Orthotown October 2022 - 60

Running the numbers
Before we talk about where to invest,
it's essential to look at how much you have
and what you need the cash for. I suggest
creating a 1-3-5 plan, where you split
your cash into short-term, near-term and
long-term buckets.
Short-term cash is your emergency
fund. It consists of roughly six months to
one year's worth of cash to keep on hand
in the event something goes wrong, like if
you lose a source of income or get too sick
to work for a period of time.
Near-term cash is money you know
you're going to spend in the next two to three
years. You might be planning to remodel
a kitchen or buy a car for a teenager in the
next few years.
Long-term cash is money you won't
need for at least five years (and for most of
us, even longer). This is the cash that you
earmark for long-term growth, possibly as a
bridge to retire early before your retirement
accounts kick in.
Breaking cash down into a 1-3-5
scenario helps investors prioritize the risk
versus the reward of earning larger returns
across the total of their funds.
Short-term cash
For the vast majority of people, a good
chunk of the cash we're talking about here
is our emergency fund-the cash we should
keep in a safe, no-risk account that's earning
a few cents a month, if that.
During times of high inflation, investors
are often tempted to move that short-term
money into a vehicle that actually earns
some real interest, but I caution my clients
to resist that urge. In an inflationary cycle
like we're in now, yes, our short-term money
is going to be worth less today than it was
yesterday. But in this situation, you need to
make an opportunity-cost decision, where
you recognize that your short-term cash is
going to be less valuable for a period of time
and be OK with that.
This is what I call investing with purpose.
The purpose of your emergency fund is to
be there when you need it. Period, end of
story. If it's locked up in a two-year CD
earning 1%, and you get sick and have to
take significant time away from your practice,
the opportunity to earn 1% is going to cost
more than it's worth.
Long-term cash
For long-term cash, I assign a five-year
time period to the plan but everyone's " long
term " is going to be different. It could be
five years if you're closer to retirement, but
it could be 10, 20 or more based on your
age and when you plan to retire.
Regardless of the time frame, the
principle remains the same. Where you
invest your cash in times of inflation is not
really any different from where you would
invest it in any other economic climate.
You look at your long-term retirement
goals, then layer your cash accordingly
to fit your overall investment strategy,
including your 401(k)s, IRAs and other
retirement savings vehicles.
For the long-term money, I'm telling
my clients not to get caught up in things
like inflation, interest rates or Russia. We
have a strong economy. The market is going
to be fine over the next 10 to 20 years, so
mix your long-term cash into your larger
investment strategy and let it do its thing.
Near-term cash is the only money that's
going to be affected by the volatility we
are seeing-money you know you're going
to spend in a few years on something that
is most likely really important to you.
60 OCTOBER 2022 // orthotown.com
Near-term cash
So now that short-term cash is stashed
safely away and long-term cash is layered
into a larger investment strategy, the only
real decision investors need to make is where
to put their near-term cash.
Near-term cash is really where the rubber
meets the road. This is the only money
you have that's going to be affected by the
volatility we are seeing.
Remember, this is money you know
you're going to spend in a few years on
something that is most likely really important
to you. Maybe it's for your kids' first car, a
bucket list trip or your daughter's wedding.
Either way, it's personal to you, and the key is
to keep it that way. I tell my clients to name
it. Give it a purpose. Make it meaningful
money because that's exactly what it is.
This not only helps you keep the money
allocated to its purpose but also helps guide
your thought process when looking for a
place to invest it.
Because this is such a personal decision,
and everyone has different access to
investment vehicles, it's virtually impossible
to recommend one place to invest it over
another without sitting down and talking
through the variables.
Let's look at two examples.
Scenario 1:
Age 45. Needs money to pay for twin
daughters to attend college in three
years. About half of the anticipated needs
have been saved in a 529 plan, but shortterm
cash is allocated to other things and
will not be able to cover the remainder.
In this type of situation, an advisor
might recommend looking for a more
stable investment, like a large-cap value
fund composed of large companies that
can produce dividends. Although there
may not be a lot of growth in dividends,
performance shouldn't be based on returns
alone. Performance is equal to returns and
risk. Investing versus holding in cash allows
you to either use the dividends to buy more
stocks or use it as cash flow to help to pay
for expenses related to college.
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Orthotown October 2022

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