Financial Wisdom for Women Over 50: How Cash Buffering Protects Your Lifestyle

By Sherry Finkel Murphy

I teach women about money so they can make the best financial decisions with knowledge and confidence. If you want to change your money mindset, that’s the work of a therapist or coach. Doing unhealthy or unproductive things with money (and food while we’re at it) is a different challenge. My job is to address the stress we place on ourselves when we don’t act intentionally with our money, whether we have a little or a lot. We need knowledge of money mechanics and financial planning best practices.

Madrina Molly: Financial Wisdom for Women of a Certain Age(ncy)

I offer Madrina Molly membership to give women the education they deserve but aren’t receiving from the financial industry. Over the next few months, I’ll be addressing concepts that will open your eyes and make it easier to determine how to manage (and grow) your wealth.

Cash Buffer

A cash reserve or “buffer” is the amount of money you set aside that ensures you’re able to pay your lifestyle expenses without hiccups. It differs from an emergency fund in that it’s the money you intend to use in the near term. Cash buffering is the act of staging assets over time to become more and more liquid the closer you are to needing to use them. While you are employed, you may not require a cash buffer in addition to your emergency fund. But once you are retired, you will certainly want a cash buffer, as you will have no active cash flow—you’ll be operating from savings and passive income.

Business owners and commissioned salespeople require cash buffers to ensure they don’t experience a cash flow crunch between receiving payments or commissions. And anytime you have assets to distribute, such as when your children are going to college and you are removing assets from their college fund, you should convert those assets to cash in anticipation of needing them. People frequently keep too small or too large a cash buffer. Too small a buffer will cause a lifestyle problem or require using debt to get by until the next influx of cash. Too large a buffer will cause your wealth to decrease because your money won’t keep up with inflation.

Best Practice

Best practice in cash buffering for businesses and commissioned individuals is to keep enough liquidity in a high-yield savings account to anticipate the timing of the next receivable or commission check. Thus, net 30, 60, or 90 terms tell you what you need to know. A salesperson who is paid quarterly needs a larger cash buffer to maintain her lifestyle than one who is paid monthly. In the case of distributions from the market, we already know that money we intend to spend within two years belongs in a cash buffer, not in the market. The act of cash buffering means selling assets up to two years in advance of needing them. They may remain in the account (avoiding taxation events) but should be converted from stock or bond funds to money market mutual funds. Some people take advantage of very high markets to rebalance by selling assets high and placing profits into a money market mutual fund to await distribution. This works well with Required Minimum Distributions (RMDs) in US IRA accounts. We shouldn’t wait until we want the distribution to sell the asset and raise cash. The beauty of cash buffering, once you reach the distribution phase of life, is that it enables you to wait out a bear market—you won’t need to touch other assets. Bear markets rarely last more than a year. This technique enables you to keep the rest of your portfolio aggressively invested, outpacing inflation.

Summary

Learning how to use a cash buffer and planning to stage one is a great skill to have, especially when you are distributing money from the stock market. By keeping an appropriately-sized buffer plus a means to refill it (investments that produce cash like dividend paying stocks and bonds) you will never have to take money out of a market when the market is down. You may not realize it, but most financial plans are successful just by avoiding that one gotcha. Madrina Molly members are able to ask me to help them choose the investments that produce the dividends and income to refill their cash buffers.