We’ve all heard it time and time again - “diversify your portfolio”. One of the most commonly preached concepts throughout the financial industry is diversification. Simply put, it involves reducing one’s risk by allocating investment into a variety of categories / products / industries, while maximizing returns for future financial prosperity. Despite doing our best to plan for the future, we cannot overlook the present. If the COVID-19 pandemic has taught us one thing, it is the importance of having immediate access to cash in the event of any emergency (emergency fund). Having funds readily available is a key component of diversification.
Why do I need an emergency fund?
Emergency funds create a financial buffer that can keep you afloat in a time of need without having to rely on credit cards or take out high-interest loans. It can be especially important to have an emergency fund if you have debt, because it can help you avoid borrowing more.
How much should I save?
The short answer: Up to half a year of expenses.
The long answer: The right amount for you depends on your financial circumstances, but a good rule of thumb is to have enough to cover three to six months’ worth of living expenses. If you lose your job, for instance, you could use the money to pay for necessities while you find a new one, or the funds could supplement your unemployment benefits. Start small, but start.
Having even $500 saved can get you out of many financial scrapes. Put something away now, and build your fund over time.
Where do I put my emergency fund?
A savings account with a high interest rate and easy access. Because an emergency can strike at any time, having quick access is crucial. But the account should be separate from a bank account you use daily, so you’re not tempted to dip into your reserves.
A high-interest savings account is a good place for your money. The money earns interest, and you can access your cash quickly when needed, whether through withdrawal or funds transfer.
Young professionals should be encouraged to make significant and affordable contributions to their RRSPs, while at the same time making sure to take full advantage of TFSA maximums. Secondary Investments for both the future and present must be managed with discipline, and structured to allow for market downturn, all while mitigating an investors risk. An integral part of risk mitigation includes incorporating investment in a vehicle with guaranteed returns. This allows for clients to ensure growth, even while other investments pose risk of potential decline.
In any event, this COVID-19 crisis has opened up our eyes to realities of global emergency. We often associate emergencies with short term, one time events or circumstances, i.e a car accident. However, as we now enter the 10th week of economic shut down, we can surely step back and reassess our understanding of the concept.
Diversification is not a new concept. With the luxury of hindsight, we at Volpe Financial Solutions can use our resources and assess the reactions of the markets as they have succumbed to this latest pandemic (and previous situations of crisis), to make choices moving forward that are in the best interests of our clients.
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