Short term financial goals should assess liquidity

For the first time in a decade, more Americans are focused on short-term financial goals rather than long ones, according to Fidelity Investments’ annual Financial Resolutions Study for 2023.

Examples of these short-term goals include big-ticket purchases, paying off credit card debt, and contributing to an emergency savings fund.

For individuals focused on short-term goals, liquidity — how quickly and easily it is to convert an asset into cash — is an important factor to consider.

We spoke to three experienced professionals in Rochester’s financial planning and investing space to find out what people with short-term goals should be doing to manage their liquidity today.

Jarrett Felton – Invessent Wealth Management

Jarrett Felton is the founder and managing director of Rochester-based Invessent Wealth Management, a boutique wealth management firm. He defines a short-term goal as one that would be accomplished in less than a year and liquidity as the ability to access cash or capital in a timely manner.

“Access to cash or capital is imperative and extremely crucial given the state of our economy,” said Felton, who separates liquidity into two separate silos.

One silo would be the liquidity of your overall portfolio of investments, for opportunities that arise. The other silo — and the focus of this piece — would be the amount of cash either on hand or easily accessible without incurring a penalty, for last minute emergency or an immediate need.

Cash is the most liquid asset, followed by money in checking, savings, and high-yield savings accounts. The next level of liquidity would be cash equivalents, like money market accounts and certificates of deposit (CDs).

A money market account is an interest-bearing savings account with variable interest rates that is insured by the Federal Deposit Insurance Corporation or National Credit Union Administration. Some financial institutions have a minimum deposit to open a money market account and there is typically a six-transaction limit per year.

“CDs, high-yield savings, and money market funds are very favorable right now,” said Felton, who attributed the current higher rates of return to the Federal Reserve’s increase in interest rates over the past year. “The beauty of a money market or high-yield savings account is in its liquidity. You can easily access your money without penalty. Just be sure to check the terms, conditions, and protections of each before utilizing”.

A CD is also offered by banks and credit unions. Unlike a money market account, a CD has a fixed interest rate and different levels of maturity terms to choose from. If you’re saving for short-term goals, you’d probably want to choose a six or twelve-month term. You’ll incur a penalty if you withdraw funds before the maturity date.

Felton noted that “another liquidity option that’s often overlooked is a home equity line of credit (HELOC).” A HELOC — also called a second mortgage — is a loan for homeowners only that allows you to borrow the equity within your home, by using your home as collateral.

“If we’re talking about liquidity, it might also be prudent to talk about the insurance coverages we have in place — just for the what-ifs in life,” said Felton, who encourages his clients to always have the proper type of insurance in place. “Another way to reduce the risk of needing access to significant cash would be to secure the correct coverages on your auto, homeowners, boat/yacht, and even umbrella policies.”

Doug Hendee – Brighton Securities Corp.

Doug Hendee is a certified financial planner and chief strategy officer for Brighton Securities Corp., an independently owned financial services firm headquartered in Rochester. When he meets with new clients one of the first things he does is make sure they have a rainy day/emergency fund in place. If not, he helps them establish one.

The amount of this rainy-day fund — for things like an unexpected job loss or home repair — will be different for everyone based on circumstances (“It’s a little bit art and a little bit science,” Hendee said), but typically you want to save about six months’ worth of your average monthly expenses.

The current statistics surrounding emergency funds are eye-opening. Bankrate’s 2023 Annual Emergency Savings Report showed that 36% of Americans surveyed have more credit card debt than emergency savings, the highest on record since 2011. Additionally, 68% of respondents worried they wouldn’t be able to cover their living expenses for just one month if they lost their primary source of income.

Hendee explains that emergency savings should be saved in a way that is easy to access, like a savings account, checking account, money market account, or certificate of deposit.

“This is not the money you take any risk with,” Hendee said. “This is the money that is set aside for an emergency and if you need it you can get it out quickly.”

Nannette Nocon – Nocon & Associates

Nannette Nocon is a certified financial planner and private wealth advisor with Nocon & Associates, a Rochester-based private wealth advisory practice of Ameriprise Financial Services LLC.

“With high prevailing interest rates, there are many options for short-term goals,” Nocon said. “Money market accounts are FDIC insured and offer safety and yield.  Money market funds offered by mutual fund companies offer a higher yield priced at $1 a share but are not covered by FDIC. These types of accounts generally have daily liquidity and give a higher yield than savings accounts.”

Depending on time horizon, Nocon says individuals with short-term goals may want to also consider laddering certificates to get a higher yield. One can get a 3-month certificate, for example, every month so that there is liquidity available for a portion of the funds each month.

Overall, Nocon advises that it’s best to keep the funds for short-term goals separate from day-to-day savings, so the value is not eroded from spending more than the cash flow. A separate account that flows through your checking account is often the most convenient.

“Cash value from whole-life policies can also serve as liquid reserves,” Nocon said. “Although access is not as convenient as a money market or money market fund. Typically, insurance companies can take up to 7 to 10 business days to process redemptions.”

Caurie Putnam is a Rochester-area freelance writer.