Where does it come from and where can it go? Many experts suggest that unexpected amounts (like bonuses, gifts or tax returns) can help fund a mad money account. This account should be relatively liquid but it may be worth exploring with clients whether this account could be held in a money market, certificate of deposit or other account.
What does wealth look like for a woman? The social media mavens at Ellevest recently asked this question.[1] Many of the results they received seemed fairly obvious – personal trainers, healthy food, vacations, etc. But my response to the question kicked off a discussion by others that what wealth looks like requires a good financial planner. How so? My response was “Myfirst real boss (a woman) told me to always have "go to heck money" as a woman in the 9 to 5 world. I've always thought that a woman who sticks up for her position in a meeting must have a healthy balance in her GTH account.”
Consider this question again in the post-pandemic world. I recently caught a snippet of my guy’s manager chiming in on a work conference call. The subject of the discussion? Please refrain from scheduling conference calls outside of the 8 am to 5 pm time frame. The fact that there was a heated discussion about this at a Fortune 500 company stopped me in my tracks. Financial advisors often work outside of the standard 9 to 5 time period so that they can optimize their client’s schedules. But clients? They may find that having calls late into the night or early in the morning drives them mad. When your work day literally never ends, you may need to have that healthy GTH account whatever your gender. Let’s call that “mad money” (money for when your work drives you mad). Here are a few things to consider when helping your client save to save their sanity by creating a mad money account.
First, mad money is not the same thing as an emergency fund. Clients probably have heard the advice to keep 3 to 6 months of living expenses in savings or other liquid account but as we’ve discussed before, they may relate that need only to a sudden unexpected unemployment. But major medical costs (such as having medical insurance deductibles or copays for specialists) can quickly add up to a month or two’s worth of living expenses, if not more. And an unexpected illness or injury could cause an employee to lose full time wages for a significant period of time. While many may think that workers’ compensation benefits will cover lost time, those benefits are not available immediately, and could require waiting as much as six months to a year.
Where does it come from and where can it go? Many experts suggest that unexpected amounts (like bonuses, gifts or tax returns) can help fund a mad money account. This account should be relatively liquid but it may be worth exploring with clients whether this account could be held in a money market, certificate of deposit or other account.
Clients may also want to consider having a backup budget. Backup budgets strip living expenses down to the bare minimum. Things to consider in backup budgets may include knowing which monthly fees can be cancelled without large fees. For example, cutting off cable may trigger a larger fee than would be saved by cutting it back. So too with gym memberships. Having that backup budget may help clients find extra money to add to a mad money account. That back up budget should be the basis of the 3 to 6 months of saved expenses. In other words, clients may be confused about what counts as “living expenses” when saving 3 to 6 months of living expenses. If a standard budget for a client is $5000 per month, they may think they need $15,000 to $30,000 in savings. But if their actual living expenses are closer to $2500 (on that backup budget) they may need to save considerably less in their emergency funds, in this example, half of the amount.
Clients may also think that they can dip into retirement funds for mad money. Obviously, borrowing from a 401(k) through a job you don’t plan to return to seems like spitting into a strong head wind. However, many clients may be hearing a lot of chatter from their friends, and yes, social media, to treat an IRA like an emergency fund. As we’ve written before, while its true that an client cannot withdraw from an IRA, it can be confusing to the client to learn that they may withdraw the post-tax money invested in a Roth IRA without penalty so long as they put the same amount as contributed in a tax year.
And what also might be confusing for clients is the concept of a self-directed IRA. A self-directed IRA involves accounts that are administered by custodian who takes direction from the account holder. If this was conveyed simplistically, it could sound like you could buy a house with funds from an IRA (instead of investing in real estate through an SDIRA). In the case of an SDIRA, purchases of real estate have to be arm’s length – meaning, no family members can use it or live in it.
[1] https://www.instagram.com/p/CAvkrwNnexx/
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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