When it comes to wealth planning, the focus is often on investing and long-term wealth accumulation. However, having a plan for managing cash flow is also important for preparing for unforeseen times. When facing unexpected life events, such as a temporary job loss or illness, ensuring you have adequate cash flow can help prevent unnecessary financial stress and protect longer-term financial goals.

Important for High-Net-Worth Individuals & Retirees Alike

A common misconception is that cash flow management is only important for those with limited assets. Yet, having substantial wealth does not eliminate the need for liquidity—in fact, it may mean having larger financial obligations. Effective cash flow management can help cover ongoing expenses, unexpected costs and planned commitments.

Some investors assume they can always sell investments to cover short-term expenses, but this approach comes with risks. Selling assets on short notice can disrupt long-term growth, trigger unnecessary taxes or force a sale in a market downturn. For example, withdrawing funds from a non-registered account could result in capital gains taxes, while early RRSP withdrawals not only trigger withholding taxes but also are considered taxable income. As well, once RRSP funds are withdrawn, contribution room is permanently lost.

For retirees, cash flow management may be more challenging. Many are on a fixed income, relying on a mix of pension income, government benefits or RRIF withdrawals. Without careful planning, the timing or structure of withdrawals can have unintended consequences. For example, liquidating investments to generate income could create unexpected tax obligations or impact eligibility for income-tested benefits, such as Old Age Security. Moreover, taking on debt can be burdensome on a fixed income, particularly if interest rates were to rise in the future (an unlikely scenario in the near term).

The Value of an Emergency Fund

An emergency fund can play a valuable role, serving as the first line of defence. Typically, this is an amount equivalent to three to six months of living expenses, set aside for unexpected life events.

Beyond a traditional cash reserve, a tiered approach to liquidity can help balance accessibility and long-term growth. This may include: i) A reserve for short-term needs, such as a high-interest savings account or cashable GICs; ii) Easily accessible investments with lower volatility, such as short-term bonds or GICs; and iii) Long-term investments to build wealth over time.

Some consider using a Tax-Free Savings Account (TFSA) as an emergency fund since withdrawals are tax free and are added back to contribution room in the following calendar year. But this approach has tradeoffs. Market downturns could reduce the value of funds at the very moment you need them. Selling investments at a loss locks in that loss, as only the withdrawn amount—not the original investment value—can be recontributed. Additionally, you forgo potential future long-term, tax-free growth (see inset below).