One of the many lessons from 2020 was the importance of having a financial cushion, so that when the unexpected happens, such as job loss or pandemic-imposed business shutdown, it doesn’t derail the client’s financial plan.
A common rule of thumb is that clients should endeavor to keep the needed capital to cover between six and 18 months of living expenses in an emergency fund. Many advisors see this as one of the first “buckets” for clients to fill when working on a financial plan, establishing the emergency fund as one of the goals to be tracked using Envestnet | MoneyGuide.
In 2019, Envestnet Institute noted that establishing a well-funded emergency fund is the first step toward financial wellness, coming before retirement planning, debt management, insurance management, and health expense planning:1
Although several studies indicate that many U.S. households would struggle to cover an unforeseen expense, the pandemic has resulted in a divergence of outcomes.2 Some households have been afflicted with both emotional and financial stress caused by illness, unemployment, or loss of a family business, while others have benefitted from a boost in savings. These households diverted funds that would have normally gone toward entertainment and travel and used them to boost investments or pay down student loans or other forms of household debt.3
MoneyGuide believes that everyone needs and deserves a quality financial plan. One of the first elements of a plan is ensuring that there is money set aside for the unexpected, such as loss of income, unbudgeted medical expense, or home repair. For those households with ample assets, setting aside sufficient funds in cash to cover unexpected events can enable them to stay true to financial plans and avoid panic selling when markets become more volatile.
MoneyGuide makes it easy for advisors to set and track goals, and new self-service modules of MyBlocksSM allow clients to complete interactive financial wellness blocks on their own time, at their own pace.
MyBlocks is a fun and intuitive way for clients to explore their lives and discover what they need or should consider for their livelihood now and in the future. There are more than 30 modules, including an Emergency Fund module to help clients increase their savings.
Among the strengths of MoneyGuide is the number of integrations available. One of the newest is with MaxMyInterest (“Max”), a leading cash management solution that enables clients to earn more on their cash while keeping it FDIC-insured and same-day liquid. By making it easy to spread cash across multiple online savings accounts, held directly in the client’s own name, Max can help clients earn the highest rates, even as rates change, while keeping cash at the ready to help cover the unexpected.
At a time when interest rates are so low, many clients and advisors are looking for higher returns on cash, without sacrificing the safety of FDIC coverage.
Using Max is one way to manage an emergency fund that is integrated with MoneyGuide, so that clients can earn more while their balances automatically update in their financial plans. Setup is easy since client data is integrated using only the advisor’s login, so clients don’t have to lift a finger. This permission is received during the account setup process, and is shown prominently in their account Profile.
Clients can track goals with MoneyGuide and MyBlocks’s Emergency Fund module, which helps them track a path to a fully funded emergency fund over time.
The impact of the pandemic on households shed light on the importance of aspects of our lives that can’t be counted in dollars and cents. Seeing family and friends and protecting our physical and mental health are on the top of that list.
It has also reminded us of the role of good financial planning and an emergency fund, as well as how solutions like MoneyGuide and MaxMyInterest can help clients have a plan to stay on track to achieve their goals, even when the unexpected happens.
Sources:
- Envestnet Institute: https://www.envestnetinstitute.com/sites/default/files/2019-05/ERS%201043%20ERSFinFit%20-%20SVINOD%20-%20FINAL_155655942990900150vH.pdf.
- BankRate: https://www.bankrate.com/banking/savings/financial-security-january-2021/.
- CNBC: https://www.cnbc.com/2020/05/29/us-savings-rate-hits-record-33percent-as-coronavirus-causes-americans-to-stockpile-cash-curb-spending.html.
WRITTEN BY
KEVIN HUGHES, Chief Growth Officer for Envestnet | MoneyGuide
MICHAEL HALLORAN, Head of Business Development and Partnerships for MaxMyInterest, a service of Six Trees Capital LLC.
The information, analysis and opinions expressed herein are for informational purposes only and do not necessarily reflect the views of Envestnet. These views reflect the judgment of the author as of the date of writing and are subject to change at any time without notice. Nothing contained in this piece is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.
Investing carries certain risks and there is no assurance that investing in accordance with the strategies mentioned will provide positive performance over any period of time. Investors could lose money if they invest in accordance with the strategies discussed herein. Past performance is not indicative of future results.
For investment professional use only.