What role should savings play in your financial plan?

Savings can provide a source of income, allowing you to achieve short-term spending goals and helping to protect you from financial distress during turbulent markets.

24 Mar 2020

Have you considered savings as a part of your holistic financial strategy? According to the UBS Chief Investment Office (CIO (PDF, 430 KB)), savings can provide a source of income, allowing you to achieve short-term spending goals and helping to protect you from financial distress during turbulent markets.

Savings strategies are part of a healthy Liquidity strategy

Savings is one part of a healthy approach to wealth management and works best in tandem with investing. Both are aspects of UBS Wealth Way, which helps you organize your financial life into three key dimensions: Liquidity—to help provide cash flow for short-term expenses, Longevity—for longer-term needs and Legacy—for needs that go beyond your own. Savings fits into your Liquidity strategy, and should be viewed as a tool in your toolbox of cash alternatives.

“The goal is to enhance the income potential of your Liquidity strategy, without risking these assets’ purchasing power in a bear market scenario,” said Justin Waring, Investment Strategist Americas, UBS. “Having a Liquidity strategy opens up alternatives to having to sell parts of your portfolio to meet day-to-day cash flow needs—and it might also give you the space you need to take a bit more risk in your longer-term assets, especially when the market is down.”

Jenny Kurz, Director of Deposit Products at UBS, provided context on how savings fits into a Liquidity strategy. “Think of it as cash on the side that’s not already locked into any other investments, so you don’t have the fear of the potential need to sell securities at an inopportune time.”

Different types of cash are useful for different scenarios. Kurz explained, “There’s the everyday cash you can keep in your checking account to cover non-discretionary expenses, like rent, groceries or your utility bill. Then there’s the cash you might allocate in your investment portfolio, alongside other kinds of assets like stocks and bonds. Finally, there is cash that you don’t need day-to-day but would still be considered ‘liquid’—which you might use for emergencies or saving for a near-term goal, like your next car or a home renovation. Some might call this their ‘back-up cash' or ‘savings cash.’”

How much of your Liquidity strategy should you keep in savings strategies?

There are various savings and cash alternative options, such as money market mutual funds and traditional retail bank savings accounts, that may be used as emergency funds. “Everyone has a different level of cash needed for different purposes. You and your financial advisor should weigh the risks and cost associated with each option,” advised Kurz.

“Generally speaking,” Waring added, “you should make sure you have enough resources in your Liquidity strategy to finance any known expenses in excess of your income over the next three- to five-year window.” This will usually provide investors with enough cash flow to “wait out” bear markets. CIO also recommends that investors keep their Liquidity strategy fully funded during bull markets, which will allow them to deplete these funds—instead of drawing from their long-term investments—during bear markets. In this way, a properly funded Liquidity strategy is key to helping investors leave their retirement accounts (the Longevity strategy) untouched until the market has recovered.

How to get started on your Liquidity strategy

Waring and Kurz shared some additional tips for implementing a Liquidity strategy that is a part of your larger wealth management goals:

  • Think of savings as cash available for unexpected expenses, an emergency fund or planning for near-term goals.
  • Consider keeping one year of expenses in short term cash alternatives that can be easily liquidated into cash, such as money market mutual funds, and the rest in an FDIC-insured savings product or another cash alternative.
  • FDIC-insured savings products have no market risk while providing you with interest income.
  • Set aside enough capital in your Liquidity strategy (PDF, 430 KB) to fund three to five years of your lifestyle—but be wary of overfunding it because you can expect low returns, especially after inflation compared to your Longevity and Legacy strategy investments.
  • Work with your Financial Advisor to find the balance of liquid assets that will best work for your portfolio.

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