Globally, many view America at the peak of prosperity with limitless upward potential. This January marked the best January returns for the history of the stock market since 1987. February was equally lovely with investors hoping the US and China would reconcile and soon come to a trade agreement. Technology stocks rebounded well from their 2018 lows and the Federal Reserve committed to raising interest rates at a slower pace in 2019 than they did in prior year.
Many might assume that with all the good news, Americans are more prosperous than ever, but a recent study revealed that average American families are not nearly as financially secure as first thought. When examining American household spending, savings and debt ratios, the Center for Financial Services Innovation found that only 28% of Americans could be considered “financially healthy.” Such statistics are disturbing because financial health can impact family stability and upward mobility for generations to come.
The same study revealed that approximately 44% of people said their expenses exceeded their income in the past year and they were reliant on short-term debt vehicles like credit cards, to close the gap. Additionally, 42% of those polled said they had no retirement savings at all. Although the future is always uncertain, we are at a clear crossroads where the government is not in a position to fund public benefit programs like Medicare and Social Security for the long haul unless drastic changes to our government budget are achieved. Therefore, it would be naïve to count on government programs to provide substantial retirement benefits for Millenials and generations to follow.
For these reasons, it is sound and prudent for every household to have a rainy day fund or savings reserved for the unexpected – a change in employment, an unexpected home or auto repair, a sudden drop in the stock market, etc. For single-income households, it is advised to keep six months’ to one year’s worth of living expenses in a highly liquid savings vehicle. For dual-income households, six months’ worth of savings may suffice under the logic that if one source of income is disturbed, the second income may carry the family over until normal finances resume.
Rainy Day Funds should be held in a liquid investment that you can access with ease in the case of an emergency. These days you can get a decent return on short-term CDs at your local or online bank. It may make sense to ladder the maturity of your CDs so that some matured funds are on the horizon regularly.
While 2019 appears to demonstrate strong economic growth potential, there is no guarantee that the market decline at the end of 2018 was the end of a down market cycle.
With savings in excess of your emergency fund, consider employing a diversified investment strategy that is built to withstand normal market cycles. A properly constructed diversified portfolio should aim to provide you with steady market returns over a long-term investment window by adding to your bottom line when the market is doing well and protecting you on the down-side if the market is contracting.
Reach out to your Certified Financial Planner ™ or CPA if you need a second opinion on your investing and saving strategy. Your financial professionals are built to serve as a financial sounding board and keep you on track during the good and not-so-good times.