Lifepoint Financial Design – LifePoint Financial Services – Mike Metzger Financial Planning

There is a reason for being strategic about how much cash you keep in savings. Many people want to believe that if their monthly income covers their monthly expenses, putting money into additional savings isn’t necessary. That’s a huge mistake that many of us come to regret later!

The Allstate Mayhem commercials stick out in my mind. You know the commercials where a man dressed as “Mayhem” shows you all the unexpected scenarios that can ruin your day in a hurry. There is a reason why they created a funny character instead of just telling you to protect yourself from unexpected risk- because they know we would just ignore it. By having a funny character to playfully paint the picture of what could go wrong, it resonates more with us.

Mayhem is the same reason why people need to have money stashed away in a “Mayhem” or emergency reserve savings account. Although we tend to discount the possibility that some type of scenario like a health emergency, housing issue, or the loss of employment can occur. Those unexpected expenses can be devastating and snowball into further financial trauma for us down the line.

For most, the general rule-of-thumb is to have 3 months of fixed and variable expenses in emergency cash reserves for a dual income household and 6 months of fixed and variable expenses for a single income household. This is to cover for any expenses that are not expected and would otherwise leave you in a bad spot with a negative cash flow, or worse, debt. As expenses come out, this account needs to replenished to make it whole again.

High-Income Household Savings

The general rule-of-thumb likely doesn’t work for high-income households. Having 3 or 6 months of fixed and variable expenses is a great start. But let’s be honest, for high-income households there is a lot more risk-exposure and sudden opportunities that could take a lot more money outlay than the traditional household.

I’m going to help explain 4 reasons to consider having, dare I say…8-12 months of fixed and variable monthly expenses set aside in a liquid savings vehicle.

1. You own commercial or residential real estate 

If you are diligent with your spending plan or budget, you have quite a bit of extra savings coming into your accounts. As a smart investor, you likely have thought about the various ways to make your money work hard for you. One of those avenues can certainly be commercial or residential real estate.

However, if you have ever come across a great opportunity on a real estate transaction, you have to move quick on those opportunities because the pool of investors in competition is deep. Income producing real estate as a part of an overall portfolio and asset plan is a crucial component to successful financial longevity. I typically advise anywhere from 5-25% of a client’s overall asset plan. Stay tuned, as I will be writing much more on the subject.

The point is that as crucial of a component as it is, finding a good opportunity does not last long, and you need to be able to have the liquid funds to move quick! Being prepared for the unforeseen opportunity will pay dividends for both your current financial picture and long-term financial success. 

2. Your liability exposure is just greater 

Unfortunately, the more income and assets that you accumulate, the larger the risk exposure is to you and your family. With many risk exposures; home, auto accidents, rental property, health emergencies, businesses- the more cash you’ll need on hand to cover deductibles and uninsurable amounts. These are situations that can be impossible to predict, so the least desired scenario would be to have to liquidate investments during times when we may be in down markets.

It is important to make sure you have insurance coverages and liquid funds on hand to meet these unexpected scenarios. You first want to make sure you have the appropriate insurances and coverages that protect your physical assets and business entities. In addition, I would highly recommend looking at an umbrella insurance policy to help protect you and your family’s assets that extend beyond your coverage limitations. There are many benefits to owning an umbrella policy and at relatively inexpensive rates.

3. You know an investment opportunity when you see it 

Being a high-income earner means that you likely have an entrepreneurial spirit that allows you to earn flexible compensation based upon how you work your day. So, it is not far-fetched to invest in a business idea that you might come up with or be introduced to. When the right entrepreneurial venture hits, you don’t want to put it off until you have saved enough. Many entrepreneurs also find that success comes easier when they have money to invest in their businesses.

When you have the excess funds at hand, you don’t have to pass up a good idea. By creating a savings bucket of 8-12 months savings, it provides the flexibility and confidence to move forward on your new entrepreneurial venture for diversified income and future growth.

4. Competition is steep when it comes to high paying careers 

The truth is that when you are in a career where the job comes with high income and great benefits, there are many others who want the same. Competition for those positions can be steep and the process may not always be fair. You earned it and deserve to be there, but it would be an oversight to not be prepared for someone else to cause a change in your position.

By having a proper emergency reserve for your income bracket, you don’t have to settle on another position that is not the equivalent. The extra cash on hand could help buy you enough time to find another great position, or perhaps, and even higher paying job. 

Bottom Line

 Traditional financial planning states 3-6 months of fixed and variable expenses are a safe emergency reserve to have on hand. Most people do not adequately save even this minimum and fill their expenses to meet their income each month. But as a high-income earner, you know better than that.

With 8-12 months of fixed and variable monthly expenses saved in a liquid account, you can be prepared for the unexpected. Whether that be a new business or rental property, or an unfortunate accident, you can continue your path to success without getting derailed. At Lifepoint Financial Design in Salt Lake City and San Luis Obispo, we’re here to help you make an intentional financial plan so you can enjoy what you love most! Talk to Mike


Asset allocation does not ensure a profit or protect against a loss

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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