only, and may be of value to the reader and audience. 

This material is not a recommendation of any particular investment or insurance strategy, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified tax advisor or investment professional. While Commerce may provide information or express opinions from time to time, such information or opinions are subject to change, are not offered as professional tax, insurance or legal advice, and may not be relied on as such. 

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. 

Commerce Trust is a division of Commerce Bank.