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In the last eighteen months or so, interest rates have gone from historically very low to what seems like very high. Historically, rates are not that high; however, since interest rates have been at historical, unprecedented lows for over a decade, the interest rates feel very high. Right now, the U.S. economy seems to be at a crossroads for interest rates. In late March, the Federal Reserve left interest rates unchanged at the 5.25% to 5.50% benchmark but signaled that two or three rate cuts could be possible this year.

As for interest rate direction, there are well intended arguments on both sides of the debate either higher or lower and/or sooner or later. No one really knows, but holding and maintaining appropriate levels of cash is a wise choice at this interest rate juncture. When I refer to “Cash,” I am referencing a bank balance or more appropriately a money market account. Brokerage money market accounts are widely and easily available yielding around 5% at prevailing interest rates.

WHAT TO DO NOW

1) Always maintain proper levels of emergency funds. Keeping a proper amount of money on hand for emergencies allows you to hold and not be forced into selling high quality/rising income investments during normal market downturns.

2) Have an extra spare tire. Additional levels of cash over and above the proper amount for emergencies is what I call the Extra Spare Time concept. I recommend at least 9 months of living expenses to be maintained in cash for emergencies. The Certified Financial Planning Board recommends 3 to 6 months of cash on hand as an adequate emergency fund. For every year over the age of 60 an additional month of emergency funds is good to have since older people need to be more prepared for additional, unexpected expenses. This is simply being conservative in preparation of Murphy’s law roulette of possibilities. Everything breaks, tears up, rusts, deteriorates, blows-up, gets sick, always, especially when your out of town, on vacation, or kicking back on a Sunday.

3) Have a personal triggering mechanism in place so that you can take advantage of normal, market downturns. For example, when the S&P 500 goes down 10%, then invest 10% of an extra spare tire and start a DCA, dollar cost averaging program. Remember, a DCA program is an automatic investment each month into your mutual fund allocation.

Again, additional levels of cash over and above the emergency fund is what I call an extra spare tire. So, assume that $25,000 is the proper amount for you to have on hand for emergencies, then $125,000 in cash, savings, and money markets, means you have a fully funded emergency fund and four extra spare tires.

TAKING ADVANTAGE OF MARKET DOWNTURNS

Learn how to take advantage of Market Downturns because “Downturns are Normal.” There are three steps to taking advantage of normal market downturns:

1) Have a properly funded emergency on hand

2) Have an extra spare tire on hand

3) When the S&P 500 Index goes down 10% (this is my personal definition of market downturn), Take 10% of an extra spare tire and invest in high quality/rising income funds and begin a dollar cost averaging program (DCA). A market downturn is a “triggering event” signaling for you to invest additional funds from your extra spare tire into investment allocation.

GRATITUDE FOR IMPROVEMENT

Gratitude is the gift that keeps on giving. The word comes from the Latin word gratus which means pleasing or thankful. I am truly grateful to be able to share these concepts for a living. My career as a Certified Financial Planner Professional is both rewarding and fulfilling as I can witness over time what small behavioral improvements can mean to any financial plan. Time, discipline, and consistency win. Let us find the gratitude to take one step to achieving improvement. This first step may be to start building that emergency fund, working on your extra spare tire, and continuing your investment plan.