People wait outside the Silicon Valley Bank headquarters in Santa Clara, California, to withdraw funds after the federal government intervened upon the bank’s collapse, on March 13, 2023.
Nikolas Liepins | Anadolu Agency | Getty Images
It’s been an unsettling period for consumers and the financial markets as the collapse of Silicon Valley Bank has rippled through the broader banking system.
Despite the economic fallout, the events provide “a great case study” for clients, according to New York-based certified financial planner Lazetta Rainey Braxton, co-founder and co-CEO of 2050 Wealth Partners.
A major lender for tech-focused venture capital funds and startups, SVB invested assets in longer-term Treasury bonds, which have declined in value amid rate hikes from the Federal Reserve. The problem occurred when SVB couldn’t cover its clients’ withdrawal requests, forcing the bank to sell its Treasury bonds before maturity at a steep loss.
“The first line of defense should always be cash,” said Braxton, who is a member of CNBC’s Financial Advisor Council.
Without liquidity, SVB couldn’t “absorb the shock of the cash run,” and had to sell its assets at the wrong time, she said.
It’s a valuable lesson for investors who may someday face their own cash crunch due to a job loss or another financial emergency, Braxton said. “You shouldn’t be forced to go to the market for liquidity,” she added.
The first line of defense should always be cash.
Lazetta Braxton
Co-founder and co-CEO of 2050 Wealth Partners
For example, if you need funds, it’s typically better to withdraw savings before selling investments in a brokerage account, she said.
Experts have similar advice for retirees, who need to manage their cash reserves to avoid selling portfolio assets when the market is down, known as the “sequence of returns” risk.
Why you always need a ‘cash cushion’
While a common rule of thumb for emergency savings is to keep three to six months of living expenses handy, Braxton urges her clients to maintain a six-month “cash cushion.”
You don’t know when your job may no longer need you, as seen in the tech industry, and a cash cushion may provide more options, she said.
“We had clients during the pandemic who were taking sabbaticals and changing jobs because they had a cushion,” Braxton said, noting that extra cash may offer more flexibility to pivot.
Cash may also provide other options for tackling financial emergencies. For example, you may opt to tap a home equity line of credit, which allows you to borrow against your home’s equity, provided you have the cash to pay it back.
“If you have cash, you can leverage that, but you shouldn’t be forced to go into debt,” Braxton said.
For all the latest World News Click Here
For the latest news and updates, follow us on Google News.
